-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Se7wWBAHMkPfBF0b2AmeALXjwCbOilhBeBg6DH0S0Et9wVJKaIqc/tm80IV8484x /NIioW1s+V7rKtCTU4o7/g== 0000898430-96-001041.txt : 19960401 0000898430-96-001041.hdr.sgml : 19960401 ACCESSION NUMBER: 0000898430-96-001041 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COAST SAVINGS FINANCIAL INC CENTRAL INDEX KEY: 0000841074 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954196764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10264 FILM NUMBER: 96540458 BUSINESS ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-2457 BUSINESS PHONE: 2133622000 MAIL ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-5624 10-K405 1 FORM 10-K (12/31/95) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from______________________ to _______________________ COMMISSION FILE NUMBER 1-10264 COAST SAVINGS FINANCIAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 95-4196764 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 1000 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 90017-2457 (ZIP CODE) Registrant's telephone number, including area code: (213) 362-2000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.01 par value New York Stock Exchange (including related Stock Purchase Rights) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing sale price of its Common Stock on the New York Stock Exchange on March 15, 1996, was approximately $529,624,535. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] The number of shares of Common Stock outstanding as of March 15, 1996: 18,583,317. DOCUMENTS INCORPORATED BY REFERENCE PART III--portions of the Proxy Statement to be filed with the Securities and Exchange Commission for the Annual Meeting of Stockholders to be held on April 24, 1996, are incorporated by reference into Part III hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- COAST SAVINGS FINANCIAL, INC. 1995 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business........................................................ 1 General......................................................... 1 Operating Strategy.............................................. 1 Yields Earned and Rates Paid.................................... 3 Lending Activities.............................................. 8 Risk Elements................................................... 14 Credit Concentration and Letters of Credit...................... 19 Nonperforming Assets............................................ 20 Other Investments............................................... 21 Subsidiaries.................................................... 22 Deposits and Other Sources of Funds............................. 23 Competition..................................................... 27 Regulation...................................................... 28 Taxation........................................................ 37 Employees....................................................... 39 Item 2. Properties...................................................... 39 Item 3. Legal Proceedings............................................... 39 Item 4. Submission of Matters to a Vote of Security Holders............. 39 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 40 Item 6. Selected Financial Data......................................... 41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 42 General......................................................... 42 Results of Operations........................................... 42 Asset/Liability Management...................................... 44 Nonperforming Assets............................................ 45 Capital Resources and Liquidity................................. 46 Item 8. Financial Statements and Supplementary Data..................... 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 86 PART III Item 10. Directors and Executive Officers of the Registrant.............. 86 Item 11. Executive Compensation.......................................... 86 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 86 Item 13. Certain Relationships and Related Transactions.................. 86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 87
PART I ITEM 1. BUSINESS GENERAL Coast Savings Financial, Inc. (the "Company"), a Delaware corporation, was organized in 1988 and is the holding company for Coast Federal Bank, Federal Savings Bank ("Coast" or the "Bank"). Substantially all of the Company's consolidated revenues are derived from the operations of Coast, and Coast represented substantially all of the Company's consolidated assets and liabilities at December 31, 1995. Coast was organized as a federal mutual savings and loan association in 1935 and converted to stock form in 1985. Coast's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate located in California. At December 31, 1995, Coast operated 89 retail banking offices in California. Coast is regulated by the Director ("OTS Director") of the Office of Thrift Supervision ("OTS"), and by the Federal Deposit Insurance Corporation ("FDIC") which, through the Savings Association Insurance Fund ("SAIF"), insures the deposit accounts of savings institutions such as Coast that are regulated by the OTS. Coast is also a member of the Federal Home Loan Bank ("FHLB") of San Francisco, which is one of the twelve regional banks for federally insured savings institutions and certain other residential lending entities comprising the Federal Home Loan Bank System. OPERATING STRATEGY In recent years, Coast's primary objective has been to enhance franchise value by (i) reducing balance sheet risk and enhancing asset quality, (ii) increasing core profitability, (iii) improving the Bank's overall capital adequacy and (iv) developing primary retail banking relationships with customers. Reducing balance sheet risk and enhancing asset quality. Coast has reduced its investment in "high-risk" assets (which it defines to include foreclosed real estate owned, real estate held for development, construction and commercial real estate loans, and high yield and derivative securities) from $3.0 billion as of December 31, 1987, to $916.0 million as of December 31, 1995. With the exception of the first quarter of 1994 (when an earthquake resulted in increased nonperforming assets), Coast's program of liquidating nonperforming assets has resulted in eighteen quarters of reductions in total nonperforming assets, from $410.1 million as of March 31, 1991 (or 4.20% of total assets), to $113.0 million as of December 31, 1995 (or 1.37% of total assets). During that same period the level of Coast's general valuation allowance ("GVA") has increased from 24% of total nonperforming assets to 73% of total nonperforming assets, respectively, at such dates. Moreover, during the fourth quarter of 1994, the Bank exercised its option to eliminate its exposure to all potential future credit losses related to $1 billion of multifamily loans sold with recourse. Coast intends to continue to emphasize the origination of one-to-four family residential, adjustable rate mortgage loans and has not originated multifamily, commercial real estate or construction loans since 1989 (other than to finance the sale of foreclosed real estate owned or to facilitate loan assumptions as permitted by the provisions of the respective mortgage notes). Increasing core profitability. As a result of the reduced level of general and administrative expenses (from $180.2 million for 1989 to $161.7 million for 1995), the improved ratio of interest-earning assets to interest-bearing liabilities (from 97% at December 31, 1989, to 103% at December 31, 1995), the increased effective net spread (from 1.63% for 1989 to 2.47% for 1995), the increased amounts of loan servicing fees and charges and retail banking and other fee income (from $27.2 million for 1989 to $40.4 million for 1995), and numerous actions to enhance branch network profitability, Coast's pretax core profitability (defined as net interest income before provision for loan losses, less general and administrative expenses, plus loan servicing fees and charges and the recurring portion of noninterest income) increased from $20.9 million in 1989 to $89.3 million in 1995. 1 Improving overall capital adequacy. During the past five years, Coast's overall capital adequacy has been enhanced by reducing the amount of capital required under the tangible, core and risk-based capital requirements specified in the OTS capital regulations and by increasing the amount of capital available to satisfy these requirements. At December 31, 1995, Coast's tangible, core and risk-based capital ratios were 5.47%, 5.47% and 10.86%, respectively, each of which was in excess of the regulatory thresholds necessary to be deemed a "well-capitalized" institution. Strategies Coast has employed to reduce the amount of capital required under these requirements include downsizing the balance sheet (from total assets of $12.4 billion at December 31, 1988, to $8.3 billion at December 31, 1995), generally eliminating originations of loans other than one-to-four family residential loans, reducing capital-intensive and nonperforming assets, securitizing mortgage loans into nonrecourse mortgage-backed securities ("MBS"), and eliminating the recourse exposure associated with $1 billion of multifamily credit extensions. Coast has increased the amount of its stockholders' equity and regulatory capital by retaining internally-generated capital and by completing various capital market transactions. During 1991 the Company completed an exchange of $10.7 million of its convertible subordinated debentures for common stock; during 1992 Coast issued $57.5 million of subordinated debt (the proceeds of which are included in risk-based capital); and during 1993 the Company issued 2,300,000 shares of common stock at $17.75 per share and $57.5 million of senior notes, contributing the majority of the resulting net proceeds to Coast as equity capital. See "Regulation--Regulatory Capital Requirements." Developing primary retail banking relationships with customers. The Company has significantly broadened its financial services related product offerings over the past five years to include a wide array of deposit, investment, and insurance products as well as other complementary financial services. The sale of these financial services and products has been facilitated by the sales and service excellence initiatives that have been implemented throughout the retail network. All retail bank employees have undergone comprehensive sales training and integrated marketing support and incentive-based compensation programs have been installed. Reflecting the success of these initiatives, the dollar balance of checking accounts has increased from $464.3 million at December 31, 1994, to $632.0 million at December 31, 1995, and retail banking fee income has increased from $13.9 million in 1989 to $26.9 million for the year ended December 31, 1995. The following table sets forth certain information with respect to Coast's operations during the periods or at the dates indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Return on assets(1)(7)............. .39% (.08)% .21% .57% .45% Return on equity(2)(7)............. 8.36 (1.70) 4.72 16.09 16.81 Equity-to-assets ratio(3)(7)....... 4.61 4.76 4.48 3.55 2.68 Dividend pay-out ratio(4).......... -- -- -- -- -- Effective net spread(5)............ 2.47 2.48 2.67 2.69 2.41 Noninterest expense to average as- sets(7)........................... 1.96 2.13 2.41 2.47 2.43 Total nonperforming assets ra- tio(6)............................ 1.37 1.73 2.72 3.82 4.28 Total general valuation allowance (in millions)..................... $ 82.0 $ 85.0 $ 120.0 $ 140.0 $ 140.0
- -------- (1) Net earnings (loss) divided by average total assets. (2) Net earnings (loss) divided by average stockholders' equity. (3) Average stockholders' equity divided by average total assets. (4) Dividends paid per share divided by primary earnings per share. (5) Net interest income divided by average total interest-earning assets. (6) Total nonperforming assets (as defined under "Risk Elements--Nonperforming Assets") divided by total assets at the end of period. (7)Average balances used in the calculation are based on month-end balances. 2 YIELDS EARNED AND RATES PAID Net interest income results from the difference between the interest income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities, and can be significantly affected by changes in the relative amounts of, and the interest rates associated with, these assets and liabilities. The ability to maintain yields on interest-earning assets which are greater than the costs of interest-bearing liabilities during periods of fluctuating interest rates is determined principally by the relative maturities of, together with the relative frequency of rate changes ("Repricing Mechanisms") on, such assets and liabilities. During periods of declining interest rates, such as occurred during 1991, 1992 and 1993, the combined yield on Coast's loan, MBS and investment securities portfolios generally does not fall as rapidly as its cost of funds. Conversely, during periods of rising interest rates, such as occurred during 1994 and early 1995, the cost of interest-bearing liabilities can be expected to rise more rapidly than the yield on interest-earning assets. The primary reason that the changes in rates on Coast's assets lag the changes in rates on its liabilities is that the majority of Coast's loans are adjustable rate mortgage loans ("ARMs") tied to the FHLB Eleventh District cost of funds index ("COFI"). This index, which is published monthly by the FHLB of San Francisco, is calculated as the average actual cost of deposits and borrowings of all member institutions of the Eleventh District for the preceding month. The published index generally becomes effective, for loans tied thereto, in the month following publication. As a result, there is generally a two-month delay between the change in effective interest costs and the time the change is reflected in COFI ARM yields. During 1991 and 1992, in an effort to reduce the impact of the inherent lag in the Repricing Mechanism of ARMs tied to COFI, Coast originated ARM products which are tied to the London Interbank Offered Rate ("LIBOR") index in 1991. This index is generally more responsive to changes in prevailing market rates of interest and, as a result, interest rates on ARMs tied to LIBOR generally respond more quickly to changes in market interest rates than do ARMs tied to COFI. As of December 31, 1995, Coast had $323.9 million (6%) of loans and $248.8 million (11%) of MBS tied to LIBOR, and $4.47 billion (82%) of loans and $1.85 billion (85%) of MBS tied to COFI included in the loan and MBS portfolios, which totaled $5.47 billion and $2.17 billion, respectively. Coast has emphasized the origination of ARMs in order to improve the interest rate sensitivity of its loan portfolio. Of Coast's loan originations since January 1991, 90% have been ARMs, the majority of which bear interest rates that fluctuate monthly in response to changes in COFI. ARMs, including assets tied to COFI, LIBOR and other indices, accounted for 95% of Coast's loan portfolio and 98% of its MBS portfolio at December 31, 1995. Coast's ability to continue to originate a substantial volume of loans with an interest rate sensitivity or a Repricing Mechanism matching that of its liabilities may be limited by economic factors, including the general level of interest rates, and by consumer preferences for alternative ARM indices or fixed rate mortgage loan products. 3 Coast measures its exposure to interest rate risk using a variety of techniques. One commonly used measure of such exposure is the difference between the amounts of assets and liabilities maturing or repricing over various periods (the "maturity gap"). The following table illustrates the contractual maturities, as adjusted for estimates of prepayments and Repricing Mechanisms, of the major interest-bearing asset and liability categories of the Company as of December 31, 1995. The table also reports the maturity gap between Coast's repricing or maturing assets and liabilities. The interest rate sensitivity of Coast's assets and liabilities illustrated in the following table could vary substantially if different assumptions were used or if actual experience differs from the assumptions utilized. See "Regulation-- Regulatory Capital Requirements" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management." ANALYSIS OF REPRICING MECHANISMS
OVER ONE OVER FIVE WITHIN TO FIVE TO TEN OVER TEN DECEMBER 31, 1995 ONE YEAR YEARS YEARS YEARS TOTAL ----------------- -------- -------- --------- -------- ------ (DOLLARS IN MILLIONS) Interest-earning assets: Cash and investment securities: Cash and due from banks....... $ 120 $ -- $ -- $ -- $ 120 Investment securities(1,2).... 184 1 -- 4 189 Loans: ARMs(3)....................... 5,102 110 -- -- 5,212 Fixed rate(4)................. 68 104 63 19 254 MBS: ARMs(3)....................... 2,125 12 -- -- 2,137 Fixed rate(4)................. 6 18 7 4 35 ------ ------ ----- ----- ------ Total....................... $7,605 $ 245 $ 70 $ 27 $7,947 ====== ====== ===== ===== ====== Interest-bearing liabilities: Deposits: Checking accounts............. $ 632 $ -- $ -- $ -- $ 632 Money market accounts......... 666 -- -- -- 666 Certificates of deposit(1).... 4,289 536 -- -- 4,825 Borrowings: FHLB advances(1).............. 779 25 -- -- 804 Other(1)...................... 677 56 56 -- 789 ------ ------ ----- ----- ------ Total....................... $7,043 $ 617 $ 56 $ -- $7,716 ====== ====== ===== ===== ====== Maturity gap...................... $ 562 $ (372) $ 14 $ 27 $ 231 ====== ====== ===== ===== ====== Cumulative maturity gap........... $ 562 $ 190 $ 204 $ 231 $ 231 ====== ====== ===== ===== ====== Cumulative maturity gap as a percentage of total assets....... 7% 2% 2% 3% 3% ====== ====== ===== ===== ======
- -------- (1) Repricing terms are based upon the contractual maturities of the instruments. (2) Includes FHLB stock. (3) Repricing terms of ARMs are based upon the interest rate reset periods called for under the terms of the respective notes. (4) Repricing terms are based upon contractual maturities adjusted for projected repayments and prepayments of principal, based upon Coast's historical experience. 4 Because of the inherent lag in the Repricing Mechanism of the ARM loans tied to COFI, interest rate spreads can be generally expected to increase as the index falls and to decrease as the index rises. However, a positive gap, such as that reflected in the table above in the "within one year" column, has the effect of repricing more assets (primarily loans and MBS tied to COFI) than liabilities during a given period. This tends to moderate both the increase in spread in a falling interest rate environment and the decrease in spread in a rising interest rate environment. The effect on net interest income of changes in interest rates and in the amounts of interest-earning assets and interest-bearing liabilities is shown in the following table. Information is provided on changes for the periods indicated attributable to (i) changes in rates (change in weighted average rate multiplied by prior period average portfolio balance), (ii) changes in volume (change in average portfolio balance multiplied by prior period weighted average rate) and (iii) the combined effect of changes in rates and volume (change in weighted average rate multiplied by change in average portfolio balance).
INCREASE (DECREASE) DUE TO ---------------------------------------- RATE VOLUME RATE/VOLUME TOTAL -------- -------- ----------- -------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995 VS 1994: Income from interest-earning assets: Loans............................ $49,491 $ 33,647 $4,355 $ 87,493 MBS.............................. 20,939 4,375 981 26,295 Investment securities............ 5,089 (257) (69) 4,763 -------- -------- ------- -------- 75,519 37,765 5,267 118,551 -------- -------- ------- -------- Expense of interest-bearing liabilities: Deposits......................... 54,958 6,073 1,529 62,560 FHLB advances and other borrowings...................... 18,407 20,230 4,214 42,851 -------- -------- ------- -------- 73,365 26,303 5,743 105,411 -------- -------- ------- -------- Change in net interest income...... $ 2,154 $ 11,462 $ (476) $ 13,140 ======== ======== ======= ======== YEAR ENDED DECEMBER 31, 1994 VS 1993: Income from interest-earning assets: Loans............................ $(30,086) $ 25,407 $(1,965) $ (6,644) MBS.............................. (5,262) (16,200) 748 (20,714) Investment securities............ 6,869 (342) (186) 6,341 -------- -------- ------- -------- (28,479) 8,865 (1,403) (21,017) -------- -------- ------- -------- Expense of interest-bearing liabilities: Deposits......................... (13,581) (2,234) 130 (15,685) FHLB advances and other borrowings...................... 6,130 2,037 156 8,323 -------- -------- ------- -------- (7,451) (197) 286 (7,362) -------- -------- ------- -------- Change in net interest income...... $(21,028) $ 9,062 $(1,689) $(13,655) ======== ======== ======= ========
5 The following table sets forth information concerning the balances and interest rates of Coast's interest-earning assets and interest-bearing liabilities for the periods and at the dates indicated. SPREAD
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1995 1994 ---------------------------------------- ---------------------------------------- AVERAGE AVERAGE AVERAGE INCOME/ YIELD/ RATE-END AVERAGE INCOME/ YIELD/ RATE-END BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD ---------- -------- ------- --------- ---------- -------- ------- --------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans(1)................ $5,850,093 $469,864 8.03% 7.95% $5,376,946 $382,371 7.11% 7.18% MBS..................... 1,880,350 119,629 6.36 6.60 1,796,164 93,334 5.20 5.68 Federal funds sold...... 64,901 4,399 6.78 3.77 59,578 2,732 4.59 -- FHLB stock.............. 83,908 4,467 5.32 5.16 68,916 3,259 4.73 5.69 Other investment securities............. 246,336 14,822 6.02 6.32 272,094 12,934 4.75 6.08 ---------- -------- ----- ----- ---------- -------- ----- ----- Total interest-earning assets................ $8,125,588 $613,181 7.55% 7.51% $7,573,698 $494,630 6.53% 6.82% ========== ======== ===== ===== ========== ======== ===== ===== INTEREST-BEARING LIABILITIES: Deposits: Checking............... $ 553,763 $ 5,675 1.02% 1.27% $ 469,035 $ 3,380 0.72% 0.65% Money market........... 724,281 18,190 2.51 2.59 1,060,119 24,317 2.29 2.47 Time certificates of deposit............... 4,793,347 257,030 5.36 5.41 4,377,920 190,638 4.35 4.83 ---------- -------- ----- ----- ---------- -------- ----- ----- Total deposits......... 6,071,391 280,895 4.63 4.67 5,907,074 218,335 3.70 4.15 ---------- -------- ----- ----- ---------- -------- ----- ----- Borrowings: FHLB advances.......... 902,159 56,632 6.28 6.10 767,890 40,621 5.29 6.20 Short-term............. 985,164 59,677 6.06 5.81 737,065 32,677 4.43 6.02 Long-term.............. 129,669 14,926 11.51 11.15 136,354 15,086 11.06 11.02 ---------- -------- ----- ----- ---------- -------- ----- ----- Total borrowings....... 2,016,992 131,235 6.51 6.40 1,641,309 88,384 5.38 6.47 ---------- -------- ----- ----- ---------- -------- ----- ----- Total interest-bearing liabilities.......... $8,088,383 $412,130 5.10% 4.95% $7,548,383 $306,719 4.06% 4.63% ========== ======== ===== ===== ========== ======== ===== ===== DIFFERENCE BETWEEN AVERAGE BALANCE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES............ $ 37,205 $ 25,315 ========== ========== NET SPREAD.............. $201,051 2.47%(4) 2.56% $187,911 2.48%(4) 2.19% ======== ===== ===== ======== ===== =====
- -------- (1) Includes Nonaccrual and Modified Loans in the "average balance", but only includes actual interest recognized on such loans in "income/expense." Interest income on loans includes amortization of net deferred loan origination fees of $.3 million, $.8 million, $3.7 million, $4.9 million and $4.1 million for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. (2) Average of daily balances during the year. (3) Income/expense divided by average balance. (4) Net spread (dollars) divided by average total interest-earning assets (the "effective net spread"). 6 TABLE
AT OR FOR THE YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 - ----------------------------------------- ----------------------------------------- ----------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE INCOME/ YIELD RATE-END AVERAGE INCOME/ YIELD/ RATE-END AVERAGE INCOME/ YIELD/ RATE-END BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD - ---------- -------- ------- --------- ---------- -------- ------- --------- ---------- -------- ------- --------- (DOLLARS IN THOUSANDS) $5,047,296 $389,015 7.71% 7.08% $5,541,517 $479,807 8.66% 7.95% $6,460,304 $645,706 9.99% 9.73% 2,093,535 114,048 5.45 5.22 1,809,785 125,294 6.92 5.92 1,541,980 145,150 9.41 8.14 43,268 886 2.05 3.09 167,643 5,676 3.39 2.90 316,187 18,709 5.92 -- 68,158 2,483 3.64 3.75 81,784 1,061 1.30 3.14 89,273 5,297 5.93 5.50 300,341 9,215 3.07 3.27 185,218 7,335 3.96 2.49 171,403 8,958 5.23 3.97 - ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- ----- $7,552,598 $515,647 6.83% 6.28% $7,785,947 $619,173 7.95% 7.02% $8,579,147 $823,820 9.60% 9.06% ========== ======== ===== ===== ========== ======== ===== ===== ========== ======== ===== ===== $ 448,000 $ 4,895 1.09% 0.83% $ 465,000 $ 7,769 1.67% 0.97% $ 474,000 $ 17,401 3.67% 2.45% 1,416,000 35,334 2.50 2.27 1,926,000 69,012 3.58 2.77 1,662,000 90,557 5.45 4.62 4,100,000 193,791 4.73 4.01 4,320,000 260,104 6.02 5.39 5,617,000 424,917 7.56 6.50 - ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- ----- 5,964,000 234,020 3.92 3.65 6,711,000 336,885 5.02 4.30 7,753,000 532,875 6.87 5.74 - ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- ----- 512,050 30,900 6.03 4.92 567,390 40,081 7.06 5.20 672,919 55,901 8.31 7.15 936,800 31,551 3.37 3.39 456,616 17,402 3.81 3.58 262,719 16,221 6.17 4.84 151,727 17,610 11.61 10.35 94,245 15,128 16.05 12.70 78,315 12,159 15.53 12.35 - ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- ----- 1,600,577 80,061 5.00 4.61 1,118,251 72,611 6.49 5.42 1,013,953 84,281 8.31 7.04 - ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- ----- $7,564,577 $314,081 4.15% 3.79% $7,829,251 $409,496 5.23% 4.54% $8,766,953 $617,156 7.04% 5.91% ========== ======== ===== ===== ========== ======== ===== ===== ========== ======== ===== ===== $ (11,979) $ (43,304) $ (187,806) ========== ========== ========== $201,566 2.67%(4) 2.49% $209,677 2.69%(4) 2.48% $206,664 2.41%(4) 3.15% ======== ===== ===== ======== ===== ===== ======== ===== =====
7 LENDING ACTIVITIES Types of Loans Coast's loan portfolio consists principally of long-term loans secured by residential real estate and Coast's MBS portfolio, 98% of which is comprised of securities which were created utilizing Coast-originated mortgage loans. At December 31, 1995, 95% and 98% of Coast's loan and MBS portfolios, respectively, consisted of adjustable rate assets. The loans made by Coast enable borrowers to purchase, refinance, or improve the security properties. Most of Coast's single family residential loan contracts provide for amortization of principal over 30 years. The majority of Coast's single family residential loans have generally remained outstanding for less time than such contractual periods because the borrowers refinanced them or prepaid the loans in full upon sale of the properties securing the loans. The following table shows the composition of Coast's loan and MBS portfolios, net of unearned discounts, undisbursed loan proceeds, deferred loan origination fees and valuation allowances, as of the dates indicated.
DECEMBER 31, ---------- ------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Loans: Real estate: 1 to 4 units........ $3,217,683 $3,278,371 $2,457,860 $2,328,405 $2,856,758 More than 4 units... 1,316,559 1,387,656 1,407,295 1,504,530 1,492,292 Commercial.......... 845,439 897,255 936,141 963,812 1,053,089 ---------- ---------- ---------- ---------- ---------- 5,379,681 5,563,282 4,801,296 4,796,747 5,402,139 VA-guaranteed and FHA-insured........ 12,354 15,825 20,782 28,132 35,269 Construction........ -- -- -- 6,298 1,890 Second mortgage..... 51,268 53,478 54,497 85,803 164,446 ---------- ---------- ---------- ---------- ---------- Total real estate loans............ 5,443,303 5,632,585 4,876,575 4,916,980 5,603,744 Commercial business. 2,177 146,122 114,693 133,537 120,271 Secured by deposits. 8,557 8,880 10,903 13,054 16,004 Overdraft line of credit............. 12,459 5,595 5,025 5,707 7,171 ---------- ---------- ---------- ---------- ---------- Total loans....... 5,466,496 5,793,182 5,007,196 5,069,278 5,747,190 ---------- ---------- ---------- ---------- ---------- MBS: 1 to 4 units.......... 2,079,888 1,632,172 1,847,662 2,097,051 1,674,000 More than 4 units..... 91,913 101,556 124,639 119,850 87,511 ---------- ---------- ---------- ---------- ---------- 2,171,801 1,733,728 1,972,301 2,216,901 1,761,511 ---------- ---------- ---------- ---------- ---------- $7,638,297 $7,526,910 $6,979,497 $7,286,179 $7,508,701 ========== ========== ========== ========== ==========
The types of loans which Coast may originate are specified in federal regulations. Although Coast may originate or purchase whole loans or loan participations secured by real estate located in any part of the United States, as of December 31, 1995, 96% of Coast's mortgage loan portfolio is secured by real estate located in California. Coast also has authority to make various kinds of secured and unsecured consumer and commercial business loans, but has not originated or purchased significant amounts of such loans. Coast offers credit card accounts as an agent for an unaffiliated entity but currently extends no credit in connection with such activities. Securitization Coast has securitized portions of its loan portfolio in recent years ($654.2 million, $434.2 million and $343.0 million in 1995, 1994 and 1993, respectively) for several reasons. First, Coast's strategic downsizing, which was largely accomplished during the period of 1989 through 1991 in response to revised capital 8 requirements mandated by federal law, was facilitated by the creation and sale of a large amount of MBS which are generally more liquid than whole mortgage loans. Second, MBS are more efficient as collateral for borrowings than are whole mortgage loans and thus have the effect of reducing Coast's borrowing costs. Third, a substantial majority of the MBS created by Coast's have been nonrecourse or credit-enhanced securities. Such MBS have the advantages of mitigating credit risk and requiring less capital under the risk-based capital regulation than nonsecuritized mortgage loans (see "Regulation--Regulatory Capital Requirements" below). Mitigating credit risk on MBS is accomplished by purchasing private mortgage insurance, paying higher guarantee fees and/or by splitting the securities into a senior/subordinated structure wherein Coast retains the senior interest and sells the subordinate interests, which generally bear any initial credit losses from the mortgage pools. Coast generally bears no credit losses related to these senior interests until the private mortgage insurance, guarantees and/or the subordinated interests are extinguished. At December 31, 1995, the balance of Coast's MBS consisting of loans originated by Coast was $2.13 billion. Coast has eliminated or mitigated credit risk as described above on $1.53 billion of these MBS. Loans to One Borrower Limitations With certain limited exceptions, the maximum amount that a savings institution may lend to one borrower (including certain entities related to such borrower) is an amount equal to 15% of the savings institution's unimpaired capital and unimpaired surplus, plus an additional 10% for loans fully secured by readily marketable collateral. Real estate is not included within the definition of "readily marketable collateral" for this purpose. Under prior law (changed in 1988), a savings institution could generally lend an amount equal to its federal regulatory capital to one borrower. The OTS recently amended its lending limit regulations to define the term "unimpaired capital and unimpaired surplus" based upon an institution's regulatory capital and to include in the basic 15% of capital lending limit that portion of an institution's allowances for loan and lease losses that is not includable in regulatory capital as calculated for other regulatory purposes. OTS regulations provide that certain credit extensions may be excepted from the described loans to one borrower limitations. Pursuant to the current regulation, the maximum amount which Coast could have loaned to any one borrower (and related entities) was $87.4 million as of December 31, 1995. At December 31, 1995, Coast's largest concentration of credit was to four limited partnerships all of which are affiliates of Lehman Brothers Holdings Inc. At that date, $225.3 million of collateralized direct pay letters of credit were outstanding in connection with housing revenue bonds used to finance multifamily residential properties owned by these partnerships. At December 31, 1995, Coast's second largest concentration of loans and extensions of credit was to Coast's former co-equal partner in CoastFed Properties and his affiliated entities in connection with the real estate development activities of CoastFed Properties. At that date, such extensions of credit totaled $95.3 million, which includes $53.8 million of letters of credit, $30.7 million of loans collateralized by multifamily residential units and $10.8 million of other credit extensions. These credit extensions are excepted from the present OTS loans to one borrower limitations. See "Credit Concentration and Letters of Credit". Loan Activity Since 1988 Coast has emphasized originations of single family (one-to-four unit) residential real estate loans and has virtually eliminated originations of other types of loans. All multifamily and commercial real estate loans originated in 1995 were to finance the sale of foreclosed real estate or to facilitate the assumption of loans as permitted by the respective mortgage notes. Single Family Residential Real Estate Lending. In 1995, 1994 and 1993, Coast originated $1.03 billion, $1.74 billion and $1.07 billion, respectively, of single family loans. Such loans represented 91%, 94% and 88% of total real estate loans originated in 1995, 1994 and 1993, respectively, and are all secured by properties located in California. During 1995, 1994 and 1993, originations of single family ARMs totaled $.99 billion, $1.71 billion and $.90 billion, respectively, and such originations represented 97%, 98% and 84%, respectively, of total single family loans originated. 9 Coast offers ARMs that have a fixed interest rate for periods ranging from one month to three years and thereafter provide for interest rates that adjust either monthly or semiannually based on changes in COFI or LIBOR, plus a contractual margin which ranged from 2.30% to 3.60% at December 31, 1995. At December 31, 1995, $4.53 billion of single family ARMs in Coast's loan and MBS portfolio had interest rates tied to COFI, and $.57 billion had interest rates tied to LIBOR. Coast generally discontinued offering second lien mortgage loans in 1991. In 1995, Coast began offering home equity credit lines, which are generally secured by second mortgage liens, to its first mortgage customers. On all home equity credit lines originated, Coast acts as an agent for an unaffiliated entity that is the actual lender. Coast currently offers fixed rate first lien mortgage loans which provide for maturities of either 15 or 30 years, with the 30-year loan bearing a slightly higher rate of interest. The general terms of these loans conform to the guidelines established by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and other securitization conduits. Substantially all of the fixed rate loans originated in recent years have been sold in the secondary mortgage market. Multifamily Residential Lending. In recent years Coast's originations of multifamily loans have been substantially reduced. Since 1989, Coast has originated multifamily mortgage loans solely to provide financing in connection with the sale of foreclosed multifamily properties or to facilitate loan assumptions as permitted by the provisions of the respective mortgage notes. Commercial and Construction Real Estate Lending. OTS Regulations generally limit the amount that any federal savings institution may invest in nonresidential real estate loans to 400% of regulatory capital. Coast eliminated virtually all commercial and construction real estate loan originations in 1988. Such originations are made solely to finance the sale of foreclosed properties of this type or to facilitate loan assumptions as permitted by the provisions of the respective mortgage notes. Commercial Business Lending. Coast is permitted to originate loans not secured by real estate up to an aggregate amount of 10% of its total assets. Until September 30, 1995, Coast engaged in asset-based commercial lending primarily through its subsidiary, CoastFed Business Credit Corporation ("CBCC"). See "Subsidiaries--Asset-Based Lending." Coast currently does not originate unsecured commercial loans other than to its subsidiaries. 10 The following table sets forth certain information with respect to activity in Coast's loan and MBS portfolios during the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ----------- (IN THOUSANDS) Real estate loans originated: Conventional: 1 to 4 units.......... $1,026,233 $1,740,587 $1,072,704 $1,315,964 $ 1,419,115 More than 4 units..... 56,304 95,554 106,944 108,063 108,999 Commercial............ 40,341 19,212 34,875 30,297 75,376 ---------- ---------- ---------- ---------- ----------- Total conventional real estate loans originated......... 1,122,878 1,855,353 1,214,523 1,454,324 1,603,490 Construction.......... -- -- -- 6,171 145 Second mortgage....... 201 55 68 2,800 5,534 ---------- ---------- ---------- ---------- ----------- Total real estate loans originated... 1,123,079 1,855,408 1,214,591 1,463,295 1,609,169 Commercial business loans originated....... 10,169 45,442 28,635 28,000 24,305 Loans exchanged for MBS, net.................... (654,238) (434,156) (342,961) (965,193) (2,223,811) Loans sold.............. (44,197) (28,398) (130,062) (286,834) (180,851) Principal repayments and other decreases of loans.................. (761,499) (652,310) (832,285) (917,180) (1,004,095) ---------- ---------- ---------- ---------- ----------- Net increase (decrease) in loans.............. (326,686) 785,986 (62,082) (677,912) (1,775,283) ---------- ---------- ---------- ---------- ----------- Loans exchanged for MBS, net.................... 654,238 434,156 342,961 965,193 2,223,811 MBS purchased........... -- 18,574 10,340 38,091 47,641 MBS sold................ (35,335) (334,617) (241,886) (222,990) (2,045,761) Principal repayments and other decreases of MBS. (180,830) (356,686) (356,015) (324,904) (63,028) ---------- ---------- ---------- ---------- ----------- Net increase (decrease) in MBS.. 438,073 (238,573) (244,600) 455,390 162,663 ---------- ---------- ---------- ---------- ----------- Net increase (decrease)....... $ 111,387 $ 547,413 $ (306,682) $ (222,522) $(1,612,620) ========== ========== ========== ========== ===========
General Loan Portfolio Composition. The following table sets forth the amounts of each of the indicated categories of loans and MBS held by Coast at the dates indicated.
DECEMBER 31, -------------------------------------------------------------- 1995 1994 1993 -------------------- -------------------- -------------------- PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO ---------- --------- ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Loans: ARMs.................. $5,213,333 69% $5,508,066 73% $4,648,458 67% Fixed rate............ 253,163 3 285,116 4 358,738 5 ---------- --- ---------- --- ---------- --- 5,466,496 72 5,793,182 77 5,007,196 72 ---------- --- ---------- --- ---------- --- MBS: ARMs.................. 2,136,777 28 1,695,412 22 1,917,007 27 Fixed rate............ 35,024 -- 38,316 1 55,294 1 ---------- --- ---------- --- ---------- --- 2,171,801 28 1,733,728 23 1,972,301 28 ---------- --- ---------- --- ---------- --- Total loans and MBS. $7,638,297 100% $7,526,910 100% $6,979,497 100% ========== === ========== === ========== ===
11 The following table presents the contractual maturities of Coast's loans and MBS in the periods indicated as of December 31, 1995.
AFTER 1 AFTER 2 AFTER 3 AFTER 5 AFTER 10 WITHIN THROUGH THROUGH THROUGH THROUGH THROUGH AFTER 1 YEAR 2 YEARS 3 YEARS 5 YEARS 10 YEARS 15 YEARS 15 YEARS TOTAL ------ ------- ------- ------- -------- -------- -------- ------ (IN MILLION) Real estate... $197 $131 $126 $191 $570 $ 84 $4,144 $5,443 Commercial.... -- 2 -- -- -- -- -- 2 Other......... 20 1 -- -- -- -- -- 21 MBS........... -- 1 -- 3 -- 14 2,154 2,172 ---- ---- ---- ---- ---- ---- ------ ------ $217 $135 $126 $194 $570 $ 98 $6,298 $7,638 ==== ==== ==== ==== ==== ==== ====== ======
At December 31, 1995, loans due after one year included $5.05 billion with adjustable interest rates and $198.0 million with fixed interest rates. At December 31, 1995, MBS due after one year included $2.14 billion with adjustable interest rates and $35.0 million with fixed interest rates. ARMs. Coast's ARMs generally provide for a 3.30% to 9.00% limit or "cap" on increases or decreases from their initial interest rates, thereby protecting borrowers from unlimited interest rate increases. Coast's ARMs are generally originated with rates of interest that remain fixed during the initial one- month to three-year period at a level that is less than the rate determined by adding the contractual margin to the index at the time of origination. Coast's ARMs also provide for either a 1% cap on the semi-annual interest rate adjustments for LIBOR-based loans and six-month COFI loans without negative amortization or, for Coast's monthly COFI loans, a 7.5% cap on the amount by which monthly payments can increase or decrease from one annual payment adjustment to the next, except that at the end of each five-year interval monthly payments may be adjusted by more than 7.5% in order to provide for amortization of the ARMs by their maturity. Because of the initial period rates, the payment cap provided on Coast's monthly COFI loans and the different times at which interest rate adjustments and payment adjustments are made, contractual monthly payments may not be sufficient to pay the interest accruing on an ARM. The amount of any shortfall ("negative amortization") is added to the principal balance of the loan to be repaid through future monthly payments, which could cause increases in the amount of principal owed to Coast. Significant negative amortization can have the effect of increasing the loss ultimately realized by Coast upon the disposition of foreclosed properties, and may also have the effect, under certain circumstances, of increasing the associated risk of default, especially on loans originated with relatively high loan-to-value ("LTV") ratios. Because interest rates have generally declined in recent years, Coast's ARMs have generally experienced reductions in negative amortization and, as a result, negative amortization has not been a significant factor in actual credit losses. During 1995, however, the net amount of negative amortization on Coast's ARMs increased by $11.6 million primarily as a result of the origination of single family ARMs for which first-year payments are fixed, based on initial rates, while interest accruals are at fully-indexed rates. Also contributing to greater negative amortization in 1995 were increases in COFI, which moved from the 4.589% level, published as of December 31, 1994, to the December 31, 1995 level of 5.059%. The following table sets forth the cumulative amounts of negative amortization included in the real estate loan portfolio at the dates indicated.
DECEMBER 31, --------------- 1995 1994 ------- ------- (IN THOUSANDS) Single family mortgage................................... $13,623 $ 1,771 Multifamily mortgage..................................... 632 982 Commercial mortgage...................................... 200 75 ------- ------- $14,455 $ 2,828 ======= =======
12 Loan Underwriting. The loan underwriting process is intended to assess both the prospective borrower's credit standing and ability to repay, and the value and adequacy of the real property security as collateral for the mortgage loan. Prospective borrowers complete an application that includes information with respect to the applicant's bank accounts, assets, liabilities, income, credit history, employment history, and personal information. The application also includes the amount of, and reason for, the loan being requested. Coast generally obtains verifications of an applicant's employment and income, and appraisals of the security property, which are part of the application process, are performed by qualified staff appraisers or Coast-approved fee appraisers. All outside fee appraisals are reviewed either by a Coast appraiser or by a retained appraisal review company. The loan must be approved by various levels of management and/or authorized underwriter(s) based on the loan amount. Coast's salaried loan underwriters analyze the loan application, the credit information and the appraisal, and, depending on the underwriter's approval limit, either approve a requested loan or make a recommendation to Coast's loan committee concerning approval of a requested loan. Prior to July 1991, borrowers were generally qualified at the initial interest rate plus 1% on single family ARMs unless the initial interest rate was below 7.5%, in which case the borrowers were qualified at that initial rate plus 1.5%. In July 1991, as interest rates declined, this guideline was modified to generally qualify borrowers at a minimum of 7.5% for single family ARMs. Coast's current general practice is to qualify borrowers at the fully indexed rate. This guideline may be modified based on changing market conditions, compensating factors and other considerations. For all real estate loans, Coast requires title insurance insuring the priority of its lien, fire and extended coverage casualty insurance, and may also require flood insurance if appropriate in order to protect Coast's interest in the security property. Loan-to-Value Ratios. Subject to certain restrictions, federal savings banks are generally permitted to make loans with LTV ratios up to 100% on single family mortgage loans. See "Regulation--Lending Standards" for a discussion of additional lending limitations. However, Coast generally limits the LTV ratios of first lien single family mortgage loans to 90% and obtains private mortgage insurance on mortgage loans with LTV ratios in excess of 80%. Coast began offering home equity credit lines to its first mortgage customers during 1995. All of the home equity credit lines which Coast originates are sold to an unaffiliated entity. The maximum combined LTV (based on both the amount of the first mortgage loan and the maximum amount of the home equity credit line) on a Coast home equity credit line is 90%. In early 1994, Coast began originating single family loans with LTV ratios up to 95% under the FNMA Low-to-Moderate Income Programs. These loans are insured through private mortgage insurance and are originated for immediate sale to either FHLMC or FNMA. Coast also offers a six-month COFI ARM without negative amortization for loans to purchase single family properties with LTV ratios up to 95% and private mortgage insurance. Due on Sale Clauses. Substantially all fixed rate loans in Coast's loan portfolio contain a "due on sale" clause providing that Coast may declare the unpaid principal amount due and payable upon the sale of the property securing the loan. While the enforceability of due on sale clauses in certain mortgage instruments has been restricted in some states, including California, federal law generally preempts certain of these state restrictions. Although the ARMs in Coast's portfolio contain a due on sale clause, an ARM is generally transferable to a purchaser of the security property, if the purchaser meets Coast's creditworthiness standards. Sales and Servicing of Mortgage Loans In addition to originating and purchasing loans for its own portfolio, Coast participates in secondary mortgage market activities by selling whole loans and participations in loans to FHLMC, FNMA and various institutional investors such as other savings banks, savings and loan associations and insurance companies. Sales of mortgage assets function primarily to fund lending operations, manage interest rate risk and increase the loan servicing portfolio. The marketability of loans, loan participations and MBS, however, depends on the purchasers' investment limitations, general market and competitive conditions, mortgage loan demand and other factors. At December 31, 1995, Coast held $221.0 million of loans designated as held for sale, whose fair value was approximately $230.0 million. 13 Prior to 1990, Coast generally sold loans with various subordination or recourse (together, "recourse") provisions which provide a remedy against Coast, as the seller, by the purchaser if the borrower fails to make payments on a sold loan. OTS regulations require the maintenance of risk-based capital for loans sold with recourse. See "Regulation--Regulatory Capital Requirements--General Capital Requirements." Accordingly, since 1990 it has generally been Coast's practice to sell loans without recourse and Coast had no recourse sales in 1995, 1994 or 1993. For additional information on loans sold with recourse, see Notes 13 and 17 of Notes to Consolidated Financial Statements. Coast sells mortgage loans and loan participations for cash proceeds calculated as a percentage of the principal amount of the loans or participations which will yield the buyer a current market return at the time of the sale, over the term of the loans or participations sold. Gain or loss is recognized based upon the difference between these proceeds and the book value of the loans or participations sold. If Coast retains the servicing of the loans sold, which it typically does, an additional gain or loss is recognized and a receivable or payable is recorded at the time of sale based upon the net present value of the expected amounts to be received or paid resulting from the difference between the contractual interest rates received from borrowers, less a normal servicing fee, and the rate to be paid to the buyer. Servicing of loans sold by Coast includes the responsibility for collecting and remitting loan payments, taking steps to ensure that insurance and tax payments are made on a timely basis, and otherwise administering the loans, for which Coast receives a fee. Coast was servicing loans for investors of $3.42 billion, $3.96 billion and $4.18 billion at December 31, 1995, 1994 and 1993, respectively. The amount of annual servicing fees collected by Coast is recognized as servicing fee income over the life of the loan and varies, but generally is calculated as an amount equal to a rate ranging from .125% to .25% (for multifamily loans), and .25% to .375% (for single family loans), based on the outstanding principal amount of the loans serviced. During 1995 the average annual servicing fee on Coast's portfolio of serviced loans was .27%. For additional information on Coast's sales and servicing of mortgage loans, see Note 17 of Notes to Consolidated Financial Statements. Fees and Discounts In addition to the interest earned on loans, Coast may charge fees for services such as originating loans, making loan commitments, receiving loan prepayments and late payments and processing changes of property ownership. The income realized from such services varies with the volume of loans originated, purchased or prepaid, and the rates of fees vary from time to time depending on various factors including competitive conditions in the mortgage markets. Loan origination fees and the incremental direct costs relating to loans originated are deferred and amortized over the lives of the related loans. Deferred loan origination fees and costs are amortized into interest income utilizing the interest method. Discounts on loans acquired are amortized using the interest method over the remaining contractual terms of the loans as adjusted for estimated prepayments. Coast's current origination fees on its single family ARMs generally range from none to 2% of the principal amount of the loan plus up to $700 of ancillary fees. RISK ELEMENTS California Real Estate Approximately 96% of Coast's loans and MBS are secured by properties located in California, which experienced rising unemployment, declining occupancy and rental rates, and declining property values from 1990 through 1992. Since 1993, however, unemployment has declined, and the decline in occupancy rates, rental rates and property values appears to have moderated. As a result of these factors, Coast's loans secured by properties located in California which are 90 days or more delinquent increased from $137.1 million at December 31, 1991, 14 to $151.1 million at December 31, 1992, but decreased to $106.4 million at December 31, 1993, $92.3 million at December 31, 1994, and $80.2 million at December 31, 1995. There can be no assurance that the California economy will continue to improve, nor can there be any assurance that there will not be additional delinquencies and/or further declines in property values in California. For additional information with respect to the California economy, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation--Nonperforming Assets." During 1994, the greater Los Angeles area experienced a strong earthquake, followed by a series of significant aftershocks, which caused damage to property and infrastructure over a widespread area of Los Angeles and surrounding communities. As a result, the GVA was increased by $15 million during the first quarter of 1994 to absorb potential losses from the damaged properties. This portion of the GVA was subsequently charged off in its entirety. Nonperforming Loans Coast defines nonperforming loans to include (i) loans on which it has ceased to accrue interest ("Nonaccrual Loans") and (ii) loans whose terms have been modified such that the interest rates charged to the borrowers have been reduced to levels below the original contract rates and below market rates of interest at both the time of modification and the reporting date ("Modified Loans"). It is Coast's policy to discontinue the recognition of income and to reverse previously accrued and uncollected interest on loans when there is reasonable doubt as to collectibility of the loans. Generally, interest accruals are discontinued when loans become 90 days past due, or earlier when other conditions warrant. If Nonaccrual Loans at December 31, 1995, had been interest-earning throughout the year, interest income of $6.3 million would have been earned on these loans at their respective contractual rates. For the year ended December 31, 1995, actual interest earned on such loans was $2.6 million. Nonaccrual Loans totaled $81.4 million, $96.7 million, $117.1 million, $156.7 million and $142.0 million at December 31, 1995, 1994, 1993, 1992 and 1991, respectively. See "Business--Nonperforming Assets" below. The following table sets forth certain loan delinquency information, which includes information on Nonaccrual Loans, at the dates indicated and by the period of delinquency.
DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------------- ----------------------------- OVER 60 OVER 90 OVER 60 OVER 90 TO 90 DAYS DAYS TOTAL TO 90 DAYS DAYS TOTAL ---------- ------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS) Single family mortgage.. $ 7,196 $43,792 $ 50,988 $ 6,999 $ 53,421 $ 60,420 Multifamily mortgage.... 6,218 25,646 31,864 16,297 30,145 46,442 Commercial mortgage..... 9,609 11,619 21,228 10,464 13,052 23,516 Other................... 179 294 473 67 95 162 ------- ------- -------- -------- -------- -------- $23,202 $81,351 $104,553 $ 33,827 $ 96,713 $130,540 ======= ======= ======== ======== ======== ======== Percent of total loans.. .42% 1.49% 1.91% .58% 1.67% 2.25% ======= ======= ======== ======== ======== ========
15 The following table stratifies the multifamily residential and commercial loan portfolios by geographical location, by type of loan and by the range of the loans' original principal balances, and compares these strata to their respective proportions of nonperforming loans as of December 31, 1995.
ORIGINAL PRINCIPAL BALANCE RANGE CALIFORNIA OTHER STATES TOTAL - -------------------------------- ------------------------ ---------------------- ------------------------ TOTAL NONPERFORMING TOTAL NONPERFORMING TOTAL NONPERFORMING FROM THROUGH LOANS LOANS LOANS LOANS LOANS LOANS - ---- --------------------------- ------------- -------- ------------- ---------- ------------- (IN THOUSANDS) LOANS: Multifamily: $ 0 $ 1 million $ 662,070 $14,441 $ 5,175 $ -- $ 667,245 $14,441 $ 1 million $ 2 million 260,930 2,470 15,066 -- 275,996 2,470 $ 2 million $ 5 million 163,624 8,735 55,854 -- 219,478 8,735 $ 5 million $ 10 million 68,973 -- 44,828 -- 113,801 -- $10 million $ 15 million 41,269 -- 25,764 -- 67,033 -- $15 million and greater 15,168 -- -- -- 15,168 -- ---------- ------- -------- ------ ---------- ------- 1,212,034 25,646 146,687 -- 1,358,721 25,646 ---------- ------- -------- ------ ---------- ------- Commercial and other: $ 0 $ 1 million 260,363 2,673 3,899 40 264,262 2,713 $ 1 million $ 2 million 131,249 3,479 20,725 1,000 151,974 4,479 $ 2 million $ 5 million 168,026 4,721 44,083 -- 212,109 4,721 $ 5 million $ 10 million 118,799 -- 44,828 -- 163,627 -- $10 million $ 15 million 10,446 -- 37,735 -- 48,181 -- $15 million and greater 68,314 -- -- -- 68,314 -- ---------- ------- -------- ------ ---------- ------- 757,197 10,873 151,270 1,040 908,467 11,913 ---------- ------- -------- ------ ---------- ------- Total multifamily and commercial loans: 1,969,231 36,519 297,957 1,040 2,267,188 37,559 ---------- ------- -------- ------ ---------- ------- MBS: Multifamily: $ 0 $ 1 million 72,084 -- -- -- 72,084 -- $ 1 million $ 2 million 12,186 -- -- -- 12,186 -- $ 2 million $ 5 million 7,643 -- -- -- 7,643 -- ---------- ------- -------- ------ ---------- ------- Total multifamily MBS 91,913 -- -- -- 91,913 -- ---------- ------- -------- ------ ---------- ------- Total $2,061,144 $36,519 $297,957 $1,040 $2,359,101 $37,559 ========== ======= ======== ====== ========== =======
Although the historical loss rates have been lower among the strata with smaller principal balances, there can be no assurance that this experience will continue, or that Coast will not experience additional delinquencies and/or credit losses in any of the strata shown above. Impaired Loans Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"), which, during the fourth quarter of 1994 was subsequently amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures. SFAS 114 does not apply to large groups of smaller-balance homogeneous loans that are collectively valued for impairment. A loan is impaired when, based on current information and events, a creditor will be unable to collect all amounts contractually due under a loan agreement. Loans are evaluated for impairment as part of Coast's normal internal asset review process. When a loan is determined to be impaired, a valuation allowance is established based upon the difference between Coast's investment in the loan and the fair value of the collateral securing the loan. Coast's impaired loans totaled $135.2 million and $112.6 million at December 31, 1995 and 1994, respectively, and for the years then ended the average investment in impaired loans was $109.9 million and $85.7 million, respectively. Interest income on such loans totaled $8.1 million in 1995 and $6.4 million in 1994, and was recognized utilizing the cash-basis method of accounting. As of December 31, 1995 and 1994, Nonaccrual Loans included $37.6 million and $43.3 million, respectively, of impaired loans. 16 Impaired loans at December 31, 1995, included $127.2 million of loans for which valuation allowances of $25.6 million had been established and $33.6 million of loans for which no allowance was considered necessary. At December 31, 1994 Coast had $92.9 million of impaired loans for which valuation allowances of $18.5 million had been established and $38.2 million of such loans for which no allowance was considered necessary. All such provisions for losses and any related recoveries are recorded as part of the provision for loan losses in the accompanying consolidated statement of operations. Coast had recoveries of zero and $.1 million of previously established allowances during the years ended December 31, 1995 and 1994, respectively. Cash payments received on impaired loans which are performing under their contractual terms are allocated to principal and interest in accordance with the terms of the respective loan. Restructured Loans Coast has reached agreements with certain borrowers that provide for restructuring existing loans secured by income-producing properties. Restructurings, which include Modified Loans (as defined under "Nonperforming Loans" above), are generally in the form of interest rate adjustments, extensions of maturities or deferred payments of principal or interest. Restructured loans totaled $30.5 million, $37.3 million, $76.4 million, $96.5 million and $38.7 million at December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The restructured loans had effective yields of 8.00% and 7.87% at December 31, 1995 and 1994, respectively. The loans identified as restructured loans at December 31, 1995, represent loans that were modified prior to the Company's implementation of SFAS 114 in 1994 and which are performing in accordance with their modified terms. Coast accounts for such loans under the provisions of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as permitted under SFAS 114. For the years ended December 31, 1995, 1994 and 1993, $2.4 million, $2.9 million and $5.2 million, respectively, was earned on these restructured loans which is included in interest income on loans in the accompanying consolidated statement of operations. Interest income on these loans for the years ended December 31, 1995, 1994 and 1993, would have totaled $3.2 million, $3.8 million and $7.8 million, respectively, under their original terms. At December 31, 1995, Coast had no commitments to lend additional funds to these borrowers. General Valuation Allowance Coast maintains a GVA to absorb credit losses related to its assets and off- balance sheet items. The GVA is reviewed and adjusted quarterly and based upon a number of factors, including asset classifications, economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency migration analysis, historical loss experience, ratio analysis and Coast's underwriting practices. Economic conditions, especially those affecting real estate markets, may change, which could result in the need for an increased GVA in future periods. In addition, regulatory agencies, as an integral part of their examination process, periodically review Coast's GVA. These agencies may require Coast to establish additional allowances based on their judgments of the information available at the time of the examination. 17 The table shown below reflects the changes in the GVA for the periods indicated.
LOANS --------------------------- RESIDENTIAL COMMERCIAL REAL REAL ESTATE ESTATE MORTGAGE OFF-BALANCE MORTAGAGE AND OTHER SHEET ITEMS TOTAL ----------- --------------- ----------- ----- (IN MILLIONS) Balance at December 31, 1990..... $ 34 $ 42 $ 20 $ 96 Additions charged to operations.. 37 26 19 82 Recoveries....................... 3 1 -- 4 Losses charged................... (13) (29) -- (42) ---- ---- ---- ---- Balance at December 31, 1991..... 61 40 39 140 Additions charged (reductions credited) to operations......... 19 31 (4) 46 Recoveries....................... 4 3 -- 7 Losses charged................... (35) (15) (3) (53) ---- ---- ---- ---- Balance at December 31, 1992..... 49 59 32 140 Additions charged (reductions credited) to operations......... 69 8 (16) 61 Recoveries....................... 2 5 -- 7 Losses charged................... (67) (19) (2) (88) ---- ---- ---- ---- Balance at December 31, 1993..... 53 53 14 120 Additions charged (reductions credited) to operations......... 68 (2) 9 75 Recoveries....................... 6 1 -- 7 Losses charged................... (78) (24) (15) (117) ---- ---- ---- ---- Balance at December 31, 1994..... 49 28 8 85 Additions charged to operations.. 40 -- -- 40 Recoveries....................... 1 1 -- 2 Losses charged................... (38) (4) -- (42) Sale of subsidiary............... -- (3) -- (3) Reallocations.................... (4) (5) 9 -- ---- ---- ---- ---- Balance at December 31, 1995..... $ 48 $ 17 $ 17 $ 82 ==== ==== ==== ====
In 1990 and earlier years, various parts of the country (particularly the Northeastern and Southeastern regions) experienced an economic recession that generally resulted in significant reductions in real estate values throughout those regions. During 1990, California began to experience an economic recession and, fueled in particular by defense industry cutbacks, the California recession grew during the succeeding years and into 1993 to a level that was both the broadest and deepest in more than 50 years. During the latter part of 1993 and through 1995 the economic conditions in California have generally stabilized, and marginal improvement has been observed in many areas of California. Coast began to establish its GVA in 1989 and, during each subsequent period, adjusted the balance of such allowance to a level believed appropriate based on available information with respect to economic and other factors, and the changing credit risk profiles of its assets and off-balance sheet items. During 1994 Coast experienced losses on residential real estate mortgage loans that exceeded the beginning of the year balance of the related portion of the GVA, primarily as a result of two factors described below--the January 1994 earthquake and the 1994 elimination of certain recourse liability. While Coast believes it has adequately provided for the possible credit loss exposure based on current conditions and the information currently available to it, deterioration of economic conditions or other circumstances could result in a need for Coast to record additional loss provisions. 1994 Earthquake--During 1994 the greater Los Angeles area experienced a significant earthquake (see "California Real Estate" above), one result of which was the necessity for Coast to provide $15 million of additional GVA for the resulting losses. This portion of the GVA was subsequently charged off in its entirety. 18 Elimination of certain recourse liability--During 1994, Coast exercised its option to eliminate the recourse liability associated with $977 million of multifamily loans that had been securitized into FNMA pools. The results of this transaction included the following: (i) Coast eliminated all future exposure to credit losses (write-downs and holding costs) related to the loans and foreclosed real estate owned, relinquished the related spread account asset and reduced the GVA allocated to such exposure by $20 million, (ii) Coast recorded an increase in its provision for losses of approximately $6 million, and (iii) Coast wrote off approximately $10 million of its excess servicing asset, with such write-off, entitled Elimination of Excess Spread Servicing Asset, included as a reduction of noninterest income in the accompanying consolidated statement of operations. While management believes that the balance of the GVA is adequate, there can be no assurance that increases in the GVA will not be required in the future, or that losses charged will not exceed the beginning of the period allowance for any future period. Net loans charged off as a percentage of average loans outstanding were .73%, 1.77%, 1.60%, .78% and .46% for the years ended December 31, 1995, 1994, 1993, 1992, and 1991, respectively. The 1994 net loan charge-offs and their percentage of average loans were greater than those recorded in 1993 due to the factors noted above. For additional information on valuation allowances, see "Nonperforming Assets", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -Nonperforming Assets" and Note 3 of Notes to Consolidated Financial Statements. CREDIT CONCENTRATION AND LETTERS OF CREDIT At December 31, 1995, Coast had letters of credit outstanding aggregating $382.6 million (see "Lending Activities--Loans to One Borrower Limitations"). The letters of credit were issued primarily in 1984 and 1985 to enhance the rating of $394.6 million of housing revenue bonds issued to finance the construction of multifamily residential projects developed by CoastFed Properties and owned by various limited partnerships. In these transactions, the proceeds of the respective housing revenue bond issues were loaned by the bond trustees to the limited partnerships to finance the respective projects. Prior to 1990, Coast was involved in real estate development activities as a co-equal partner in CoastFed Properties, a real estate development partnership. During 1990, Coast withdrew from CoastFed Properties and ceased all involvement in such real estate development activities; however, various extensions of credit to Coast's former general partner and his affiliates generally resulting from these activities remain outstanding and represent Coast's second largest credit concentration, totaling $95.3 million, comprised of $53.8 million of letters of credit, $30.7 million of loans collateralized by multifamily residential units and $10.8 million of other credit extensions. At December 31, 1995, the loan payable to the housing bond trustee associated with one of the letters of credit issued to the respective borrower was in default. Coast has installed a court-appointed receiver to manage the property. In the event the default is not remedied by the borrower and Coast forecloses on the property, it would become a component of Coast's foreclosed real estate owned and would increase nonperforming assets by approximately $32 million. All other extensions of credit to this borrower and his affiliates are performing in accordance with their terms. At December 31, 1995, the loan payable to the housing revenue bond trustee associated with another letter of credit was in default. Coast has installed a court-appointed receiver to manage the property. In the event the default is not remedied by the borrowing entity and Coast forecloses on the property, it would become a component of Coast's foreclosed real estate owned and would increase nonperforming assets by approximately $19 million. 19 Coast receives periodic fees for providing the letters of credit supporting the housing revenue bonds represented by the positive difference, if any, between the rates of interest paid to the bondholders and the rates of interest received from the owners of the various projects. The rates of interest on the tax-exempt housing revenue bonds are reset each week. In the event the rates of interest on the bonds were to exceed the rates of interest on the respective notes, Coast would pay the difference and would not, therefore, receive the periodic fee income described above. These letters of credit fees amounted to $5.9 million, $9.2 million and $7.8 million in 1995, 1994 and 1993, respectively, and are included in other noninterest income in the accompanying consolidated statement of operations. The decrease of $3.3 million from 1994 to 1995 in servicing fee income related to housing bonds resulted primarily from decreases in the spread between fixed rates received from the borrowers and adjustable rates paid to the bondholders. Any draws against the letters of credit not reimbursed by the project owners generally are advanced under subordinate deed of trust notes held by Coast on the projects, and such advances are generally charged off as disbursed. The risks to Coast under the letters of credit are generally similar to those of permanent financing of multifamily residential properties. In evaluating the overall adequacy of Coast's GVA, management has considered various aspects of these credit extensions. While Coast believes it has adequately provided for the possible credit loss exposure based on current conditions and the information currently available to it, deterioration of economic conditions or other circumstances could result in a need for Coast to record additional loss provisions with respect to these letters of credit. NONPERFORMING ASSETS Coast defines nonperforming assets to include foreclosed real estate owned, Nonaccrual Loans, nonaccrual high yield bonds and Modified Loans. The following table sets forth the components of nonperforming assets at the dates indicated.
DEC DEC DEC DEC DEC 31, 31, 31, 31, 31, 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ (DOLLARS IN MILLIONS) Foreclosed real estate owned........... $ 32 $ 44 $ 101 $ 161 $ 187 Nonaccrual Loans....................... 81 97 117 157 142 Modified Loans......................... -- 1 2 1 38 Nonaccrual high yield bonds............ -- -- -- -- 3 ------ ------ ------ ------ ------ Total nonperforming assets........... $ 113 $ 142 $ 220 $ 319 $ 370 ====== ====== ====== ====== ====== Total assets........................... $8,252 $8,197 $8,095 $8,352 $8,635 ====== ====== ====== ====== ====== Ratio of total nonperforming assets to total assets.......................... 1.37% 1.73% 2.72% 3.82% 4.28% ====== ====== ====== ====== ======
The following table highlights certain ratios with respect to Coast's GVA as of the dates indicated.
AS OF DECEMBER 31, ---------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- GVA to Nonaccrual Loans........................... 101% 88% 103% 89% 99% GVA to Nonperforming Assets....................... 73% 60% 55% 44% 38%
As of December 31, 1995, Coast's ratios of Nonaccrual Loans to total loans and nonperforming assets to total assets declined to 1.49% and 1.37%, respectively, from 1.67% and 1.73%, respectively, as of December 31, 1994. Management believes the historical progress in reducing nonperforming assets is generally attributable to a slowly improving economy in California, stabilizing property values in Coast's market areas and a continuation of management's policy of aggressively resolving delinquencies and disposing of foreclosed real estate owned. In that the incidence of delinquencies and foreclosures is influenced by many variables, there can be no assurance that Coast will not experience increased levels of nonperforming assets, despite the apparently improving economic outlook for California. 20 The following table sets forth the December 31, 1995, components of nonperforming assets by geographic location.
OTHER PERCENT NONPERFORMING ASSETS CALIFORNIA STATES TOTAL OF TOTAL - -------------------- ---------- ------ -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual Loans: Single family residential................. $ 43,633 $ 159 $ 43,792 38.8% Multifamily residential................... 25,646 -- 25,646 22.7 Commercial and other...................... 10,873 1,040 11,913 10.5 -------- ------ -------- ----- 80,152 1,199 81,351 72.0 -------- ------ -------- ----- Foreclosed real estate owned: Single family residential................. 15,030 47 15,077 13.3 Multifamily residential................... 6,652 -- 6,652 5.9 Commercial and other...................... 7,672 2,295 9,967 8.8 -------- ------ -------- ----- 29,354 2,342 31,696 28.0 -------- ------ -------- ----- Total nonperforming assets.................. $109,506 $3,541 $113,047 100.0% ======== ====== ======== =====
SUBSIDIARIES Insurance and Investment Services Coast Fed Services ("CFS"), a wholly owned subsidiary of Coast, provides hazard and other insurance and investment products as an agent for insurers and mutual funds and a range of trustee services, including acting as trustee on deeds of trust held by Coast. CFS reported pretax earnings of $11.0 million and $9.9 million for the years ended December 31, 1995 and 1994, respectively, which results include commissions earned on investment, insurance and related products of $12.7 million and $13.2 million, respectively. For segment reporting related to CFS, see Note 18 of Notes to Consolidated Financial Statements. Asset-Based Lending On September 30, 1995 the Bank terminated its asset-based lending activity through the sale of its former subsidiary, CBCC. At the date of sale, CBCC had a loan portfolio of $135.8 million. The consolidated statement of operations for the year ended December 31, 1995, includes a pretax gain of $7.5 million resulting from the sale of CBCC. 21 OTHER INVESTMENTS In addition to loans and MBS, Coast invests in other securities. These investments, a majority of which have maturities of less than ninety days, satisfy regulatory requirements that Coast maintain minimum average balances of liquid assets and also serve to fund normal operational requirements. Such investments are summarized in the following table as of the dates indicated.
DECEMBER 31, --------------------------------------------- 1995 1994 1993 -------------- -------------- --------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE -------- ----- -------- ----- -------- ------ (IN MILLIONS) Federal funds sold and other short term investments: Qualifying for regulatory liquidity: Federal funds sold.............. $28.0 $28.0 $ -- $ -- $120.0 $120.0 Repurchase agreements........... -- -- -- -- 340.0 340.0 ----- ----- ----- ----- ------ ------ 28.0 28.0 -- -- 460.0 460.0 ----- ----- ----- ----- ------ ------ Not qualifying for regulatory liquidity: Commercial paper................ 2.4 2.4 2.4 2.4 4.1 4.1 ----- ----- ----- ----- ------ ------ Federal funds sold and other short term investments......... 30.4 30.4 2.4 2.4 464.1 464.1 ----- ----- ----- ----- ------ ------ Investment securities: Qualifying for regulatory liquidity: U.S. Treasury securities........ -- -- 4.8 4.8 -- -- ----- ----- ----- ----- ------ ------ Not qualifying for regulatory liquidity: Commercial paper, custodial..... 24.3 24.3 32.6 32.6 39.0 39.0 Repurchase agreements, custodial...................... 3.4 3.4 -- -- 5.8 5.8 Other marketable securities, custodial...................... .4 .4 .1 .1 .5 .5 ----- ----- ----- ----- ------ ------ 28.1 28.1 32.7 32.7 45.3 45.3 ----- ----- ----- ----- ------ ------ Investment securities.......... 28.1 28.1 37.5 37.5 45.3 45.3 ----- ----- ----- ----- ------ ------ $58.5 $58.5 $39.9 $39.9 $509.4 $509.4 ===== ===== ===== ===== ====== ======
As of December 31, 1995, the weighted average yield on the short-term investment securities listed above was 4.79%. 22 The carrying and fair values of long-term investment securities are shown in the following table at the dates indicated.
DECEMBER 31, -------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE -------- ----- -------- ----- -------- ----- (IN MILLIONS) Qualifying for regulatory liquidity: U.S. Treasury securities: Held to maturity................. $40.3 $40.5 $40.7 $39.8 $ -- $ -- ----- ----- ----- ----- ----- ----- Not qualifying for regulatory liquidity: States of the U.S. and political subdivisions thereof: Held to maturity................. 3.6 3.7 3.7 3.7 4.1 4.4 Corporate debt and equity securities: Available for sale............... -- -- -- -- .5 .5 Money market trust accounts: Held to maturity................. -- -- -- -- 29.1 29.1 Other marketable securities: Held to maturity................. .8 .8 .6 .6 .5 .5 ----- ----- ----- ----- ----- ----- 4.4 4.5 4.3 4.3 34.2 34.5 ----- ----- ----- ----- ----- ----- $44.7 $45.0 $45.0 $44.1 $34.2 $34.5 ===== ===== ===== ===== ===== =====
Following is a table which describes the amounts of Coast's long-term investment securities which mature in the periods indicated, and their weighted average yields as of December 31, 1995.
WEIGHTED REMAINING MATURITY AMOUNT AVERAGE YIELD ------------------ ------ ------------- (DOLLARS IN MILLIONS) Within one year...................................... $40.3 6.17% After one through two years.......................... .8 7.00 After ten years...................................... 3.6 7.21 ----- ---- $44.7 6.27% ===== ====
DEPOSITS AND OTHER SOURCES OF FUNDS General In addition to deposits, Coast obtains funds from payments on loans and MBS, positive cash flows generated from its operations, from borrowings and securities sold under agreements to repurchase ("Reverse Repurchase Agreements"), from FHLB of San Francisco advances, and from sales of loans and MBS. Scheduled loan payments are a relatively stable source of funds, while deposit inflows and outflows and the related cost of such funds vary widely. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations.") Deposits Coast's primary source of funding is retail deposits obtained through its 89 retail banking offices. Coast attracts deposits from the general public by offering a wide assortment of accounts and rates. Coast offers regular deposit accounts, checking accounts, various money market accounts, fixed interest rate certificates with varying maturities and individual retirement and Keogh retirement accounts. 23 Another potential source of funding is broker-originated deposits, although in recent years Coast has not utilized broker-originated deposits as interest rates on such deposits have been higher than on comparable branch-originated deposits. At December 31, 1995 Coast had remaining broker-originated deposits of $34.7 million. The variety of deposit accounts offered by Coast has allowed it to be competitive in obtaining retail funds and has allowed it to mitigate the effect of disintermediation (the flow of funds away from depository institutions into alternate investments such as mutual funds and money market accounts as well as into direct investment vehicles including government and corporate securities). However, Coast has become more subject to short-term fluctuations in deposit flows in recent years as customers have become more interest rate sensitive. The ability of Coast to attract and maintain deposits and to minimize its cost of funds has been and will continue to be significantly affected by money market conditions. The following table sets forth Coast's deposit flows during the periods indicated.
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (IN MILLIONS) Deposits..................... $ 14,758 $ 13,922 $ 12,146 $ 12,269 $ 17,614 Withdrawals.................. (14,693) (14,128) (12,521) (13,172) (18,617) -------- -------- -------- -------- -------- Net cash deposits flow..... 65 (206) (375) (903) (1,003) Accounts obtained through acquisitions of branches.... 149 -- -- -- -- Accounts disposed of through sales of branches........... (209) -- (35) (314) (1,027) Interest credited............ 239 177 182 253 422 -------- -------- -------- -------- -------- Net increase (decrease) in deposits.................. $ 244 $ (29) $ (228) $ (964) $ (1,608) ======== ======== ======== ======== ========
24 The following table shows the amounts of Coast's deposits by type of account at the dates indicated.
DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Demand: Checking accounts..... $ 632,025 $ 464,321 $ 448,325 $ 475,170 $ 476,855 ---------- ---------- ---------- ---------- ---------- Savings: Money market.......... 666,019 866,569 1,186,787 1,760,187 1,963,336 ---------- ---------- ---------- ---------- ---------- Time: Currently offered: Less than 90-day.... 9,551 19,471 29,331 62,837 100,753 90-day.............. 21,158 35,424 74,628 202,155 459,653 Six-month........... 76,050 238,496 1,465,925 561,196 376,567 Seven-month......... 1,689,716 1,324,501 94,878 138,010 137,085 Eight-month......... 74,831 458,358 63,620 129,456 653,448 Nine-month.......... 34,754 213,575 915,276 129,298 456,913 Ten-month........... 670,174 38,959 -- -- -- One-year and fourteen-month..... 1,433,381 1,080,919 295,336 923,709 591,479 Eighteen-month and two-year........... 412,105 686,503 777,703 1,284,973 1,496,475 Three-year.......... 39,478 89,915 139,329 130,895 109,666 Four-year........... 23,689 32,665 54,684 37,305 37,625 More than four-year. 280,739 281,723 293,285 230,506 102,218 Public agency deposits........... 100 297 4,150 642 6,040 Broker-originated... 34,724 40,874 55,290 60,369 128,708 ---------- ---------- ---------- ---------- ---------- 4,800,450 4,541,680 4,263,435 3,891,351 4,656,630 ---------- ---------- ---------- ---------- ---------- Discontinued products: Less than one-year.. 1,676 4,099 6,728 3,528 1,859 One-year to two- year............... 500 2,817 2,503 5,370 742 Over two-year to four-year.......... 350 195 501 377 617 Over four years..... 22,452 127 280 147 77 ---------- ---------- ---------- ---------- ---------- 24,978 7,238 10,012 9,422 3,295 ---------- ---------- ---------- ---------- ---------- Total time........ 4,825,428 4,548,918 4,273,447 3,900,773 4,659,925 ---------- ---------- ---------- ---------- ---------- $6,123,472 $5,879,808 $5,908,559 $6,136,130 $7,100,116 ========== ========== ========== ========== ==========
The following table sets forth the amounts of deposits as of the dates indicated by interest rate categories.
DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ (IN MILLIONS) 0.00- 1.99%.......................................... $ 480 $ 489 $ 501 2.00- 2.99%.......................................... 398 606 1,241 3.00- 3.99%.......................................... 574 1,193 2,190 4.00- 4.99%.......................................... 1,442 1,780 1,395 5.00- 5.99%.......................................... 2,358 1,263 172 6.00- 6.99%.......................................... 723 414 171 7.00- 7.99%.......................................... 100 85 160 8.00-13.99%.......................................... 48 50 79 ------ ------ ------ $6,123 $5,880 $5,909 ====== ====== ======
25 The following table presents the amount of deposits by interest rate categories at December 31, 1995, which mature during the periods indicated.
ACCOUNTS WHICH MATURE IN ---------------------------------- AFTER 1996 1997 1998 1999 1999 TOTAL ------ ---- ---- ---- ----- ------ (IN MILLIONS) 0.00-1.99%................................ $ 480 $ -- $ -- $ -- $ -- $ 480 2.00-2.99%................................ 398 -- -- -- -- 398 3.00-3.99%................................ 574 -- -- -- -- 574 4.00-4.99%................................ 1,424 13 4 1 -- 1,442 5.00-5.99%................................ 2,086 212 36 24 -- 2,358 6.00-6.99%................................ 582 85 22 34 -- 723 7.00-9.99%................................ 43 52 19 34 -- 148 ------ ---- ---- ---- ---- ------ $5,587 $362 $ 81 $ 93 $ -- $6,123 ====== ==== ==== ==== ==== ======
The following table sets forth the amounts of deposits with balances greater than or equal to $100,000 by remaining term to maturity as of December 31, 1995.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT -------------------------------------- ------------- (IN MILLIONS) Three or less................................................ $ 445 Over three to six............................................ 238 Over six to twelve........................................... 304 Over twelve.................................................. 120 ------ $1,107 ======
Borrowings and Other Financing Transactions Other potential sources of funds available to Coast include a line of credit with the FHLB of San Francisco, revenue repurchase agreements and, if other sources are not available, direct access to borrowings from the Federal Reserve System. In addition, Coast has access to the capital markets for issuing debt or equity securities; however, access can be limited from time to time by various external factors including market conditions, Coast's credit rating and general economic conditions. At December 31, 1995, FHLB advances were $804.3 million, and the amount of additional credit available from the FHLB was $1.26 billion. The reverse repurchase agreements used by Coast involve the sale of securities owned by Coast with a commitment to repurchase the same securities at a predetermined price at a future date, typically within three months, depending on the type of collateral, from the date of the initial sale. These transactions are borrowings collateralized by the securities sold and are included as other borrowings in Coast's consolidated statement of financial condition. See Note 8 of Notes to Consolidated Financial Statements. At December 31, 1995, Coast had capital notes outstanding with a face amount of $57.5 million due in 2002, and the Company had senior notes outstanding with a face amount of $57.5 million due in 2000. The capital notes are redeemable at the option of Coast, in whole or in part, after December 31, 1997, and the senior notes are redeemable at the option of the Company, in whole or in part, after April 1, 1998. At December 31, 1995, Coast had pledged $3.19 billion of loans receivable, MBS, and FHLB of San Francisco stock to secure its advances from the FHLB of San Francisco and other borrowings. See Note 8 of Notes to Consolidated Financial Statements. Changes in the collateralization levels due to changes in market interest rates or other factors could require Coast to add collateral to secure its outstanding borrowings. 26 The following table sets forth certain information with respect to Coast's borrowings at the dates indicated.
DECEMBER 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) FHLB advances........... $ 804,250 $ 954,450 $ 704,200 $1,094,950 $ 712,750 Reverse repurchase agreements (1)......... 546,153 714,689 742,196 401,478 198,912 Federal funds purchased (1).................... 110,120 19,822 80,581 58,513 60,623 Capital notes........... 55,746 55,495 55,244 112,577 57,380 Senior notes............ 56,227 55,922 55,616 -- -- Convertible subordinated debentures............. -- -- -- 593 594 Other................... 20,840 19,183 19,544 35,837 33,833 ---------- ---------- ---------- ---------- ---------- Total borrowings...... $1,593,336 $1,819,561 $1,657,381 $1,703,948 $1,064,092 ========== ========== ========== ========== ========== Weighted average inter- est rate............... 6.28% 6.47% 4.61% 5.42% 7.04% ========== ========== ========== ========== ==========
- -------- (1) The period-end amounts are not necessarily reflective of Coast's activity in these borrowings during the periods. Certain information with respect to Coast's significant short-term borrowings is set forth below.
AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- ------ -------- (DOLLARS IN MILLIONS) Reverse repurchase agreements: Balance........................................... $ 546.2 $714.7 $ 742.2 Average amount outstanding (1).................... 856.7 668.1 816.9 Maximum amount outstanding (2).................... 1,123.3 766.0 1,033.5 Weighted average rate: At end of year.................................. 5.80% 6.05% 3.42% During year (1)................................. 5.97 4.42 3.33 Federal funds purchased: Balance........................................... $ 110.1 $ 19.8 $ 80.6 Average amount outstanding (1).................... 70.6 62.8 73.2 Maximum amount outstanding (2).................... 110.1 96.0 103.8 Weighted average rate: At end of year.................................. 5.37% 5.06% 3.10% During year (1)................................. 6.08 4.31 3.29
- -------- (1) Weighted average based upon end of month balances and rates. (2) Based upon end of month balances. COMPETITION Coast faces significant competition both in its lending activities and in attracting deposits. Competition in originating loans comes primarily from other savings banks, savings and loan associations, commercial banks and mortgage bankers. Coast competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides borrowers. Coast faces substantial competition for deposits from other savings banks, savings and loan associations, commercial banks, money market mutual funds, credit unions and others providing investment opportunities. The ability of Coast to attract and retain deposits depends on its ability to provide an investment opportunity meeting the requirements of investors as to rate of return, liquidity, risk and other factors. Coast attracts deposits through its retail banking offices primarily from the communities in which such offices are located. Coast competes for 27 deposits by offering a variety of deposit accounts at competitive rates and by maintaining convenient business hours and retail banking office locations with interbranch deposit and withdrawal privileges at each and access to automated teller machines which provide 24-hour facilities for the convenience of its customers. Many states, including California, have adopted legislation which permits, subject to various conditions and restrictions, banking on an interstate basis. Additionally, federal legislation enacted in 1994 eliminates certain federal restrictions, and preempts certain state law restrictions, on interstate banking by banks. Certain key provisions of this legislation do not become effective until 1997. With the advent of interstate branching, competitors of Coast may be able to conduct extensive interstate banking operations and thereby gain competitive advantages. In addition, the OTS has removed prior regulatory restrictions on the branching authority of federal savings institutions and now permits nationwide branching by institutions meeting certain capital and other requirements. REGULATION General The Company is registered with the OTS as a savings and loan holding company and is subject to regulation and examination as such by the OTS. Coast is a federally chartered savings bank and a member of the FHLB of San Francisco. Coast's deposits are insured by the FDIC through the SAIF. Coast is subject to examination and regulation by the OTS and the FDIC with respect to most of its business activities, including, among others, lending activities, capital standards, general investment authority, deposit taking and borrowing authority, mergers and other business combinations, establishment of branch offices, and permitted subsidiary investments and activities. The OTS's operations, including examination activities, are funded by assessments levied on its regulated institutions. Coast is further subject to regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") concerning reserves required to be maintained against deposits, consumer lending requirements and certain other matters. Financial institutions, including Coast, may also be subject, under certain circumstances, to potential liability under various statutes and regulations applicable to property owners generally, including statutes and regulations relating to the environmental condition of real property and potential liability for the costs of remediation thereof. The descriptions of the statutes and regulations applicable to the Company and Coast set forth below and elsewhere herein do not purport to be complete descriptions of such statutes and regulations and their effects on the Company and Coast. Such descriptions also do not purport to identify every statute and regulation that may apply to the Company or Coast. The OTS's enforcement authority over savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to initiate removal and prohibition orders against officers, directors and certain other persons. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound conditions or practices. The FDIC has authority to recommend that the OTS take any authorized enforcement action with respect to any federally insured savings institution. If the OTS does not take the recommended action or provide an acceptable plan for addressing the FDIC's concerns within 60 days after receipt of the recommendation from the FDIC, the FDIC may take such action if the FDIC Board of Directors determines that the institution is in an unsafe or unsound condition or that failure to take such action will result in the continuation of unsafe or unsound practices in conducting the business of the institution. The FDIC may also take action prior to the expiration of the 60-day time period in exigent circumstances after notifying the OTS. The FDIC may terminate the deposit insurance of any insured depository if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation or order or any condition imposed 28 in writing by the FDIC. In addition, FDIC regulations provide that any insured institution that falls below a 2% minimum leverage ratio will be subject to FDIC deposit insurance termination proceedings unless it has submitted, and is in compliance with, a capital plan with its primary federal regulator and the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital. Federal Home Loan Bank System As a member of the FHLB System, Coast is required to own capital stock in its regional FHLB, the FHLB of San Francisco, in a minimum amount determined at the end of each year based on the greatest of (i) 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations, (ii) 5% of its outstanding borrowings and letters of credit from the FHLB, or (iii) 0.3% of its total assets. Coast was in compliance with this requirement, with an investment of $85.8 million in FHLB of San Francisco stock at December 31, 1995. The FHLB of San Francisco serves as a reserve or central bank for the member institutions within its assigned region, the Eleventh FHLB District. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the Federal Housing Finance Board and the Board of Directors of the FHLB of San Francisco. See "Deposits and Other Sources of Funds--Borrowings and Other Financing Transactions" above. Each FHLB is required to transfer a certain portion of its reserves and undivided profits to the Resolution Funding Corporation ("REFCORP"), the entity established to raise funds to resolve troubled thrift cases, to fund the principal and a portion of the interest on bonds issued by the REFCORP and certain other obligations. In addition, each FHLB is required to transfer a percentage of its annual net earnings, now 10%, to fund an affordable housing program mandated by applicable federal law. As a result of these requirements and other factors, the FHLB of San Francisco has experienced reduced earnings since the enactment of FIRREA. It is anticipated that this may continue and that Coast will continue to receive a relatively low level of dividends on its FHLB of San Francisco stock in future periods. During 1995, 1994 and 1993, Coast recorded dividend income of $4.5 million, $3.3 million and $2.5 million respectively, on its FHLB of San Francisco Stock. Insurance of Accounts The FDIC administers two separate deposit insurance funds. The Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and other institutions that were insured by the FDIC prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). The SAIF insures the deposits of savings institutions that were insured by the FSLIC prior to the enactment of FIRREA. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the SAIF or the BIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC has implemented a risk-based federal deposit insurance premium system under which savings institutions are assigned a deposit insurance premium rate ranging from 0.23% to 0.31%. Coast paid $17.3 million, $16.4 million and $18.5 million in deposit insurance premiums to SAIF in 1995, 1994 and 1993, respectively, compared to $15.5 million in 1992. Prior to 1995, the risk-based deposit insurance premiums paid by savings institutions insured by the SAIF and by commercial banks and other institutions insured by the BIF, which, together with earnings on investments, are the principal funding sources for the respective insurance funds, had been assessed based on identical rate schedules having the above range of premium assessment rates (that is, from 0.23% to 0.31%). The SAIF and the BIF are each required by statute to attain and thereafter to maintain a reserve to deposits ratio of 1.25%. The BIF has reached the required reserve level, whereas, based upon projections by the FDIC, the SAIF is not 29 expected to reach its targeted ratio until at least the year 2002, or later. This disparity arises from the BIF's greater premium revenues and the requirement that a substantial portion of the SAIF premiums be used to repay bonds (commonly referred to as the "FICO Bonds") that were issued by a specially created federal corporation for the purpose of funding the resolution of failed thrift institutions. In November 1995, the FDIC reduced its deposit insurance premiums for BIF member institutions to a range of from none to $.27 per $100 of deposits (subject to a statutory minimum of $2,000 in annual assessments), with an historical low average of approximately $.043 per $100 of deposits, effective beginning with the semiannual period commencing January 1, 1996. The FDIC maintained the current range of deposit insurance premiums assessable against SAIF member institutions at $.23 to $.31 per $100 of deposits. The current deposit rate premium disparity between BIF-insured institutions and SAIF-insured institutions resulting from the recently implemented BIF premium reduction places SAIF-insured institutions at a competitive disadvantage due to higher premium costs and may worsen the financial condition of the SAIF by leading to a shrinkage in its deposit base. A number of proposals for assisting the SAIF in attaining its required reserve level, and thereby permitting SAIF deposit insurance premiums to be reduced to levels at or near those paid by BIF-insured institutions, have been under discussion in Congress and among various of the affected parties and relevant government agencies. Congress proposed, as part of the budget reconciliation bill submitted to and vetoed by the President in late 1995, a one-time, special assessment on all savings institutions to recapitalize the SAIF. The proposal would have required SAIF-insured institutions to pay a one-time special assessment (estimated to be between approximately 80 and 90 basis points on deposits) and would provide for a pro rata sharing by all federally insured institutions of the obligation, now borne entirely by SAIF-insured institutions, to pay the interest on the FICO Bonds. If the proposed legislation were ultimately to become law, the special assessment would be reported in Coast's consolidated statement of operations in the quarter during which the budget reconciliation bill (or such other bill to which such legislation may be attached) is finally enacted. Also included in the budget reconciliation bill were provisions that would eliminate the deduction for additions to tax bad debt reserves available to qualifying thrift institutions under existing provisions of the Internal Revenue Code. The bill would also generally have required "recapture" (i.e., inclusion in taxable income) of the balance of such reserve accounts to the extent they exceed a base year amount (generally the balance of reserves as of December 31, 1987. (Coast's tax bad debt reserves at December 31, 1995, exceeded the base year amount by approximately $5.8 million and the related liability for recapture has been accrued.) The Company cannot predict whether or in what form the above described legislation will be enacted or the effect of such legislation, if adopted, on Coast's operations and financial condition. Liquidity Federal regulations currently require a savings institution to maintain a monthly average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations) equal to at least 5% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% of such accounts and borrowings depending upon economic conditions and the deposit flows of member institutions. Federal regulations also require each member institution to maintain a monthly average daily balance of short-term liquid assets (generally those having maturities of 12 months or less) equal to at least 1% of the average daily balance of its net withdrawable accounts and short term borrowings during the preceding calendar month. Monetary penalties may be imposed for failure to meet these liquidity ratio requirements. Coast's liquidity and short-term liquidity ratios for the calculation period ended December 31, 1995, were 5.57% and 4.89%, respectively, which exceeded the applicable requirements. Community Reinvestment Act The Community Reinvestment Act ("CRA") requires each savings institution, as well as commercial banks and certain other lenders, to identify the communities served by the institution and to identify the types of credit 30 the institution is prepared to extend within those communities. The CRA also requires the OTS to assess an institution's performance in meeting the credit needs of its identified communities as part of its examination of the institution, and to take such assessments into consideration in reviewing applications with respect to branches, mergers and other business combinations, and savings and loan holding company acquisitions. An unsatisfactory CRA rating may be the basis for denying such an application and community groups have successfully protested applications on CRA grounds. The OTS assigns CRA ratings of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance." Coast was rated "outstanding" in its last CRA examination. Classification of Assets Federal regulations require savings institutions to review their assets on a regular basis and to classify them as "substandard", "doubtful" or "loss" if warranted. Adequate valuation allowances for loan losses, consistent with generally accepted accounting principles, are required to be established for assets classified as "substandard" or "doubtful". If an asset is classified as "loss", the institution must either charge it off or establish a specific allowance for loss in an amount equal to the amount classified as "loss". An asset which currently does not warrant classification as "substandard" but which possesses weaknesses or deficiencies deserving close attention is required to be designated as "special mention". The institution's OTS District Director has the authority to approve, disapprove or modify any asset classification and any amounts established as allowances for loan losses. Regulatory Capital Requirements General Capital Requirements. Federal law and the regulatory capital provisions of the OTS regulations promulgated thereunder (the "Capital Regulations") established three capital requirements -a "core capital requirement" (referred to as the "leverage limit" in the Capital Regulations), a "tangible capital requirement" and a "risk-based capital requirement." The capital standards established by the OTS are required, with certain exceptions, to be no less stringent than the capital standards applicable to national banks. The OTS may also establish, on a case by case basis, individual minimum capital requirements for a savings institution which vary from the requirements that would otherwise apply under the Capital Regulations. The core capital requirement currently included in the Capital Regulations mandates that a savings institution maintain "core capital" of not less than 3% of adjusted total assets. "Core capital" generally includes common stockholders' equity, noncumulative perpetual preferred stock, including any related surplus, and minority interests in the equity accounts of fully consolidated subsidiaries. The amount of an institution's core capital is, in general, calculated in accordance with generally accepted accounting principles ("GAAP"), but with certain exceptions. Among other exceptions, adjustments to an institution's GAAP equity accounts that are required under GAAP to reflect changes in the fair value of certain securities held by the institution that are categorized as "available for sale" are not to be included in the calculation of core capital for regulatory capital purposes. Intangible assets (not including purchased or originated mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill as described below) must be deducted from core capital. Under the Capital Regulations, core capital may include purchased or originated mortgage servicing rights and purchased credit card relationships, subject to certain limitations. In addition, prior to January 1, 1995, qualifying supervisory goodwill was permitted to be included by an eligible savings institution in core capital in an amount up to .375% of adjusted total assets. The amount of qualifying supervisory goodwill which may be included in core capital was completely eliminated beginning January 1, 1995. At December 31, 1994, the amount of qualifying supervisory goodwill included in Coast's core capital was $31 million. This amount represents a portion of the $299 million contribution that Coast received from the Federal Savings and Loan Insurance Corporation ("FSLIC") to induce Coast's 1987 acquisition of Central Savings and Loan Association's ("Central") assets and liabilities as further described below in this section, and that the FSLIC agreed was to have been considered a permanent capital contribution. After subsequent amendment of applicable federal law, the OTS characterized the contribution as qualifying supervisory goodwill. 31 The tangible capital requirement adopted by the OTS Director requires a savings institution to maintain "tangible capital" in an amount not less than 1.5% of adjusted total assets. "Tangible capital" means core capital less any intangible assets (including supervisory goodwill), plus purchased or originated mortgage servicing rights, subject to certain limitations. The risk-based capital requirements provide, among other things, that the capital ratios applicable to various classes of assets are to be adjusted to reflect the degree of credit risk deemed to be associated with such assets. In addition, the asset base for computing a savings institution's risk-based capital requirement includes off-balance sheet items, including letters of credit, and loans or other assets sold with subordination or other recourse arrangements. Generally, the Capital Regulations require savings institutions to maintain "total capital" equal to 8% of risk-weighted assets. "Total capital" for these purposes consists of core capital and supplementary capital. Supplementary capital includes, among other things, certain types of preferred stock and subordinated debt and, subject to certain limitations, loan and lease general valuation allowances. A savings institution's supplementary capital may be used to satisfy the risk-based capital requirement only to the extent of that institution's core capital. The Capital Regulations substantially changed the capital requirements for asset sales with recourse or the retention of the subordinated portion of a senior/subordinated loan participation or interest in a package of loans sold. Essentially, the Capital Regulations treat asset sales with recourse as if they had not occurred, and generally require a savings institution to maintain capital against the entire amount of assets sold with recourse, even if the recourse is for less than the full amount of assets sold, with one limited exception. The exception is that assets sold with recourse with respect to which the recourse percentage is less than the applicable risk-based capital requirement are not included in risk-weighted assets; however, capital is required to be maintained in an amount equal to such recourse amount. A savings institution's retention of the subordinated portion of a senior/subordinated loan participation or interest in a package of loans sold is treated in the same manner as an asset sale with recourse. As of December 31, 1995, the outstanding principal balances of loans Coast had sold with recourse or subordination totaled $398.5 million, and the amount of capital required to be maintained against such off-balance sheet items was $14.2 million, which included $13.1 million determined based on recourse amounts representing recourse percentages which are less than the applicable risk- based capital percentage, and $1.1 million determined by applying the applicable risk-based capital percentage to the risk-weighted principal balance of the respective loans sold with recourse. The federal banking regulatory authorities and the OTS are currently considering revising the definition and treatment of recourse for purposes of the risk-based capital requirement. There can be no assurance that any new rules ultimately adopted will not be more restrictive than the recourse-related provisions of the current Capital Regulations or that past transactions will be "grandfathered" under any new rules. The Capital Regulations state that OTS regulated institutions are required to maintain additional risk-based capital equal to one-half of the amount by which the decline in the institution's "net portfolio value" that would result from a hypothetical 200 basis point increase or decrease in interest rates exceeds 2% of the estimated "economic value" of its assets. The one exception to this general rule is that if the three-month Treasury bond equivalent yield falls below 4%, an institution would measure the hypothetical downward change at one-half of that Treasury yield. An institution's "net portfolio value" is defined for this purpose as the difference between the aggregate expected future cash inflows from an institution's assets and the aggregate expected future cash outflows on its liabilities, plus the net expected cash flows from existing off-balance sheet contracts, each discounted to present value. The estimated "economic value" of an institution's assets is defined as the discounted present value of the estimated future cash flows from its assets. Both the "net portfolio value" and the "economic value" include, as specified in the regulation, the book value of assets and liabilities that are not interest rate sensitive. The OTS has stated that implementation of this amendment to its regulations will require additional capital to be maintained only by institutions having "above normal" interest rate risk and, based on Coast's balance sheet as of December 31, 1995, there would be no increase in Coast's minimum capital requirement as of that date. The OTS has to date deferred implementation of this regulation. 32 The risk-based capital rules of the OTS, FDIC and other federal banking agencies provide that an institution must hold capital in excess of regulatory minimums to the extent that examiners find either (i) significant exposure to concentration of credit risk such as risks from high interest rates, prepayments, significant off-balance sheet items or risks arising from nontraditional activities, or (ii) that the institution is not adequately managing these risks. For this purpose, however, the agencies have stated that, in view of the statutory requirements relating to permitted lending and investment activities of savings institutions, the general concentration by such institutions in real estate lending activities would not, by itself, be deemed to constitute an exposure to concentration of credit risk that would require greater capital levels. On April 10, 1987, Coast acquired substantially all of the assets and liabilities of Central Savings and Loan Association from the FSLIC in a supervisory-assisted transaction. As part of the transaction, Coast entered into a contractual agreement with the FSLIC under which the FSLIC made a cash contribution to Coast of approximately $299 million which, pursuant to the agreement, was to be reflected as a permanent addition to Coast's regulatory capital. FIRREA eliminated the FSLIC and replaced it (and the Federal Home Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS has taken the position that the FSLIC contribution should be classified as supervisory goodwill, thereby excluding it from regulatory capital. In June 1992, Coast filed an action in the United States Court of Federal Claims seeking monetary damages for breach of the contractual agreement with the FSLIC. No prediction can be made as to whether this lawsuit will be successful, or if successful, what damages might be awarded to Coast. In three cases with similar issues the Court of Federal Claims ruled in favor of the plaintiff thrift institutions on the issue of liability of the federal government for breach of contract. The Court of Appeals for the Federal Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these cases. The federal government was granted a review of the Court of Appeals decision by the United States Supreme Court with oral arguments scheduled for April 1996. The following table reflects, in both dollars and ratios, Coast's regulatory capital position as of December 31, 1995, as well as the requirements at that date.
ACTUAL REQUIRED ------------ ------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- (DOLLARS IN MILLIONS) December 31, 1995: Risk-based..................................... $567 10.86% $418 8.00% Core........................................... 449 5.47 246 3.00 Tangible....................................... 449 5.47 123 1.50
33 Following is a reconciliation of Coast's stockholder's equity to the minimum federal regulatory capital requirements as of December 31, 1995 and 1994.
DECEMBER 31, ----------------------------------------------- 1995 1994 ----------------------- ----------------------- RISK- RISK- TANGIBLE BASED TANGIBLE BASED CORE CAPITAL CAPITAL CORE CAPITAL CAPITAL ----- -------- ------- ----- -------- ------- (IN MILLIONS) Stockholder's equity of Coast.. $ 463 $ 463 $ 463 $ 420 $ 420 $ 420 Excluded items: Long-term foreclosed real estate owned................ (2) -- Unrealized (gain) loss on securities available for sale, net of taxes.......... (7) (7) (7) 1 1 1 Goodwill..................... (7) (7) (7) (12) (12) (12) Fully capitalized items...... (1) (1) Supplementary capital: Subordinated debt............ 56 55 General valuation allowance.. 65 67 Qualifying supervisory goodwill.................... -- -- -- 31 -- 31 ----- ----- ----- ----- ----- ----- 449 449 567 440 409 561 Minimum requirement............ (246) (123) (418) (245) (122) (427) ----- ----- ----- ----- ----- ----- Excess..................... $ 203 $ 326 $ 149 $ 195 $ 287 $ 134 ===== ===== ===== ===== ===== =====
FIRREA requires a savings institution which fails to meet its capital standards to submit a capital restoration plan to the OTS Director which describes the manner in which the institution proposes to increase its capital and the activities in which it will engage, and requires that any increase in its assets be met with a commensurate increase in tangible capital and risk- based capital. As part of the submission of a capital plan, a savings institution is required to certify that, during the pendency of its application for approval of its capital plan, it will adhere to certain growth restrictions, and will not make any capital distributions or engage in certain other prohibited or restricted activities. The OTS must, with certain limited exceptions, limit the asset growth of any such institution. Upon approval of a capital plan by the OTS, the submitting savings institution is not generally subject to enforcement sanctions for failure to meet its statutory capital standards as long as it is in compliance with the approved capital plan. However, there is no limit on the authority of the OTS to take any appropriate action with respect to any unsafe or unsound practice or condition of a savings institution, other than the failure to comply with the capital standards. As a result, approval of a capital plan by the OTS does not limit any authority of the Director of the OTS under any other provisions of law. The OTS has the authority to issue a capital directive to a savings institution that does not satisfy its minimum capital requirements. The capital directive may also specify corrective actions to be taken and a capital directive, including any plan submitted pursuant to a capital directive, is directly enforceable in a court of law. The Capital Regulations provide that material failure of a savings institution to comply with any plan, regulation, written agreement, undertaking, order or directive issued pursuant to the Capital Regulations, including a material noncompliance with the capital requirements, shall be treated by the Director as an unsafe and unsound practice. The existence of an unsafe and unsound practice authorizes the OTS to take enforcement or supervisory action against a savings institution, including the appointment of a conservator or receiver. Moreover, other regulations restrict growth and prohibit savings institutions not meeting minimum capital requirements from paying dividends and from making certain types of investments without the prior approval of the OTS. The FDIC may also terminate a savings institution's deposit insurance upon failure to meet applicable capital requirements and may temporarily suspend a savings institution's deposit insurance if the FDIC finds that the institution has no tangible capital (which may be calculated under certain conditions by including goodwill). If such termination were to occur, accounts outstanding at the time of such termination would continue to be insured for a period of at least six months. 34 Prompt Corrective Action. FDICIA contains "prompt corrective action" provisions pursuant to which insured depository institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized." These provisions expand the powers and duties of the OTS and the FDIC and expressly authorize, or in many cases direct, regulatory intervention at an earlier state than was previously the case. The OTS regulations implementing the "prompt corrective action" provisions of FDICIA define the five capital categories as follows: (i) a savings institution is "well capitalized" if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio (Tier 1 capital to total assets) of 6% or greater, has a core capital ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level or any capital measure; (ii) a savings institution is "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater and has a core capital ratio of 4% or greater (3% for certain highly rated institutions); (iii) a savings institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8% or has either a Tier 1 risk-based or a core capital ratio that is less than 4%; (iv) a savings institution is "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, or has either a Tier 1 risk-based or a core capital ratio that is less than 3%; and (v) a savings institution is "critically undercapitalized" if its "tangible equity" (defined in the prompt corrective action regulations to mean core capital plus cumulative perpetual preferred stock) is equal to or less than 2% of its total assets. The OTS also has authority, after an opportunity for a hearing, to downgrade a savings institution from "well capitalized" to "adequately capitalized", or to subject an "adequately capitalized" or "undercapitalized" savings institution to the supervisory actions applicable to the next lower category, for supervisory concerns. At December 31, 1995, Coast's regulatory capital exceeded the thresholds necessary to be considered well capitalized. Generally, FDICIA requires that an undercapitalized institution submit an acceptable capital restoration plan to the appropriate federal banking agency. The appropriate federal banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of four consecutive calendar quarters and has provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of (i) 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the institution as of the time the institution fails to comply with a plan filed pursuant to FDICIA. An undercapitalized institution may not acquire an interest in any company or any other insured depository institution, establish or acquire additional branch offices or engage in any new business unless the appropriate federal banking agency has accepted its capital restoration plan, the institution is implementing the plan and the agency determines that the proposed action is consistent with and will further the achievement of the plan, or the FDIC determines the proposed action will further the purpose of the "prompt corrective action" sections of FDICIA. Under FDICIA, the OTS must place a "critically undercapitalized," institution in conservatorship or receivership within 90 days after it becomes "critically undercapitalized" or take such other actions as the OTS, with the concurrence of the FDIC, deems appropriate. In addition, the institution must comply with the restriction described above and must discontinue, beginning 60 days after becoming critically undercapitalized, any payment of principal and interest on its subordinated debt unless the FDIC determines that an exception to this provision would further the purposes of FDICIA. Until July 15, 1996, these provisions do not apply to subordinated debt outstanding on July 15, 1991, and unpaid interest may continue to accrue on any subordinated debt affected by the provisions. The FDIC is authorized to restrict the activities of any critically undercapitalized 35 institution and to prohibit such an institution, without the FDIC's prior written approval, from: (i) entering into any material transaction other than in the usual course of business; (ii) engaging in any covered transaction (as defined in Section 23A(b) of the Federal Reserve Act) with affiliates; (iii) paying excessive compensation or bonuses; and (iv) paying interest on new or renewed liabilities at a rate that would increase the institution's weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution's normal market areas. Qualified Thrift Lender Test Under the qualified thrift lender ("QTL") test, as revised by FDICIA, a savings institution generally is required to invest at least 65% of its portfolio assets (as defined) in "qualified thrift investments." Qualified thrift investments include, in general, loans, securities and other investments that are related to housing. At December 31, 1995, Coast's qualified thrift investments were 86% of portfolio assets, calculated on a monthly average, rolling 12-month "look-back" basis. A savings institution's failure to remain a QTL may result in: (i) limitations on new investments and activities; (ii) imposition of branching restrictions; (iii) loss of FHLB borrowing privileges; and (iv) limitations on the payment of dividends. Savings and Loan Holding Company Regulations As a savings and loan holding company, the Company is subject to certain restrictions with respect to its activities and investments. Among other things, the Company is generally prohibited, either directly or indirectly, from acquiring more than 5% of the voting shares of any savings association or savings and loan holding company which is not a subsidiary of the Company. Similarly, OTS approval must be obtained prior to any person acquiring control of the Company or Coast. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the institution or holding company or controls in any manner the election of a majority of the directors of the insured institution or the holding company. The Company is considered an "affiliate" of Coast for regulatory purposes. Savings associations are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System and certain additional limitations. In addition, savings associations are generally prohibited from extending credit to an affiliate, other than the association's subsidiaries, unless the affiliate is engaged only in activities which the Federal Reserve Board has determined to be permissible for bank holding companies and which the OTS has not disapproved. Savings and loan holding companies which control only one savings association are exempt, if the association meets its QTL test, from restrictions on the conduct of unrelated business activities that are applicable to other savings and loan holding companies and that are similar to the restrictions on the conduct of unrelated business activities applicable to bank holding companies under the Bank Holding Company Act. Restrictions on Dividends and Other Capital Distributions. Savings association subsidiaries of holding companies generally are required to provide not less than thirty days' advance notice to their OTS District Director of any proposed declaration of a dividend on the association's stock. Any dividend declared within the notice period, or without giving the prescribed notice, is invalid. Limitations are imposed under OTS regulations upon "capital distributions" by savings associations, including cash dividends, payments to repurchase or otherwise acquire an association's shares, payments to stockholders of another association in a cash-out merger and other distributions charged against capital. An institution that meets its fully phased-in capital requirements is permitted to make capital distributions during a calendar year of up to the greater of (i) 100% of its net income during the calendar year, plus the amount that would reduce by not more than one-half its "surplus capital ratio" at the beginning of the calendar year 36 (the amount by which the institution's actual capital exceeded its fully phased-in capital requirement at that date) and (ii) 75% of its net income over the most recent four-quarter period. An institution that meets its current minimum capital requirements but not its fully phased-in capital requirements may make capital distributions up to 75% of its net income over the most recent four-quarter period, as reduced by the amounts of any capital distributions previously made during such period. An institution that does not meet its minimum regulatory capital requirements immediately prior to, or on a pro forma basis after giving effect to, a proposed capital distribution is not authorized to make any capital distributions unless it receives prior written approval from the OTS or the distributions are in accordance with the express terms of an approved capital plan. As of December 31, 1995, Coast met its fully phased-in capital requirement. The OTS has proposed an amendment to its capital distribution regulation to conform to its "prompt corrective action" regulations by replacing the current "tiered" approach summarized above with one that would allow savings institutions to make capital distributions that would not result in the institution falling below the "adequately capitalized" capital category. Under this proposal, a savings institution would be able to make a capital distribution (i) without notice or application, if the institution is not held by a savings and loan holding company and received a composite CAMEL rating (the CAMEL rating is assigned by federal financial institution examiners to summarize an institution's condition by reference to five key components of the examination process: capital, asset quality, management, earnings and liquidity) of 1 or 2, (ii) by providing notice to the OTS if, after the capital distribution, the institution would remain at least "adequately capitalized," or (iii) by submitting an application to the OTS. The OTS retains the authority to prohibit any capital distribution otherwise authorized under the regulation if the OTS determines that the capital distribution would constitute an unsafe or unsound practice. The regulation also states that the capital distribution limitations apply to direct and indirect distributions to affiliates, including those occurring in connection with corporate reorganizations. Lending Standards The OTS and the other federal banking agencies have jointly adopted uniform rules on real estate lending and related Interagency Guidelines for Real Estate Lending Policies. The uniform rules require that institutions adopt and maintain comprehensive written policies for real estate lending. Although the final rule did not impose specific maximum loan-to-value ratios, the related Interagency Guidelines state that such ratio limits established by individual institutions' boards of directors should not exceed levels set forth in the Interagency Guidelines, which range from a maximum of 65% for loans secured by raw land to 85% for loans secured by improved property other than owner- occupied single family residences. No limit is set for loans secured by owner- occupied single family residence loans, but the Interagency Guidelines state that such loans exceeding a 90% loan-to-value ratio should have private mortgage insurance or some form of credit enhancement. The Interagency Guidelines further permit a limited amount of loans that do not conform to these criteria. Coast has adopted lending policies in accordance with the Interagency Guidelines, and requires private mortgage insurances for single family loans with a loan-to-value ratio higher than 80%. TAXATION General Federal Income Tax. Under applicable provisions of the Internal Revenue Code of 1986, as amended, a savings institution that meets certain definitional tests relating to the composition of its assets and the sources of its income (a "Qualifying Savings Institution") is permitted to establish reserves for bad debts and to make annual additions thereto under the experience method ("Experience Deduction") which qualify as deductions from taxable income. Alternatively, a Qualifying Savings Institution may elect annually to compute its deduction for allowable additions to its bad debt reserves on qualifying real property loans as a percentage of taxable income before such deduction ("Percentage Deduction"), regardless of its actual bad debt experience, subject to certain limitations based upon the amount of its deposits and qualifying real property loans. 37 The availability of the Percentage Deduction, presently 8% of taxable income, has permitted Qualifying Savings Institutions to be taxed at a lower effective federal income tax rate (32.2%) than that generally applicable to corporations (35.0%). For the period from 1981 through 1994, however, Coast claimed an Experience Deduction because such deduction was higher than that allowed under the Percentage Deduction method. Coast anticipates it will have a tax-basis loss and therefore will claim an Experience Deduction for its 1995 taxable year as well. If Coast's accumulated bad debt reserves are deemed to have been used for any purpose other than to absorb bad debt losses, such as for the payment of dividends in excess of its current and accumulated earnings and profits (as calculated for federal income tax purposes) or for the redemption of Coast's common stock, all or a portion of the amount used, and an amount equal to the tax attributable thereto, may both be subject to federal income tax at then applicable rates. Coast will also be subject to an alternative minimum tax computed with respect to Coast's regular taxable income (with certain adjustments) as increased by its tax preference items, if such alternative minimum tax exceeds Coast's regular tax liability. The tax preference items common to savings institutions such as Coast include the excess (if any) of its annual tax bad debt deduction over the deduction that would have been available under the experience method and 75% of the excess of Coast's "adjusted current earnings" over its regular taxable income. For any taxable years in which its regular taxable income is fully offset by net operating loss carry-forwards, Coast will incur an alternative minimum tax liability equal to approximately 2% of its alternative minimum taxable income. The Omnibus Budget Reconciliation Act of 1993 generally provides that FSLIC assistance is to be taken into account as compensation in determining the loss deductible on the disposition of a "covered asset." This provision applies to assistance credited on or after March 4, 1991. Certain assets acquired in Coast's acquisition of Central are subject to this provision. This provision of the 1993 legislation did not have any adverse impact on Coast because, under Coast's agreement with the FSLIC relating to the Central acquisition, federal tax benefits related to affected FSLIC assistance are payable to the FDIC as successor to the FSLIC. Pending Legislation. The Revenue Reconciliation Act of 1995, which was vetoed by President Clinton, contained certain provisions that, if enacted into law, (1) would repeal the special rules of existing law that enable savings banks and other thrift institutions to claim a deduction for additions to a reserve for bad debts, and (2) would require thrift institutions to recapture into income their post-1987 bad debt reserves over a six-year period. The thrift tax provisions were proposed to be effective for taxable years beginning after December 31, 1995. There can be no assurance as to whether the thrift tax provisions will be enacted into law and, if so, whether the provisions will be modified in any material respect; therefore, the Company cannot predict the impact of the pending legislation. See "Business-- Regulation--Insurance of Accounts." California Franchise Tax. The California franchise tax applicable to Coast is a variable rate tax, computed under a formula which results in a rate higher than the rate applicable to nonfinancial corporations because it reflects an amount "in lieu" of local personal property and business license taxes paid by such corporations, which taxes generally are not paid by banks or financial corporations such as Coast. Coast and its California subsidiaries file California state franchise tax returns on a combined reporting basis. Examinations. Coast's federal income tax returns have been examined by the Internal Revenue Service through December 31, 1986, and by the California Franchise Tax Board through December 31, 1987. The Franchise Tax Board is currently examining the years 1988 through 1990. It is expected that the Franchise Tax Board will challenge the taxability of income earned by Coast's former Nevada financing subsidiaries, the last of which was liquidated in 1989. While there can be no assurance as to the outcome of this matter, the management of Coast believes the position taken by Coast on its franchise tax returns will most likely be sustained. The Internal Revenue Service has recently commenced an examination of the Company's tax returns for the years 1992 and 1993. The Company does not anticipate any material changes to its federal tax returns as previously filed. 38 EMPLOYEES At December 31, 1995, Coast had approximately 1,441 full-time equivalent employees, none of whom was represented by a union or other collective bargaining group or agent. Coast believes its relations with its employees are satisfactory. ITEM 2. PROPERTIES Coast owns 12 of its branch offices and its administrative offices. The remaining branch offices and the office building in which its executive offices are located are leased under leases which expire by the year 2032. Lease payments were $19.4 million in 1995 and $19.8 million in 1994. Coast's net investment in branch offices, premises, equipment and leaseholds was $92.9 million at December 31, 1995. ITEM 3. LEGAL PROCEEDINGS On April 10, 1987, Coast acquired substantially all of the assets and liabilities of Central Savings and Loan Association from the FSLIC in a supervisory-assisted transaction. As part of the transaction, Coast entered into a contractual agreement with the FSLIC under which the FSLIC made a cash contribution to Coast of approximately $299 million which, pursuant to the agreement, was to be reflected as a permanent addition to Coast's regulatory capital. FIRREA eliminated the FSLIC and replaced it (and the Federal Home Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS has taken the position that the FSLIC contribution should be classified as supervisory goodwill, thereby excluding it from regulatory capital. In June 1992, Coast filed an action in the United States Court of Federal Claims seeking monetary damages for breach of the contractual agreement with the FSLIC. No prediction can be made as to whether this lawsuit will be successful, or if successful, what damages might be awarded to Coast. In three cases with similar issues the Court of Federal Claims ruled in favor of the plaintiff thrift institutions on the issue of liability of the federal government for breach of contract. The Court of Appeals for the Federal Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these cases. The federal government was granted a review of the Court of Appeals decision by the United States Supreme Court with oral arguments scheduled for April 1996. There are various other actions pending against Coast or the Company but, in the opinion of management, the probable liability resulting from such suits is unlikely, individually or in the aggregate, to have a material effect on Coast. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 39 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York and Pacific stock exchanges under the symbol "CSA." There were 4,259 stockholders of record at December 31, 1995. See Note 15 of Notes to Consolidated Financial Statements for information regarding the market price of the Company's common stock. The Company's ability to pay cash dividends primarily depends upon cash dividends it receives from Coast and is also subject to limitations based on liquidity and other factors set forth in the indenture relating to outstanding debt securities of the Company. Based on the level of liquid assets maintained by the Company as of December 31, 1995, and the aforementioned indenture restrictions, the Company had approximately $.3 million available for dividend distributions at December 31, 1995. Coast's ability to pay cash dividends to the Company is subject to limitations contained in applicable federal regulations and to additional limitations based on earnings and other factors set forth in an indenture relating to outstanding debt securities of Coast. Under the most restrictive of these limitations, Coast had approximately $79.8 million available for distribution at December 31, 1995. In addition, payment of dividends in excess of Coast's accumulated earnings and profits as calculated for tax purposes (approximately $156 million at December 31, 1994) would have significant negative tax consequences to Coast. See Item 1. "Business--Regulation--Restrictions on Dividends and Other Capital Distributions" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources and Liquidity." The Company has paid no dividends to its stockholders since 1990 and does not anticipate paying dividends on its common stock in the foreseeable future. See Note 10 of Notes to Consolidated Financial Statements. 40 ITEM 6. SELECTED FINANCIAL DATA COAST SAVINGS FINANCIAL INC. AND SUBSIDIARIES FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) FINANCIAL CONDITION Total assets............ $8,251,680 $8,196,517 $8,094,817 $8,351,826 $8,635,014 Loans receivable, net(1)................. 5,466,496 5,793,182 5,007,196 5,069,278 5,747,190 MBS(1).................. 2,171,801 1,733,728 1,972,301 2,216,901 1,761,511 Investment securities, short-term investments, federal funds sold and FHLB stock(1).......... 189,016 164,181 607,471 496,811 460,569 Goodwill................ 7,332 11,504 12,927 13,841 15,631 Deposits................ 6,123,472 5,879,808 5,908,559 6,136,130 7,100,116 FHLB advances and other borrowings............. 1,537,590 1,764,066 1,602,137 1,590,778 1,006,118 Capital notes and other subordinated debt...... 55,746 55,495 55,244 113,170 57,974 Stockholders' equity(2). 417,434 375,214 393,568 325,745 278,627 ========== ========== ========== ========== ========== OPERATIONS Net interest income..... $ 201,051 $ 187,911 $ 201,566 $ 209,677 $ 206,664 Provision for loan losses................. 40,000 75,000 61,000 46,000 82,000 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses........... 161,051 112,911 140,566 163,677 124,664 ---------- ---------- ---------- ---------- ---------- Noninterest income: Loan servicing fees and charges............... 13,518 15,231 19,155 21,306 23,233 Gain on sale of subsidiary............ 7,549 -- -- -- -- Gain (loss) on sale of loans and securities.. (110) (540) 6,653 7,539 52,180 Other.................. 36,662 28,233 34,485 35,824 71,153 ---------- ---------- ---------- ---------- ---------- 57,619 42,924 60,293 64,669 146,566 ---------- ---------- ---------- ---------- ---------- Noninterest expense: General and administrative........ 161,722 160,278 160,950 153,732 168,686 Real estate operations. 4,090 10,088 34,259 52,779 52,190 Amortization of goodwill.............. 1,221 1,424 1,413 1,467 1,509 Debt conversion expense............... -- -- -- -- 2,185 ---------- ---------- ---------- ---------- ---------- 167,033 171,790 196,622 207,978 224,570 ---------- ---------- ---------- ---------- ---------- Earnings (loss) from continuing operations before income tax expense (benefit) and cumulative effect of change in accounting for income taxes...... 51,637 (15,955) 4,237 20,368 46,660 Income tax expense (benefit).............. 18,835 (9,417) (12,999) (16,746) 4,946 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before cumulative effect of change in accounting for income taxes...... 32,802 (6,538) 17,236 37,114 41,714 Cumulative effect of change in accounting for income taxes....... -- -- -- 10,914 -- ---------- ---------- ---------- ---------- ---------- Net earnings (loss)... $ 32,802 $ (6,538) $ 17,236 $ 48,028 $ 41,714 ========== ========== ========== ========== ========== Per share data: Stockholders' equity... $ 22.46 $ 20.33 $ 21.32 $ 20.24 $ 17.41 Fully diluted earnings (loss): Before cumulative effect of change in accounting for income taxes................. 1.71 (.35) .94 2.25 2.62 Cumulative effect of change in accounting for income taxes...... -- -- -- .67 -- ---------- ---------- ---------- ---------- ---------- Net earnings (loss)... $ 1.71 $ (.35) $ .94 $ 2.92 $ 2.62 ========== ========== ========== ========== ========== Dividends declared..... $ -- $ --- $ --- $ -- $ -- ========== ========== ========== ========== ========== Number of full service retail banking offices. 89 92 88 89 100
- -------- (1) Includes assets identified as being held or available for sale. (2) For a discussion of Coast's regulatory capital, see Item 1. "Business-- Regulation--Regulatory Capital Requirements." 41 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Substantially all of the Company's consolidated revenues are derived from the operations of Coast, and Coast represented substantially all of the Company's consolidated assets and liabilities at December 31, 1995. See Item 1. "Business--Operating Strategy." The Company reported net earnings of $32.8 million, a net loss of $6.5 million and net earnings of $17.2 million for the years ended December 31, 1995, 1994 and 1993, respectively. Primary and fully diluted earnings per share of common stock were $1.72 and $1.71, respectively, for 1995. The primary and fully diluted loss per share of common stock was $.35 for 1994. Primary and fully diluted earnings per share of common stock were $.94 for 1993. RESULTS OF OPERATIONS Interest Income and Expense Interest income was $613.2 million, $494.6 million and $515.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. The increase of $118.6 million in 1995 compared to 1994 resulted primarily from an increase in the average yield on interest-earning assets of 1.02%, to 7.55%, as well as an increase of $551.9 million in average interest-earning assets. The $21.0 million decline in interest income in 1994 compared to 1993 resulted from a decrease in the average yield on interest-earning assets of .30%, to 6.53%, partially offset by an increase of $21.1 million in average interest-earning assets. The lower yield on loans during 1994 reflects declines in prevailing market rates of interest throughout 1993 and the first quarter of 1994. After the first quarter of 1994, market rates and yields on interest-earning assets and the rates paid on interest-bearing liabilities showed steady increases through early 1995. During the latter half of 1995, such yields and rates declined slightly. During 1995, Coast received $4.5 million of dividends on an average balance of FHLB stock of $83.9 million, compared to $3.3 million on an average balance of FHLB stock of $68.9 million and $2.5 million on an average balance of such stock of $68.2 million during 1994 and 1993, respectively. The effective yield on FHLB of San Francisco stock was 5.32%, 4.73% and 3.64% for the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, Coast held $85.8 million of FHLB of San Francisco stock as compared to $79.3 million and $63.9 million of such stock at December 31, 1994 and 1993, respectively. Interest expense was $412.1 million, $306.7 million and $314.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. The $105.4 million increase in 1995 compared to 1994 resulted primarily from an increase in the average cost of interest-bearing liabilities of 1.04%, to 5.10%, as well as to an increase of $540.0 million in average interest-bearing liabilities. The $7.4 million decrease in interest expense in 1994 compared to 1993 resulted primarily from a decrease of 9 basis points in the average cost of interest-bearing liabilities as well as a decrease of $16.2 million in the average balance of such liabilities. See discussion below under "Capital Resources and Liquidity." The average cost of deposits for the years ended December 31, 1993 and 1994, decreased from 3.92% to 3.70%, respectively. During 1995, the average cost of deposits increased to 4.63%. The decreases during 1993 and 1994 followed by an increase during 1995 are reflective of fluctuations in the interest rate environment during the years under discussion, due, in part, to Federal Reserve Bank policy actions. For additional information relating to net interest income, see Item 1. "Business--Yields Earned and Rates Paid." Provision for Loan Losses During 1995, 1994 and 1993, Coast established $40.0 million, $75.0 million and $61.0 million, respectively, of provisions for loan losses. The increase from 1993 to 1994 was primarily a result of $15.0 million of losses 42 related to damage to security properties resulting from the January 17, 1994, earthquake experienced in the greater Los Angeles area. This portion of the GVA was subsequently charged off in its entirety as losses were realized. In addition, the 1994 provision included approximately $6 million related to a transaction eliminating certain recourse liability relating to multifamily loans. The decrease in the provision for loan losses from $75.0 million for 1994 to $40.0 million for 1995 is due to lower realized losses and reflects decreased portfolio risk, as evidenced by the lower level of nonperforming assets, which declined from $142 million at December 31, 1994, to $113 million at December 31, 1995. Additionally, the California economy has experienced gradual improvement throughout 1994 and 1995 and real estate prices have generally stabilized. (See Item 1. "Business--Risk Elements--General Valuation Allowance.") Despite the positive trends, management has continued concern over general economic conditions and property values in California and maintained a balance in Coast's GVA of $82 million as of December 31, 1995. During 1995, the GVA was reduced by $3 million, reflecting the allocation of allowances to Coast's asset-based lending subsidiary, CoastFed Business Credit Corporation ("CBCC"), which was sold in September 1995. (See Item 1. "Business--Subsidiaries--Asset-Based Lending.") Noninterest Income Noninterest income increased by $14.7 million in 1995 compared to 1994 and decreased by $17.4 million in 1994 compared to 1993. The $14.7 million increase for 1995 included the $7.5 million gain on the sale of CBCC. (For additional information, see Item 1. "Business--Subsidiaries--Asset-Based Lending.") The $17.4 million decrease in 1994 resulted primarily from the writeoff of $9.9 million of the Excess Spread Servicing Asset related to the elimination of the multifamily recourse discussed above, and a lower level of gains on the sale of MBS and loans. Losses on sales of loans and MBS were $.1 million and $.5 million for the years ended December 31, 1995 and 1994, respectively. Gains on sales of loans and MBS were $10.5 million during the year ended December 31, 1993. These results reflect sales totaling $79.5 million, $363.0 million and $371.9 million occurring in these respective periods. The losses on sales in 1994 were attributable primarily to depressed pricing for adjustable rate MBS. Sales were from the portfolios of loans and MBS either previously identified as being available for sale or originated during the respective period and being so-designated. Loan servicing fees and charges were $13.5 million, $15.2 million and $19.2 million for the years ended December 31, 1995, 1994 and 1993, respectively. This generally recurring element of other income arises principally from servicing loans sold to investors (the outstanding balances of which were $3.42 billion, $3.96 billion and $4.18 billion at December 31, 1995, 1994 and 1993 respectively), prepayment and late charges assessed against borrowers, and commitment and escrow fees. The $3.8 million loss on sale of investment securities during 1993 primarily resulted from the sales of two issues of equity securities and the write-off of a third, which net book values, in the aggregate, totaled $6.5 million. Other income in 1995 was $36.7 million compared to $38.1 million in 1994 and $34.5 million in 1993. This category of Noninterest income primarily consists of retail banking fees (deposit-related fee income plus commissions earned on insurance and related products sold largely through Coast's retail banking offices) and service fees earned on housing bond transactions. Retail banking fees totaled $26.9 million for 1995 and $23.1 million for each of the years ended December 31, 1994 and 1993, respectively, and servicing fee income related to housing bonds was $5.9 million, $9.2 million and $7.8 million for the same respective periods. The decrease of $3.3 million from 1994 to 1995 in servicing fee income related to housing bonds resulted primarily from decreases in the spread between fixed rates received from borrowers and adjustable rates paid to bondholders. 43 Noninterest Expense Noninterest expense totaled $167.0 million, $171.8 million and $196.6 million in 1995, 1994 and 1993, respectively. The decreases from the previous years of $4.8 million and $24.8 million in 1995 and 1994, respectively, were primarily caused by improvements in the real estate operations component resulting primarily from lower write-downs and reduced losses on sales of foreclosed real estate owned, and to the lower level of foreclosed real estate owned, which declined from $101 million at December 31, 1993, to $32 million at December 31, 1995. Federal deposit insurance premium expense for 1995 increased $1.0 million from 1994 and such expense for 1994 decreased $2.2 million over 1993. The fluctuations in premium expense resulted primarily from changes in the deposit balances subject to premium assessment rather than to rate changes. For a further discussion related to deposit insurance rates, see Item 1. "Business-- Regulation--Insurance of Accounts." Income Tax Benefit The effective tax rates for 1995, 1994 and 1993 were less than the applicable statutory rates for each of the periods. The primary cause of this in 1995 was the income tax rate related to the sale of CBCC, previously a subsidiary of Coast. The effective tax rate on this transaction was lower than the statutory rate due to a difference in the book and tax basis of Coast's investment in CBCC. In 1994 and 1993, the valuation allowance for deferred tax assets was reduced by $1.7 million and $14.2 million, respectively, decreasing tax expense for those periods. These reductions in the valuation allowances were pursuant to management's periodic evaluation of the realizability of the deferred tax asset. ASSET/LIABILITY MANAGEMENT The Asset/Liability Management Committee ("ALCO") of Coast, consisting of senior management of the Bank, is responsible for directing the allocation of the Bank's assets and liabilities. ALCO continuously reviews the significant components of Coast's assets and liabilities to ensure that investment and funding activities are consistent with the Company's strategic objectives and business plans. Substantially all of Coast's assets and liabilities are comprised of interest-earning assets including loans, MBS and short-term investments, and interest-bearing liabilities including deposits and borrowings. The risks associated with interest-earning assets can be generally categorized as credit risk, market risk and interest rate risk. Credit risk is, generally, the risk that a loan or other credit-related instrument will not be repaid in accordance with its terms, and is discussed in more detail in the preceding sections entitled Item 1. "Business--Lending Activities, Risk Elements, Credit Concentration and Letters of Credit, and Nonperforming Assets." Market risk is, generally, the risk that the market value of an asset could decline in response to changes in various factors, including prevailing rates of interest, demand for that type of asset, and others. Interest rate risk is generally associated with the degree to which interest-earning assets and interest-bearing liabilities mature or reprice at different frequencies (e.g., maturities) and/or on different bases (e.g., indices to which specific assets or groups of assets are tied). In order to mitigate the impact of interest rate risk, management places a significant emphasis on seeking to match the maturities and repricing characteristics of Coast's interest-earning assets and interest-bearing liabilities ("financial assets" and "financial liabilities," respectively). At December 31, 1995, Coast's estimated one-year gap between maturities or repricing of financial assets and financial liabilities was approximately a positive $562 million, representing 7% of total assets, compared to $478 million, or 6% of total assets, at December 31, 1994. For a more detailed discussion of the interest rate sensitivity of Coast's interest-earning assets and interest-bearing liabilities, see Item 1. "Business--Yields Earned and Rates Paid." The most significant strategy Coast has employed to match the interest rate sensitivities of its financial assets and liabilities has been its emphasis on the origination of ARMs. Except for the utilization of interest rate 44 exchange agreements ("Swaps") from time to time, Coast has generally not utilized derivative financial instruments to manage interest rate or other risks. (See Notes 1 and 13 of Notes to Consolidated Financial Statements.) Historically, Coast's cost of funds has closely matched COFI, with the result that increases in Coast's cost of funds are accompanied by increases in interest rates on its COFI-based loans. However, because of the inherent lag in the reset mechanism of these loans, Coast's interest rate spreads generally can be expected to increase as COFI falls and to decrease as COFI rises (See Item 1. "Business--Yields Earned and Rates Paid"). Changes in interest rates also can affect the amount of loans originated by an institution, as well as the value of its loans and other interest-earning assets, and the resultant ability to realize gains on the sale of assets carried in the available for sale portfolios. Coast originated $1.1 billion and $1.87 billion of ARMs during the years ended December 31, 1995 and 1994, respectively. Coast's lending activity is focused on the origination of single family ARM loans on properties located within California. Coast does not currently lend or anticipate lending on other types of properties for the foreseeable future except to finance sales of foreclosed real estate or to facilitate loan assumptions as permitted by the provisions of the respective mortgage notes. Another strategy Coast has employed to match interest rate sensitivities, as well as to constrain asset growth and increase its loan servicing portfolio, is the sale of mortgage-related assets (loans and MBS). This strategy is, however, limited, based upon other factors including the purchasers' investment limitations, general market and competitive conditions and mortgage loan demand. Loans which have been classified as held for sale are carried at the lower of amortized historical cost or fair value. As of December 31, 1995, such loans totaled $221.0 million, comprised primarily of single family ARMs. MBS classified as available for sale are carried at fair value. At December 31, 1995, such MBS totaled $354.4 million which was comprised of adjustable- rate securities issued by either FNMA or FHLMC. During the year ended December 31, 1995, Coast sold $44.2 million of loans, from its available for sale portfolio, of which $11.4 million were adjustable rate and $4.8 million were fixed rate loans. In addition, Coast sold $35.3 million of adjustable rate MBS from its available for sale portfolio. NONPERFORMING ASSETS Obtaining control and disposing of nonperforming assets (Nonaccrual Loans, foreclosed real estate owned and Modified Loans) has been one of the Company's primary objectives for several years. During 1994 and 1995 Coast continued its strategy of aggressively liquidating its foreclosed real estate portfolio. Approximately $89 million and $159 million of foreclosed assets were sold in 1995 and 1994, respectively, approximately $.1 million and $7 million of which were located outside of California. As a result of these sales and a $15 million reduction in Nonaccrual Loans, total nonperforming assets declined from $141.9 million at December 31, 1994, to $113.0 million at December 31, 1995. Changes in Coast's portfolio mix and in the economic well-being of different states in which Coast has originated loans have resulted in shifts in the types and locations of assets included in total nonperforming assets. At December 31, 1992, California nonperforming assets accounted for approximately 90% of total nonperforming assets, and California residential nonperforming assets comprised approximately 74% of California nonperforming assets included in total nonperforming assets. At December 31, 1995, the percentage of California nonperforming assets included in total nonperforming assets had risen to 97%, and the percentage of California residential nonperforming assets to total California nonperforming assets had increased to 83%. As a result of economic conditions and other factors, delinquencies increased during 1992 and, as the economy generally stabilized, with certain sectors and regions experiencing marginal improvement in recent quarters, delinquencies have decreased during 1993, 1994 and 1995; however, property values have continued to decline somewhat in some regions of California. There can be no assurance that there will not be additional delinquencies and/or further declines in property values in California and in other states. See Item 1. "Business--Risk Elements--Nonperforming Loans." 45 Further improvements in the level of nonearning assets and future reductions in the aggregate level of credit losses are dependent upon continued emphasis on sales of foreclosed real estate owned, but are also largely dependent on the California economy, where the majority of Coast's loan portfolio is based. The California economy began experiencing the recession later than other regions of the country and has also lagged in the economic recovery which has been experienced elsewhere. Despite the severity and the relatively long term of the recession experienced in California, there were positive signs for the California economy during 1994. Unemployment in California improved significantly in 1994, but has remained relatively stable during 1995. Nonfarm employment in California has increased by over 2% in 1995, a rate in excess of that experienced nationwide. While improvement in the California economy has been experienced throughout most sectors of the economy, construction and real estate have continued to lag in most areas of California. Housing starts remain at relatively low levels and, while real estate prices have not experienced the significant declines experienced in earlier years, real estate appreciation has been modest and present only in selected areas of the state. Economists generally anticipate continued low inflation, relatively stable interest rates and continued improvement in the California economy for the immediate future; however, unforeseen events could result in a slowing of such progress, or could result in a deterioration of the current economic climate. Coast maintains a GVA to absorb credit losses related to its loan-related assets and off-balance sheet items. The GVA is reviewed and adjusted quarterly and based upon a number of factors, including asset classifications, economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency migration analysis, historical loss experience, ratio analysis and Coast's underwriting practices. Economic conditions, especially those affecting real estate markets, may change, which could result in the need for an increased balance in the GVA in future periods. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Coast's GVA. These agencies may require Coast to establish additional allowances based on their judgments of the information available at the time of the examination. CAPITAL RESOURCES AND LIQUIDITY OTS regulations require a savings association to maintain a specified ratio of cash and short-term United States government and other specified investment securities to net withdrawable deposits and borrowings payable in one year or less. This liquidity requirement is based upon average liquidity balances maintained during each month and may vary from time to time, depending upon economic conditions and deposit flows, and is currently 5%. For calculation periods ended December 31, 1995 and 1994, Coast's regulatory liquidity ratios were 5.57% and 5.07%, respectively. Sales of and principal repayments on loans and MBS have been a primary source of funds for Coast. During 1995, 1994 and 1993, sales proceeds amounted to $79.5 million, $363.0 million and $371.9 million, respectively. The sales of loans and MBS were from the portfolios of loans and MBS either previously identified as being held or available for sale, or originated during the period and being so designated. Principal repayments on loans and MBS amounted to $648.8 million, $795.9 million and $809.4 million, respectively, for these periods. A primary use of funds was the origination of loans (net of refinances of loans in Coast's portfolio) of $992.3 million, $1.61 billion and $851.7 million during 1995, 1994 and 1993, respectively. Additionally, none, $18.6 million and $10.3 million of MBS were purchased during 1995, 1994 and 1993, respectively. During 1995, Coast experienced a net increase in deposits of $243.7 million. This increase is primarily attributable to Coast's focused efforts to market its transaction accounts which resulted in an increase of $167.7 million in checking account balances during 1995. During 1994 and 1993, Coast experienced net decreases in deposits of $28.8 million and $227.6 million, respectively, of which none and $35.4 million, respectively, were the result of branch sales. 46 Other potential sources of funds available to Coast include secured borrowings (securities sold under agreements to repurchase), a line of credit with the FHLB of San Francisco and direct access to borrowings from the Federal Reserve System. At December 31, 1995, the amount of additional credit available from the FHLB was $1.26 billion. In addition, Coast has access to the capital markets for issuing debt or equity securities; however, access can be limited from time to time by various factors including market conditions, Coast's credit rating and general economic conditions. During the first quarter of 1993, the Company issued 2,300,000 shares of common stock at $17.75 per share and contributed the net proceeds, totaling $38.2 million, to Coast as equity capital. During the second quarter of 1993, the Company issued $57.5 million of 10% Senior Notes due 2000. The majority of the proceeds from that offering were also contributed to Coast as equity capital. Also during the second quarter of 1993, Coast redeemed the remaining $40.6 million of its 16% capital notes due 1994. During the third quarter of 1993, Coast redeemed the remaining $18.0 million of its 15.75% capital notes due 2000. At December 31, 1995, the Company's total of approved commitments to originate or purchase loans and MBS amounted to $77.7 million, and the Company had $16.4 million of commitments to sell loans and MBS. Outstanding letters of credit at December 31, 1995, which were primarily related to the former real estate development activities of CoastFed Properties, totaled $386.5 million. Scheduled repayments of FHLB of San Francisco advances for the year ended December 31, 1996, are $729.3 million. Under OTS capital regulations Coast must meet three capital tests. First, the tangible capital requirement mandates that Coast's stockholder's equity less intangible assets (as defined) be at least 1.5% of adjusted total assets as defined in the regulation. At December 31, 1995, Coast's tangible capital ratio was 5.47%, $326.1 million in excess of the requirement at that date. Second, the core capital requirement currently mandates core capital to be at least 3% of adjusted total assets as defined in the regulation. At December 31, 1995, Coast's core capital ratio was 5.47%, $203.0 million in excess of the requirement at that date. Third, the risk-based capital requirement presently mandates that core capital plus supplementary capital as defined in the OTS capital regulations be at least 8% of risk-adjusted assets as defined therein. At December 31, 1995, Coast's risk-based capital ratio was 10.86%, $149.4 million in excess of the requirement at that date. See Item 1. "Business--Regulation--Regulatory Capital Requirements." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................... 48 Consolidated Statement of Financial Condition.............................. 49 Consolidated Statement of Operations....................................... 50 Consolidated Statement of Stockholders' Equity............................. 51 Consolidated Statement of Cash Flows....................................... 52 Notes to Consolidated Financial Statements................................. 54
All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto. 47 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Coast Savings Financial, Inc. We have audited the consolidated statement of financial condition of Coast Savings Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coast Savings Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 23, 1996 48 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, --------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) ASSETS Cash and due from banks............................. $ 119,717 $ 99,578 Federal funds sold and other short term investments. 30,394 2,443 Investment securities held to maturity (fair value of $73.2 million and $81.6 million)..................................... 72,785 82,477 Loans receivable, net............................... 5,245,464 5,632,517 Loans receivable held for sale, at the lower of cost or fair value (fair value of $230.0 million and $161.3 million).................................... 221,032 160,665 Mortgage-backed securities held to maturity (fair value of $1.83 billion and $1.37 billion)................................. 1,817,403 1,404,815 Mortgage-backed securities available for sale, at fair value......................................... 354,398 328,913 Real estate held for sale........................... 31,696 44,168 Federal Home Loan Bank stock........................ 85,837 79,261 Land and depreciable assets......................... 92,920 87,493 Interest receivable and other assets................ 172,702 262,683 Goodwill............................................ 7,332 11,504 ---------- ---------- $8,251,680 $8,196,517 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits............................................ $6,123,472 $5,879,808 Federal Home Loan Bank advances..................... 804,250 954,450 Other borrowings.................................... 733,340 809,616 Other liabilities................................... 104,754 113,346 Income taxes payable................................ 12,684 8,588 Capital notes....................................... 55,746 55,495 ---------- ---------- 7,834,246 7,821,303 ---------- ---------- Commitments and contingent liabilities Stockholders' equity: Serial preferred stock, without par value; 50,000,000 shares authorized, none outstanding................................. -- -- Common stock, $.01 par value; 100,000,000 shares authorized, 18,582,917 and 18,457,454 shares issued and outstanding at December 31, 1995 and 1994, respectively......... 186 185 Additional paid-in capital........................ 265,018 263,161 Unrealized gain (loss) on securities available for sale, net of taxes............................... 6,554 (1,006) Retained earnings, substantially restricted....... 145,676 112,874 ---------- ---------- Total stockholders' equity...................... 417,434 375,214 ---------- ---------- $8,251,680 $8,196,517 ========== ==========
See accompanying notes to consolidated financial statements. 49 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Interest income: Loans receivable............................... $469,864 $382,371 $389,015 Mortgage-backed securities ("MBS")............. 119,629 93,334 114,048 Investment securities.......................... 23,688 18,925 12,584 -------- -------- -------- 613,181 494,630 515,647 -------- -------- -------- Interest expense: Deposits....................................... 280,895 218,335 234,020 Borrowings..................................... 131,235 88,384 80,061 -------- -------- -------- 412,130 306,719 314,081 -------- -------- -------- Net interest income.......................... 201,051 187,911 201,566 Provision for loan losses........................ 40,000 75,000 61,000 -------- -------- -------- Net interest income after provision for loan losses...................................... 161,051 112,911 140,566 -------- -------- -------- Noninterest income: Loan servicing fees and charges................ 13,518 15,231 19,155 Gain on sale of subsidiary..................... 7,549 -- -- Gain (loss) on sale of loans................... 177 (2,352) 1,978 Loss on sale of investment securities.......... -- -- (3,815) Elimination of Excess Spread Servicing Asset... -- (9,891) -- Gain (loss) on sale of MBS..................... (287) 1,812 8,490 Other.......................................... 36,662 38,124 34,485 -------- -------- -------- 57,619 42,924 60,293 -------- -------- -------- Noninterest expense: Compensation and benefits...................... 71,302 77,063 76,385 Office occupancy, net.......................... 40,633 38,423 39,511 Federal deposit insurance premiums............. 17,333 16,359 18,545 Other general and administrative expenses...... 32,454 28,433 26,509 -------- -------- -------- Total general and administrative expenses.... 161,722 160,278 160,950 Real estate operations, net.................... 4,090 10,088 34,259 Amortization of goodwill....................... 1,221 1,424 1,413 -------- -------- -------- 167,033 171,790 196,622 -------- -------- -------- Earnings (loss) before income tax expense (benefit)................................... 51,637 (15,955) 4,237 Income tax expense (benefit)..................... 18,835 (9,417) (12,999) -------- -------- -------- Net earnings (loss).......................... $ 32,802 $ (6,538) $ 17,236 ======== ======== ======== Primary net earnings (loss) per share of common stock........................................... $ 1.72 $ (.35) $ .94 ======== ======== ======== Fully diluted net earnings (loss) per share of common stock.................................... $ 1.71 $ (.35) $ .94 ======== ======== ========
See accompanying notes to consolidated financial statements. 50 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED GAIN (LOSS) ON UNREALIZED SECURITIES LOSS ON SERIAL ADDITIONAL AVAILABLE MARKETABLE TOTAL PREFERRED COMMON PAID-IN FOR SALE, EQUITY RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL NET OF TAXES SECURITIES EARNINGS EQUITY --------- ------ ---------- ------------ ---------- -------- ------------- (IN THOUSANDS) Balance at December 31, 1992................... $-- $161 $224,658 $ -- $(1,250) $102,176 $325,745 Common stock issuance... -- 23 38,148 -- -- -- 38,171 Exercise of stock options................ -- 1 344 -- -- -- 345 Realization of loss on marketable equity securities............. -- -- -- -- 1,250 -- 1,250 Unrealized gain on securities available for sale, net of taxes. -- -- -- 10,821 -- -- 10,821 Net earnings for the year 1993.............. -- -- -- -- -- 17,236 17,236 ---- ---- -------- -------- ------- -------- -------- Balance at December 31, 1993................... -- 185 263,150 10,821 -- 119,412 393,568 Exercise of stock options................ -- -- 11 -- -- -- 11 Unrealized loss on securities available for sale, net of taxes. -- -- -- (11,827) -- -- (11,827) Net loss for the year 1994................... -- -- -- -- -- (6,538) (6,538) ---- ---- -------- -------- ------- -------- -------- Balance at December 31, 1994................... -- 185 263,161 (1,006) -- 112,874 375,214 Exercise of stock options................ -- 1 1,857 -- -- -- 1,858 Unrealized gain on securities available for sale, net of taxes. -- -- -- 7,560 -- -- 7,560 Net earnings for the year 1995.............. -- -- -- -- -- 32,802 32,802 ---- ---- -------- -------- ------- -------- -------- Balance at December 31, 1995................... $-- $186 $265,018 $ 6,554 $ -- $145,676 $417,434 ==== ==== ======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements. 51 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 --------- ----------- --------- (IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)....................... $ 32,802 $ (6,538) $ 17,236 --------- ----------- --------- Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Net decrease (increase) in accounts receivable............................. 71,651 (38,964) (3,574) Sale of loans held for sale............. 44,197 28,398 130,062 Provision for loan losses............... 40,000 75,000 61,000 Deferred income tax expense (benefit)... 18,835 (9,417) (12,999) Principal repayments on loans held for sale................................... 14,562 23,296 3,310 Depreciation and amortization........... 11,500 10,079 9,940 Amortization of discounts and premiums, net.................................... 5,146 8,244 5,301 Amortization of goodwill................ 1,221 1,424 1,413 Net decrease in prepaid expenses........ 794 459 696 Provision for losses on real estate held for sale............................... 293 2,132 15,584 Elimination of Excess Spread Servicing Asset.................................. -- 9,891 -- Net increase (decrease) in interest payable................................ (137) 4,765 1,835 Net present value gain on sale of loans and MBS................................ (284) (6,176) (4,571) Net decrease in deferred income......... (1,731) (7,209) (5,739) Federal Home Loan Bank stock dividends.. (4,467) (3,259) (2,483) Net decrease (increase) in interest receivable............................. (7,179) 1,160 2,085 Gain on sale of subsidiary.............. (7,549) -- -- Net decrease in accounts payable........ (27,068) (46,626) (19,743) Loans originated for sale, net of refinances............................. (146,024) (516,343) (625,401) Other................................... (7,137) (2,781) (9,363) --------- ----------- --------- Total adjustments..................... 6,623 (465,927) (452,647) --------- ----------- --------- Net cash provided (used) by operations........................... 39,425 (472,465) (435,411) --------- ----------- --------- Cash flows from investing activities: Loans originated for investment, net of refinances............................... (846,230) (1,097,250) (226,257) Repurchase of loans....................... (18,937) (113,146) (88,367) Principal repayments on loans............. 441,452 429,655 425,094 Purchase of MBS........................... -- (18,574) (10,340) Principal repayments on MBS............... 163,614 266,907 283,020 Principal repayments on MBS available for sale..................................... 29,169 76,081 97,930 Sale of MBS available for sale............ 35,335 334,617 241,886 Net decrease (increase) in short-term investment securities.................... 9,411 14,473 (7,832) Purchase of investment securities......... (193) (48,864) (3,604) Purchase of FHLB stock.................... (2,450) (13,226) -- Maturities and principal repayments on investment securities.................... 53 55 46 Sale of investment securities available for sale................................. -- -- 6,495 Net increase in land and depreciable assets................................... (16,129) (18,361) (16,309) Sale of real estate held for sale......... 47,317 43,895 68,170 FHLB stock redeemed....................... -- -- 20,368 Proceeds from sale of subsidiary.......... 150,054 -- -- --------- ----------- --------- Net cash provided (used) by investing activities........................... (7,534) (143,738) 790,300 --------- ----------- ---------
(continued) 52 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Cash flows from financing activities: Net increase (decrease) in deposits.......... $ 303,733 $ (28,751) $(192,205) Deposits disposed of in branch sales, net.... (60,069) -- (35,366) Net increase (decrease) in FHLB advances..... (150,200) 250,250 (390,750) Net increase (decrease) in short-term borrowings.................................. (78,238) (88,266) 362,786 Net decrease in long-term borrowings......... -- -- (17,823) Common stock options exercised............... 973 11 345 Issuance of common stock..................... -- -- 38,171 --------- --------- --------- Net cash provided (used) by financing activities................................ 16,199 133,244 (234,842) --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................. 48,090 (482,959) 120,047 Cash and cash equivalents at beginning of year. 102,021 584,980 464,933 --------- --------- --------- Cash and cash equivalents at end of year....... $ 150,111 $ 102,021 $ 584,980 ========= ========= ========= Supplemental disclosures of cash flow information: Cash payments of interest.................... $ 173,354 $ 119,615 $ 118,237 Cash payments (refunds) of income taxes, net. (496) 52 6,942 ========= ========= ========= Supplemental schedule of noncash investing and financing activities: Loans exchanged for MBS, net................. $ 654,238 $ 434,156 $ 342,961 Additions to loans resulting from the sale of real estate acquired in settlement of loans. 35,627 88,366 136,302 Additions to real estate acquired in settlement of loans......................... 89,979 141,499 231,923 Reductions to real estate acquired through in-substance foreclosure, net............... -- (2,217) (26,055) Unrealized gain (loss) on securities available for sale, net of taxes............ 7,560 (11,827) 10,821
See accompanying notes to consolidated financial statements. 53 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Presentation Coast Savings Financial, Inc., a Delaware corporation (the "Company"), was organized in 1988 and is the parent company of Coast Federal Bank, Federal Savings Bank ("Coast"). Substantially all of the Company's consolidated revenues are derived from the operations of Coast, and Coast represented substantially all of the Company's consolidated assets and liabilities at December 31, 1995. Coast's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate located in California. At December 31, 1995, Coast operated 89 retail banking offices in California. Coast is subject to significant competition from other financial institutions, and is also subject to regulation by certain federal agencies and undergoes periodic examinations by those regulatory authorities. These consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition, and revenues and expenses for the period. Actual results could differ from those estimates. The majority-owned and controlled subsidiaries have been consolidated and all significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the financial statements for 1994 and 1993 to conform to the 1995 presentation. Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles which are to be disposed of. SFAS 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that a long-lived asset is determined to be impaired, an impairment loss shall be recognized. SFAS 121 prescribes that impairment losses for long-lived assets shall be measured as the amount by which the carrying amount of the asset exceeds its fair value. Additionally, SFAS 121 provides that long-lived assets that are to be disposed of by sale or abandonment shall be reported at the lower of carrying amount or fair value less cost of disposition. This statement is effective for financial statements for fiscal years beginning after December 15, 1995. It is not expected that SFAS 121 will have a material adverse effect on the Company's financial condition or results of operations. In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing Rights ("SFAS 122"), which is an amendment to SFAS No. 65, Accounting for Certain Mortgage Banking Activities ("SFAS 65"). SFAS 122 amends SFAS 65 to remove the distinction of accounting for mortgage servicing rights resulting from originated loans and those resulting from purchased loans. Additionally, SFAS 122 requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. SFAS 122 is to be applied prospectively to fiscal years beginning after December 16, 1995. It is not expected that SFAS 122 will have a material adverse effect on the Company's financial condition or results of operations. 54 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In November 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement establishes financial accounting standards for stock-based employee compensation plans. SFAS 123 permits the Company to choose either a new fair-value-based method or the current APB Opinion 25 intrinsic value-based method of accounting for its stock-based compensation arrangements with pro forma disclosures of net earnings and earnings per share computed as if the fair-value-based method had been applied. SFAS 123 is effective for fiscal years beginning after December 15, 1995. It is not expected that SFAS 123 will have a material adverse effect on the Company's financial condition or results of operations. Loan Impairment During 1993, the FASB issued SFAS No. 114 entitled Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Effective January 1, 1994, the Company adopted SFAS 114, which, during the fourth quarter of 1994 was subsequently amended by SFAS No. 118 entitled Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures. A loan is impaired when, based on current circumstances and events, it is probable that a creditor will be unable to collect all amounts contractually due under a loan agreement. If a loan is determined to be impaired, a writedown is taken or an allowance is established based upon the difference between Coast's investment in the loan and the fair value of the loan's underlying collateral. Where impairment is considered to be permanent, a charge-off is recorded; where impairment may be temporary, an allowance is established. Impaired loans which are performing under the contractual terms are reported as performing loans, and cash payments are allocated to principal and interest in accordance with the terms of the loan. At December 31, 1995, Coast had $31.5 million of troubled debt restructurings which were modified prior to the implementation of SFAS 114 and which were performing in accordance with their modified terms. Coast accounts for such loans under the provisions of SFAS No. 15 entitled Accounting by Debtors and Creditors for Troubled Debt Restructurings, as permitted under SFAS 114. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash, amounts due from banks, certain short-term investments, certificates of deposit and federal funds sold. Federal funds are generally sold for one-day periods, and short-term investment securities and certificates of deposit have maturities of less than three months. Assets Held or Available for Sale The Company identifies those loans, MBS and investment securities for which at the time of acquisition it does not have the positive intent and ability to hold to maturity. If management has the positive intent and the Company has the ability at the time of acquisition to hold such assets until maturity, they are classified as held to maturity and are carried at amortized historical cost. Securities that are to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. Loans held for sale are carried at the lower of amortized historical cost or fair value. Assets held for indefinite periods of time include assets that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors. 55 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assets Held to Maturity Investment securities, loans and MBS, excluding those held or available for sale, are carried at amortized historical cost, adjusted for amortization of premiums and discounts utilizing the interest method over the contractual terms of the assets. The carrying value of these assets is not adjusted for temporary declines in market value since Coast intends and has the ability to hold them to their maturities. In November 1995, the FASB issued a Special Report as an aid in understanding and implementing SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). The Special Report included guidance that allowed Coast to review the appropriateness of the classifications of all securities held. Any reclassifications would be accounted for at fair value in accordance with SFAS 115. In accordance with the Special Report, during the fourth quarter of 1995, Coast transferred $18.8 million of MBS from the held-to-maturity portfolio to the available-for-sale portfolio. Premiums and Discounts on Investment Securities, Loans and MBS Premiums and discounts on investment securities, loans and MBS purchased are amortized utilizing the interest method over the contractual terms of the assets. General Valuation Allowance Coast maintains a general valuation allowance ("GVA") to absorb future losses that may be realized on its loan-related assets and off-balance sheet items. The GVA is reviewed and adjusted quarterly based upon a number of factors, including asset classifications, economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency migration analysis, historical loss experience, ratio analysis and Coast's underwriting practices. Economic conditions, especially those affecting real estate markets, may change, which could result in the need for an increased balance in the GVA in future periods. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Coast's GVA. These agencies may require Coast to increase the amount of the GVA, based on their judgments of the information available at the time of the examination. (See Notes 3 and 13 for additional information regarding the GVA.) Goodwill Goodwill is generally amortized at a constant rate based on the anticipated end-of-period remaining principal balance of long-term interest-earning assets acquired in various savings and loan acquisitions. Loan Sales and Servicing Coast sells loans and participations in loans for cash proceeds equal to the market value of the loans and participations sold, with yield rates to the investors based upon current market rates. Gain or loss is recognized equal to the difference between the cash proceeds received and the carrying value of the loans and participations sold. In addition, gain or loss is recognized and a premium or discount is recorded at the time of sale based upon the net present value of the amounts expected to be received or paid resulting from the difference between the contractual interest rates received from the borrowers and the rates paid to the investors. The resulting premium or discount (the "Excess Spread Servicing Asset") is amortized utilizing the interest method. Excluded from the net present value portion of the gain or loss is an amount equal to the present value of a normal loan servicing fee and any periodic or recurring expenses. 56 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Coast's policy regarding the allocation of cost when a loan or part of a loan is sold is to allocate the recorded investment, excluding any amount included in the GVA, based on relative fair values on the date that the loan was acquired, adjusted for principal repayments and other activity from the date of acquisition to the date of sale. Interest Income on Loans Interest income on loans is accrued as it is earned. Coast defers and amortizes both the loan origination fees and the incremental direct costs relating to loans originated. The deferred origination fees and costs are amortized into interest income utilizing the interest method over the lives of the related loans. Loans are placed on a nonaccrual status after being delinquent 90 days, or earlier if the ultimate collectibility of the accrual is in doubt. Whenever the accrual of interest is stopped, previously accrued but uncollected interest income is reversed. Thereafter, interest is recognized only as cash is received until the loan is reinstated. Accretion of discounts and deferred loan fees is discontinued when loans are placed on a nonaccrual status. Real Estate Held for Sale Real estate held for sale, which represents real estate acquired through foreclosure, is carried at the lower of cost or estimated fair value less costs of disposition. Income recognition resulting from the disposition of real estate is dependent upon the transaction having met certain criteria relating to the nature of the property sold and the terms of sale. Depreciation and Amortization Depreciation is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the estimated useful life of the assets or the terms of the respective leases. Fair Value of Financial Instruments Pursuant to the requirements of Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS 107"), the Company has included in the following Notes to Consolidated Financial Statements information about the fair values of Coast's financial instruments, whether or not such instruments are recognized in the accompanying consolidated statement of financial condition. In cases where quoted market prices are not available, fair values are estimated based upon discounted cash flows. Those techniques are significantly affected by the assumptions utilized, including the assumed discount rates and estimates of future cash flows. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale or other disposition of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. All components of accrued interest receivable and payable are presumed to have approximately equal book and fair values because the periods over which such amounts are realized are relatively short. As a result of the assumptions utilized, the aggregate fair value estimates presented herein do not necessarily represent the Company's aggregate underlying fair value. The fair values of investment securities and MBS are generally obtained from market bids for similar or identical securities, or are quotes from independent securities brokers or dealers. The fair values of loans are estimated for portfolio segments with similar characteristics (e.g., single family, multifamily, commercial and other, and are further segmented into fixed and adjustable rate categories: London 57 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interbank Offered Rate (LIBOR), COFI and Treasury indices). The fair values of performing loans are calculated using an option-based approach which values the prepayment options contained in the loans. Prepayment options introduce significant uncertainty into the timing of loan cash flows. When loan rates fall significantly, prepayments typically accelerate, forcing lenders to reinvest the proceeds of the prepayments at lower rates. An important aspect of valuing a loan, therefore, is determining the appropriate value of the option component of the loan. The fair values of significant nonperforming loans are based on recent appraisals, or if not available, on estimated cash flows, discounted using a rate commensurate with the risk associated with the specific properties. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined utilizing available market information and specific borrower information. The fair value of the Excess Spread Servicing Asset is equal to its carrying value because such asset is adjusted quarterly based upon current portfolio and market factors. The fair values of deposits are estimated based upon the type of deposit product. Demand and money market deposits are presumed to have equal book and fair values. The estimated fair values of time deposits are determined by discounting the cash flows of segments of deposits having similar maturities and rates, utilizing a yield curve that approximated the rates offered as of the reporting date. No value has been estimated for Coast's long term relationships with depositors (commonly known as the core deposit intangible) since such intangible asset is not a financial instrument pursuant to the definitions contained in SFAS 107. The fair values of borrowings are generally obtained from market bids for similar or identical financial instruments, or are quotes from independent securities brokers or dealers. When such information is not available, the fair values are determined by discounting the cash flows called for thereunder at rates available for similar instruments as of the reporting date. The fair values of off-balance sheet financial instruments are determined in several ways: (i) the value of interest rate exchange agreements ("Swaps") and interest rate cap contracts ("Caps") is determined by discounting the cash flows called for under the respective agreements at rates available as of the reporting date, (ii) the value of the letters of credit is determined by measuring the potential liability under the letters against the underlying security properties, (iii) the fair value of the potential liability associated with loans sold with recourse is based upon an estimate of the future losses likely to be realized under such recourse arrangements, and (iv) the fair values of commitments to extend credit and purchase assets are based on rates for similar transactions as of the reporting date. Swaps Swaps are undertaken in order to reduce the interest rate risk associated with certain assets and liabilities having fixed or floating interest rate provisions (matched Swaps). When these Swaps are sold simultaneously with the disposition of the related assets or liabilities, any resulting gain or loss is recognized. When Swaps are terminated without the simultaneous disposition of the related assets or liabilities, any resulting gain or loss is deferred and amortized over the remaining life of the Swap upon termination. The net interest income or expense resulting from the differential between exchanging floating rate and fixed rate interest payments is recorded on a current basis. 58 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND OTHER SHORT TERM INVESTMENTS AND INVESTMENT SECURITIES The carrying and fair values of cash and due from banks, federal fund sold and other short term investments and investment securities are shown in the following table at the dates indicated.
DECEMBER 31, ---------------------------------- 1995 1994 ----------------- ---------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- ------- (IN THOUSANDS) Cash and due from banks..................... $119,717 $119,717 $99,578 $99,578 ======== ======== ======= ======= Federal funds sold and other short term investments: Federal funds sold........................ $ 28,000 $ 28,000 $ -- $ -- Commercial paper.......................... 2,394 2,394 2,443 2,443 -------- -------- ------- ------- 30,394 30,394 2,443 2,443 -------- -------- ------- ------- Investment securities: Held to maturity: Short term: Commercial paper, custodial........... 24,344 24,344 32,636 32,636 Repurchase agreements, custodial...... 3,392 3,392 -- -- United States Treasury securities..... -- -- 4,825 4,787 Other marketable securities, custodial............................ 374 374 60 60 -------- -------- ------- ------- 28,110 28,110 37,521 37,483 -------- -------- ------- ------- Long term: United States Treasury securities..... 40,275 40,528 40,695 39,768 Securities of states of the U.S. and political subdivisions thereof....... 3,569 3,717 3,622 3,667 Other marketable securities........... 831 831 639 639 -------- -------- ------- ------- 44,675 45,076 44,956 44,074 -------- -------- ------- ------- 72,785 73,186 82,477 81,557 -------- -------- ------- ------- $103,179 $103,580 $84,920 $84,000 ======== ======== ======= =======
At December 31, 1995 and 1994, there were gross unrealized gains of $401,000 and $45,000, respectively, and gross unrealized losses of none and $965,000, respectively. The following table summarizes cash and cash equivalents, as reported in the accompanying Consolidated Statement of Cash Flows, as of the dates indicated.
DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Cash and due from banks....................... $119,717 $ 99,578 $120,840 Repurchase agreements......................... -- -- 340,000 Federal funds sold............................ 28,000 -- 120,000 Commercial paper.............................. 2,394 2,443 4,140 -------- -------- -------- $150,111 $102,021 $584,980 ======== ======== ========
59 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The amounts included above in cash and cash equivalents and qualifying investment securities generally constitute Coast's liquidity portfolio. Coast maintains liquidity to satisfy regulatory requirements which require Coast to maintain minimum average balances of liquid assets and to fund normal operational requirements. The liquidity portfolio is managed in a manner intended to maximize flexibility and yield, while minimizing interest rate risk, credit risk and the cost of the capital required to be maintained for such assets. There were no sales of long-term investment securities during 1995 or 1994. During 1993, proceeds from sales of long-term investment securities available for sale were $5.7 million, gross gains from such sales were $28,000 and gross losses were $3.8 million. The following is a summary of the contractual terms to maturity of long-term investment securities, excluding securities available for sale, as of December 31, 1995. The fair values of the securities listed below are approximately equal to their book values.
CONTRACTUAL MATURITY ---------------------------------- AFTER 5 AFTER 1 THROUGH AFTER WITHIN THROUGH 10 10 1 YEAR 5 YEARS YEARS YEARS TOTAL ------ ------- ------- ----- ----- (IN MILLIONS) U.S. Treasury securities.................... $40.3 $-- $ -- $-- $40.3 Securities of states of the U.S. and politi- cal subdivisions thereof................... -- -- -- 3.6 3.6 Other marketable securities................. -- .8 -- -- .8 ----- ---- ----- ---- ----- $40.3 $ .8 $ -- $3.6 $44.7 ===== ==== ===== ==== =====
The combined weighted average yield on federal funds sold, other short term investments and investment securities was 5.43% and 6.09% at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, Coast had accrued interest receivable on these investment securities totaling $974,000 and $952,000, respectively, which is included in interest receivable and other assets in the accompanying consolidated statement of financial condition. Coast, as a member institution of the Federal Home Loan Bank ("FHLB") of San Francisco, is required to own common stock in the FHLB of San Francisco based generally upon Coast's balance of residential mortgage loans and the combination of FHLB advances and letters of credit. At December 31, 1995, Coast owned $85.8 million of FHLB stock, $18.4 million in excess of the minimum requirement. At December 31, 1994, Coast owned $79.3 million of FHLB stock, $8.8 million in excess of the minimum requirement. The yield on FHLB stock was 5.16% and 5.69% at December 31, 1995 and 1994, respectively. See Notes 8 and 13 for a summary of assets which were pledged as security for borrowings and Swaps. Interest income on investment securities includes the following for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Federal funds sold............................... $ 4,399 $ 2,732 $ 886 Short-term investment securities................. 11,966 8,891 8,176 Long-term investment securities.................. 2,856 4,043 1,039 FHLB stock....................................... 4,467 3,259 2,483 ------- ------- ------- $23,688 $18,925 $12,584 ======= ======= =======
60 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (3) LOANS RECEIVABLE The following is a summary of loans receivable at the dates indicated.
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) Held to maturity: Real estate: Residential: One to four units ("single family")......... $3,054,334 $3,180,847 Five or more units ("multifamily").......... 1,355,394 1,430,892 ---------- ---------- 4,409,728 4,611,739 Commercial.................................... 876,889 941,988 ---------- ---------- 5,286,617 5,553,727 Commercial business............................. 3,177 149,298 Secured by deposits............................. 8,557 8,880 Overdraft lines of credit....................... 12,459 5,595 ---------- ---------- 5,310,810 5,717,500 Deferred loan origination fees and costs, net... 6,292 3,435 Other unamortized net discounts................. (6,638) (11,380) General valuation allowance..................... (65,000) (77,038) ---------- ---------- 5,245,464 5,632,517 Held for sale..................................... 221,032 160,665 ---------- ---------- $5,466,496 $5,793,182 ========== ==========
The combined contractual weighted average interest rate of loans receivable was 7.95% and 7.18% at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, Coast had accrued interest receivable on loans receivable of $34.6 million and $31.5 million, respectively, which is included in interest receivable and other assets in the accompanying consolidated statement of financial condition. At December 31, 1995 and 1994, Coast had approved commitments to originate loans totaling $77.7 million and $143.1 million, respectively, substantially all of which were for adjustable rate single family residential loans. Coast had $16.4 million of commitments to sell loans at December 31, 1995, and had no commitments to sell loans at December 31, 1994. On September 30, 1995 the Bank terminated its asset-based lending activity through the sale of its former subsidiary, CBCC. At the date of sale, CBCC had a loan portfolio of $135.8 million. The consolidated statement of operations for the year ended December 31, 1995, includes a pretax gain of $7.5 million resulting from the sale of CBCC. See Note 8 for a summary of loans and other assets which were pledged as security for borrowings. 61 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table presents carrying and fair values of loans receivable at the dates indicated.
DECEMBER 31, --------------------------------------------------- 1995 1994 ------------------------- ------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- (IN THOUSANDS) Held for Investment: Real estate: Residential: Single family-- adjustable rates.... $2,954,136 $3,026,338 $3,047,975 $2,940,599 Single family--fixed rates............... 102,618 105,844 123,520 118,602 ---------- ---------- ---------- ---------- 3,056,754 3,132,182 3,171,495 3,059,201 ---------- ---------- ---------- ---------- Multifamily-- adjustable rates.... 1,314,960 1,327,223 1,378,613 1,328,296 Multifamily--fixed rates............... 39,654 39,598 53,275 50,405 ---------- ---------- ---------- ---------- 1,354,614 1,366,821 1,431,888 1,378,701 ---------- ---------- ---------- ---------- 4,411,368 4,499,003 4,603,383 4,437,902 ---------- ---------- ---------- ---------- Commercial: Adjustable rates..... 788,995 795,228 842,991 806,505 Fixed rates.......... 85,908 84,081 99,408 96,152 ---------- ---------- ---------- ---------- 874,903 879,309 942,399 902,657 ---------- ---------- ---------- ---------- 5,286,271 5,378,312 5,545,782 5,340,559 Commercial business...... 3,177 3,499 149,298 153,046 Secured by deposits...... 8,557 8,613 8,880 8,889 Overdraft lines of credit.................. 12,459 12,968 5,595 5,826 ---------- ---------- ---------- ---------- 5,310,464 5,403,392 5,709,555 5,508,320 Held for sale.............. 221,032 229,955 160,665 161,325 ---------- ---------- ---------- ---------- 5,531,496 5,633,347 5,870,220 5,669,645 GVA........................ (65,000) -- (77,038) -- ---------- ---------- ---------- ---------- $5,466,496 $5,633,347 $5,793,182 $5,669,645 ========== ========== ========== ==========
At December 31, 1995, loans receivable included nonaccrual loans as indicated below.
OTHER CALIFORNIA STATES TOTAL ---------- ------ ------- (IN THOUSANDS) Nonaccrual loans: Single family.................................... $43,633 $ 159 $43,792 Multifamily...................................... 25,646 -- 25,646 Commercial and other............................. 10,873 1,040 11,913 ------- ------ ------- $80,152 $1,199 $81,351 ======= ====== =======
If nonaccrual loans at December 31, 1995, had been interest-earning throughout the year, interest income of $6.3 million would have been earned on these loans at their respective contractual rates. For the year ended December 31, 1995, actual interest earned on such loans was $2.6 million. 62 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The table shown below reflects the changes in the GVA attributable to loan- related assets for the periods indicated. See also the GVA attributable to off-balance sheet items described in Note 13.
RESIDENTIAL COMMERCIAL REAL REAL ESTATE ESTATE MORTGAGE MORTGAGE AND OTHER TOTAL ----------- --------------- ----- (IN MILLIONS) Balance at December 31, 1992.............. $ 49 $ 59 $108 Additions charged (reductions credited) to operations............................... 69 8 77 Recoveries................................ 2 5 7 Losses charged............................ (67) (19) (86) ---- ---- ---- Balance at December 31, 1993.............. 53 53 106 Additions charged (reductions credited) to operations............................... 68 (2) 66 Recoveries................................ 6 1 7 Losses charged............................ (78) (24) (102) ---- ---- ---- Balance at December 31, 1994.............. 49 28 77 Additions charged (reductions credited) to operations............................... 40 -- 40 Recoveries................................ 1 1 2 Losses charged............................ (38) (4) (42) Sale of subsidiary........................ -- (3) (3) Reallocation to off-balance sheet items... (4) (5) (9) ---- ---- ---- Balance at December 31, 1995.............. $ 48 $ 17 $ 65 ==== ==== ====
A loan is impaired when, based on current information and events, a creditor will be unable to collect all amounts contractually due under a loan agreement. When a loan is determined to be impaired, a valuation allowance is established based upon the difference between Coast's investment in the loan and the fair value of the collateral securing the loan. Coast's impaired loans totaled $135.2 million and $112.6 million at December 31, 1995 and 1994, respectively, and for the years then ended the average investment in impaired loans was $109.9 million and $85.7 million, respectively. Interest income on such loans totaled $8.1 million in 1995 and $6.4 million in 1994, and was recognized utilizing the cash-basis method of accounting. As of December 31, 1995 and 1994, nonaccrual loans included $37.6 million and $43.3 million, respectively, of impaired loans. Impaired loans at December 31, 1995, included $127.2 million of loans for which valuation allowances of $25.6 million had been established and $33.6 million of loans for which no allowance was considered necessary. At December 31, 1994 there were $92.9 million of impaired loans for which valuation allowances of $18.5 million had been established and $38.2 million of such loans for which no allowance was considered necessary. All such provisions for losses and any related recoveries are recorded as part of the provision for loan losses in the accompanying consolidated statement of operations. There were recoveries of zero and $.1 million of previously established allowances during the years ended December 31, 1995 and 1994, respectively. Cash payments received on impaired loans which are performing under their contractual terms are allocated to principal and interest in accordance with the terms of the respective loan. Coast has reached agreements with certain borrowers that provide for the restructuring of existing loans secured by income-producing properties. Restructurings are generally in the form of interest rate adjustments, extensions of maturities or deferred payments of principal or interest. At December 31, 1995 and 1994, Coast had $30.5 million and $37.3 million, respectively, of loans which were performing in accordance with their restructuring agreements. The restructured loans had effective yields of 8.00% and 7.87% at December 31, 1995 63 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and 1994, respectively. For the years ended December 31, 1995, 1994 and 1993, $2.4 million, $2.9 million and $5.2 million, respectively, was earned on these restructured loans which is included in interest income on loans in the accompanying consolidated statement of operations. Interest income on these loans for the years ended December 31, 1995, 1994 and 1993, would have totaled $3.2 million, $3.8 million and $7.8 million, respectively, under their original terms. At December 31, 1995, Coast had no commitments to lend additional funds to these borrowers. (4) MORTGAGE-BACKED SECURITIES ("MBS") The amortized cost and fair values of MBS are shown in the following tables at the dates indicated.
AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1995 Held to maturity: Adjustable rate: MBS issued by Coast............ $ 898,713 $ 2,012 $(16,232) $ 884,493 FNMA securities................ 711,371 24,672 (249) 735,794 FHLMC securities............... 128,687 4,024 -- 132,711 Issued by other financial institutions.................. 43,609 -- (1,088) 42,521 ---------- ------- -------- ---------- 1,782,380 30,708 (17,569) 1,795,519 ---------- ------- -------- ---------- Fixed rate: FNMA securities................ 34,975 170 (72) 35,073 Other securities............... 48 -- -- 48 ---------- ------- -------- ---------- 35,023 170 (72) 35,121 ---------- ------- -------- ---------- $1,817,403 $30,878 $(17,641) $1,830,640 ========== ======= ======== ========== Available for sale: Adjustable rate: FNMA securities................ $ 169,575 $ 5,215 $ -- $ 174,790 FHLMC securities............... 175,127 4,481 -- 179,608 ---------- ------- -------- ---------- $ 344,702 $ 9,696 $ -- $ 354,398 ========== ======= ======== ==========
64 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1994 Held to maturity: Adjustable rate: MBS issued by Coast............ $1,014,847 $-- $(21,464) $ 993,383 FNMA securities................ 138,264 -- (4,127) 134,137 FHLMC securities............... 163,894 -- (2,595) 161,299 Issued by other financial institutions.................. 49,494 -- (1,488) 48,006 ---------- ---- -------- ---------- 1,366,499 -- (29,674) 1,336,825 ---------- ---- -------- ---------- Fixed rate: FNMA securities................ 38,254 107 (3,074) 35,287 Other securities............... 62 -- (8) 54 ---------- ---- -------- ---------- 38,316 107 (3,082) 35,341 ---------- ---- -------- ---------- $1,404,815 $107 $(32,756) $1,372,166 ========== ==== ======== ========== Available for sale: Adjustable rate: FNMA securities................ $ 198,169 $585 $ (2,215) $ 196,539 FHLMC securities............... 134,640 -- (2,266) 132,374 ---------- ---- -------- ---------- $ 332,809 $585 $ (4,481) $ 328,913 ========== ==== ======== ==========
As of December 31, 1995, $2.17 billion of Coast's MBS included in the table above have contractual terms to maturity of more than ten years, $46 thousand have contractual maturities of from five to ten years, $4.0 million have contractual maturities of one to five years and none have contractual maturities of less than one year. The combined contractual weighted average interest rate of MBS was 6.60% and 5.66% at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, Coast had accrued interest receivable on MBS of $13.7 million and $9.9 million, respectively, which is included in interest receivable and other assets in the accompanying consolidated statement of financial condition. At December 31, 1995 and 1994, Coast had no commitments to sell MBS. Principal proceeds from sales of MBS available for sale were $35.3 million, $334.6 million and $241.9 million during 1995, 1994 and 1993, respectively. See Note 8 for a summary of MBS and other assets which were pledged as security for borrowings, and Note 13 for a discussion of MBS which were pledged as security for certain letters of credit and Swaps issued by Coast. (5) REAL ESTATE HELD FOR SALE Real estate held for sale, which represents real estate acquired through foreclosure, totaled $31.7 million and $44.2 million at December 31, 1995 and 1994, respectively. 65 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of real estate operations, net are presented in the following table for each of the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Net expense (income) from operations: Operations of foreclosed real estate owned........ $ 3,797 $ 7,956 $19,050 Real estate held for development.................. -- -- (375) ------- ------- ------- 3,797 7,956 18,675 Write downs and provisions for estimated losses..... 293 2,132 15,584 ------- ------- ------- $ 4,090 $10,088 $34,259 ======= ======= =======
(6) LAND AND DEPRECIABLE ASSETS AND LEASE COMMITMENTS The following is a summary of land and depreciable assets at the dates indicated.
DECEMBER 31, ------------------ 1995 1994 -------- -------- (IN THOUSANDS) Furniture, fixtures, equipment and automobiles........... $ 80,064 $ 77,388 Leasehold improvements................................... 43,966 40,088 Buildings, parking lots and building improvements........ 21,921 16,562 Land..................................................... 16,594 16,594 Construction in progress................................. 6,463 6,427 -------- -------- 169,008 157,059 Accumulated depreciation................................. (76,088) (69,566) -------- -------- $ 92,920 $ 87,493 ======== ========
Depreciation expense totaled $11.5 million, $10.1 million and $9.9 million for the years ended December 31, 1995, 1994 and 1993, respectively, and is included in office occupancy, net in the accompanying consolidated statement of operations. Coast leases certain property and equipment under operating leases which expire in various years. Substantially all the leases expire by the year 2032. Certain of these leases contain renewal options and require Coast to pay property taxes and insurance. Lease expense for office facilities and equipment amounted to $19.4 million, $19.8 million and $20.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. 66 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The total annual minimum lease commitment under non-cancelable operating leases at December 31, 1995, including estimated increases due to rising levels of the Consumer Price Index for leases contractually tied thereto, was as follows for the periods indicated.
AMOUNT -------------- (IN THOUSANDS) Year Ending December 31, 1996........................................................ $ 16,228 1997........................................................ 15,477 1998........................................................ 15,886 1999........................................................ 16,136 2000........................................................ 15,946 Thereafter.................................................. 58,510 -------- $138,183 ========
(7) DEPOSITS Deposit balances by type of account are summarized in the following table as of the dates indicated.
WEIGHTED AVERAGE DECEMBER 31, INTEREST RATE AT --------------------- DECEMBER 31, 1995 1995 1994 ----------------- ---------- ---------- (IN THOUSANDS) Checking and other demand deposits.. 1.27% $ 632,025 $ 464,321 Money market deposits............... 2.59 666,019 866,569 Time deposits: One to 31 days.................... 3.38 6,704 16,837 32 days to six months............. 3.49 101,331 276,554 Over six months to two years...... 5.34 4,315,862 3,809,858 Over two years.................... 6.54 385,431 429,372 Housing bond certificates of deposit.......................... 7.00 16,000 16,000 Public funds...................... 4.90 100 297 ---------- ---------- $6,123,472 $5,879,808 ========== ==========
The combined weighted average interest rate of deposits, including the effects of Swaps described in Note 13 below, was 4.67% and 4.15% at December 31, 1995 and 1994, respectively. Public funds are deposits obtained from governmental agencies within California and were secured by loans receivable of $12.7 million, at December 31, 1994. Public funds held at December 31, 1995, did not require collateral. Broker-originated deposits totaled $34.7 million and $40.9 million at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, Coast had accrued interest payable on deposits of $1.4 million and $1.3 million, respectively, which is included in other liabilities in the accompanying consolidated statement of financial condition. 67 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the amounts of deposits with balances greater than or equal to $100,000 by remaining term to maturity as of December 31, 1995.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT -------------------------------------- ------------- (IN MILLIONS) Three or less.................................................. $ 445 Over three to six.............................................. 238 Over six to twelve............................................. 304 Over twelve.................................................... 120 ------ $1,107 ======
Deposits at December 31, 1995, mature as indicated in the following table.
AMOUNT -------------- (IN THOUSANDS) Immediately withdrawable...................................... $1,298,044 Year Ending December 31, 1996................................. 4,289,244 1997........................................................ 361,770 1998........................................................ 80,957 1999........................................................ 93,091 2000........................................................ 152 Thereafter.................................................. 214 ---------- $6,123,472 ==========
Interest expense by type of deposit account is summarized in the following table for the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Checking and other demand deposits............. $ 5,694 $ 3,230 $ 4,895 Money market deposits.......................... 18,250 22,855 35,334 Time deposits.................................. 257,820 192,885 194,467 Early withdrawal penalties..................... (869) (635) (676) -------- -------- -------- $280,895 $218,335 $234,020 ======== ======== ========
Coast receives a variety of fees from customers for providing various services including fees on checking accounts, fees for returned items, and fees for various other services. Fee income from these sources totaled $14.2 million, $9.9 million and $9.7 million for the years ended December 31, 1995, 1994 and 1993, respectively, and is included in other noninterest income in the accompanying Consolidated Statement of Operations. The following table presents the carrying and fair values of deposits as of December 31, 1995.
CARRYING FAIR VALUE VALUE ---------- ---------- (IN THOUSANDS) Demand deposits........................................ $ 632,025 $ 632,025 Savings deposits....................................... 666,019 666,019 Time deposits.......................................... 4,825,428 4,836,586 ---------- ---------- $6,123,472 $6,134,630 ========== ==========
68 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) BORROWINGS A summary of FHLB advances and other borrowings follows.
DECEMBER 31, 1995 DECEMBER 31, 1994 -------------------------------------- -------------------------------------- RATES RATES -------------------- -------------------- RANGE RANGE ----------- ----------- CARRYING FAIR WEIGHTED CARRYING FAIR WEIGHTED VALUE VALUE AVERAGE LOW HIGH VALUE VALUE AVERAGE LOW HIGH -------- -------- -------- ---- ----- -------- -------- -------- ---- ----- FHLB advances, due at various dates through 1999................... $804,250 $808,300 6.04% 4.95% 10.03% $954,450 $952,317 6.19% 3.93% 10.03% ======== ======== ===== ==== ===== ======== ======== ===== ==== ===== Other borrowings: Short-term: Securities sold under agreements to repurchase, secured, due in 1996........... $546,153 $546,335 5.80 5.74 6.00 $714,689 $714,689 6.05 5.68 6.30 Federal funds purchased............. 110,120 110,120 5.37 4.73 6.00 19,822 19,822 5.06 4.94 5.13 -------- -------- ----- ---- ----- -------- -------- ----- ---- ----- 656,273 656,455 734,511 734,511 -- -- -- -------- -------- -------- -------- Long-term: Senior notes, due in 2000.................. 56,227 59,944 10.00 -- -- 55,922 57,500 10.00 -- -- Housing bond borrowings, secured, due in 1998, 2006 and 2010.................. 20,840 19,242 4.73 -- -- 17,458 17,458 5.50 -- -- Capital lease, due in 2000.................. -- -- -- -- -- 1,725 1,725 11.85 -- -- -------- -------- -------- -------- ----- 77,067 79,186 75,105 76,683 -------- -------- -------- -------- $733,340 $735,641 $809,616 $811,194 ======== ======== ======== ========
The composition of assets pledged as security for collateralized FHLB and other borrowings was as set forth in the table below as of the indicated dates.
DECEMBER 31, --------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) Loans receivable.................................... $1,964,570 $1,527,104 MBS................................................. 1,134,695 998,595 FHLB stock.......................................... 85,837 79,261 ---------- ---------- $3,185,102 $2,604,960 ========== ==========
69 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The carrying value of principal maturities of FHLB advances and other borrowings at December 31, 1995, was as follows for the years indicated.
FHLB OTHER ADVANCES BORROWINGS TOTAL -------- ---------- ---------- (IN THOUSANDS) Year Ending December 31, 1996..................................... $729,250 $656,273 $1,385,523 1997..................................... 50,000 -- 50,000 1998..................................... -- 6,992 6,992 1999..................................... 25,000 -- 25,000 2000..................................... -- 56,227 56,227 Thereafter............................... -- 13,848 13,848 -------- -------- ---------- $804,250 $733,340 $1,537,590 ======== ======== ==========
Securities sold under agreements to repurchase (commonly referred to as reverse repurchase agreements) totaled $546.2 million and $714.7 million at December 31, 1995 and 1994, respectively. The weighted average interest rate of reverse repurchase agreements was 5.80% at December 31, 1995. Average balances of reverse repurchase agreements were $856.7 million and $668.1 million during the years ended December 31, 1995 and 1994, respectively, and the maximum amount outstanding at any month end during the years ended December 31, 1995 and 1994 was $1.12 billion and $766.0 million, respectively. Reverse repurchase agreements were secured by MBS with a carrying value of $566.3 million and $776.8 million (included in the table above) at December 31, 1995 and 1994, respectively. These MBS had a fair value of $580.9 million and $764.9 million at December 31, 1995 and 1994, respectively. The following table describes the Company's Senior Notes and Coast's Capital Notes as of December 31, 1995.
AT DECEMBER 31, 1995 ---------------------- CARRYING FAIR INTEREST AMOUNT DATE DESCRIPTION VALUE VALUE RATE DATE DUE ISSUED ISSUED - ----------- ----------- ---------- -------- ------------- ------------ --------- (IN MILLIONS) (IN MILLIONS) Senior Notes (1)........ $ 56.2 $ 59.9 10% Mar. 01, 2000 $57.5 Apr. 1993 Capital Notes (2)....... 55.7 65.4 13 Dec. 31, 2002 57.5 Dec. 1992 ========== ========== $ 111.9 $ 125.3 ========== ==========
- -------- (1) Interest is payable semiannually on April 1 and October 1. The senior notes are redeemable at any time after April 1, 1998 at the option of the Company as a whole or from time to time in part, at the redemption price plus accrued interest to the redemption date. (2) Interest is payable quarterly on March 31, June 30, September 30 and December 31. The capital notes are redeemable by Coast in whole or in any part at any time after December 31, 1997 at the redemption price plus accrued interest to the redemption date. The combined weighted average interest rate of FHLB advances, other borrowings, capital notes and debentures, was 6.28% and 6.47% at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had accrued interest payable on FHLB advances, other borrowings, capital notes and debentures of $10.8 million and $11.2 million, respectively, which is included in other liabilities in the accompanying consolidated statement of financial condition. 70 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A tabulation of interest expense on borrowings for the periods indicated follows.
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 -------- ------- ------- (IN THOUSANDS) FHLB advances.................................... $ 56,632 $40,621 $30,900 Short-term borrowings............................ 59,677 32,677 31,551 Long-term borrowings............................. 14,926 15,086 17,610 -------- ------- ------- $131,235 $88,384 $80,061 ======== ======= =======
Other potential sources of funds available to Coast include a line of credit with the FHLB of San Francisco and direct access to borrowings from the Federal Reserve System. At December 31, 1995, FHLB advances were $804.3 million, and the amount of additional credit available from the FHLB was $1.26 billion. (9) INCOME AND OTHER TAXES The following table summarizes the elements of income tax expense (benefit) for the years endedDecember 31, 1995, 1994 and 1993.
FEDERAL STATE TOTAL -------- ------- -------- (IN THOUSANDS) 1995: Current.................................... $ -- $ -- $ -- Deferred................................... 15,767 3,068 18,835 -------- ------- -------- $ 15,767 $ 3,068 $ 18,835 ======== ======= ======== 1994: Current.................................... $ -- $ -- $ -- Deferred................................... (7,676) (1,741) (9,417) -------- ------- -------- $ (7,676) $(1,741) $ (9,417) ======== ======= ======== 1993: Current.................................... $ -- $ -- $ -- Deferred................................... (12,999) -- (12,999) -------- ------- -------- $(12,999) $ -- $(12,999) ======== ======= ========
Deferred tax assets are initially recognized for net operating loss and tax credit carryforwards and differences between the financial statement carrying amount and the tax bases of assets and liabilities which will result in future deductible amounts. A valuation allowance is then established to reduce that deferred tax asset to the level at which it is "more likely than not" that the tax benefits will be realized. A taxpayer's ability to realize the tax benefits of deductible temporary differences and operating loss or credit carryforwards depends on having sufficient taxable income of an appropriate character within the carryback and carryforward periods. Sources of taxable income that may allow for the realization of tax benefits include (i) taxable income in the current year or prior years that is available through carryback, (ii) future taxable income that will result from the reversal of existing taxable temporary differences, and (iii) future taxable income generated by future operations. Based on a re-evaluation of the realizability of the deferred tax asset, the valuation allowance was reduced which had the effect of recognizing $1.7 million and $14.2 million of the subject tax benefits in 1994 and 1993, respectively. 71 A reconciliation from expected federal income tax expense (benefit) to consolidated effective income tax expense (benefit) for the periods indicated follows.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 Statutory federal income tax rate............... 35% 35% 35% ======= ======= ======== (IN THOUSANDS) Expected federal income tax expense (benefit)... $18,073 $(5,584) $ 1,483 Increases (reductions) in income taxes resulting from: Change in the beginning-of-the-year valuation allowance for deferred tax assets allocated to income tax expense........................ -- (1,669) (14,178) State tax expense (benefit), net of federal income tax effect............................ 3,502 (646) -- Basis in stock of subsidiary.................. (1,732) -- -- Prior year underaccrual....................... (916) (887) -- Increase in base year reserve amount.......... (519) (1,129) -- Amortization of goodwill...................... 427 498 495 Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates.................................... -- -- (799) ------- ------- -------- $18,835 $(9,417) $(12,999) ======= ======= ========
Savings banks that meet certain definitional tests and other conditions prescribed by the Internal Revenue Code are allowed to deduct, within limitations, a bad debt deduction computed as a percentage of taxable income before such deduction. The deduction percentage is 8% for the years ended December 31, 1995, 1994 and 1993. Alternatively, a qualified savings bank may compute its bad debt deduction based upon actual loan loss experience (the "Experience Method"). Coast computed its bad debt deduction utilizing the Experience Method in all years presented. Due to the increase in the amount of qualifying loans for tax purposes at December 31, 1995 and 1994, as compared to December 31, 1987, the amount of the bad debt deduction was restored by $1.5 million and $3.6 million, respectively. Qualifying loans decreased at December 31, 1993, and, accordingly, the bad debt deduction was limited by $2.9 million. The cumulative amount of the limit on bad debts was $13.4 million at December 31, 1995. Should qualifying loans further increase in future periods, the bad debt amounts previously limited may be restored. The significant components of deferred income tax expense (benefit) attributable to income from continuing operations are detailed in the following table.
1995 1994 1993 ------- ------- -------- (IN THOUSANDS) Deferred tax expense (exclusive of the effects of the other components listed below).............. $18,835 $(7,748) $ 1,978 Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates........................................... -- -- (799) Decrease in beginning-of-the-year balance of the valuation allowance for deferred tax assets..... -- (1,669) (14,178) ------- ------- -------- $18,835 $(9,417) $(12,999) ======= ======= ========
72 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below.
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Deferred tax assets: Loan loss allowances deferred for tax purposes... $ 41,632 $ 74,845 $ 62,176 Net operating loss carryforwards................. 19,597 13,571 6,604 Tax credit carryforwards......................... 5,942 5,942 5,535 Deferred compensation not yet deducted for tax purposes........................................ 3,352 2,758 2,600 Interest income on nonaccrual loans for book purposes, recognized for tax purposes........... 3,032 1,850 -- Branch sale gains recognized for tax purposes and amortized for financial statement purposes.................... 1,387 1,921 2,222 Securities marked to market for tax purposes only............................................ 1,246 -- 1,948 Loan discounts arising from acquisitions......... 541 664 883 Investments and real estate writedowns for financial statement purposes not recognized for tax purposes.................................... -- -- 7,278 Securities marked to market for financial statement purposes only......................... -- 646 -- Other............................................ 608 366 -- -------- -------- -------- Total gross deferred tax assets................ 77,337 102,563 89,246 Less valuation allowance......................... -- -- (1,669) -------- -------- -------- Deferred tax assets............................ 77,337 102,563 87,577 -------- -------- -------- Deferred tax liabilities: FHLB stock dividends deferred for tax purposes... 18,267 16,369 15,015 Guaranteed payments recognized when received for tax purposes.................................... 8,278 8,278 7,347 Loan fees and origination costs capitalized for financial statement purposes only............... 7,038 3,788 -- Excess Spread Servicing Asset, not recognized for tax purposes.................................... 5,097 8,674 14,705 Securities marked to market for financial statement purposes only......................... 4,082 -- 8,015 Depreciation for tax purposes in excess of such amount for financial statement purposes......... 3,939 3,896 4,558 Securities marked to market for tax purposes only............................................ -- 4,638 -- Interest income on loans recognized on the cash basis for tax purposes only................................... -- 757 1,749 Other............................................ -- -- 327 -------- -------- -------- Deferred tax liabilities....................... 46,701 46,400 51,716 -------- -------- -------- Net deferred tax asset....................... $ 30,636 $ 56,163 $ 35,861 ======== ======== ========
At December 31, 1995, the Company had net operating loss carryforwards ("NOLs") for federal income tax purposes of $51.3 million which are available to offset future federal taxable income through 2010. The Company also had alternative minimum tax credit carryforwards of approximately $5.5 million as of December 31, 1995, which are available to reduce future regular federal income taxes, if any, over an indefinite period. The consolidated financial statements at December 31, 1995, 1994 and 1993, did not include a tax liability of $34.4 million, $33.9 million and $32.6 million, respectively, related to the adjusted base year bad debt reserve amounts since these reserves are not expected to reverse until indefinite future periods, and may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a further 73 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) significant reduction in qualifying loan levels relative to the end of 1987, failure to meet the tax definition of a savings institution, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of Coast's stock. The Company's tax returns have been audited by the Internal Revenue Service through December 31, 1986 and by the California Franchise Tax Board through December 31, 1987. The Franchise Tax Board is currently examining the years 1988 through 1990. It is expected that the Franchise Tax Board will challenge the taxability of income earned by Coast's former Nevada financing subsidiaries, the last of which was liquidated in 1989. While there can be no assurance as to the outcome of this matter, management believes the position taken by Coast on its franchise tax returns will be sustained. The Internal Revenue Service has recently commenced an examination of the Company's tax returns for the years 1992 and 1993. The Company does not anticipate any material changes to its federal tax returns as previously filed. (10) STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE The Company's ability to pay cash dividends primarily depends upon cash dividends it receives from Coast, and is also subject to limitation based on liquidity and other factors set forth in the indenture relating to outstanding debt securities of the Company. Based on the level of liquid assets maintained by the Company as of December 31, 1995, and the aforementioned indenture restrictions, the Company had approximately $.3 million available for distribution at December 31, 1995. Coast's ability to pay cash dividends to the Company is subject to limitations contained in applicable federal regulations and to additional limitations based on earnings and other factors set forth in an indenture relating to outstanding debt securities of Coast. Under the most restrictive of these limitations, Coast had approximately $79.8 million available for distribution at December 31, 1995. In addition, payment of dividends in excess of Coast's accumulated earnings and profits as calculated for tax purposes (approximately $156 million at December 31, 1994) would have significant negative tax consequences to Coast. Earnings (loss) per share of common stock are based upon the weighted average number of common shares, which include common stock, dilutive common stock equivalent shares ("CSEs") and other potentially dilutive securities, outstanding during each period. The calculations of earnings per share of common stock are as follows for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1995 1994 1993 --------------- ---------------- --------------- FULLY FULLY FULLY PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED ------- ------- ------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net earnings (loss).......... $32,802 $32,802 $(6,538) $(6,538) $17,236 $17,236 Interest on the convertible subordinated debentures, net of taxes.................... -- -- -- -- -- 15 ------- ------- ------- ------- ------- ------- Net earnings (loss) applicable to common stock, dilutive CSEs and securities.................. $32,802 $32,802 $(6,538) $(6,538) $17,236 $17,251 ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding.......... 18,511 18,511 18,457 18,457 17,880 17,880 Dilutive CSEs on stock options..................... 507 629 -- -- 383 383 Assumed conversion of the convertible subordinated debentures.................. -- -- -- -- -- 17 ------- ------- ------- ------- ------- ------- Weighted average shares...... 19,018 19,140 18,457 18,457 18,263 18,280 ======= ======= ======= ======= ======= ======= Net earnings (loss) per share of common stock............. $ 1.72 $ 1.71 $ (.35) $ (.35) $ .94 $ .94 ======= ======= ======= ======= ======= =======
74 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On August 23, 1989, the Company's Board of Directors adopted a stockholder rights plan (the "Rights Plan") pursuant to which the Company distributed one Right (collectively, the "Rights") for each outstanding share of common stock. Each Right will entitle the holder (other than certain persons who have acquired, or have obtained the right to acquire, the beneficial ownership of at least 15% of the common stock ("Control Persons") and certain related persons or entities) to purchase one one-hundredth of a share of a newly issued series of preferred stock at an exercise price of $50 (the "Rights Exercise Price"), subject to certain adjustments. Each one one-hundredth of a share of preferred stock is designed to have a value approximately equal to the value of one share of common stock. If any person becomes the beneficial owner of 15% or more of the outstanding common stock without complying with a specified procedure designed to provide fair treatment to all holders of the common stock, then holders of Rights not previously exercised or redeemed by the Company (other than Rights held by Control Persons and certain related persons or entities) will be entitled upon payment of the Rights Exercise Price to receive common stock having a fair market value equal to two times the Rights Exercise Price. If the Company is merged into another corporation or 50% or more of the Company's assets are sold, each previously unexercised Right will entitle the holder (other than a Control Person and certain related persons or entities) upon payment of the Rights Exercise Price to purchase common stock of the acquiring corporation or corporations or certain related corporations having a market value equal to two times the Rights Exercise Price. A majority of the independent directors of the Company may authorize the redemption of the Rights in whole at a price of $.01 per Right at any time before the tenth business day following the date of public announcement that any person has become a Control Person. (11) REGULATORY CAPITAL Coast is required by federal law and OTS regulations to maintain minimum levels of capital that are measured by three ratios. The tangible capital standard requires savings institutions to maintain tangible capital of at least 1.5 percent of tangible assets. Tangible capital consists principally of stockholders' equity, but excludes most intangible assets such as goodwill. The core capital standard requires savings institutions to maintain core capital of at least 3.0 percent of adjusted tangible assets. Core capital consists of tangible capital and certain other intangible assets. At December 31, 1995 there were no differences in the calculation of tangible and core capital for Coast. The risk-based capital standard requires savings institutions to maintain risk-based capital equal to 8.0 percent of risk- weighted assets. Risk-based capital consists of core capital plus certain subordinated debt and, subject to certain limitations, general valuation allowances on loans receivable. The following table reflects in both dollars and ratios, Coast's regulatory capital position as ofDecember 31, 1995, as well as the requirements at that date:
ACTUAL REQUIRED ------------ ------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- (DOLLARS IN MILLIONS) December 31, 1995: Risk-based.................................. $567 10.86% $418 8.00% Core........................................ 449 5.47 246 3.00 Tangible.................................... 449 5.47 123 1.50
The Federal Deposit Insurance Corporation Act of 1991 contains "prompt corrective action" provisions pursuant to which insured depositiory institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized." At December 31, 1995, Coast's regulatory capital exceeded the thresholds necessary to be considered well capitalized. 75 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (12) PENSION AND STOCK OPTION PLANS The Company sponsors a pension plan covering substantially all of its employees. The benefits are based upon an employee's length of service and the employee's average compensation during the five consecutive years of the last 10 years in which the greatest compensation was paid to the employee. The following table sets forth the status of funding of Coast's pension plan at December 31, 1995 and 1994, and related amounts appearing in Coast's consolidated financial statements at or for the years then ended.
AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested.............................................. $ 38,143 $ 34,969 Non-vested.......................................... 1,963 1,231 --------- --------- Accumulated benefit obligations................... $ 40,106 $ 36,200 ========= ========= Pension plan assets at fair value (primarily listed stocks, U.S. government obligations, corporate obligations and Coast deposits)...................... $ 46,974 $ 39,847 Projected benefit obligations for service rendered to date................................................. (45,256) (37,308) --------- --------- Pension plan assets in excess of projected benefit obligation........................................... 1,718 2,539 Activity not recognized in net pension plan cost: Net gain............................................ (1,555) (1,352) Unrecognized prior service cost..................... 194 285 Net asset at December 31, 1985, being amortized over 15 years........................................... (1,508) (1,809) --------- --------- Accrued pension plan costs........................ $ (1,151) $ (337) ========= ========= Net pension plan cost: Interest on projected benefit obligations........... $ 3,040 $ 2,944 Service costs....................................... 1,428 2,049 Return on pension plan assets....................... (10,004) (365) Amortization and deferral, net...................... 6,350 (3,054) --------- --------- $ 814 $ 1,574 ========= =========
For the years ended December 31, 1995 and 1994, the weighted average discount rates used in determining the actuarial present value of the accumulated and projected benefit obligations were 7.25% and 8.75%, respectively. The rate of increase in future compensation was projected to be 3.75% and 4.00% for the years ended December 31, 1995 and 1994, respectively. The expected long-term rate of return on assets was 9% for the years ended December 31, 1995 and 1994. Total pension plan expenses were $2.5 million, $2.7 million and $1.5 million for the years ended December 31, 1995, 1994 and 1993, respectively. 76 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the 1985 Stock Option and Stock Appreciation Rights Plan (the "Plan"), options having lives of up to ten years are granted which give the owner of the options the right to purchase shares of the Company's common stock at a price equal to their fair market value on the date the options are granted. The table below reflects option activity for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 --------- ------- --------- Balance at beginning of period................ 968,406 976,186 881,072 Granted....................................... -- -- 318,947 Canceled or expired........................... (10,000) (6,780) (162,717) Exercised..................................... (125,463) (1,000) (61,116) --------- ------- --------- Balance at end of period...................... 832,943 968,406 976,186 ========= ======= ========= Options exercisable........................... 832,943 968,406 976,186 Shares available for grant.................... 98,346 88,346 81,566 ========= ======= ========= Weighted average option price per share: Under option................................ $ 8.71 $ 8.63 $ 8.68 Exercisable................................. 8.71 8.63 8.68 Exercised................................... 7.92 11.28 5.63 ========= ======= =========
Pursuant to the Plan, stock appreciation rights ("SARs") having lives of up to ten years are granted which give the owner of the SARs the right, upon exercise of the SARs, to receive an amount equal to the excess of the fair market value of the Company's common stock over the price assigned to the SARs. The table below reflects SARs activity for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1995 1994 1993 ------------------- ------------------- ------------------- SARS AVERAGE SARS AVERAGE SARS AVERAGE OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE ----------- ------- ----------- ------- ----------- ------- Balance at beginning of period................. 181,907 $11.25 201,130 $11.54 510,906 $13.55 Canceled or expired..... -- -- (17,467) 14.60 (253,645) 14.99 Exercised............... (1,200) 11.28 (1,756) 11.28 (56,131) 14.25 ------- ------- -------- Balance at end of period................. 180,707 11.25 181,907 11.25 201,130 11.54 ======= ======= ========
(13) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Coast is a party to off-balance sheet financial instruments containing certain types of risk in the normal course of business in order to meet the borrowing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit, Swaps and Caps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the dollar amount of liability set forth in the accompanying consolidated statement of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. At December 31, 1995, Coast had issued $386.5 million of letters of credit which are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in these letters of credit is essentially the same as that involved in making real estate loans. Coast's letters of credit generally expire from one to twelve years after the date of issuance. The outstanding letters of credit were issued 77 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in connection with real estate development activities. The letters of credit were collateralized by $26.4 million of Coast's MBS and $378.7 million of FHLB of San Francisco letters of credit (which letters of credit were in turn collateralized by $504.5 million of Coast's loans and securities), to support $371.2 million of housing revenue bonds at December 31, 1995. Coast receives periodic fees for providing the letters of credit supporting the housing revenue bonds represented by the positive difference, if any, between the rates of interest paid to the bondholders and the rates of interest received from the owners of the various projects. The rates of interest on the tax- exempt housing revenue bonds are reset each week. In the event the rates of interest on the bonds were to exceed the rates of interest on the respective notes, Coast would pay the difference and would not, therefore, receive the periodic fee income described above. These letters of credit fees amounted to $5.9 million, $9.2 million and $7.8 million in 1995, 1994 and 1993, respectively, and are included in other noninterest income in the accompanying consolidated statement of operations. Commitments to originate mortgage loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. At December 31, 1995, Coast had $77.7 million of such commitments outstanding, the majority of which were to fund adjustable rate mortgages on single family residences. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The fair value of commitments to originate mortgage loans was $2.9 million as of December 31, 1995. At December 31, 1995, Coast had $66.5 million of approved undisbursed overdraft lines of credit associated with retail checking accounts. Since the majority of the undisbursed amount is not expected to be drawn upon, the total undisbursed amount does not necessarily represent future credit exposure. Loans sold with recourse are loans for which the purchaser has partial or full recourse against Coast if any borrower should fail to perform on a loan. See Note 17 for further discussion of loans sold with recourse. Coast is a party to off-balance sheet financial instruments containing certain types of risk in the normal course of business in order to meet the borrowing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include Swaps and Caps, both of which are considered derivative financial instruments held for purposes other than trading. Swaps generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying notional principal amounts. In that the credit exposure of these Swaps is limited to the potential default of the Swap counterparty, the potential credit risks associated with such Swaps are substantially less than the notional principal amounts of these Swaps. At December 31, 1995, Coast had $195.0 million of Swaps on which Coast paid a floating rate and received a fixed rate of interest. These Swaps were entered into during 1994 and have remaining maturities ranging from 3 to 6 months. The Swaps are matched with specific certificates of deposit and effectively convert the matched fixed rate deposits to floating rate liabilities. These Swaps are comprised of $115 million based on LIBOR and $80 million based on COFI. These Swaps provide a discrete funding source which directly matches portions of Coast's earning asset base (COFI- and LIBOR-based loans), and result in a fixed spread between the interest rates paid on the Swaps and the yield on the related portion of the loan portfolio. 78 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes certain information regarding Swaps outstanding at the dates indicated.
DECEMBER 31, 1995 ------------------------------------------------------------------------ NOTIONAL WEIGHTED AVERAGE TYPE AMOUNT INTEREST RATE MATURITY DATES - ---- ---------------------- -------------------- --------------------------- PAID RECEIVED -------- ---------- (DOLLARS IN THOUSANDS) Pay variable/receive fixed.................. $195,000 5.58% 5.35% March 1996 to June 1996 ======== ======== DECEMBER 31, 1994 ------------------------------------------------------------------------ NOTIONAL WEIGHTED AVERAGE TYPE AMOUNT INTEREST RATE MATURITY DATES - ---- ---------------------- -------------------- --------------------------- PAID RECEIVED -------- ---------- (DOLLARS IN THOUSANDS) Pay variable/receive fixed.................. $245,000 5.01% 5.18% September 1995 to June 1996 ======== ========
As described above, these Swaps were entered into for the purpose of converting the interest rate characteristics of certain liabilities, therefore, "hedge accounting" rules apply and there is no requirement to mark the values of the Swaps to market under generally accepted accounting principles. The fair values of Swaps represent the estimated amounts Coast would receive or pay to terminate the agreements, taking into consideration current interest rates. As of December 31, 1995, the fair value of the Swaps approximated a loss of $66,000. The net effect of the Swaps, exclusive of interest on the related deposits, was to record $.8 million, $6.2 million and $11.2 million of interest expense during 1995, 1994 and 1993, respectively, which is included in interest expense on deposits in the accompanying consolidated statement of operations. Coast has pledged $3.7 million and $6.4 million of MBS at December 31, 1995 and 1994, respectively, to guarantee its performance under swap agreements. During 1985, Coast entered into a Cap which expires in 1997. The notional balance of the Cap is $75.0 million and the agreement provides for payments of interest to Coast if the three-month LIBOR index, upon which the Cap is based, exceeds a ceiling rate of 12.38%. Amortization of the fees Coast paid to acquire the Caps was $.8 million for the year ended December 31, 1993, and is included in interest expense on deposits in the accompanying consolidated statement of operations. There were no remaining unamortized fees at December 31, 1993, or thereafter. No payments were made to Coast under the Cap for the periods presented, and, in the current interest rate environment, management does not anticipate that the interest rate ceiling will be reached prior to the Cap's maturity. The following table summarizes the allocation of the GVA attributable to Coast's off-balance sheet items for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------- -------- -------- (IN THOUSANDS) Balance at beginning of period.................. $ 7,962 $ 14,185 $ 31,860 Additions charged (reductions credited) to operations..................................... -- 9,012 (16,275) Losses charged.................................. -- (15,235) (1,400) Reallocation from loan-related assets........... 9,038 -- -- ------- -------- -------- Balance at end of period........................ $17,000 $ 7,962 $ 14,185 ======= ======== ========
79 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1995, $12 million of the GVA attributable to off-balance sheet activity related to Coast's letters of credit and $5 million related to loans sold with recourse. Based on currently available information, Coast believes it has adequately provided for losses which might emanate from these sources, however, deterioration of economic conditions or other circumstances could result in the need for additional allowances. (14) CONTINGENT LIABILITIES There are various actions pending against Coast or the Company but, in the opinion of management, the probable liability resulting from such suits is unlikely, individually or in the aggregate, to have a material effect on Coast. (15) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1995 Interest income............... $145,034 $154,703 $158,593 $154,851 $613,181 Interest expense.............. 97,624 105,607 106,187 102,712 412,130 Net interest income........... 47,410 49,096 52,406 52,139 201,051 Provision for loan losses..... 10,000 10,000 10,000 10,000 40,000 Net earnings.................. 3,478 5,633 14,762 8,929 32,802 Primary earnings per share of common stock: Net earnings(1)............. .18 .30 .77 .47 1.72 Fully diluted earnings per share of common stock: Net earnings(1)............. .18 .30 .77 .47 1.71 Market range: High bid.................... 16.375 21.250 28.125 34.625 Low bid..................... 13.625 16.500 19.375 25.500 1994 Interest income............... $117,714 $117,817 $126,244 $132,855 $494,630 Interest expense.............. 68,685 70,803 79,212 88,019 306,719 Net interest income........... 49,029 47,014 47,032 44,836 187,911 Provision for loan losses..... 32,000 14,000 14,000 15,000 75,000 Net earnings (loss)........... (6,719) 1,881 2,292 (3,992) (6,538) Primary earnings (loss) per share of common stock: Net earnings (loss)(1)...... (.36) .10 .12 (.22) (.35) Fully diluted earnings (loss) per share of common stock: Net earnings (loss)(1)...... (.36) .10 .12 (.22) (.35) Market range: High bid.................... 17.375 17.250 18.750 17.375 Low bid..................... 13.375 13.000 16.875 12.625
- -------- (1) The sum of the quarterly earnings per share amounts may not equal the amount for the year because per share amounts are computed independently for each quarter and the full year based upon respective weighted average shares of common stock outstanding. Another factor affecting fully diluted earnings per share is that, for certain periods, the fully diluted computed amounts would be antidilutive; primary earnings per share are shown above in such cases. 80 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (16) PARENT COMPANY FINANCIAL INFORMATION This information should be read in conjunction with the other Notes to Consolidated Financial Statements. During the first quarter of 1993 the Company issued $40.8 million of common stock at $17.75 per share and contributed the net proceeds of $38.2 million to Coast as equity capital. During the second quarter of 1993, the Company issued $57.5 million of 10% Senior Notes due 2000. The majority of the proceeds from the offering were contributed to Coast as equity capital. See Note 8. STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, ----------------- 1995 1994 -------- -------- (IN THOUSANDS) ASSETS Cash......................................................... $ 25 $ 106 Short term investments....................................... 2,394 2,443 Mortgage-backed securities ("MBS") available for sale........ 9,363 10,068 Interest receivable and other assets......................... 431 515 Investment in subsidiary..................................... 463,077 419,668 -------- -------- $475,290 $432,800 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Senior notes................................................. $ 56,227 $ 55,922 Other liabilities............................................ 1,629 1,664 -------- -------- 57,856 57,586 -------- -------- Stockholders' equity: Common stock............................................... 186 185 Additional paid-in capital................................. 265,018 263,161 Unrealized gain (loss) on securities available for sale.... 6,554 (1,006) Retained earnings.......................................... 145,676 112,874 -------- -------- Total stockholders' equity............................... 417,434 375,214 -------- -------- $475,290 $432,800 ======== ========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------- -------- ------- (IN THOUSANDS) Dividends received from subsidiary................. $ 6,000 $ 2,000 $ -- ------- -------- ------- Interest Income: MBS.............................................. 560 504 359 Investment securities............................ 291 156 148 ------- -------- ------- 851 660 507 ------- -------- ------- Equity in undistributed net earnings (loss) of subsidiary........................................ 30,038 (5,401) 19,678 Interest expense on borrowings..................... (6,105) (6,102) (4,469) General and administrative expense................. (140) (29) (112) Income tax benefit................................. 2,158 2,334 1,632 ------- -------- ------- Net earnings (loss)............................ $32,802 $ (6,538) $17,236 ======= ======== =======
81 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)............................ $ 32,802 $ (6,538) $ 17,236 -------- -------- -------- Adjustments to reconcile net earnings to net cash provided (used) by operations: Amortization of premiums and discounts....... 346 346 230 Net increase in interest payable............. -- -- 1,438 Net (increase) decrease in interest receivable.................................. (119) 10 (100) Deferred income tax benefit.................. (2,158) (2,334) (1,632) Equity in net (earnings) loss of subsidiary.. (30,038) 5,401 (19,678) Other........................................ 21 43 (126) -------- -------- -------- Total adjustments.......................... (31,948) 3,466 (19,868) -------- -------- -------- Net cash provided (used) by operating activities................................ 854 (3,072) (2,632) -------- -------- -------- Cash flows from investing activities: Purchase of MBS available for sale........... -- -- (12,817) Principal repayments on MBS available for sale........................................ 1,043 1,444 726 Equity investment in subsidiary.............. (3,000) -- (75,558) -------- -------- -------- Net cash provided (used) by investing activities................................ (1,957) 1,444 (87,649) -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of senior notes... -- -- 55,387 Issuance of common stock..................... -- -- 38,171 Common stock options exercised............... 973 11 345 -------- -------- -------- Net cash provided by financing activities.. 973 11 93,903 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................... (130) (1,617) 3,622 Cash and cash equivalents at beginning of year... 2,549 4,166 544 -------- -------- -------- Cash and cash equivalents at end of year......... $ 2,419 $ 2,549 $ 4,166 ======== ======== ======== Supplemental schedule of noncash investing activities: Unrealized gain (loss) on securities available for sale, net of taxes........................ $ 7,560 $(11,827) $ 10,821
82 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (17) MORTGAGE BANKING ACTIVITIES Sales of mortgage assets held or available for sale function primarily to constrain asset growth, fund lending operations, manage interest rate risk and increase the loan servicing portfolio. The following table represents components of the Company's mortgage banking activities for each of the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- (IN THOUSANDS) Loans receivable held for sale: Loans originated, net of refinances....... $ 146,024 $ 516,343 $ 625,401 Sale of loans............................. 44,197 28,398 130,062 Gain (loss) on sales...................... 177 (2,352) 1,978 Balance at end of period, at the lower of amortized historical cost or fair value.. 221,032 160,665 175,391 MBS available for sale: Sale of MBS............................... 35,335 334,617 241,886 Gain (loss) on sales...................... (287) 1,812 8,490 Balance at end of period, at fair value... 354,398 328,913 586,482 Loans serviced for others................... 3,416,880 3,960,564 4,175,682 Loan servicing fee income................... 9,829 10,715 12,620
The following table summarizes the activity in the Excess Spread Servicing Asset, which is included in interest receivable and other assets in the accompanying consolidated statement of financial condition, for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------- ------- -------- (IN THOUSANDS) Balance at beginning of period..................... $38,849 $52,290 $ 59,499 Additions from sales of loans and MBS.............. 284 6,176 4,571 Amortization....................................... (5,021) (7,968) (11,505) Adjustments due to prepayments exceeding expected levels............................................ ( 540) (1,758) (275) Elimination of Excess Spread Servicing Asset....... -- (9,891) -- ------- ------- -------- Balance at end of period........................... $33,572 $38,849 $ 52,290 ======= ======= ========
During the years ended December 31, 1995, 1994 and 1993, Coast did not sell loans with recourse or subordination. At December 31, 1995, 1994 and 1993, the principal balances of loans sold prior to 1992 with recourse or subordination totaled $.40 billion, $.44 billion and $1.52 billion, respectively, and the amount of recourse or subordination against Coast totaled $78.5 million, $84.4 million and $121.9 million, respectively. The decrease in principal balances of loans sold with recourse or subordination from 1993 to 1994 is primarily due to Coast exercising its option to eliminate the recourse liability on $977.1 million of multifamily loans during 1994. These pools were guaranteed by FNMA, which increased the ongoing guarantee fee paid to FNMA by .30%, thereby reducing the future excess spread and its resultant Excess Servicing Spread Asset. Losses on loans sold with recourse or subordination totaled $4.4 million, $2.2 million and $4.7 million in 1995, 1994 and 1993, respectively. 83 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (18) FINANCIAL HIGHLIGHTS BY BUSINESS SEGMENT Coast's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate located in California. CoastFed Services ("CFS"), a wholly owned subsidiary of Coast, provides hazard and other insurance and investment products as an agent for insurers and mutual funds, and also provides a range of trustee services, including acting as trustee in deeds of trust held by Coast. The following table represents financial highlights, net of intercompany transactions, concerning the Company's principal business segments for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ---------- ---------- --------- (IN THOUSANDS) Revenues: Retail banking............................. $ 655,795 $ 521,152 $ 559,191 ---------- ---------- --------- CFS: Insurance/annuity/mutual fund sales commissions............................. 12,675 13,226 13,460 Trustee and reconveyance fees and other.. 2,330 3,176 3,289 ---------- ---------- --------- 15,005 16,402 16,749 ---------- ---------- --------- Consolidated revenues.................... $ 670,800 $ 537,554 $ 575,940 ========== ========== ========= Earnings (loss) before income tax expense (benefit): Retail banking............................. $ 41,291 $ (27,582) $ (7,890) CFS........................................ 10,346 11,627 12,127 ---------- ---------- --------- Consolidated earnings (loss) before income tax expense (benefit)............ $ 51,637 $ (15,955) $ 4,237 ========== ========== ========= Assets: Retail banking............................. $8,248,619 $8,194,433 CFS........................................ 3,061 2,084 ---------- ---------- Consolidated assets...................... $8,251,680 $8,196,517 ========== ==========
84 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (19) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at the dates indicated. For further detail of fair value information, see the notes referenced in the table. See Note 1 to the Consolidated Financial Statements for a discussion of the accounting policies followed in determining fair value information.
DECEMBER 31, -------------------------------------------------- 1995 1994 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- (IN THOUSANDS) ASSETS Cash and due from banks (Note 2).................. $ 119,717 $ 119,717 $ 99,578 $ 99,578 Federal funds sold and other short term investments (Note 2)...... 30,394 30,394 2,443 2,443 Investment securities (Note 2)........................ 72,785 73,186 82,477 81,557 Loans receivable, net (Note 3)........................ 5,245,464 5,403,392 5,632,517 5,508,320 Loans receivable held for sale (Note 3)............. 221,032 229,955 160,665 161,325 Mortgage-backed securities (Note 4).................. 1,817,403 1,830,640 1,404,815 1,372,166 Mortgage-backed securities available for sale (Note 4).................. 354,398 354,398 328,913 328,913 Federal Home Loan Bank stock (Note 2)............ 85,837 85,837 79,261 79,261 LIABILITIES Deposits (Note 7).......... (6,123,472) (6,134,630) (5,879,808) (5,773,224) Federal Home Loan Bank advances (Note 8)......... (804,250) (808,300) (954,450) (952,317) Other borrowings (Note 8).. (733,340) (735,641) (809,616) (811,194) Capital Notes (Note 8)..... (55,746) (65,406) (55,495) (60,375) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (NOTE 13) Swaps...................... -- 310 -- (4,446) Caps....................... -- -- -- -- Commitments to originate mortgage loans............ -- 2,194 -- (6,642) Letters of credit.......... -- (12,000) -- (6,260) Loans sold with recourse... -- (5,000) -- (1,702)
85 COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10.DIRECTORS AND OFFICERS OF THE REGISTRANT Those portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with registrant's Annual Meeting of Stockholders to be held on April 24, 1996 ("Proxy Statement"), appearing under the captions "Election of Directors", "Executive Officers Who are Not Directors," and, to the extent required by 17 C.F.R. 229.405, "Security Ownership of Management," are incorporated herein by reference. ITEM 11.EXECUTIVE COMPENSATION The portion of the Proxy Statement appearing under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Those portions of the Proxy Statement appearing under the captions "Security Ownership of Management" and "Principal Stockholders" are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS That portion of the Proxy Statement appearing under the caption "Certain Transactions of Management with Coast" is incorporated herein by reference. 86 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K EXHIBITS*
EXHIBIT NUMBER EXHIBIT ------- ------- 3.1 Current Certificate of Incorporation of the Registrant (Exhibit 3.0 to Form 8-K dated September 1, 1989) 3.2 Bylaws of the Registrant (Exhibit 3.1 to Form 8-K dated September 1, 1989) 4.1 Section 4 of the Registrant's Certificate of Incorporation and Articles III and IX of the Registrant's Bylaws (page 5 of Exhibit 3.0 and pages 1-5 and 13-14 of Exhibit 3.1 to Form 8-K dated September 1, 1989) Shareholder Rights Plan (Exhibit 1.1 to Form 8-A dated September 1, 4.2 1989) 4.3 Copies of instruments defining the rights of holders of long-term debt of the Registrant or any of its subsidiaries are, under Item 601(b)(4)(iii)(A) of Regulation S-K, not required to be filed, but will be filed upon request of the Commission. 10.1** Deferred Compensation Plan Agreement between Harold B. Starkey, Jr. and First Federal Savings and Loan Association and assumed by Coast (Exhibit 10.16 to Form 8-K dated September 1, 1989) 10.2** Board of Directors Retirement Plan of Coast (Exhibit 10.21 to Form 8-K dated September 1, 1989) 10.3** Pension Plan of Coast (Exhibit 10.22 to Form 8-K dated September 1, 1989) 10.4** First Amendment to Pension Plan of Coast (Exhibit 10.23 to Form 8-K dated September 1, 1989) 10.5** Form of Post-Retirement Compensation Arrangement of Coast (Exhibit 10.9 to Form 10-K dated March 30, 1990) 10.6** Executive and Senior Management Short-Term Compensation Incentive Plans of Coast, effective January 1, 1996 10.7** Amended and Restated Executive Supplemental Retirement Plan of Coast, dated February 28, 1996 10.8** Form of Deferred Compensation Agreement of Coast, effective January 24, 1996 10.9** 1985 Stock Option and Stock Appreciation Rights Plan of Coast as amended through February 22, 1989 (Exhibit 10.5 to Form 8-K dated September 1, 1989) 10.10** Coast Federal Bank, Federal Savings Bank Performance Share Plan for Key Employees dated July 22, 1992 (Exhibit 10.16 to Form 10-K dated March 6, 1993) 10.11** Amended and Restated Employment Agreement between Ray Martin and Coast dated as of January 1, 1996 10.12** Amended and Restated Employment Agreement between Robert L. Hunt II and Coast dated as of January 1, 1996 10.13** Amended and Restated Employment Agreement between Norman H. Raiden and Coast dated as of January 1, 1996 10.14** Amended and Restated Employment Agreement between James R. Boyle and Coast dated as of January 1, 1996 10.15** Deferred Compensation Death Benefit Plan between Leon S. Angvire and Coast (Exhibit 10.24 to Form 10-K dated March 30, 1990) 10.16** Amended and Restated Employment Agreement between James F. Barritt and Coast dated as of January 1, 1996
87
EXHIBIT NUMBER EXHIBIT ------- ------- 10.17** Severance Agreement between Gerald I. Rich and Coast dated January 20, 1995 (Exhibit 10.27 to Form 10-K filed March 28, 1995) 10.18** Severance Agreement between Mark T. Neal and Coast dated January 20, 1995 (Exhibit 10.28 to Form 10-K filed March 28, 1995) 10.19** Coast Director Share Purchase Plan adopted April 27, 1994 (Exhibit 10.29 to Form 10-K dated March 28, 1995) 11.1 The statement regarding computation of per share earnings is included in Note 10 to Registrant's Consolidated Financial Statements and incorporated herein by this reference 13.1 Not Applicable 22.1 Subsidiaries (Exhibit 22.1 to Form 10-K dated March 28, 1995) 24.1 Consent of KPMG Peat Marwick LLP
- -------- * Exhibits followed by a parenthetical reference are incorporated by reference herein from the document described therein. ** Indicates employment or compensation agreements affecting past or present executive officers and directors. FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been omitted because they are not applicable or the required information is shown in the body of this Form 10-K. REPORTS ON FORM 8-K No Current Reports on Form 8-K were filed for the three months ended December 31, 1995. 88 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Coast Savings Financial, Inc. /s/ Ray Martin By: _________________________________ RAY MARTIN CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: March 27, 1996 89 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. NAME CAPACITY DATE /s/ Ray Martin Chairman of the March 27, 1996 - ------------------------------------- Board, Chief (RAY MARTIN) Executive Officer and Director (Principal Executive Officer) /s/ Robert L. Hunt II President, Chief March 27, 1996 - ------------------------------------- Operating Officer (ROBERT L. HUNT II) and Director /s/ James F. Barritt Senior Executive March 27, 1996 - ------------------------------------- Vice President and (JAMES F. BARRITT) Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Leon S. Angvire Director March 27, 1996 - ------------------------------------- (LEON S. ANGVIRE) /s/ John C. Argue Director March 27, 1996 - ------------------------------------- (JOHN C. ARGUE) /s/ Gerald D. Barrone Director March 27, 1996 - ------------------------------------- (GERALD D. BARRONE) /s/ Joan Milke Flores Director March 27, 1996 - ------------------------------------- (JOAN MILKE FLORES) /s/ Jack P. Libby Director March 27, 1996 - ------------------------------------- (JACK P. LIBBY) /s/ James P. Miscoll Director March 27, 1996 - ------------------------------------- (JAMES P. MISCOLL) /s/ Keith W. Renken Director March 27, 1996 - ------------------------------------- (KEITH W. RENKEN) /s/ Harold B. Starkey, Jr. Director March 27, 1996 - ------------------------------------- (HAROLD B. STARKEY, JR.) 90 DIRECTORS AND OFFICERS LEON S. ANGVIRE JOHN C. ARGUE GERALD D. BARRONE JOAN MILKE FLORES ROBERT L. HUNT II* President and Chief Operating Officer JACK P. LIBBY RAY MARTIN* Chairman and Chief Executive Officer JAMES P. MISCOLL KEITH W. RENKEN HAROLD B. STARKEY, JR. Officers RAY MARTIN* Chairman and Chief Executive Officer ROBERT L. HUNT II* President and Chief Operating Officer JAMES R. BOYLE* Senior Executive Vice President Loan Group NORMAN H. RAIDEN* Senior Executive Vice President Legal/Appraisal/MIS Group JAMES F. BARRITT* Chief Financial Officer and Senior Executive Vice President HOWARD BENNETT, JR. Senior Vice President Branch Division RON FOX Chief Appraiser and Senior Vice President Appraisal Division RICHARD E. KREMER Senior Vice President Marketing/Training Division MARK T. NEAL Senior Vice President Corporate Planning/Investor Relations Division GEOFFREY G. OLSEN Senior Vice President Legal Division CHARLES E. O'NEIL Senior Vice President Savings Operations/Human Resources Division CAROLYN PHILMON Senior Vice President Loan Service Division MICHAEL C. PIERCE Senior Vice President General Services Division GERALD I. RICH* Senior Vice President Controller/Treasurer Division LEON SCALES Senior Vice President Wholesale Lending Division THELMA SHOUSE Senior Vice President MIS Division ALAN D. ORECHWA Senior Vice President Internal Audit/Security/Compliance ELDON L. RICHARDSON II Senior Vice President Loan Production/ Mortgage Banking Division PRISCILLA FINCH* Corporate Secretary Assistant Vice President Investor Relations * Also Officers of Coast Savings Financial, Inc. 91 CORPORATE INFORMATION Executive Offices COAST SAVINGS FINANCIAL, INC. 1000 Wilshire Boulevard Los Angeles, CA 90017-2457 (213) 362-2000 Stockholder Information INVESTOR RELATIONS DEPARTMENT 1000 Wilshire Boulevard Los Angeles, CA 90017-2457 (213) 362-2134 Common Stock Coast's stock is traded on the New York and Pacific Stock Exchanges under the ticker symbol CSA. Stock Transfer Agent and Registrar CHEMICAL BANK P.O. Box 7708 San Francisco, CA 94120 (415) 954-9540 Independent Auditors KPMG PEAT MARWICK LLP 725 South Figueroa Street Los Angeles, CA 90017 (213) 972-4000 Annual Meeting Sierra Room of the Omni Los Angeles Hotel 930 Wilshire Boulevard Los Angeles, CA 90017 Wednesday, April 24, 1996, 2:00 pm Principal Subsidiaries and Affiliates COAST FEDERAL BANK, FSB Administrative Offices 8433 Fallbrook Avenue West Hills, CA 91304-3226 (818) 316-8000 COAST FED SERVICES 19900 Plummer Street Chatsworth, CA 91311 (818) 701-7016 92 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE ------- ------- ------------ 3.1 Current Certificate of Incorporation of the Registrant (Exhibit 3.0 to Form 8-K dated September 1, 1989) 3.2 Bylaws of the Registrant (Exhibit 3.1 to Form 8-K dated September 1, 1989) 4.1 Section 4 of the Registrant's Certificate of Incorporation and Articles III and IX of the Registrant's Bylaws (page 5 of Exhibit 3.0 and pages 1-5 and 13-14 of Exhibit 3.1 to Form 8-K dated September 1, 1989) Shareholder Rights Plan (Exhibit 1.1 to Form 8-A dated September 1, 4.2 1989) 4.3 Copies of instruments defining the rights of holders of long-term debt of the Registrant or any of its subsidiaries are, under Item 601(b)(4)(iii)(A) of Regulation S-K, not required to be filed, but will be filed upon request of the Commission. 10.1** Deferred Compensation Plan Agreement between Harold B. Starkey, Jr. and First Federal Savings and Loan Association and assumed by Coast (Exhibit 10.16 to Form 8-K dated September 1, 1989) 10.2** Board of Directors Retirement Plan of Coast (Exhibit 10.21 to Form 8-K dated September 1, 1989) 10.3** Pension Plan of Coast (Exhibit 10.22 to Form 8-K dated September 1, 1989) 10.4** First Amendment to Pension Plan of Coast (Exhibit 10.23 to Form 8-K dated September 1, 1989) 10.5** Form of Post-Retirement Compensation Arrangement of Coast (Exhibit 10.9 to Form 10-K dated March 30, 1990) 10.6** Executive and Senior Management Short-Term Compensation Incentive Plans of Coast, effective January 1, 1996 10.7** Amended and Restated Executive Supplemental Retirement Plan of Coast, dated February 28, 1996 10.8** Form of Deferred Compensation Agreement of Coast, effective January 24, 1996 10.9** 1985 Stock Option and Stock Appreciation Rights Plan of Coast as amended through February 22, 1989 (Exhibit 10.5 to Form 8-K dated September 1, 1989) 10.10** Coast Federal Bank, Federal Savings Bank Performance Share Plan for Key Employees dated July 22, 1992 (Exhibit 10.16 to Form 10-K dated March 6, 1993) 10.11** Amended and Restated Employment Agreement between Ray Martin and Coast dated as of January 1, 1996 10.12** Amended and Restated Employment Agreement between Robert L. Hunt II and Coast dated as of January 1, 1996 10.13** Amended and Restated Employment Agreement between Norman H. Raiden and Coast dated as of January 1, 1996 10.14** Amended and Restated Employment Agreement between James R. Boyle and Coast dated as of January 1, 1996 10.15** Deferred Compensation Death Benefit Plan between Leon S. Angvire and Coast (Exhibit 10.24 to Form 10-K dated March 30, 1990) 10.16** Amended and Restated Employment Agreement between James F. Barritt and Coast dated as of January 1, 1996 10.17** Severance Agreement between Gerald I. Rich and Coast dated January 20, 1995 (Exhibit 10.27 to Form 10-K filed March 28, 1995). 10.18** Severance Agreement between Mark T. Neal and Coast dated January 20, 1995 (Exhibit 10.28 to Form 10-K filed March 28, 1995) 10.19** Coast Director Share Purchase Plan adopted April 27, 1994 (Exhibit 10.29 to Form 10-K dated March 28, 1995) 11.1 The statement regarding computation of per share earnings is included in Note 10 to Registrant's Consolidated Financial Statements and incorporated herein by this reference 13.1 Not Applicable 22.1 Subsidiaries (Exhibit 22.1 to Form 10-K dated March 28, 1995) 24.1 Consent of KPMG Peat Marwick LLP
- -------- * Exhibits followed by a parenthetical reference are incorporated by reference herein from the document described therein. ** Indicates employment or compensation agreements affecting past or present executive officers and directors. EX-10.6 2 MGT. COMPENSATION PLAN DATED 01/01/96 EXHIBIT 10.6 EXECUTIVE AND SENIOR MANAGEMENT SHORT-TERM COMPENSATION ------------------------------------------------------- INCENTIVE PLANS --------------- OBJECTIVES: These plans provide for short-term incentive compensation to certain corporate officers of the Bank who, by their position, ability and diligence in the performance of future services to the Bank, are in a position to make important contributions to the achievement of the Company's short- and long-term goals, and enable the Company to retain such personnel. ELIGIBILITY: Awards may be granted only to eligible officers of the Bank who are full-time salaried employees. Executive officers and senior officers are eligible to participate in the Incentive Program. In addition, the Compensation Committee of the Board may approve participation by other selected corporate officers recommended by the Chief Executive Officer. Awards will be prorated for those who start employment during the year. Officers leaving the Bank, either voluntarily or involuntarily, prior to the Board's review and approval of awards will not be eligible for an award pursuant to these Plans. ADMINISTRATION: The Plans are administered by the Compensation Committee of the Board, consisting of non-employee members of the Board who are selected by and serve at the pleasure of the Board. The Compensation Committee is charged with the responsibility of considering all relevant aspects of corporate and individual performance, including the Company's financial and operating results relative to its peer group, e.g., returns on average assets and equity, and reviewing recommendations presented by the Chief Executive Officer for the individuals eligible to receive awards and the amounts thereof. The Compensation Committee is solely responsible for recommending to the Board the individuals who should receive awards and the amounts thereof. The final determination regarding the individual award amounts shall be made by the Board. A director eligible for an award may not participate in the vote on any award determination for such director. Eligible participants will be evaluated by the Chief Executive Officer and Chief Operating Officer following each Award Year with respect to their individual performance and contributions to the Bank's overall results. Evaluations of individual performance will be based on achieving or exceeding the predetermined levels of performance on a select number of individual objectives. Based on the evaluation process, the Chief Executive Officer may recommend that an individual receive a reduced incentive award, no award at all, or a higher than average award. Results of these evaluations and preliminary recommendations will be submitted by the Chief Executive Officer to the Compensation Committee by February 15th. GROUP For purposes of determining award recommendations, the DESIGNATIONS: executive and senior officers will be separated into three Groups as follows: Group I will be comprised of the Company's Chief Executive Officer and Chief Operating Officer; Group II will consist of the Company's Senior Executive Vice Presidents; and Group III will be comprised of the Company's Senior Vice Presidents and the President of the Bank's insurance service corporation subsidiary (Coast Fed Insurance). FORM OF PAYMENT: Awards as determined by the Board will be paid to individual participants within 30 days of approval. PERFORMANCE Corporate Performance Award Pools - For Groups I and II, the CRITERIA AND short-term incentive award pools will be established based AWARD POOLS: solely upon overall corporate performance. Overall performance will be measured by the Bank's capital position, supervisory subgroup, total problem asset ratio, operating expenses, and net earnings. Certain thresholds of each of these five performance criteria must be accomplished for a corporate incentive award pool to be established. If the thresholds (described below) for capital, supervisory subgroup, total problem asset ratio and operating expenses are achieved, the Corporate Incentive Award Pool for each Group will be established at the levels set forth under "Net Earnings" below. -2- Net Earnings: Net earnings, determined in accordance with ------------- generally accepted accounting principles, must be equal to or greater than the levels specified below in order for the Corporate Incentive Award Pools to be established. As detailed in the following table, the Corporate Incentive Award Pools are expressed as a percentage of base salaries and will be calculated on a sliding scale, whereunder such pools will be capped at the indicated maximum levels in the event that Net Earnings exceed, and established at pro rata levels within the sliding scale. Individual Performance Award Pools (Group III only) - For Group III officers, the Chief Executive Officer and the Chief Operating Officer will develop recommended Individual Performance Awards for each officer, depending upon each officer's performance relative to the predetermined goals and objectives established for his or her division. Such awards will be limited to a maximum of 10% of base salaries. MODIFICATION The Board in its sole discretion may modify the performance AND TERMINA- criteria, eligibility requirements or any other provision of TION OF THE the Plans, requirements or any other provision of the Plans, PLANS including termination of the Plans. Therefore, regardless of whether the performance criteria are achieved, the Board may increase, curtail or eliminate award payments pursuant to these Plans. -3- EX-10.7 3 RETIREMENT PLAN DATED 02/28/96 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF COAST FEDERAL BANK * * * 1996 RESTATEMENT TABLE OF CONTENTS -----------------
ARTICLE AND SECTION PROVISIONS PAGE - ------- ---------- ---- I OVERVIEW............................. 1 II PARTICIPATION........................ 2 2.1 Selection for Participation.......... 2 2.2 Participation Classes................ 2 III BENEFITS............................. 3 3.1 Normal Retirement.................... 3 3.2 Early Retirement..................... 4 3.3 Rule of 80 Retirement................ 4 3.4 Termination After a Change in Control 4 3.5 Disability........................... 5 3.6 Death................................ 5 3.7 Termination for any Other Reason..... 6 3.8 Optional Benefit Forms............... 6 3.9 Application of Payments.............. 7 IV ADMINISTRATION OF THE PLAN........... 8 4.1 Duties of the Plan Administrator..... 8 4.2 Compensation, Expenses and Indemnity. 8 4.3 Claims Procedure..................... 9 4.4 Effect of Plan Administrator Action.. 11 V AMENDMENT AND TERMINATION OF THE PLAN 12 5.1 Amendments........................... 12 5.2 Termination of Plan.................. 12
-i-
ARTICLE AND SECTION PROVISIONS PAGE - ------- ---------- ---- VI MISCELLANEOUS PROVISIONS 13 6.1 Plan History......................... 13 6.2 Plan is Unfunded..................... 13 6.3 Adverse Tax Consequences............. 13 6.4 Business Succession.................. 13 6.5 Limitation on Rights of Employees.... 13 6.6 Benefits May not be Assigned......... 14 6.7 Withholding.......................... 14 6.8 Headings............................. 14 6.9 Counterparts......................... 14 6.10 Severability......................... 14 6.11 Governing Law........................ 14 VII DEFINITIONS.......................... 15 7.1 "Bank"............................... 15 7.2 "Board of Directors"................. 15 7.3 "Change in Control".................. 15 7.4 "Claimant"........................... 16 7.5 "Code"............................... 16 7.6 "Disability"......................... 16 7.7 "Equivalent"......................... 16 7.8 "Final Average Monthly Compensation". 16 7.9 "Normal Benefit Form"................ 16
-ii-
ARTICLE AND SECTION PROVISIONS PAGE - ------- ---------- ---- 7.10 "Optional Benefit Form".............. 16 7.11 "Participant"........................ 17 7.12 "Plan"............................... 17 7.13 "Plan Administrator"................. 17 7.14 "Resigns for Good Reason"............ 17 7.15 "Terminated Without Cause"........... 18 7.16 "Vested"............................. 19 7.17 "Year of Service".................... 19 EXHIBIT A List of Participants................. 20 EXHIBIT B Future Disputes Submissions Agreement 21 EXHIBIT C List of Vested Participants.......... 22
-iii- EXHIBIT 10.8 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF ----------------------------------------- COAST FEDERAL BANK ------------------ ARTICLE I --------- OVERVIEW -------- Coast Federal Bank (the Bank) has adopted this Plan to provide supplemental retirement benefits to its senior officers. This document restates the Plan, effective as of the date it was signed. The Plan is intended to be a nonqualified "top hat plan" subject to the Employee Retirement Income Security Act of 1974. Capitalized terms used in this Plan generally are defined in Article VII. The Plan's history is described in Section 6.1. -1- ARTICLE II ---------- PARTICIPATION ------------- 2.1 Selection for Participation --------------------------- A person shall become a Participant when selected for participation by the Bank's Chief Executive Officer, with Board of Directors' approval, but only after executing a written participation agreement if required by the Plan Administrator. Although only senior vice presidents or more senior officers may become Participants in this Plan, such an officer does not have a right to participate unless admitted to the Plan in accordance with this Section. 2.2 Participation Classes --------------------- A new Participant shall be assigned to one of the following three participation classes as follows: If the Participant is He or she will be in --------------------- -------------------- Chief Executive Officer or Chief Operating Officer Class I Executive Vice President Class II Senior Vice President Class III A Participant's final participation class determines his or her Plan benefits (see Section 3.1). If an employee is promoted to a position in a higher participation class after becoming a Participant, the Participant shall be admitted into that higher participation class, but only if the Bank's Chief Executive Officer, with Board of Directors' approval, elects to transfer the Participant to that higher class. Before a Participant's benefit becomes Vested, the Chief Executive Officer, with the approval of the Board of Directors, may discontinue that individual's participation in the Plan. Exhibit A lists each Participant and his or her participation class. The Plan Administrator shall update this exhibit periodically. -2- ARTICLE III ----------- BENEFITS -------- 3.1 Normal Retirement ----------------- If a Participant terminates employment with the Bank after attaining age 65, on the first working day of the next calendar month the Bank shall commence paying the Participant a benefit in the Normal Benefit Form or the Equivalent in an Optional Benefit Form (see Section 3.8). When payable in the Normal Benefit Form, the Participant's benefit shall be the greater of (a) 10, 20 or 30 percent of his or her Final Average Monthly Compensation (for Class III, II or I Participants, respectively); or (b) 65, 75 or 90 percent of his or her Final Average Monthly Compensation (for Class III, II or I Participants, respectively) minus the following: (i) the Participant's benefit under the Bank's qualified defined benefit plan and the Bank's Board of Directors' Supplemental Retirement Plan. If either of these offsetting benefits is paid or payable other than in the Normal Benefit Form or commences before or after the Participant's benefit under this Plan, the offset shall be the Equivalent of the offsetting benefit, expressed as an amount payable in the Normal Benefit Form commencing when the Participant's Plan benefit commences, and (ii) his or her primary insurance amount actually received under the Social Security Act. If the Participant's benefits are payable in a joint and survivor annuity form, the offset rules described above apply, except that the Participant's benefit is offset by the Participant's Social Security benefit and the spouse's benefit is offset by the spouse's Social Security benefit. If the Participant elects the lump sum benefit under the Plan, the offset shall be the Equivalent of the primary insurance amount then payable under the Social Security Act or, if no amount is then payable, the present value of -3- the primary insurance amount under the Social Security Act payable upon the Participant's attainment of age 65. 3.2 Early Retirement ---------------- If a Participant terminates employment with the Bank after attaining age 60 and completing ten Years of Service, on the first working day of the next calendar month the Bank shall commence paying the Participant a benefit in the Normal Benefit Form in the amount determined under Section 3.1, or the Equivalent of that amount if the Participant's benefit is payable in an Optional Benefit Form (see Section 3.8). However, this benefit shall be reduced by three percent times the number of years (rounded to the highest year) by which the Participant's termination of active employment precedes his or her 65th birthday, but this reduction shall not exceed the full actuarial reduction for early commencement of this benefit using the assumptions in Section 7.7. 3.3 Rule of 80 Retirement --------------------- If a Participant terminates employment with the Bank after attaining age 55 and after completing 25 Years of Service, the sum of the number of such Years of Service and the Participant's age is at least 80, on the first working day of the next calendar month the Bank shall commence paying the Participant a benefit in the Normal Benefit Form in the amount determined under Section 3.1, or the Equivalent of that amount if the Participant's benefit is payable in an Optional Benefit Form (see Section 3.8). 3.4 Termination After a Change in Control ------------------------------------- (a) If a Participant is Terminated Without Cause or Resigns for Good Reason before the third anniversary of a Change in Control, on the first working day of the next calendar month following the Participant's termination of employment, the Bank shall commence paying the Participant a benefit in the Normal Benefit Form in the amount determined under Section 3.1, or the Equivalent of that amount if the Participant's benefit is payable in an Optional Benefit Form (see Section 3.8), reduced for any early commencement of this benefit (if the Participant's termination of employment precedes his or her 65th birthday) using the assumptions in Section 7.7. If the Participant is entitled to a more generous benefit under another provision of this Plan, this Section 3.4 shall not apply. -4- (b) Notwithstanding the provisions of Section 3.4(a), the aggregate present value of all parachute payments payable to or for the benefit of a Participant, whether payable pursuant to the Plan (or otherwise)(excluding those payments made pursuant to an agreement with the Bank that specifically provides otherwise), shall be limited to three times the Participant's base amount less one dollar and, to the extent necessary, the special treatment described in Section 3.4(a) shall be reduced or eliminated by the Committee in order that this limitation not be exceeded; provided, however, that this provision shall not apply if the Participant's written employment agreement provides otherwise. For purposes of this Section 3.4(b), the terms "parachute payment," "base amount" and "present value" shall have the meanings assigned thereto under Code section 280G. It is the intention of this Section 3.4(b) to avoid excise taxes on the Participant under Code section 4999 or the disallowance of a deduction to the Bank pursuant to Code section 280G. 3.5 Disability ---------- If a Participant terminates active employment with the Bank due to a Disability, on the first working day of the next calendar month the Bank shall commence paying the Participant a benefit in the Normal Benefit Form in the Vested amount then determined under Section 3.1 and this Section 3.5, or the Equivalent of that amount if the Participant's benefit is payable in an Optional Benefit Form (see Section 3.8). This benefit shall vest at a rate of ten percent for each Year of Service at the time of the Participant's termination of active employment due to Disability. However, this benefit shall be reduced by three percent times the number of years (rounded to the highest year) by which the Participant's termination of active employment precedes his or her 65th birthday, but this reduction shall not exceed the full actuarial reduction for early commencement of this benefit using the assumptions in Section 7.7. 3.6 Death ----- If a Participant dies while employed by the Bank and is survived by his or her spouse, on the first working day of the next calendar month the Bank shall commence paying the surviving spouse the Equivalent (based upon the spouse's age) of the Participant's vested benefit determined under Section 3.1 and this Section 3.6, reduced by three percent times the number of years (rounded to the -5- highest year) by which the Participant's death precedes his or her 65th birthday, but this reduction shall not exceed the full actuarial reduction for early commencement of this benefit using the assumptions in Section 7.7. This benefit shall vest at a rate of ten percent for each Year of Service on the date of the Participant's death. This benefit shall be paid in the Normal Benefit Form, unless the Participant elected in writing to have a lump sum paid to his or her spouse. 3.7 Termination for any Other Reason -------------------------------- If a Participant's employment with the Bank terminates for any reason other than ones specified in Sections 3.1 through 3.6, the Participant shall forfeit his or her benefit under the Plan, with one exception: If a Participant listed on Exhibit C terminates employment with the Bank and benefits are not otherwise immediately payable, on the first working day of the calendar month beginning after the Participant's 65th birthday, the Bank shall commence paying the Participant a benefit in the Normal Benefit Form in the amount determined under Section 3.1, or the Equivalent of that amount if the Participant's benefit is payable in an Optional Benefit Form (see Section 3.8). If such a Participant dies after attaining age 55 or before age 65, the death benefit provided for in Section 3.6 shall be paid. 3.8 Optional Benefit Forms ---------------------- (a) A Participant's benefit under the Plan shall commence at the same time and in the same form as the Participant's benefit under the Bank's qualified defined benefit plan with the following two exceptions: (i) the Participant may elect to receive a lump sum payment under this Plan, as provided in Section 3.8(b) and (ii) the Participant's benefits under the Bank's qualified defined benefit plan may commence, in accordance with its terms, earlier than those under the Plan. The election to receive a lump sum payment must be made in writing in accordance with the requirements of the Plan Administrator. An election made more than thirty days after the Participant commenced Plan participation shall be effective only if the Participant makes the election at least one year before the benefits are to commence under this Plan. (b) The Optional Benefit Forms available to a Participant are as follows: -6- Lump Sum: A cash lump sum Equivalent to the benefit otherwise payable -------- to the Participant; or Any Form Provided in the Bank's Qualified Defined Benefit Plan: A -------------------------------------------------------------- form of benefit payable to the Participant under the Bank's qualified defined benefit plan. 3.9 Additional Tax-Related Payments ------------------------------- The Bank shall pay gross-up payments to the Participant to make him or her whole for any tax imposed under Code Section 3121(v) on his or her Plan benefits, including the vesting of benefits, and shall cease to pay any gross-up payments upon the Participant's commencement of benefits under the Plan. The gross-up amount will be an amount which, after payment by the Participant of all income and excise taxes on the gross-up payment, equals the taxes the Participant must pay under Code Section 3121(v) with respect to the payments and benefits for which the Participant is receiving the gross-up payment. -7- ARTICLE IV ---------- ADMINISTRATION OF THE PLAN -------------------------- 4.1 Duties of the Plan Administrator -------------------------------- The Plan Administrator shall be responsible for the general administration and management of the Plan. The Plan Administrator shall have all powers and duties necessary to fulfill its responsibilities, including, but not limited to, the following powers and duties: (a) To determine all questions relating to the eligibility of persons to participate; (b) To determine the amount and kind of benefits payable to Participants; (c) To maintain all records necessary for the administration of the Plan; (d) To provide for disclosure of all information and filing or provision of all reports and statements required by federal law; (e) To administer the claims procedure set forth in Section 4.3; (f) To delegate any power or duty to any firm or person; and (g) To exercise all other powers or duties granted to the Plan Administrator by other provisions of the Plan. 4.2 Compensation, Expenses and Indemnity ------------------------------------ (a) The Plan Administrator and any delegate who is employed by the Bank shall serve without compensation for services to the Plan. The Bank shall furnish the Plan Administrator or any such delegate with all clerical or other assistance necessary in the performance of his or her duties. The Plan Administrator is authorized to employ such legal counsel and advisors as it may deem advisable to assist in the performance of its duties hereunder. (b) All costs of administering the Plan (including the cost of legal services described in subsection (a)) shall be paid by the Bank. -8- (c) To the extent permitted by applicable law, the Bank shall indemnify and save harmless the Board of Directors, the Plan Administrator and any delegate employed by the Bank against any and all expenses, liabilities and claims (including legal fees incurred to defend against such liabilities and claims) arising out of their discharge in good faith of responsibilities under or incident to the Plan. Expenses and liabilities arising out of willful misconduct shall not be covered under this indemnity. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Bank or provided by the Bank under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, as such indemnities are permitted under applicable law. Payments with respect to any indemnity and payment of expenses or fees shall be made only from assets of the Bank. 4.3 Claims Procedure ---------------- (a) Normally, a Participant need not present a formal claim for benefits in order to qualify for rights or benefits under this Plan. If, however, any person (a Claimant) is not granted the rights or benefits to which the person believes himself or herself to be entitled, a formal claim for benefits must be filed in accordance with this Section. A Claimant must file his or her claim in writing with the Plan Administrator within two years after the Claimant first knows or should know of the facts on which the claim is based. A claims official appointed by the Plan Administrator shall, within a reasonable time, consider the claim and shall issue his or her determination thereon in writing within 90 days of the receipt by the Plan Administrator of the claim or, if special circumstances require, and the Claimant is so notified in writing, within 180 days of the receipt by the Plan Administrator of the claim. If the claim is granted, the benefits claimed shall be paid. If the claim is denied, the notice shall (i) set forth the specific reasons for the denial of benefits; (ii) contain specific references of provisions of the Plan relevant to the denial; (iii) describe any material and information, if any, necessary for the claim to be allowed which the Plan Administrator does not have; and (iv) advise the Claimant that any appeal of the adverse determination must be made in writing to the Plan Administrator, within sixty days after receipt of this notification, setting forth the facts upon which the appeal is based. If a claim is not timely decided, the claim shall be deemed denied. -9- (b) If a claim is denied, the Claimant may appeal the denial in writing within 90 days after the actual or deemed denial. If the Claimant fails to do so, the claim denial shall become final and the Claimant may not challenge it thereafter. (c) If the Claimant timely appeals a claim denial, the Plan Administrator shall reexamine all issues relevant to the original denial of benefits. The Plan Administrator may in addition, upon at least ten days written notice, request the Claimant or his or her representative to personally appear before it to make an oral presentation or answer questions that may have been raised, or the Claimant or their representative may make a request to personally appear before the Plan Administrator. (d) The Plan Administrator shall advise the Claimant in writing of its decision and the specific reasons on which such decision was based within 60 days after receipt of the written appeal, unless special circumstances require an extension of not more than an additional 60 days. If such extension is necessary, all parties shall be given written notice of the delay. If an appeal is not timely decided, the appeal shall be deemed denied. (e) If the Claimant disputes the Plan Administrator's appeal determination, the Claimant's only recourse shall be to have the dispute resolved by final and binding arbitration. The Claimant must initiate this arbitration within one year after actual or deemed appeal denial; failure to initiate arbitration within this one-year period shall constitute an absolute bar to the institution of any new proceedings. In all other respects, the arbitration shall be conducted in accordance with the terms of the Claimant's then binding arbitration agreement with the Bank or, if none, in accordance with the following arbitration rules: Arbitration shall take place in the local offices of Judicial Arbitration & Mediation Services, Inc. ("JAMS"). The Bank and the disputing party may agree on a retired judge from the JAMS panel. If they are unable to agree, JAMS will provide a list of three judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as the arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. The aggrieved party can initiate arbitration by sending written notice of an intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain a description of the dispute, the amount involved and the remedy sought. All arbitration shall be subject to a Future Disputes Submission -10- Agreement, a copy of which is attached hereto as Exhibit B and incorporated herein. 4.4 Effect of Plan Administrator Action ----------------------------------- (a) The Plan shall be interpreted by the Plan Administrator in accordance with the terms of the Plan and their intended meanings. However, the Plan Administrator shall have the discretion to make any findings of fact needed in the administration of the Plan, and shall have the discretion to interpret or construe ambiguous, unclear or implied (but omitted) terms in any fashion it deems to be appropriate in its sole judgment. The validity of any such finding of fact, interpretation, construction or decision shall not be given de novo -- ---- review if challenged in court, by arbitration or in any other forum, and shall be upheld unless clearly arbitrary or capricious. (b) To the extent the Plan Administrator has been granted discretionary authority under the Plan, the Plan Administrator's prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter. (c) If, due to errors in drafting, any Plan provisions does not accurately reflect its intended meaning, as demonstrated by consistent interpretations or other evidence of intent, or as determined by the Plan Administrator in its sole and exclusive judgment, the provision shall be considered ambiguous and shall be interpreted by the Plan Administrator in a fashion consistent with its intent, as determined by the Plan Administrator in its sole discretion. The Plan Administrator, without the need for Board of Directors' approval, or the Board of Directors, shall amend the Plan retroactively to cure any such ambiguity. (d) All actions taken and all determinations made in good faith by the Plan Administrator or by Plan fiduciaries shall be final and binding upon all persons claiming any interest in or under the Plan. (e) This Section may not be invoked by any person to require the Plan to be interpreted in a manner which is inconsistent with its interpretation by the Plan Administrator. This Section shall cease to apply upon the occurrence of a Change in Control and it shall thereafter never be reinstated in any way. -11- ARTICLE V --------- AMENDMENT AND TERMINATION OF THE PLAN ------------------------------------- 5.1 Amendments ---------- (a) The Bank reserves the right at any time to amend or restructure the Plan in any way not expressly prohibited by the Plan. No amendment shall reduce the value of a Participant's or surviving spouse's Vested benefit below the present value Equivalent of that benefit. (b) All amendments or other changes shall be adopted in writing by resolution of the Board of Directors or, in the case of an amendment that does not substantially alter the nature or expense of the Plan, by the Plan Administrator without Board of Directors approval. (c) If an improperly adopted written Plan amendment is retroactively ratified by the Board of Directors, it shall be treated as having been properly adopted and shall be valid as of its initial effective date. (d) All rights under the Plan shall be determined under the terms of the Plan as in effect at the time the determination is made. 5.2 Termination of Plan ------------------- The Bank shall have the right at any time to terminate the Plan, in which case all benefits that are not Vested shall be forfeited. Vested benefits shall remain payable except to the extent the Plan Administrator elects to pay the present value Equivalent of the remaining payments due to the person entitled to the benefit. -12- ARTICLE VI ---------- MISCELLANEOUS PROVISIONS ------------------------ 6.1 Plan History ------------ The Bank adopted the Executive Supplemental Retirement Plan in 1984. The plan was suspended in 1991 and amended and restated in 1993. In 1994 it was submitted to the National Office of the Internal Revenue Service for a ruling, amended and restated in 1995 in response to IRS comments from representatives of that agency. 6.2 Plan is Unfunded ---------------- This Plan is an unfunded deferred compensation plan for a select group of management employees. The Plan constitutes only a mere promise by the Bank to make benefit payments in the future. 6.3 Adverse Tax Consequences ------------------------ To the extent that any benefit under the Plan is taxable to the Participant prior to the Participant's actual receipt of payment for the Plan (except as a result of the imposition of tax under Code section 3121(v)), the Plan Administrator shall make payment to the Participant of the taxed benefit. 6.4 Business Succession ------------------- The Bank may transfer its obligations under this Plan to a successor, but the Bank shall remain secondarily liable for benefits due under the Plan to any Participant or surviving spouse who does not consent to the transfer. 6.5 Limitation on Rights of Employees --------------------------------- Except as otherwise required by law, nothing contained in the Plan shall give any Participant the right to be retained in the service of the Bank or to interfere with or restrict the right of the Bank, which is hereby expressly reserved, to discharge or retire any Participant at any time, with or without cause. Except as otherwise required by law, inclusion under the Plan will not give any Participant any right or claim to any benefit hereunder except to the extent such right has specifically become fixed under the terms of the Plan. Each condition and -13- provision, including numerical items, has been carefully considered and constitutes the minimum limit on performance which will give rise to the applicable right. 6.6 Benefits May not be Assigned ---------------------------- A Participant's or spouse's rights to benefits under the Plan are not subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors. 6.7 Withholding ----------- All amounts paid or accrued under the Plan shall be subject to applicable federal, state and local withholding for taxes. 6.8 Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing the Plan. 6.9 Counterparts ------------ The Plan may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 6.10 Severability ------------ Any provision of the Plan which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of the Plan 6.11 Governing Law ------------- The Plan shall be interpreted, administered and enforced in accordance with the Employee Retirement Security Act of 1974, and the rights of Participants and all other persons shall be determined in accordance with this law. To the extent that state law is applicable, however, the laws of the State of California shall apply, without regard to the principles of the conflict of laws thereof. -14- ARTICLE VII ----------- DEFINITIONS ----------- The following terms, when capitalized, shall have the meaning specified below unless the context clearly indicates to the contrary. 7.1 "Bank" means Coast Federal Bank, Federal Savings Bank, a ---- federally chartered savings bank. To the extent the Plan Administrator determines to be appropriate, the term Bank shall also include affiliates of the Bank. 7.2 "Board of Directors" means the Board of Directors of the Bank. ------------------ 7.3 "Change in Control" means a change in control as defined in the ----------------- employee's written employment agreement. If the employee does not have a written employment agreement or that agreement does not define "change in control" or an analogous term, change in control means the acquisition by any person or entity of control of the Bank, or any entity controlling the Bank, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe and unsound condition, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of directors of the Board ("Voting Stock") of the Bank or any organization controlling the Bank receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Bank or any entity controlling the Bank, or -15- obtains control of the election of a majority of the directors of the Bank or any entity controlling the Bank. 7.4 "Claimant" shall have the meaning provided in Section 4.3(a). -------- 7.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- 7.6 "Disability" means the total disability of the Participant as ---------- determined under the Bank's group long-term disability plan, assuming for this purpose, that the Participant was covered by such plan. 7.7 "Equivalent" means the actuarial equivalent of a given amount or ---------- benefit payable in another manner, at another time or by any other means, determined conclusively by or under the direction of, the Plan Administrator in accordance with actuarial principles, methods and assumptions which are found to be appropriate by the Plan's actuary and which may not be adversely changed following Change in Control. Lump Sum equivalencies shall be based on the mortality assumptions set forth in the 1995 Buck Mortality Table and on an interest assumption of the Pension Benefit Guaranty Corporation immediate interest rate as of January 1st. 7.8 "Final Average Monthly Compensation" means the average monthly ---------------------------------- earnings payable to a Participant for the 36 consecutive calendar months in which the Participant received the highest earnings during the 120 months immediately preceding the Participant's termination of employment. This average shall be computed by dividing the Participant's total "earnings" (as defined in this Section) during that 36-month period by 36. A Participant's "earnings" shall mean the base salary paid to the Participant during the months in question, including any salary waived or deferred under any salary reduction arrangement, but not including deferred fees, bonuses and similar forms of non- salaried compensation and any accelerated payments of future salary. 7.9 "Normal Benefit Form" means the normal form of benefit under the ------------------- Plan, which is a monthly life annuity. 7.10 "Optional Benefit Form" means any form of benefit available --------------------- under the Plan, other than the Normal Benefit Form. -16- 7.11 "Participant" means any person who is included in the Plan ----------- pursuant to Article III. 7.12 "Plan" means the 1995 Supplemental Executive Retirement Plan of ---- Coast Federal Bank, as restated in this document. The Plan's plan year is the 12-month period ending December 31st. 7.13 "Plan Administrator" means the Bank, acting through the ------------------ Compensation and Benefits Committee of the Board of Directors or such Committee's delegate. 7.14 "Resigns for Good Reason" means that a Participant has resigned ----------------------- after a Change in Control for good reason (or the analogous concept) set forth in the Participant's written employment agreement. If the employee does not have a written employment agreement or that agreement does not define "good reason" or an analogous term, good reason shall mean the following as determined by the Committee: (a) Demotion: The Participant's duties and -------- responsibilities are substantially and adversely altered from those in effect immediately prior to the Change in Control, other than as a result of the Bank or its parent ceasing to be a public company. (b) Pay Cut: The Participant's annual base salary is reduced. ------- (c) Relocation: The Participant's principal office is transferred to ---------- another location, which increases his or her one-way commute to work by more than 30 minutes, based on the Participant's residence when the transfer was announced or, if he or she consents to the transfer, the Bank fails to pay (or reimburse for) all reasonable moving expenses the Participant incurs in changing his or her principal residence in connection with the relocation and to indemnify the Participant against any loss upon the sale of principal residence in connection with such relocation. For purposes of the preceding sentence, "loss" shall be the difference between the actual sales price of the residence and the higher of: (a) the Participant's aggregate investment in the residence; or (b) the fair market value of the residence as determined by a real estate appraiser -17- designated by the Participant and reasonably satisfactory to the Bank. (d) Breach Of Promise: The Bank fails to pay to the Participant any ----------------- present or deferred compensation within seven days after it is due. (e) Discontinuance Of Compensation Plan: The Bank fails to continue, ----------------------------------- or continue the Participant's participation in, any compensation plan in which the Participant participated immediately prior to the Change in Control which is material to his or her total compensation, unless an equitable substitute arrangement has been adopted or made available on a basis not materially less favorable to the Participant than the plan in effect immediately prior to the Change in Control, both as to the benefits the Participant receives and his or her level of participation relative to other participants. The plans referred to in the preceding sentence include such programs as the annual incentive awards, the 1995 and 1996 Incentive Compensation Plan, the 1985 Stock Option and Stock Appreciation Rights Plan (as amended through February 22, 1989), similar programs, and any substitute plans adopted prior to the Change in Control. (f) Discontinuance of Benefit Plan: The Bank stops providing the ------------------------------ Participant with benefits which, in the aggregate, are substantially as valuable to the Participant as those he or she enjoyed immediately before the Change in Control under the Bank's pension, life insurance, medical, health, disability, accident, vacation, and fringe benefit plans, programs and arrangements. (g) Notice Of Prospective Action: The Participant is officially ---------------------------- notified or it is officially announced that the Bank will take any of the actions listed above. 7.15 "Terminated Without Cause" means that a Participant has been ------------------------ discharged or laid off by the Bank after a Change in Control without cause. If the Participant is employed under a written employment contract that defines "cause," that definition shall apply. Otherwise, "cause" means the occurrence of the following, as determined by the Committee -18- (a) the Participant's refusal to follow written, lawful directions or the Participant's material failure to perform his or her duties, in either case, after the Participant has been given notice and a reasonable opportunity to cure; (b) the Participant's material failure to comply with the Bank's policies; or (c) the Participant's engaging in conduct which is or may be unlawful or disreputable, to the possible detriment of the Bank, any of its affiliates, or the Participant's own reputation. 7.16 "Vested" means non-forfeitable. A Participant's benefit shall ------ become Vested when the Participant becomes eligible to terminate employment with the Bank with an immediately commencing benefit under Article III. In addition, a Participant's benefit shall be Vested if the Participant is listed on Exhibit C. 7.17 "Year of Service" means the number of years from the date of the --------------- Participant's most recently commenced employment with the Bank through the date of his or her termination of employment from the Bank, rounding any partial year of employment to the next highest year. Adopted on February 28, 1996. ----------- BY: /s/ RAY MARTIN --------------------------------------------- Chairman of the Board of Directors and Chief Executive Officer of Coast Federal Bank BY: /s/ ROBERT L. HUNT II --------------------------------------------- President and Chief Operating Officer of Coast Federal Bank -19- EXHIBIT A --------- COAST FEDERAL BANK SENIOR MANAGEMENT PARTICIPANTS IN EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN CORPORATE TITLE NAME - --------------- ---- GROUP I - ------- Chairman of the Board, Chief Executive Officer Ray Martin President, Chief Operating Officer Robert L. Hunt GROUP II - -------- Senior Executive Vice President Norman Raiden Senior Executive Vice President James R. Boyle Senior Executive Vice President James Barritt GROUP III - --------- Senior Vice President Howard Bennett Senior Vice President Richard Kremer Senior Vice President Michael C. Pierce Senior Vice President Gerald I. Rich Senior Vice President Leon Scales Senior Vice President Thelma Shouse Senior Vice President Charles E. O'Neil Senior Vice President Geoffrey Olsen Senior Vice President Carolyn Philmon Senior Vice President Mark Neal Senior Vice President Rick Richardson Senior Vice President Ron Fox Senior Vice President Alan Orechwa President, Coast Fed Services Bill Moody EXHIBIT "B" ----------- FUTURE DISPUTE SUBMISSION AGREEMENT ----------------------------------- PRE-HEARING CONFERENCE - ---------------------- The Arbitrator shall schedule a pre-hearing conference to reach agreement on procedural matters, arrange for the exchange of information, obtain stipulation, and attempt to narrow the issues. DISCOVERY - --------- It is our objective to expedite the arbitration proceedings by eliminating discovery as provided by the Discovery Act pursuant to Code of Civil Procedure Section 1985, et seq. Instead of discovery, the parties agree to the following exchange of information. a. Either party can make a written demand of lists of the witnesses to be called or the documents to be introduced at the hearing. The demand must be received prior to the pre-hearing conference. b. The lists must be served within fifteen (15) days of the demand. c. No depositions may be taken for discovery. THE HEARING - ----------- 1. The parties must file briefs with the arbitrator at least three (3) days before the hearing, specifying the facts each intends to prove and analyzing the applicable law. 2. The parties have the right to representation by legal counsel throughout the arbitration proceedings. 3. Judicial rules of evidence and procedure relating to the conduct at the hearing, examination of witnesses, and presentation of evidence do not apply. Any relevant evidence, including hearsay, shall be admitted by the arbitrator if it is the sort of evidence on which responsible persons are accustomed to rely on the conduct of serious affairs, regardless of the admissibility of such evidence in a court of law. 4. Within reasonable limitations, both sides at the hearing may call and examine a witness for relevant testimony, introduce relevant exhibits or other documents, cross-examine or impeach witnesses who shall have testified orally on any matter relevant to 1 the issues, and otherwise rebut evidence as long as these rights are exercised in an efficient and expeditious manner. 5. Any party desiring a stenographic record may secure a court reporter to attend the proceedings. The requesting party must notify the other parties of the arrangements in advance of the hearing and must pay the cost incurred. 6. Any party may request the oral evidence to be given under oath. THE AWARD - --------- 1. The decision shall be based on the evidence introduced at the hearing, including all logical and reasonable inferences therefrom. The arbitrator may grant any remedy or relief which is just and equitable. The arbitrator shall apply the laws of the State of California in making its decision. 2. The award must be made in writing and signed by the arbitrator. It shall contain a concise statement of the reasons in support of the decision. 3. The award can be judicially enforced (confirmed, corrected or vacated) pursuant to Section 1285 et seq. of the Code of Civil Procedure. It is final and binding and there is no direct appeal from the award on the grounds of error in the application of the law. FEES AND EXPENSES - ----------------- Each party must pay its own witness fees, its pro rata share of the arbitrator's fees, and its own attorney's fees and costs, unless the arbitrator's award is greater than the Bank's best offer prior to arbitration. If the Arbitrator's award is greater, the Bank will pay the Executive's reasonable attorney's fees and costs. The reasonableness of the attorney's fees and costs will be determined by the arbitrator. 2 EXHIBIT "C" COAST FEDERAL BANK VESTED PARTICIPANTS IN EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN CORPORATE TITLE NAME - --------------- ---- Chairman of the Board, Chief Executive Officer Ray Martin President, Chief Operating Officer Robert L. Hunt Senior Executive Vice President Norm Raiden Senior Executive Vice President James R. Boyle Senior Executive Vice President James Barritt THIS PAGE MUST BE KEPT AS THE LAST PAGE OF THE DOCUMENT. 24 EX-10.8 4 FORM OF DEFERRED COMPENSATION PLAN 2/28/96 EXHIBIT 10.8 DEFERRED COMPENSATION PLAN -------------------------- ARTICLE 1. ELIGIBLE EMPLOYEES ------------------ All officers of Coast Federal Bank (the "Bank") who are designated as being eligible to participate in this Deferred Compensation Plan ("Plan") either by the Board of Directors of the Bank, or by such party or parties as may be appointed from time to time by the Board with authority to administer the Plan ("Administrators") shall be identified as "Eligible Participants" for purposes of this Plan. An Eligible Participant may elect to participate in this Plan by filing a written and signed notice of election in the form prescribed by the Board of Directors or the Administrators. Said written notice must be filed with the Bank or with the Bank subsidiary for which the Participant performs services. Any reference to Plan Year and Calendar Year shall be deemed to have the same meaning. ARTICLE 2. ELECTION TO DEFER RECEIPT OF COMPENSATION ----------------------------------------- (A) An Eligible Participant in the Plan may elect, from year-to-year to defer a portion of his/her compensation (including bonuses) that otherwise would be payable on a current basis. Except as provided for hereafter, an election to defer compensation 1 shall be delivered to the Bank prior to the first day of the calendar year in which the compensation to be deferred would otherwise be earned for services to be performed after such election. An election by an Eligible Participant for deferral of compensation referable to a particular year of employment shall not constitute an election to defer compensation referable to employment in any other year except as otherwise specified by the Eligible Participant. An Eligible Participant who elects to defer receipt of compensation under the terms of this Plan is identified as a "Participant" for purposes of this Plan. (B) With regard to calendar year 1995, the year in which this Plan is adopted and implemented, an Eligible Participant may make an election to defer compensation for services to be performed in 1995 subsequent to his/her election, provided that such election must be delivered within 30 days after the date that the Plan is effective. (C) In the first year in which a party becomes an Eligible Participant, such newly Eligible participant may make an election to defer compensation for services to be performed during that calendar year at a time subsequent to the election, provided that such election must be delivered within 30 days after the date such party first becomes an Eligible Participant. (D) An election to be an Eligible Participant (or any other notice(s) to the Bank from a Participant (or any other notice(s) to the Bank from an Eligible Participant or a Participant made pursuant to the notice provision of this Plan) will be deemed 2 delivered for purposes of the Plan on the date that a signed writing is personally delivered to the Secretary of the Bank, or two business days after such signed writing is deposited by registered or certified mail (with appropriate prepaid postage and delivery instructions) to the Secretary of the Bank. ARTICLE 3. AMOUNT THAT MAY BE DEFERRED --------------------------- A Participant may designate the percentage of compensation otherwise earned by him/her for services performed in a particular calendar year which shall be deferred. A Participant may designate different deferral percentages with regard to his/her regular compensation or bonuses, and may also specify a maximum total amount that shall be deferred in a particular calendar year. Notwithstanding the foregoing, the maximum total amount that may be deferred in a particular calendar year shall not exceed fifty percent (50%) of the sum of a Participant's regularly scheduled compensation and bonuses otherwise payable with regard to that calendar year (or a greater amount approved from time-to- time by the Bank's Board of Directors or the Plan's Administrators). ARTICLE 4. DEFERRED COMPENSATION ACCOUNT ----------------------------- Subject to the terms and conditions of Article 5, all compensation deferred hereunder will be credited by the Bank to a Deferred Compensation Account maintained in the name of the Participant. The amount deferred will be credited to the account of the Participant as of the day that such amount would otherwise be payable as compensation or as a bonus to that Participant, or such earlier date as specified by the Administrator. Each 3 Participant shall be annually provided with a statement of the balance in his or her Deferred Compensation Account. ARTICLE 5. INVESTMENT OF AMOUNTS DEFERRED ------------------------------ (A) Unless the Administrators elect to make investment options available in accordance with paragraphs (B), (C) or (D) of this Plan, deferrals under this Plan will be credited with interest at a rate which shall be determined in the sole discretion of the Administrators. (B) In connection with their respective Deferred Compensation Account, each Participant may select from among the investment options offered from time- to-time by the Plan Administrators described hereinafter, provided further that absent a Participant selection, the Plan Administrators shall make the selection. A Participant's Deferred Compensation Account shall be credited or charged on at least an annual basis with the earnings or losses that are referable to the investment option elected by said Participant. (C) A Participant may elect, subject to the approval of the Bank and to the conditions of this Section (B), to have all or a portion of the amounts credited to the Participant's Deferred Compensation Account treated as a deemed investment in a specified life insurance policy insuring the life of the Participant. In the event that the Bank approves any such election, then the Bank may, at its sole option, apply for and purchase such specified life insurance policy, and in such event all premium payments and 4 related costs and expenses shall be charged to the credit balances in the Participant's Deferred Compensation Account. (D) In the event that the Bank elects to purchase a life insurance policy on the life of a Participant, then notwithstanding the deemed investment of the Participant in the policy described herein, such policy shall for all purposes be owned by and be the sole property of the Bank, all policy proceeds shall be payable to and be the sole property of the Bank, and the Bank shall have sole authority to determine and make all elections and options provided for in the policy, including but not limited to the right to the receipt of all dividends and other amounts declared thereon, and the right to receive policy loans. ARTICLE 6. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNT --------------------------------------------- (A) At such time as a Participant provides the Bank with a timely election, in the manner specified in Article 2, to defer compensation for a particular year of service, such Participant shall specify in writing the manner in which amounts credited to the Participant's Deferred Compensation Account for that forthcoming year of service shall be distributed by the Bank; provided further that the Administrators have the sole discretion to determine the benefit payment options available to a Participant and may limit the period or periods during which equal yearly installments may be made, such as to a choice of three periods of equal yearly installments payable over 5 years, 10 years or 15 years. The Administrators shall determine in their sole discretion the manner in which deemed interest is to be credited on amounts 5 held in a Participant's Deferred Compensation Account during the installment payment period. (B) In the event of a termination of employment with the Bank for any reason other than a leave of absence approved by the Administrators of the Plan, the benefits will be paid to the participant in a lump sum distribution. Payments will be made within 60 days of termination. (C) In the event a Participant's employment with the Bank is terminated by the Bank following a "change in control," as defined in paragraph (D) below, or the Participant terminates employment because his/her responsibilities or overall compensation benefits are materially reduced following such a change in control, then the Bank agrees to pay the Participant a lump sum distribution. Payments will be made on or after January 1st of the year following the year of termination and before January 31st of the year following the year of termination. (D) For the purpose of this Agreement a change in control of the Bank shall mean the acquisition by any person or entity of control of the Bank, or any entity controlling the Bank, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, as amended, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in Section 563.39 (b) (5) of the Regulations of the Office of Thrift Supervision, as amended, or in the event of any merger, consolidation, or corporate reorganization in which the owners 6 prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Bank or any organization controlling the Bank receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Bank or any entity controlling the Bank, or obtains control of the election of a majority of the directors of the Bank or any entity controlling the Bank. (E) In the event of the death of a Participant while in the employ of the Bank, and in the further event that the election described in Article 5(B) is in effect at the time of such death, then the Participant's Deferred Compensation Account shall be credited with a deemed investment amount equal to the full face amount of the life insurance policy. (F) All distributions made by the Bank under the provisions of this Article 6 shall be paid to the Participant; provided that in the event that the Bank receives delivery of a certified copy of a death certificate pertaining to Participant, then the Bank shall make all remaining payments to the estate of the Participant, or to such other party as has been designated as a beneficiary in a writing delivered to the Bank by a Participant prior to his/her death. Payments made to the designated beneficiary or estate shall be made in accordance with the Participant's installment payment elections in effect at the time 7 of the Participant's death or in such manner as determined in the sole discretion of the Administrators. ARTICLE 7. DISTRIBUTION DUE TO AN UNFORESEEN EMERGENCY ------------------------------------------- (A) In the event that a Participant, or a beneficiary of the Participant who has vested rights to receive distributions under the terms of the Plan, requests immediate distribution of all or any portion of the amounts credited to a Participant's Deferred Compensation Account, and provides proof to the satisfaction of the Administrators of the existence of an unforeseeable emergency, then the Administrators shall have the right, but not the obligation, to provide for an early withdrawal of amounts that would otherwise continue to be deferred under the terms of this Plan. The Administrators shall have total discretion with regard to its option hereunder, including but not limited to the discretion to refuse to provide for an early distribution in one or more instances without regard to the existence of an unforeseeable emergency. Notwithstanding anything herein to the contrary, if the Administrators approve of an early withdrawal hereunder, the amount of any such early withdrawal shall be limited to the amount necessary to meet the emergency in issue. (B) The term "unforeseeable emergency" shall for purposes of this Plan be defined as an unanticipated emergency that is caused by an event beyond the control of the Participant or beneficiary, which event would result in severe financial hardship to the individual if an early withdrawal were not permitted. In this regard it is the intent of this Plan that the Administrators 8 comply with the early withdrawal requirements set forth in the Revenue Procedure 92-65 and all relevant further announcements, rulings and regulations of the Internal Revenue Service, inclusive of subsequent amendments to such requirements, if any. ARTICLE 8. INTERPRETATION OF PLAN PROVISIONS --------------------------------- (A) The Participants in the Plan are aware of the fact that issues relating to the interpretation of the provisions of this Plan may arise from time to time, including but not limited to ambiguities, if any, relating to the application of the terms and conditions of this Plan to the facts and circumstances of a particular Participant. As a condition to being selected as an Eligible Participant in the Plan, it is understood that each Participant agrees that the Board of Directors and the Plan Administrators appointed by the Board from time to time shall have broad discretion to interpret the terms and provisions of this Plan in accordance with the intent and purpose of the Plan, and to make binding determinations and resolve ambiguities in accordance with such interpretations. In this regard the Board of Directors and the Plan Administrators may, from time to time, issue rulings regarding the proper interpretation of the terms and provisions of this Plan, which rulings shall be final and determinative for all purposes. To the extent permitted by applicable law and regulation, the Bank shall indemnify and hold harmless the members of the Board of Directors and the Plan Administrators from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act or omission to act in 9 connection with performance under the Plan, other than liabilities, costs and expenses as may result from gross negligence, bad faith, willful misconduct, or criminal act of such persons. ARTICLE 9. DEFERRAL OF NON-DEDUCTIBLE PAYMENTS ----------------------------------- A. It is agreed and understood that it is the intent of this Plan that all distributions by the Bank hereunder shall qualify for a corporate tax deduction for both federal and state income tax purposes during the calendar year in which any such distribution is made. In the event that the Board of Directors or the Administrators determine in good faith that any provision of the Internal Revenue Code or the California Bank and Corporation Tax Law may preclude an immediate deduction for any proposed distribution scheduled to be made pursuant to the provisions of Article 6 then the Board of Directors or the Administrators may, at their option, require that all or any portion of such distribution shall be further deferred until the taxable period(s) in which it can be determined in good faith by the Bank that such distribution(s) would be fully deductible by the Bank for federal and state income tax purposes. In the event of any further deferral under the terms of this Article 9, the unpaid amounts in the Participant's Deferred Compensation Account shall continue to accrue earnings, if any, through the date of actual distribution. In the event of any conflict between the provisions of this Article 9 and any of the other provisions of this Plan, then the provisions of this Article 9 shall be controlling. 10 ARTICLE 10. NATURE OF RIGHT TO RECEIVE PAYMENTS ----------------------------------- The Participants in the Plan have the status of general unsecured creditors of the Bank and the Plan constitutes a mere promise by the Bank to make benefit payments in the future. Accordingly, all amounts credited to a Participant's Deferred Compensation Account, as well as the ownership and the proceeds of any insurance policies purchased by the Bank due to its purchase option hereunder, constitute general assets of the Bank and shall be subject to claims by the Bank's creditors. ARTICLE 11. NO RIGHT TO ASSIGN, ENCUMBER OR OTHERWISE ALIENATE -------------------------------------------------- (A) A Participant's rights to benefit payments under this Plan are not subject in any manner to alienation, anticipation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or the Participant's beneficiary. (B) In the event that prior to a Participant's death or the date that a Participant or the Bank provides notice of intent to terminate employment, the Bank determines in good faith that it would be materially adverse to the financial interests of the Bank to continue to own one or more life insurance policies on the life of a Participant previously purchased by the Bank pursuant to the provisions of Article 5, the Bank shall have the discretion to terminate one or more of such policies and credit the Participant's Deferred Compensation Account with an amount equal to the cash surrender value of the policy, plus all other amounts therefore received by the Bank with regard to the policy, including, but not 11 limited to dividend and interest payments and policy loan proceeds, less premiums, if any, advanced by the Bank at times when the Participant's Deferred Compensation Account was insufficient to pay policy premiums. Nothing contained herein shall be construed to require the Bank to purchase a life insurance policy on the life of a Participant in the event the Bank approves an election by a Participant to have all or a portion of the amounts credited to a Participant's Deferred Compensation Plan Account treated as a deemed investment in a specified life insurance policy. ARTICLE 12. MISCELLANEOUS ------------- (A) All notices provided in the Plan to the Bank shall be addressed to Coast Federal Bank, 8433 Fallbrook Avenue, West Hills, California 91304, Attention: Director of Human Resources. All notices and distributions by the Bank provided in the Plan to a Participant or a beneficiary may be addressed to the last home address that has theretofore been provided to the Bank by the Participant. (B) All section headings herein have been inserted for convenience of reference only and shall in no way modify, restrict or otherwise affect the meaning or interpretation of any of the terms or provisions of this Plan. (C) If any provision of this Plan is determined to be invalid and unenforceable, then the Board of Directors shall determine if such invalidity does not materially undermine the purpose and intent of this Plan, and if such is the case, then it may carry into effect the remaining provisions of this Plan. 12 (D) It is the intent of the Bank to obtain a ruling from the Internal Revenue Service stating in effect that a Participant in this Plan shall not recognize taxable income with regards to amounts deferred hereunder until the date of distribution of amounts from his/her Deferred Compensation Account. In the event that such a ruling is not obtained within nine months after date of the adoption of this Plan, then the Bank, at its option, may terminate this Plan and provide for the immediate distribution of all balances in the Deferred Compensation Account of the Participants. (E) It is the intent of this Board of Directors that this Plan shall constitute an unfunded plan for purposes of the Internal Revenue Code and the California Bank and Corporation Tax Code, as well as for purposes of Title I of Employee Retirement Income Security Act of 1974, as amended ("ERISA"). However, the Administrators may elect in their sole discretion to establish a funding vehicle for the Plan, however, any such funding vehicle shall continue for all purposes to be a part of the general assets of the Bank and no person other than the Bank shall by virtue of the provisions of this Plan have any interest in such assets. (F) The Board of Directors reserves the right, at any time and from time to time to modify, amend or terminate any or all of the provisions of this Plan, except that in the absence of a written agreement to the contrary, a Participant or his/her successors shall be deemed vested with all amounts credited to their respective Deferred Compensation Account, and such vested 13 benefits shall not be diminished or otherwise affected by any such modification, amendment or termination. If the Plan is terminated, the Bank reserves the right to pay each Participant the amount credited to his Deferred Compensation Account in a lump sum. (G) This Plan shall be subject to all rules and restrictions imposed by the Bank's governing regulatory authorities dealing with the adoption, implementation and termination of non-qualified deferred compensation plans. (H) All amounts paid or deferred pursuant to this Plan shall be subject to applicable federal, state and local withholding for taxes. (I) Normally, a Participant need not present a formal claim for payment in order to qualify for rights or receive payment under the Plan. However, if any person has a claim under the Plan, the formal claim must be pursued by procedures adopted by the Administrators in accordance with Section 503 of ERISA. Following exhaustion of a Participant's remedies under the claims procedures adopted by the Administrators and if the claim was denied, a claimant may pursue his or her claims in arbitration as provided in the arbitration agreement entered into by each Participant with the Bank. In no event will any claim be subject to resolution by any means (such as in a court of law) other than this claims procedure or arbitration. ARTICLE 13. PROCEDURE FOR APPEAL OR DENIAL OF BENEFITS ------------------------------------------ (A) The Committee shall provide notice in writing to the Participant's spouse or successor if applicable (hereinafter 14 individually and collectively referred to as "Claimant") if a claim for benefits under this 1995 Plan has been denied in whole or in part. Such notice shall be made within 90 days of the receipt by the Committee of the claim or, if special circumstances require, and the Claimant is so notified in writing, within 180 days of the receipt by the Committee of the claim. The notice shall (i) set forth the specific reasons for the denial of benefits; (ii) contain specific references of provisions of the 1995 Plan relative to the denial; (iii) describe any material and information, if any, necessary for the claim for benefits to be allowed, which had been requested, but not received by the Committee; and (iv) advise the Claimant that any appeal of the Committee's adverse determination must be made in writing to the Committee, within 60 days after receipt of this notification, setting forth the facts upon which the appeal is based. (B) If the Claimant fails to appeal the Committee's denial of benefits in writing and within 9 days, the Committee's determination shall become final and conclusive. (C) If the Claimant timely appeals the Committee's denial of benefits, the Committee shall reexamine all issues relevant to the original denial of benefits. The Committee may in addition, upon at least 10 days written notice, request the Claimant or his/her representative to personally appear before it to make an oral presentation or answer questions that may have been raised, or the Claimant or their representative may make a request to personally appear before the Committee. 15 (D) The Committee shall advise the Claimant in writing of its decision and the specific reasons on which such decision was based within 60 days of receipt of the written appeal, or personal appearance of the Claimant or his/her representative, unless special circumstances require an extension of 60 day period for not more than an additional 60 days. Where such extension is necessary, all parties shall be given written notice of the delay. (E) If the decision of the Committee remains in dispute, then all such disputes under this Plan will be resolved by submission to binding arbitration at the local offices of Judicial Arbitration & Mediation Services, Inc. (JAMS). The Bank and the disputing party may agree on a retired judge from the JAMS panel. If they are unable to agree, JAMS will provide a list of three judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as the arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. All arbitration must be initiated within one year after the written decision of the Committee and the failure to initiate arbitration within the one-year period constitutes an absolute bar to the institution of any new proceedings. The aggrieved party can initiate arbitration by sending written notice of an intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain description of the dispute, the amount involved, and the remedy sought. All arbitration shall be subject to a Future Disputes Submission Agreement, a copy of which is attached hereto as Exhibit "C" and 16 incorporated herein. Exhibit "C" sets forth the rights of the parties if the case is arbitrated and rules and procedures to be followed at the arbitration hearing. ARTICLE 14. NOTICES, STATEMENTS AND REPORTS ------------------------------- The Committee shall be the "administrator" of the Agreement as defined in Section 3 (16)(A) of ERISA for purposes of the reporting and disclosure requirements imposed by ERISA and the Internal Revenue Code of 1986, as amended. ARTICLE 15. INDEMNIFICATION --------------- To the extent permitted by applicable law and regulation, the Bank shall indemnify and hold harmless the members of the Board of Directors of the Bank and the members of the Committee from and against any and all liabilities, costs, and expenses incurred by such persons as a result of any act, or omission to act, in connection with the performance of such persons' duties, responsibilities, and obligations under this Plan, other than such liabilities, costs and expenses as may result from gross negligence, bad faith, willful misconduct, or criminal acts of such persons. 17 EX-10.11 5 RAY MARTIN EMPLOYMENT AGREEMENT 01/01/96 EXHIBIT 10.11 AMENDED and RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- THIS AMENDED AND RESTATED AGREEMENT is made and entered into effective as of the first day of January, 1996 between COAST FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered capital stock savings bank organized under the laws of the United States and successor in interest to Coast Savings and Loan Association (the "Company"), and RAY MARTIN (the "Executive"), with reference to the following facts: A. The Executive is currently Chairman of the Board of Directors, and Chief Executive Officer of the Company as well as an officer and/or director of certain affiliates of the Company (the "Affiliates"). The Executive has been employed by the Company since 1959, and is an innovative, highly experienced and knowledgeable savings and loan executive whose creativity, expertise and effort have been instrumental in the development of the business and growth of the Company. B. The Company recognizes that the future growth, profitability and success of the business of the Company requires, and will be substantially and materially advanced by the continued employment of the Executive. The Company desires, therefore, to secure for the Company and its affiliates the continued benefit of the Executive's experience, ability and leadership. In order to retain the services of the Executive and to maximize the period of his continued availability, and in recognition of his continuing contribution to the Company's success, the Company desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. A Post Retirement Compensation Arrangement, dated as of August 24, 1984, was previously entered into between the Company and the Executive, was amended and supplemented by the Board of Directors of the Company ("the Board") pursuant to the terms of the Employment Agreement between the Company and the Executive dated as of June 24, 1986 (the "1986 Employment Agreement"), and subsequently incorporated into the terms of the Executive's Amended and Restated Employment and Post Retirement Compensation Agreement dated January 1, 1990 (the "1990 Employment Agreement"). D. The Company and the Executive subsequently terminated the retirement benefits payable under the provisions of the 1990 Employment Agreement by mutual agreement, and replaced them with the retirement benefits to which the Executive is -1- entitled under the terms of Bank's Amended and Restated Executive Supplemental Retirement Plan dated June 24, 1991. E. The 1990 Employment Agreement was amended and restated as of January 1, 1993, as further amended by amendments dated January 1, 1994 and June 1, 1994 (the "1993 Employment Agreement"). The Company and the Executive now wish to update, amend and restate the 1993 Employment Agreement. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Employment ---------- Association hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, on the terms and subject to the conditions hereinafter set forth in this Employment Agreement (hereinafter the "Agreement"). 2. Term ---- Subject to the provisions and conditions of this Agreement, the term of this Agreement shall commence on the effective date of this Agreement, and shall continue through December 31, 1998 (referred to herein as the "Initial Term"), provided that such employment term shall be subject to extension(s) pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 10 herein (which defines terminating events). (a) On or before January 1, 1997, and each January 1 thereafter, the Board shall review this Agreement and the Executive's performance hereunder and shall determine whether to extend the term of this Agreement for an additional calendar year, thereby extending the remaining term of this Agreement to three (3) calendar years. The Board shall also review the terms upon which this Agreement should be extended as if the Board were approving the Agreement in the first instance. For purposes of this Agreement, a reference to an "extension date" shall pertain to any such January 1 as of which this Agreement is extended for an additional calendar year under the provisions hereof, and a reference to the "term" of this Agreement shall be inclusive of the Initial Term and any extension(s) under the operation of this Section. In the event of any extension(s) hereunder all provisions and conditions of this Agreement shall remain in effect. (b) In the event this Agreement becomes inoperative or is otherwise terminated, all rights and benefits -2- which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any obligation requiring performance after the date of such termination. (c) In the event of a "change in control" of the Company (as defined in Section 3(f) below), the Initial Term, or any extension thereto as described above, shall be automatically extended so that the then remaining term is three years. 3. Position And Duties ------------------- (a) Subject to the provisions and conditions contained herein, the Company hereby engages the Executive and the Executive hereby agrees to render services to the Company as the Chairman of the Board and Chief Executive Officer of the Company, or in such other capacity as the parties hereto shall mutually agree, and as an executive officer of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. The Executive shall have responsibility for the overall conduct of the Company's business and shall have authority to do and perform or cause to be performed such services, acts or things as he shall deem necessary or advisable to manage and conduct the business of the Company including supervision of all employees and consultants, consistent with policies established from time to time by the Board. In the performance of such duties, the Executive shall only be required to the Board. (b) Subject to the provisions and conditions contained herein, the Executive agrees that during the term hereof he shall, as long as he shall be elected, serve as Chairman on the Board of Directors of the Company and serve on the Boards of Directors of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) The Executive's obligation to continue to render any of the services and performances set forth above in Sections 3(a) and 3(b) is expressly conditioned upon the Company's compliance, at all times during the term of this Agreement, with all of the following: (i) the Company shall fully comply with its obligations to the Executive under the terms of this Agreement including, without limitation, its obligation respecting rate of compensation and fringe benefits; (ii) in the event of a "change in control" of the Company (as defined in Section 3(f) below): (A) the Executive shall be provided with the right to continue to serve in the position of Chairman of the Board and Chief Executive Officer of the Company (or in such other capacity as the parties -3- hereto shall mutually agree); (B) the Executive shall be provided with the right to continue to serve as an officer and/or director of all Affiliates, as well as any affiliates of the Company of which the Executive becomes an officer or director subsequent to the date of this Agreement, subject to the Company's unrestricted right to liquidate, reorganize or otherwise eliminate its interest in any of its affiliates; (C) the Executive shall be provided with the right to continue to fully exercise all responsibilities and duties of office which the Executive is exercising as an officer of the Company or its affiliates as of the date of this Agreement; and (D) the Executive shall not be assigned any duties inconsistent with or in limitation of the powers of the Executive contemplated by this Section 3. The aforesaid conditions to Executive's obligation to continue to serve hereunder are cumulatively referred to hereafter as "assumed conditions of service". (d) The Executive agrees that during the term hereof he shall devote substantially all of his regular business time solely and exclusively to the business of the Company, whether such business is operated directly by the Company or through one or more affiliates of the Company. The Executive agrees that during the term of this Agreement, he will not, directly or indirectly, provide services on behalf of any competitive financial institution, any insurance association or agency, any mortgage or loan broker or any other competitive entity or on behalf of any subsidiary or affiliate of any such competitive entity, as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term of this Agreement the ownership of more than 1% of the outstanding equity interest in any such competitive entity. Subject to the foregoing, the Executive may serve on Boards of Directors of unaffiliated corporations, subject to advance approval by the Chief Executive Officer and such approved service shall be presumed for these purposes to be of benefit to the association. The Executive shall diligently carry out his responsibilities under this Agreement, it being hereby agreed by the association that the Executive may engage in personal business and investment activities, including real estate investments; provided further, that, except as expressly set forth above, nothing contained herein shall be construed as preventing the Executive from making personal investments in the stocks, securities and obligations of other financial institutions. (e) The Company reserves the right to elect, from time to time, any person to its Board of Directors, to appoint any person as an officer of the Company and to remove any of its officers and directors, without exception, in any manner and upon the basis or bases presently or subsequently provided for by its Charter and Bylaws, provided however, that except when expressly -4- provided herein to the contrary, any such removal shall not relieve the Company from any of its existing obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the Chief Executive Officer's authority to retain, supervise or remove Association personnel. (f) For the purpose of this Agreement, a change in control of the Company shall mean the acquisition by any person or entity of control of the Company, or any entity controlling the Company, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in Section 10(a) (viii) below, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Company or any organization controlling the Company receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Company or any entity controlling the Company, or obtains control of the election of a majority of the directors of the Company or any entity controlling the Company. (g) During and after the term of this Agreement, the Executive shall not disclose to any person (other than an employee or agent of the Company or any affiliate entitled to receive the same) any confidential information relating to the business of the Company or any affiliate and obtained by him while providing services to the Company, without the consent of the Board, or until such information ceases to be confidential. Notwithstanding the foregoing, the Executive shall not be precluded from disclosures respecting the Company where made pursuant to compulsory legal process or when otherwise required by an appropriate government agency. -5- 4. Place of Performance -------------------- In connection with his employment by the Company, the executive shall at all times be entitled to maintain his office at the principal executive offices of the Company, presently located in Los Angeles, California. The Company shall not, without the written consent of the Executive, transfer the Executive to a location that is more than 30 miles from the Executive's principal residence. The Company shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Executive against, and reimburse the Executive for, any loss incurred as a result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence and the higher of (a) the Executive's aggregate investment in such residence for (b) the fair market value of such residence as determined by a real estate appraiser designated by the Company) in connection with any such change in residence. 5. Working Facilities ------------------ The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and service as are presently or may hereafter be furnished to the most senior executive officers of the Company; provided that such facilities, amenities and services shall, in the reasonable judgment of the Executive, be appropriate for the Executive's position with the Company and adequate for the performance of his duties hereunder. 6. Compensation ------------ (a) As compensation for the performance of Executive's services hereunder, inclusive of services as Chairman of the Board, as a member of various committees of the Board, and as an officer and director of the Company's affiliates, the Company shall pay to the Executive in accordance with its normal payroll practices a monthly salary (the "Monthly Base Salary") in such amount as shall be determined from time to time by the Board (or a duly authorized committee or representative thereof) and set forth in the Executive's personnel file. For the purposes of this Agreement, the Monthly Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any deferred compensation plan maintained by the Company. -6- (b) The Monthly Base Salary payable to the Executive during any calendar year during the term of this Agreement (including extensions) subsequent to 1996 shall in no event be less than the highest Monthly Base Salary received by the Executive during calendar year 1996 Nothing contained herein, however, shall be construed as requiring the Company to raise, from time to time, the amount of the Executive's Monthly Base Salary or to award the Executive with additional bonuses or incentive compensation during the term of this Agreement, and any such raises, bonuses or incentive compensation shall be awarded at the sole discretion of the Board (or a duly authorized committee or representative thereof). (c) In the event the Executive's Monthly Base Salary is increased during the term of this Agreement, the minimum Monthly Base Salary payable to the Executive subsequent to the date of such increase shall be the Monthly Base Salary as so increased, unless the Executive otherwise agrees. In the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein) during the term of this Agreement, the Monthly Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the aggregate amount of Monthly Base Salary and (ii) one-twelfth (1/12) of the aggregate amount of any "discretionary bonuses" attributable to one of the last two bonus computation years that ended on or before the change in control, whichever is higher. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to the Company's Executive Senior Management Incentive Program, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 8 herein (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Company's Board of Directors. (d) The Executive shall receive a gross-up payment if the payments and benefits under this Agreement and all other contracts, arrangements, or programs, in the aggregate, exceed the maximum amount that may be paid to the Executive without triggering golden parachute penalties under Section 280G and related provisions of the Code. The gross-up amount will be an amount which, after payment by the Executive of all income and excise taxes on the gross-up payment, equals the excise taxes the Executive must pay under Code Section 4999 with respect to the payments and benefits for which the Executive is receiving the gross-up payment. -7- (i) All determinations needed to apply this Section 6(d) shall be made in good faith by the Company's independent auditors. The independent auditors shall assume that the Executive pays federal income taxes at the highest marginal tax rate in the calendar year in which the gross-up payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence when the Executive's employment terminated, net of the maximum reduction in federal income taxes which could be obtained from deduction of those state and local taxes. (ii) If the Executive's gross-up payment turns out to have been insufficient (for example, because the Executive receives payments which were not expected when the gross-up payment was calculated), the Company will pay the Executive an additional gross-up payment which, on an after tax basis, shall be sufficient to cover both the extra Code Section 4999 excise taxes the Executive owes and any interest, penalties, or additions the Executive must pay because of the miscalculation of the Executive's excise tax liability. If the Executive receives a gross-up payment which turns out to have been excessive, the Executive must pay the Company the excise tax included in the gross-up that the Executive did not, in fact, have to pay, the federal, state, and local income tax gross-up the Executive received with respect to that excise tax amount (to the extent that the Executive is allowed a federal state, or local income tax deductions with respect to the repayment), and interest on the amount the Executive must repay at the rate provided in Code Section 1274(b)(2)(B). (iii) The Executive and the Company agree reasonably to cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits the Executive receives. (iv) If all or part of the gross-up payment described in this Paragraph (d) may not be paid for any reason, and the net amount the Executive would realize would increase by cutting back the amount paid to the Executive so that the Code Section 4999 penalties would not be triggered, then the Executive's payments and benefits shall be cut back in the priority order the Executive designates or, if the Executive fails promptly to designate an order, in the priority order designated by the Company. 7. Expenses -------- Subject to compliance with the Company's normal and customary policies regarding substantiation and verification of business expenses, the Executive is authorized to incur on behalf -8- of the Company, and the Company shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses incurred for promoting, pursuing or otherwise furthering the business of the Company or its affiliates. 8. Fringe Benefits --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, understandings, arrangements or programs now or hereafter made available by the Company or its affiliates to executives, key management employees and their families on terms at least as favorable as those provided to any other executive of the Company or its affiliates. The benefits and perquisites received by the Executive during the term of this Agreement shall at all times be commensurate with his position as Chief Executive Officer of a major financial institution and, in the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein), the benefits and perquisites provided to the Executive shall not thereafter be reduced below their highest level during the six month period immediately preceding such change in control. Nothing paid to or received by the Executive pursuant to this Section 8 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 6 of this Agreement. 9. Vacations --------- The Executive shall be entitled to a minimum of four weeks of vacation time each year during the term of this Agreement, as well as additional vacation time equal to that available to other top executive officers of the Company of comparable tenure, during which vacation time his compensation hereunder shall be paid in full. Such vacation time need not be taken in consecutive periods except as otherwise required by applicable regulations. The Executive shall also be entitled to all paid holidays provided by the Company to its most senior executive officers. 10. Termination ----------- (a) Terminating Events. This Agreement may be terminated or suspended ------------------ prior to the expiration of its term in accordance with the following: (i) Death. This Agreement shall terminate upon the ----- Executive's death. (ii) Disability. In the event that the Executive becomes ---------- disabled within the meaning of the Coast Savings -9- and Loan Pension Plan, and remains so disabled for substantially all of a 180 day period and has not returned to work by the end of such 180 day period, this Agreement shall terminate effective as of the last day of such 180 day period of disability. (iii) Cause. This Agreement shall be subject to termination ------ by the Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or in the event of a material breach by the Executive of any provision of this Agreement. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting called and held for this purpose after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard by the Board, finding that, in the good faith opinion of the Board, the Executive is guilty of misconduct of the type described in this Section 10(a)(iii), and specifying the particulars thereof in detail and in the case of misconduct that can be cured, the Executive shall have failed to cure the same within a reasonable period of time thereafter. (iv) Regulatory Removal. If the Executive is removed from ------------------- office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1), all obligations of the date of the order, but such termination shall not affect any of the vested rights of either of the parties to this Agreement. (v) Regulatory Suspension. If the Executive is suspended ---------------------- from office and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. In the event that the service of a notice in the manner provided above results in the suspension of any compensation due to the Executive during the term promptly following the dismissal of the charges specified in such notice the Company may, in its discretion, pay to the Executive all compensation that was withheld from him and may, in its discretion, pay to the Executive all compensation that was -10- withheld from him and may, in its discretion, reinstate all of the obligations of the Company suspended hereunder. (vi) Default. If the Company is in default (as defined in -------- section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1), this Agreement shall terminate as of the date of such default, but this paragraph 10(a)(vi) shall not affect any vested rights of the contracting parties. (vii) Other Regulatory Action. All obligations under this ----------------------- Agreement shall be terminated, except to the extent it is determined that continuation of the Agreement is necessary for the continued operation of the Company: (A) by the Director of the Office of Thrift Supervision or his or her designee at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Company or when the Company is determined by such Director to be in an unsafe and unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (viii) Notice by the Executive. This Agreement may be terminated ------------------------ by the Executive upon ninety (90) days written notice, provided that: (A) a termination by the Executive within one year of a change in control (as defined in Section 3(f) (above) or in the event the Company shall fail to continuously provide the Executive with working conditions that fully comply, both in form and substances, with each and every of the "assumed conditions of service" as defined in Section 3(c) above shall be deemed a termination by the Company under Section 10(a)(ix) below, and (B) a termination by the Executive during the thirty day period immediately following the one year anniversary of a "change in control" of the Company (as defined in Section 3(f)) shall be deemed a termination by the Company under Section 10(a)(ix) below. (ix) Notice by the Company. This Agreement may be terminated --------------------- at any time by the Executive upon ninety (90) days written notice; provided, however, that a termination of this Agreement under this Section 10(a)(ix) shall not reduce the remaining Term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 10(b)(iv). (b) Compensation and Benefits Payable By the Company Upon Termination. ----------------------------------------------------------------- Compensation and benefits shall be -11- payable by the Company upon a termination of this Agreement in accordance with the following: (i) In the event of a termination of this Agreement under Section 10(a)(i) (due to the Executive's death), the spouse, heirs or estate of the Executive shall continue to receive the compensation specified in Section 6 and the Executive's spouse and/or dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by such spouse or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (ii) In the event of a termination of this Agreement under Section 10(a)(ii) (due to the disability of the Executive), the Executive, or his duly appointed personal representatives, shall continue to receive the compensation specified in Section 6 and the Executive, his spouse and/or his dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (iii) In the event of a termination of this Agreement under Sections 10(a)(iii)-(viii) (due to a termination of the Executive for cause, regulatory removal or suspension, default by the Company, other regulatory action of notice by the Executive, excluding a deemed termination by the Company under Section 10(a)(ix)), the Company's obligation to provide the compensation and benefits specified in Sections 6, 7 and 8 herein shall terminate as of the effective date of such termination (subject to potential reinstatement in the case of a regulatory suspension, as provided in Section 10(a)(v). (iv) In the event of a termination of this Agreement under Section 10(a)(ix) (due to termination of the Executive without cause, including a deemed termination by the Company under Section 10(a)(ix)) the Company shall make a lump sum payment to the Executive (or his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value, based on a discount rate equal to the then current Eleventh District Cost of Funds Index, of the future compensation payable to the Executive under Section 6 of this Agreement. Such lump sum payment shall be made within thirty days following the date of such termination. In addition, following any such termination the Company shall continue to provide the Executive, his spouse and/or his dependents with the -12- medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or his dependents of any premium co- payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement. 11. Definition of "Affiliate" ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereafter, directly or indirectly, controls, is controlled by, or is under common control with the Company, including without limitation, any service corporation of the Company. 12. Nonassignment ------------- (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and its assigns. As used in this Agreement, the term "successor" shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, conversion or other corporate reorganization involving the Company, directly or indirectly acquires all or substantially all of the assets or business of the Company. This Agreement may not be assigned by the Company without the prior written consent of the Executive. (b) Neither the Executive nor his wife or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Company shall not be bound thereby and shall be relieved of its liability under this Agreement by making payments in accordance with this Agreement to the parties designated to receive payments under this Agreement. -13- 13. Successors ---------- (a) The Company agrees that it will require any successor, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place, provided that no such written assumption shall be required in connection with a transaction that does not constitute a change in control as defined in Section 3(f) above. As used in this Agreement, the term "Company" shall include any successor to its business and/or assets which becomes bound by all the terms and provisions of this Agreement by agreement or by operation of law, without regard to whether such successor executes and delivers the agreement provided for in this Section 13. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided written notice to the Company specifying a different beneficiary or beneficiaries (which notice(s) may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 14. Waiver And Modification ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transaction hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 15. Governing Law; Severability --------------------------- This Agreement shall be governed by and construed in accordance with the laws of California. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. -14- 16. Arbitration ----------- Any dispute or controversy under or in connection with this Agreement as well as any differences which may arise between the Company and the Executive during or following the Executive's employment with the Company shall be settled exclusively in accordance with the provisions of The Coast Federal Bank Mutual Agreement to Arbitrate Claims ("the Arbitration Agreement"), a copy of which is attached hereto marked "Exhibit A" and incorporated by reference herein, except that the provisions of the Arbitration Agreement as appearing on page 5 under the heading of "Not an Employment Agreement" are not made a part of or incorporated within this Employment Agreement. The provisions of this Employment Agreement shall exclusively govern the nature of the Executive's employment with the Company. 17. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): TO THE COMPANY; Coast Federal Bank, Federal Savings Bank 1000 Wilshire Boulevard, 22nd Floor Los Angeles, CA 90017 Attention: General Counsel TO THE EXECUTIVE: The most recent address of the Executive as shown in the personnel records of the Company. The date of such personal delivery or the date three days after such mailing shall be deemed to be the effective date of such notice, demand or communication. 18. Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. -15- 19. Entire Agreement ---------------- This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the matters addressed herein. Except as otherwise provided herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the matters addressed herein. 20. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. /s/ RAY MARTIN -------------------------------------------- RAY MARTIN (the "Executive") COAST FEDERAL BANK, FEDERAL SAVINGS BANK (the "Company") By: /s/ KEITH W. RENKEN ----------------------------------------- Keith W. Renken, Chairman of the Compensation Committee of the Board of Directors of Coast Federal Bank, Federal Savings Bank -16- [LOGO OF COAST FEDERAL BANK] Exhibit A THE COAST FEDERAL BANK MUTUAL AGREEMENT TO ARBITRATE CLAIMS I (also referenced herein as "Employee") recognize that differences may arise between Coast Federal Bank ("the Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. I understand that any reference in this Agreement to the Company will be a reference also to its parent company, all subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, affiliates, and all successors and assigns of any of them. CLAIMS COVERED BY THE AGREEMENT - ------------------------------- The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement are claims that would normally, absent this Agreement, be cognizable by a court of law, and include, but are not limited to, claims of wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded in the following paragraph. CLAIMS NOT COVERED BY THE AGREEMENT - ---------------------------------- Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement. Also not covered are claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as well as claims by the Company for injunctive and/or other equitable relief for matters regarding any loan(s) or savings or checking accounts the Employee may obtain or maintain with the Company, as to which I 1 [LOGO OF COAST FEDERAL BANK] understand and agree that the Company may seek and obtain relief from a court of competent jurisdiction. REQUIRED NOTICE OF ALL CLAIMS - ----------------------------- The Company and Employee agree that, as the first step to starting the arbitration process, the aggrieved party must give written notice of any claim to the other party within the applicable statute of limitation period. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to Human Resources Division of the Company at Coast Federal Bank, 18000 Chatsworth Street, Granada Hills, California, attention Human Resources Director. The Employee will be given written notice at the last recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. REPRESENTATION - -------------- Any party may be represented by an attorney or other representative selected by the party. DISCOVERY - --------- Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. DESIGNATION OF WITNESSES - ------------------------ At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. SUBPOENAS - --------- Each party shall have the right to subpoena witnesses and documents for the arbitration. 2 [LOGO OF COAST FEDERAL BANK] ARBITRATION PROCEDURES - ---------------------- The Company and Employee agree that, except as provided in this Agreement, any arbitration shall be in accordance with either the Employment Arbitration Rules (if such rules cease to exist or are changed by J.A.M.S, the substantive equivalent rules shall be used as determined by the Company) of Judicial Arbitration & Mediation Services, Inc. or, if applicable, the successor organization to Judicial Arbitration Mediation Services, Inc.(hereinafter "J.A.M.S") or the Employment Dispute Resolution Arbitration Rules of the American Arbitration Association (if such rules cease to exist or are changed by A.A.A., the substantive equivalent rules shall be used as determined by the Company) or, if applicable, the successor organization to the American Arbitration Association (hereinafter "A.A.A.",) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ("the Arbitrator"). The determination to use J.A.M.S or A.A.A. as the Arbitrator shall be made solely by the party who did not initiate the claim. The determination to use either J.A.M.S or A.A.A. shall be made by the party who did not initiate the claim within thirty (30) calendar days of receipt by the non complaining party of the written notice of claim as submitted by the complaining party. In the event the noncomplaining party fails to make a determination to utilize either J.A.M.S or A.A.A. and to provide written notice of such determination to use either J.A.M.S or A.A.A. to the aggrieved party within such thirty (30) days period, it shall be conclusively deemed that the arbitration shall be heard by J.A.M.S. The arbitration shall take place in the offices of J.A.M.S or A.A.A., as the case may be, nearest to the city in which I am or was last employed by the Company or such other place as may be mutually agreed in writing between Employee and the Company. The Arbitrator shall be selected as follows. J.A.M.S or A.A.A., as the case may be, shall give each party a list of 11 arbitrators drawn from its panel of labor and employment arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains: The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, J.A.M.S or A.A.A., as the case may be, shall furnish an additional list or lists until an Arbitrator is selected. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The State of California Code of Evidence shall apply. Damages recoverable for claims brought under this agreement include those damages and/or remedies provided by the applicable statutes, which may include punitive damages, back wages, reinstatement and other monetary or equitable damages. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement 3 [LOGO OF COAST FEDERAL BANK] is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the State of California Code of Civil Procedure. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement. The Arbitrator shall render an award and opinion in the form typically tendered in labor arbitrations. ARBITRATION FEES AND COSTS - -------------------------- The Company and I shall equally share the fees and costs of the Arbitrator except, however, if the claim relates to a monetary amount where an amount is less than fifty thousand dollars ($50,000) then the share of the fees and costs of the Arbitrator of the Company and Employee shall be as follows: If the amount of the claim is less than fifty thousands dollars ($50,000) but more than twenty-five thousand dollars ($25,000), the fees and costs of the Arbitrator shall be allocated 66 2/3 for the Company and 33 1/3 for Employee; and if the amount of the claim is less than twenty-five thousand dollars ($25,000) the fees and costs of the Arbitrator shall be allocated 90% for the Company and 10% for the Employee. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party. 4 [LOGO OF COAST FEDERAL BANK] JUDICIAL REVIEW - --------------- Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. REQUIREMENTS FOR MODIFICATION OR REVOCATION - ------------------------------------------- This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. SOLE AND ENTIRE AGREEMENT - ------------------------- This is the complete agreement of the parties on the subject of arbitration of disputes except for any arbitration agreement, if any, existing in connection with any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. CONSTRUCTION - ------------ If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement. CONSIDERATION - ------------- The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. NOT AN EMPLOYMENT AGREEMENT - --------------------------- This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment. 5 [LOGO OF COAST FEDERAL BANK] VOLUNTARY AGREEMENT - ------------------- I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT BY ENTERING INTO THIS AGREEMENT, I AM WAIVING MY RIGHT TO A JURY TRIAL. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. [EMPLOYEE NAME] COAST FEDERAL BANK, Federal Savings Bank - ----------------------------- Signature of Employee ----------------------------- Signature of Authorized Company Representative - ----------------------------- Print Name of Employee ----------------------------- Title of Representative - ----------------------------- Employee Number - ----------------------------- Date 6 EX-10.12 6 ROBERT L. HUNT EMPLOYMENT AGREEMENT EXHIBIT 10.12 AMENDED and RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into effective as of the first day of January, 1996 between COAST FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered capital stock savings bank organized under the laws of the United States and successor in interest to Coast Savings and Loan Association (the "Company"), and ROBERT L. HUNT II (the "Executive"), with reference to the following facts: A. The Executive is currently President of the Company as well as an officer and/or director of certain affiliates of the Company (the "Affiliates"). The Executive is experienced and knowledgeable in the savings and loan industry and possesses creativity, expertise and initiative that is expected to assist in the development of the business and growth of the Company. B. The Company recognizes that the future growth, profitability and success of the business of the Company will be advanced by the employment of the Executive. The Company desires, therefore, to secure for the Company and its affiliates the benefit of the Executive's experience and ability. In order to obtain the services of the Executive and to maximize the period of his continued availability, the Company desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. An Employment Agreement, dated as of September 24, 1986, was previously entered into between the Company and the Executive and was updated, amended and restated in an Amended and Restated Employment Agreement dated as of October 1, 1990, as further amended by amendment dated January 23, 1991 (the "1990 Employment Agreement"). The 1990 Employment Agreement was amended and restated as of January 1, 1993, as further amended by amendments dated January 1, 1994 and June 1, 1994 (the "1993 Employment Agreement"). The Company and the Executive now wish to update, amend and restate the 1993 Employment Agreement. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Employment ---------- The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, on the terms and subject to the conditions hereinafter set forth in this Employment Agreement (hereinafter the "Agreement"). -1- 2. Term ---- Subject to the provisions and conditions of this Agreement, the term of this Agreement shall commence on the effective date of this Agreement, and shall continue through December 31, 1997 (referred to herein as the "Initial Term"), provided that such employment term shall be subject to extension(s) pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 10 herein (which defines terminating events). (a) On or before January 1, 1997, and on or before each January 1 thereafter, the Board of Directors of the Company (the "Board") shall review this Agreement and the Executive's performance hereunder and shall determine whether to extend the term of this Agreement for an additional calendar year, thereby extending the remaining term of this Agreement to two (2) calendar years. The Board shall also review the terms upon which this Agreement should be extended as if the Board were approving this Agreement in the first instance. For purposes of this Agreement, a reference to an "extension date" shall pertain to any such January 1 as of which this Agreement is extended to an additional calendar year under the provisions hereof, and a reference to the "term" of this Agreement shall be inclusive of the Initial Term and any extension(s) under the operation of this Section. In the event of any extension(s) hereunder all provisions and conditions of this Agreement shall remain in effect. (b) In the event this Agreement becomes inoperative or is otherwise terminated, all rights and benefits which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any accrued obligation incurred to the other under the operation of this Agreement, including, without limitation, any obligation requiring performance after the date of such termination. (c) In the event of a "change in control" of the Company (as defined in Section 3(f) below, the Initial Term, or any extension thereto as described above, shall be automatically extended so that the then remaining term is three years. 3. Position And Duties ------------------- (a) Subject to the provisions and conditions contained herein, the Company hereby engages the Executive and the Executive hereby agrees to render services to the Company as the President of the Company and as an executive officer of such of the -2- Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. As the President, the Executive shall have responsibility and authority to do and perform or cause to be performed such services, acts or things as shall, from time to time, be specifically delegated to him by the Company's Chief Executive Officer, including supervision of employees and consultants, in a manner consistent with policies established from time to time by the Company's Chief Executive Officer and/or Board. In the performance of such duties, the Executive shall be required to report to the Chief Executive Officer, such other executive officers as the Chief Executive Officer of the Company shall designate and, as appropriate, to the Board. (b) Subject to the provisions and conditions contained herein, the Executive agrees that during the term hereof he shall, as long as he shall be elected, serve on the Boards of Directors of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) Executive's obligation to render any of the services and performances set forth above in Sections 3(a) and 3(b) is expressly conditioned upon the Company's compliance, at all times during the term of this Agreement, with all of the following: (i) the Company shall fully comply with its obligations to the Executive under the terms of this Agreement including, without limitation, its obligation respecting rate of compensation and fringe benefits; (ii) in the event of a "change in control" of the Company (as defined in Section 3(f) below): (A) the Executive shall be provided with the right to continue to serve in the position of President of the Company (or in such other capacity as the parties hereto shall mutually agree); (B) the Executive shall be provided with the right to continue to serve as an officer and/or director of all Affiliates, as well as any affiliates of the Company of which the Executive becomes an officer or director subsequent to the date of this Agreement, subject to the Company's unrestricted right to liquidate, reorganize or otherwise eliminate its interest in any of its affiliates; (C) the Executive shall be provided with the right to continue to fully exercise all responsibilities and duties of office which the Executive is exercising as an officer of the Company or its affiliates as of the date of this Agreement; and (D) the Executive shall not be assigned any duties inconsistent with or in limitation of the powers of the Executive contemplated by this Section 3. The aforesaid conditions to Executive's obligation to continue to serve hereunder are cumulatively referred to hereafter as "assumed conditions of service". -3- (d) The Executive agrees that during the term hereof he shall devote substantially all of his regular business time solely and exclusively to the business of the Company, whether such business is operated directly by the Company or through one or more affiliates of the Company. The Executive agrees that during the term of this Agreement, he will not, directly or indirectly, provide services on behalf of any competitive financial institution, any insurance association or agency, any mortgage or loan broker or any other competitive entity or on behalf of any subsidiary or affiliate of any such competitive entity, as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term of this Agreement the ownership of more than 1% of the outstanding equity interest in any such competitive entity. Subject to the foregoing, the Executive may serve on Boards of Directors of unaffiliated corporations, subject to advance approval by the Chief Executive Officer and such approved service shall be presumed for these purposes to be of benefit to the association. The Executive shall diligently carry out his responsibilities under this Agreement, it being hereby agreed by the association that the Executive may engage in personal business and investment activities, including real estate investments; provided further, that, except as expressly set forth above, nothing contained herein shall be construed as preventing the Executive from making personal investments in the stocks, securities and obligations of other financial institutions. (e) The Company reserves the right to elect, from time to time, any person to its Board of Directors, to appoint any person as an officer of the Company and to remove any of its officers and directors, without exception, in any manner and upon the basis or bases presently or subsequently provided for by its Charter and Bylaws, provided however, that except when expressly provided herein to the contrary, any such removal shall not relieve the Company from any of its existing obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the Chief Executive Officer's authority to retain, supervise or remove Company personnel, or to change, from time to time, the duties, responsibilities and authority of the Executive. (f) For the purpose of this Agreement, a change in control of the Company shall mean the acquisition by any person or entity of control of the Company, or any entity controlling the Company, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in -4- Section 10(a) (vii) below, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Company or any organization controlling the Company receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Company or any entity controlling the Company, or obtains control of the election of a majority of the directors of the Company or any entity controlling the Company. (g) During and after the term of this Agreement, the Executive shall not disclose to any person (other than an employee or agent of the Company or any affiliate entitled to receive the same) any confidential information relating to the business of the Company or any affiliate and obtained by him while providing services to the Company, without the consent of the Board, or until such information ceases to be confidential. Notwithstanding the foregoing, the Executive shall not be precluded from disclosures respecting the Company where made pursuant to compulsory legal process or when otherwise required by an appropriate government agency. 4. Place of Performance -------------------- In connection with his employment by the Company, the executive shall at all times be entitled to an office at the principal executive offices of the Company, presently located in Los Angeles, California, and/or at such other office of the Company as the Chief Executive Officer shall, in his sole discretion, deem to be in the best interest of the Company. In the event the Company shall transfer the Executive to a location that is 20 or more miles further from his principal residence than the office to which the Executive was assigned on the effective date of this Agreement, the Company shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Exec-utive against, and reimburse the Executive for, any less incurred as a result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence and the higher of (a) the Executive's aggregate investment in such residence for (b) the fair market value of such residence as determined by a real estate appraiser designated by the Company) in connection with any such change in residence. -5- 5. Working Facilities ------------------ The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and service as are presently or may hereafter be furnished to the most senior executive officers of the Company. 6. Compensation ------------ (a) As compensation for the performance of Executive's services hereunder, inclusive of services as an officer or director of the Company's affiliates, the Company shall pay to the Executive in accordance with its normal payroll practices a monthly salary (the "Monthly Base Salary") in such amount as shall be determined from time to time by the Board of Directors of the Company (or a duly authorized committee or representative thereof) and set forth in the Executive's personnel file. For the purposes of this Agreement, the Monthly Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any deferred compensation plan maintained by the Company. (b) The Monthly Base Salary payable to the Executive during any calendar year during the term of this Agreement (including extensions) subsequent to 1993 shall in no event be less than the highest Monthly Base Salary received by the Executive during calendar year 1993. Nothing contained herein, however, shall be construed as requiring the Company to raise, from time to time, the amount of the Executive's Monthly Base Salary or to award the Executive with additional bonuses or incentive compensation during the term of this Agreement, and any such raises, bonuses or incentive compensation shall be awarded at the sole discretion of the Company's Chief Executive Officer and/or Board. (c) In the event the Executive's Monthly Base Salary is increased during the term of this Agreement, the minimum Monthly Base Salary payable to the Executive subsequent to the date of such increase shall be the Monthly Base Salary as so increased, unless the Executive otherwise agrees. In the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein) during the term of this Agreement, the Monthly Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the -6- aggregate amount of Monthly Base Salary and (ii) one-twelfth (1/12) of the aggregate amount of any "discretionary bonuses" attributable to one of the last two bonus computation years that ended on or before the change in control, whichever is higher. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to the Company's Executive Senior Management Incentive Program, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 8 herein (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Company's Board of Directors. (d) The Executive shall receive a gross-up payment if the payments and benefits under this Agreement and all other contracts, arrangements, or programs, in the aggregate, exceed the maximum amount that may be paid to the Executive without triggering golden parachute penalties under Section 280G and related provisions of the Code. The gross-up amount will be an amount which, after payment by the Executive of all income and excise taxes on the gross-up payment, equals the excise taxes the Executive must pay under Code Section 4999 with respect to the payments and benefits for which the Executive is receiving the gross-up payment. (i) All determinations needed to apply this Section 6(d) shall be made in good faith by the Company's independent auditors. The independent auditors shall assume that the Executive pays federal income taxes at the highest marginal tax rate in the calendar year in which the gross-up payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence when the Executive's employment terminated, net of the maximum reduction in federal income taxes which could be obtained from deduction of those state and local taxes. (ii) If the Executive's gross-up payment turns out to have been insufficient (for example, because the Executive receives payments which were not expected when the gross-up payment was calculated), the Company will pay the Executive an additional gross-up payment which, on an after tax basis, shall be sufficient to cover both the extra Code Section 4999 excise taxes the Executive owes and any interest, penalties, or additions the Executive must pay because of the miscalculation of the Executive's excise tax liability. If the Executive receives a gross-up payment which turns out to have been excessive, the Executive must pay the Company the excise tax included in the gross-up that the Executive -7- did not, in fact, have to pay, the federal, state, and local income tax gross-up the Executive received with respect to that excise tax amount (to the extent that the Executive is allowed a federal state, or local income tax deductions with respect to the repayment), and interest on the amount the Executive must repay at the rate provided in Code Section 1274(b)(2)(B). (iii) The Executive and the Company agree reasonably to cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits the Executive receives. (iv) If all or part of the gross-up payment described in this Paragraph (d) may not be paid for any reason, and the net amount the Executive would realize would increase by cutting back the amount paid to the Executive so that the Code Section 4999 penalties would not be triggered, then the Executive's payments and benefits shall be cut back in the priority order the Executive designates or, if the Executive fails promptly to designate an order, in the priority order designated by the Company. 7. Expenses -------- Subject to compliance with the Company's normal and customary policies regarding substantiation and verification of business expenses, the Executive is authorized to incur on behalf of the Company, and the Company shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses incurred for promoting, pursuing or otherwise furthering the business of the Company or its affiliates. 8. Fringe Benefits --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, understandings, arrangements or programs now or hereafter generally made available by the Company or its affiliates to executives, key management employees and their families. Nothing paid to or received by the Executive pursuant to this Section 8 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 6 of this Agreement. -8- 9. Vacations --------- The Executive shall be entitled to a minimum of four weeks of vacation time each year during the term of this Agreement, during which vacation time his compensation hereunder shall be paid in full. Such vacation time need not be taken in consecutive periods except as otherwise required by applicable regulations. The Executive shall also be entitled to all paid holidays provided by the Company to its most senior executive officers. 10. Termination ----------- (a) Terminating Events. This Agreement may be terminated or suspended ------------------ prior to the expiration of its term in accordance with the following: (i) Death. This Agreement shall terminate upon the ----- Executive's death. (ii) Disability. In the event that the Executive becomes ---------- disabled within the meaning of the Coast Savings and Loan Pension Plan, and remains so disabled for substantially all of a 180 day period and has not returned to work by the end of such 180 day period, this Agreement shall terminate effective as of the last day of such 180 day period of disability. (iii) Regulatory Suspension. If the Executive is suspended --------------------- from office and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. In the event that the service of a notice in the manner provided above results in the suspension of any compensation due to the Executive during the term promptly following the dismissal of the charges specified in such notice the Company may, in its discretion, pay to the Executive all compensation that was withheld from him and may, in its discretion, reinstate all of the obligations of the Company suspended. hereunder. (iv) Cause. This Agreement shall be subject to termination ------ by the Chief Executive Officer and/or Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the -9- stated duties under this Agreement or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease- and-desist order, or in the event of a material breach by the Executive of any provision of this Agree-ment. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a written notice informing the Executive that he has been found guilty of misconduct of the type described in this Section 10(a)(iv) and specifying the particulars thereof in detail, and, in the case of misconduct that can be cured, the Executive shall have failed to cure the same within a reasonable period of time thereafter. (v) Regulatory Removal. If the Executive is removed from ------------------ office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Sections 8(3)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)), this agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (vi) Default. If the Company is in default (as defined in ------- Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1)), this Agreement shall terminate as of the date of such default, but this paragraph 10(a)(vi) shall not affect any vested rights of the contracting parties. (vii) Other Regulatory Action. This Agreement may be ----------------------- terminated: (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Company or when the Company is determined by such Director to be in an unsafe and unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (viii) Notice by the Executive. This Agreement may be ----------------------- terminated by the Executive upon ninety (90) days written notice, provided that: (A) a termination by the Executive in the event the Company shall fail to continuously comply, both in form and substance, with each and every of the "assumed conditions of service" as defined in Section 3(c) above shall be deemed a termination by the Company under Section 10(a)(ix) below, and (B) a -10- termination by the Executive during the thirty day period immediately following the one year anniversary of a "change in control" of the Company (as defined in Section 3(f)) shall be deemed a termination by the Company under Section 10(a)(ix) below. (ix) Notice by the Company. This Agreement may be --------------------- terminated at any time by the Executive upon ninety (90) days written notice; provided, however, that a termination of this Agreement under this Section 10(a)(ix) shall not reduce the remaining Term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 10(b)(iv). (b) Compensation and Benefits Payable By the Company Upon Termination. ----------------------------------------------------------------- Compensation and benefits shall be payable by the Company upon a termination of this Agreement in accordance with the following: (i) In the event of a termination of this Agreement under Section 10(a)(i) (due to the Executive's death), the spouse, heirs or estate of the Executive shall continue to receive the compensation specified in Section 6 and the Executive's spouse and/or dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by such spouse or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (ii) In the event of a termination of this Agreement under Section 10(a)(ii) (due to the disability of the Executive), the Executive, or his duly appointed personal repre-sentatives, shall continue to receive the compensation specified in Section 6 and the Executive, his spouse and/or his dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agree-ment, notwithstanding such termination. (iii) In the event of a termination of this Agreement under Sections 10(a)(iii)-(viii) (due to a termination of the Executive for cause, regulatory removal or suspension, default by the Company, other regulatory action of notice by the Executive, excluding a deemed termination by the Company under Section 10(a)(ix)), the Company's obligation to provide the compensation and benefits specified in Sections 6, 7 and 8 herein shall terminate as of the effective date of such termination (subject to -11- potential reinstatement in the case of a regulatory suspension, as provided in Section 10(a)(v). (iv) In the event of a termination of this Agreement under Section 10(a)(ix) (due to termination of the Executive without cause, including a deemed termination by the Company under Section 10(a)(ix)) the Company shall make a lump sum payment to the Executive (or his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value, based on a discount rate equal to the then current Eleventh District Cost of Funds Index, of the future compensation payable to the Executive under Section 6 of this Agreement. Such lump sum payment shall be made within thirty days following the date of such termination. In addition, following any such termination the Company shall continue to provide the Executive, his spouse and/or his dependents with the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or his dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement. 11. Definition of "Affiliate" ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereafter, directly or indirectly, controls, is controlled by, or is under common control with the Company, including without limitation, any service corporation of the Company. 12. Nonassignment ------------- (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and its assigns. As used in this Agreement, the term "successor" shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, conversion or other corporate reorganization involving the Company, acquires all or substantially all of the assets or business of the Company. This Agreement may not be assigned by the Company without the prior written consent of the Executive. (b) Neither the Executive nor his wife or his estate shall have any right to alienate, pledge, hypothecate, -12- encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Company shall not be bound thereby and shall be relieved of its liability under this Agreement by making payments in accordance with this Agreement to the parties designated to receive payments under this Agreement. 13. Successors ---------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all amounts payable hereunder shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided written notice to the Company specifying a different beneficiary or beneficiaries (which notices may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 14. Waiver And Modification ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transaction hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 15. Governing Law; Severability --------------------------- This Agreement shall be governed by and construed in accordance with the laws of California. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. -13- 16. Arbitration ----------- Any dispute or controversy under or in connection with this Agreement as well as any differences which may arise between the Company and the Executive during or following the Executive's employment with the Company shall be settled exclusively in accordance with the provisions of The Coast Federal Bank Mutual Agreement to Arbitrate Claims ("the Arbitration Agreement"), a copy of which is attached hereto marked "Exhibit A" and incorporated by reference herein, except that the provisions of the Arbitration Agreement as appearing on page 5 under the heading of "Not an Employment Agreement" are not made a part of or incorporated within this Employment Agreement. The provisions of this Employment Agreement shall exclusively govern the nature of the Executive's employment with the Company. 17. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): TO THE COMPANY; Coast Federal Bank, Federal Savings Bank 1000 Wilshire Boulevard, 22nd Floor Los Angeles, CA 90017 Attention: General Counsel TO THE EXECUTIVE: The most recent address of the Executive as shown in the personnel records of the Company. The date of such personal delivery or the date three days after such mailing shall be deemed to be the effective date of such notice, demand or communication. 18. Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. -14- 19. Entire Agreement ---------------- This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the matters addressed herein. Except as otherwise provided herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the matters addressed herein. 20. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. /s/ ROBERT L. HUNT II --------------------------------------------- (the "Executive") COAST FEDERAL BANK, FEDERAL SAVINGS BANK (the "Company") By: /s/ RAY MARTIN ------------------------------------------ Ray Martin Chairman and Chief Executive Officer -15- [LOGO OF COAST FEDERAL BANK] Exhibit A THE COAST FEDERAL BANK MUTUAL AGREEMENT TO ARBITRATE CLAIMS I (also referenced herein as "Employee") recognize that differences may arise between Coast Federal Bank ("the Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. I understand that any reference in this Agreement to the Company will be a reference also to its parent company, all subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, affiliates, and all successors and assigns of any of them. CLAIMS COVERED BY THE AGREEMENT - ------------------------------- The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement are claims that would normally, absent this Agreement, be cognizable by a court of law, and include, but are not limited to, claims of wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded in the following paragraph. CLAIMS NOT COVERED BY THE AGREEMENT - ---------------------------------- Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement. Also not covered are claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as well as claims by the Company for injunctive and/or other equitable relief for matters regarding any loan(s) or savings or checking accounts the Employee may obtain or maintain with the Company, as to which I 1 [LOGO OF COAST FEDERAL BANK] understand and agree that the Company may seek and obtain relief from a court of competent jurisdiction. REQUIRED NOTICE OF ALL CLAIMS - ----------------------------- The Company and Employee agree that, as the first step to starting the arbitration process, the aggrieved party must give written notice of any claim to the other party within the applicable statute of limitation period. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to Human Resources Division of the Company at Coast Federal Bank, 18000 Chatsworth Street, Granada Hills, California, attention Human Resources Director. The Employee will be given written notice at the last recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. REPRESENTATION - -------------- Any party may be represented by an attorney or other representative selected by the party. DISCOVERY - --------- Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. DESIGNATION OF WITNESSES - ------------------------ At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. SUBPOENAS - --------- Each party shall have the right to subpoena witnesses and documents for the arbitration. 2 [LOGO OF COAST FEDERAL BANK] ARBITRATION PROCEDURES - ---------------------- The Company and Employee agree that, except as provided in this Agreement, any arbitration shall be in accordance with either the Employment Arbitration Rules (if such rules cease to exist or are changed by J.A.M.S, the substantive equivalent rules shall be used as determined by the Company) of Judicial Arbitration & Mediation Services, Inc. or, if applicable, the successor organization to Judicial Arbitration Mediation Services, Inc.(hereinafter "J.A.M.S") or the Employment Dispute Resolution Arbitration Rules of the American Arbitration Association (if such rules cease to exist or are changed by A.A.A., the substantive equivalent rules shall be used as determined by the Company) or, if applicable, the successor organization to the American Arbitration Association (hereinafter "A.A.A.",) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ("the Arbitrator"). The determination to use J.A.M.S or A.A.A. as the Arbitrator shall be made solely by the party who did not initiate the claim. The determination to use either J.A.M.S or A.A.A. shall be made by the party who did not initiate the claim within thirty (30) calendar days of receipt by the non complaining party of the written notice of claim as submitted by the complaining party. In the event the noncomplaining party fails to make a determination to utilize either J.A.M.S or A.A.A. and to provide written notice of such determination to use either J.A.M.S or A.A.A. to the aggrieved party within such thirty (30) days period, it shall be conclusively deemed that the arbitration shall be heard by J.A.M.S. The arbitration shall take place in the offices of J.A.M.S or A.A.A., as the case may be, nearest to the city in which I am or was last employed by the Company or such other place as may be mutually agreed in writing between Employee and the Company. The Arbitrator shall be selected as follows. J.A.M.S or A.A.A., as the case may be, shall give each party a list of 11 arbitrators drawn from its panel of labor and employment arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains: The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, J.A.M.S or A.A.A., as the case may be, shall furnish an additional list or lists until an Arbitrator is selected. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The State of California Code of Evidence shall apply. Damages recoverable for claims brought under this agreement include those damages and/or remedies provided by the applicable statutes, which may include punitive damages, back wages, reinstatement and other monetary or equitable damages. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement 3 [LOGO OF COAST FEDERAL BANK] is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the State of California Code of Civil Procedure. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement. The Arbitrator shall render an award and opinion in the form typically tendered in labor arbitrations. ARBITRATION FEES AND COSTS - -------------------------- The Company and I shall equally share the fees and costs of the Arbitrator except, however, if the claim relates to a monetary amount where an amount is less than fifty thousand dollars ($50,000) then the share of the fees and costs of the Arbitrator of the Company and Employee shall be as follows: If the amount of the claim is less than fifty thousands dollars ($50,000) but more than twenty-five thousand dollars ($25,000), the fees and costs of the Arbitrator shall be allocated 66 2/3 for the Company and 33 1/3 for Employee; and if the amount of the claim is less than twenty-five thousand dollars ($25,000) the fees and costs of the Arbitrator shall be allocated 90% for the Company and 10% for the Employee. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party. 4 [LOGO OF COAST FEDERAL BANK] JUDICIAL REVIEW - --------------- Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. REQUIREMENTS FOR MODIFICATION OR REVOCATION - ------------------------------------------- This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. SOLE AND ENTIRE AGREEMENT - ------------------------- This is the complete agreement of the parties on the subject of arbitration of disputes except for any arbitration agreement, if any, existing in connection with any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. CONSTRUCTION - ------------ If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement. CONSIDERATION - ------------- The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. NOT AN EMPLOYMENT AGREEMENT - --------------------------- This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment. 5 [LOGO OF COAST FEDERAL BANK] VOLUNTARY AGREEMENT - ------------------- I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT BY ENTERING INTO THIS AGREEMENT, I AM WAIVING MY RIGHT TO A JURY TRIAL. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. [EMPLOYEE NAME] COAST FEDERAL BANK, Federal Savings Bank - ----------------------------- Signature of Employee ----------------------------- Signature of Authorized Company Representative - ----------------------------- Print Name of Employee ----------------------------- Title of Representative - ----------------------------- Employee Number - ----------------------------- Date 6 EX-10.13 7 NORMAN H. RAIDEN EMPLOYMENT AGREEMENT 01/01/96 EXHIBIT 10.13 AMENDED and RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into effective as of the first day of January, 1996 between COAST FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered capital stock savings bank organized under the laws of the United States and successor in interest to Coast Savings and Loan Association (the "Company"), and NORMAN H. RAIDEN (the "Executive"), with reference to the following facts: A. The Executive is currently a Senior Executive Vice President of the Company as well as an officer and/or director of certain affiliates of the Company (the "Affiliates"). The Executive is experienced and knowledgeable in the savings and loan industry and possesses creativity, expertise and initiative that is expected to assist in the development of the business and growth of the Company. B. The Company recognizes that the future growth, profitability and success of the business of the Company will be advanced by the employment of the Executive. The Company desires, therefore, to secure for the Company and its affiliates the benefit of the Executive's experience and ability. In order to obtain the services of the Executive and to maximize the period of his continued availability, the Company desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. An Employment Agreement, dated as of March 1, 1990, was previously entered into between the Company and the Executive and was updated, amended and restated in an Amended and Restated Employment Agreement dated as of October 1, 1990, as further amended by amendment dated January 23, 1991 (the "1990 Employment Agreement"). The 1990 Employment Agreement was amended and restated as of January 1, 1993, as further amended by amendments dated January 1, 1994 and June 1, 1994 (the "1993 Employment Agreement). The Company and the Executive now wish to update, amend and restate the 1993 Employment Agreement. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Employment ---------- The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, on the terms and subject to the conditions hereinafter set forth in this Employment Agreement (hereinafter the "Agreement"). 1 2. Term ---- Subject to the provisions and conditions of this Agreement, the term of this Agreement shall commence on the effective date of this Agreement, and shall continue through December 31, 1997 (referred to herein as the "Initial Term"), provided that such employment term shall be subject to extension(s) pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 10 herein (which defines terminating events). (a) On or before January 1, 1997, and on or before each January 1 thereafter, the Board of Directors of the Company (the "Board") shall review this Agreement and the Executive's performance hereunder and shall determine whether to extend the term of this Agreement for an additional calendar year, thereby extending the remaining term of this Agreement to two (2) calendar years. The Board shall also review the terms upon which this Agreement should be extended as if the Board were approving this Agreement in the first instance. For purposes of this Agreement, a reference to an "extension date" shall pertain to any such January 1 as of which this Agreement is extended to an additional calendar year under the provisions hereof, and a reference to the "term" of this Agreement shall be inclusive of the Initial Term and any extension(s) under the operation of this Section. In the event of any extension(s) hereunder all provisions and conditions of this Agreement shall remain in effect. (b) In the event this Agreement becomes inoperative or is otherwise terminated, all rights and benefits which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any accrued obligation incurred to the other under the operation of this Agreement, including, without limitation, any obligation requiring performance after the date of such termination. (c) In the event of a "change in control" of the Company (as defined in Section 3(f) below), the Initial Term, or any extension thereto as described above, shall be automatically extended so that the then remaining term is three years. 3. Position And Duties ------------------- (a) Subject to the provisions and conditions contained herein, the Company hereby engages the Executive and the Executive hereby agrees to render services to the Company as a Senior Executive Vice President of the Company and as an executive officer of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. As a Senior Executive Vice President, the Executive shall have responsibility 2 and authority to do and perform or cause to be performed such services, acts or things as shall, from time to time, be specifically delegated to him by the Company's Chief Executive Officer, including supervision of employees and consultants, in a manner consistent with policies established from time to time by the Company's Chief Executive Officer and/or Board. In the performance of such duties, the Executive shall be required to report to the Chief Executive Officer, such other executive officers as the Chief Executive Officer of the Company shall designate and, as appropriate, to the Board. (b) Subject to the provisions and conditions contained herein, the Executive agrees that during the term hereof he shall, as long as he shall be elected, serve on the Boards of Directors of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) Executive's obligation to render any of the services and performances set forth above in Sections 3(a) and 3(b) is expressly conditioned upon the Company's compliance, at all times during the term of this Agreement, with all of the following: (i) the Company shall fully comply with its obligations to the Executive under the terms of this Agreement including, without limitation, its obligation respecting rate of compensation and fringe benefits; (ii) in the event of a "change in control" of the Company (as defined in Section 3(f) below): (A) the Executive shall be provided with the right to continue to serve in the position of Senior Executive Vice President of the Company (or in such other capacity as the parties hereto shall mutually agree); (B) the Executive shall be provided with the right to continue to serve as an officer and/or director of all Affiliates, as well as any affiliates of the Company of which the Executive becomes an officer or director subsequent to the date of this Agreement, subject to the Company's unrestricted right to liquidate, reorganize or otherwise eliminate its interest in any of its affiliates; (C) the Executive shall be provided with the right to continue to fully exercise all responsibilities and duties of office which the Executive is exercising as an officer of the Company or its affiliates as of the date of this Agreement; and (D) the Executive shall not be assigned any duties inconsistent with or in limitation of the powers of the Executive contemplated by this Section 3. The aforesaid conditions to Executive's obligation to continue to serve hereunder are cumulatively referred to hereafter as "assumed conditions of service". (d) The Executive agrees that during the term hereof he shall devote substantially all of his regular business time solely and exclusively to the business of the Company, whether such business is operated directly by the Company or through one or more affiliates of the Company. The Executive agrees that during the term of this Agreement, he will not, directly or indirectly, 3 provide services on behalf of any competitive financial institution, any insurance association or agency, any mortgage or loan broker or any other competitive entity or on behalf of any subsidiary or affiliate of any such competitive entity, as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term of this Agreement the ownership of more than 1% of the outstanding equity interest in any such competitive entity. Subject to the foregoing, the Executive may serve on Boards of Directors of unaffiliated corporations, subject to advance approval by the Chief Executive Officer and such approved service shall be presumed for these purposes to be of benefit to the association. The Executive shall diligently carry out his responsibilities under this Agreement, it being hereby agreed by the association that the Executive may engage in personal business and investment activities, including real estate investments; provided further, that, except as expressly set forth above, nothing contained herein shall be construed as preventing the Executive from making personal investments in the stocks, securities and obligations of other financial institutions. (e) The Company reserves the right to elect, from time to time, any person to its Board of Directors, to appoint any person as an officer of the Company and to remove any of its officers and directors, without exception, in any manner and upon the basis or bases presently or subsequently provided for by its Charter and Bylaws, provided however, that except when expressly provided herein to the contrary, any such removal shall not relieve the Company from any of its existing obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the Chief Executive Officer's authority to retain, supervise or remove Company personnel, or to change, from time to time, the duties, responsibilities and authority of the Executive. (f) For the purpose of this Agreement, a change in control of the Company shall mean the acquisition by any person or entity of control of the Company, or any entity controlling the Company, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in Section 10(a) (vii) below, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Company or any organization controlling the Company receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Company or any entity 4 controlling the Company, or obtains control of the election of a majority of the directors of the Company or any entity controlling the Company. (g) During and after the term of this Agreement, the Executive shall not disclose to any person (other than an employee or agent of the Company or any affiliate entitled to receive the same) any confidential information relating to the business of the Company or any affiliate and obtained by him while providing services to the Company, without the consent of the Board, or until such information ceases to be confidential. Notwithstanding the foregoing, the Executive shall not be precluded from disclosures respecting the Company where made pursuant to compulsory legal process or when otherwise required by an appropriate government agency. 4. Place of Performance -------------------- In connection with his employment by the Company, the executive shall at all times be entitled to an office at the principal executive offices of the Company, presently located in Los Angeles, California, and/or at such other office of the Company as the Chief Executive Officer shall, in his sole discretion, deem to be in the best interest of the Company. In the event the Company shall transfer the Executive to a location that is 20 or more miles further from his principal residence than the office to which the Executive was assigned on the effective date of this Agreement, the Company shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Executive against, and reimburse the Executive for, any loss incurred as a result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence and the higher of (a) the Executive's aggregate investment in such residence for (b) the fair market value of such residence as determined by a real estate appraiser designated by the Company) in connection with any such change in residence. 5. Working Facilities ------------------ The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and service as are presently or may hereafter be furnished to the most senior executive officers of the Company. 5 6. Compensation ------------ (a) As compensation for the performance of Executive's services hereunder, inclusive of services as an officer or director of the Company's affiliates, the Company shall pay to the Executive in accordance with its normal payroll practices a monthly salary (the "Monthly Base Salary") in such amount as shall be determined from time to time by the Board of Directors of the Company (or a duly authorized committee or representative thereof) and set forth in the Executive's personnel file. For the purposes of this Agreement, the Monthly Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any deferred compensation plan maintained by the Company. (b) The Monthly Base Salary payable to the Executive during any calendar year during the term of this Agreement (including extensions) subsequent to 1996 shall in no event be less than the highest Monthly Base Salary received by the Executive during calendar year 1996. Nothing contained herein, however, shall be construed as requiring the Company to raise, from time to time, the amount of the Executive's Monthly Base Salary or to award the Executive with additional bonuses or incentive compensation during the term of this Agreement, and any such raises, bonuses or incentive compensation shall be awarded at the sole discretion of the Company's Chief Executive Officer and/or Board. (c) In the event the Executive's Monthly Base Salary is increased during the term of this Agreement, the minimum Monthly Base Salary payable to the Executive subsequent to the date of such increase shall be the Monthly Base Salary as so increased, unless the Executive otherwise agrees. In the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein) during the term of this Agreement, the Monthly Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the aggregate amount of Monthly Base Salary and (ii) one-twelfth (1/12) of the aggregate amount of any "discretionary bonuses" attributable to one of the last two bonus computation years that ended on or before the change in control, whichever is higher. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to the Company's Executive Senior Management Incentive Program, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 8 herein (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Company's Board of Directors. 6 (d) The Executive shall receive a gross-up payment if the payments and benefits under this Agreement and all other contracts, arrangements, or programs, in the aggregate, exceed the maximum amount that may be paid to the Executive without triggering golden parachute penalties under Section 280G and related provisions of the Code. The gross-up amount will be an amount which, after payment by the Executive of all income and excise taxes on the gross-up payment, equals the excise taxes the Executive must pay under Code Section 4999 with respect to the payments and benefits for which the Executive is receiving the gross-up payment. (i) All determinations needed to apply this Section 6(d) shall be made in good faith by the Company's independent auditors. The independent auditors shall assume that the Executive pays federal income taxes at the highest marginal tax rate in the calendar year in which the gross-up payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence when the Executive's employment terminated, net of the maximum reduction in federal income taxes which could be obtained from deduction of those state and local taxes. (ii) If the Executive's gross-up payment turns out to have been insufficient (for example, because the Executive receives payments which were not expected when the gross-up payment was calculated), the Company will pay the Executive an additional gross-up payment which, on an after tax basis, shall be sufficient to cover both the extra Code Section 4999 excise taxes the Executive owes and any interest, penalties, or additions the Executive must pay because of the miscalculation of the Executive's excise tax liability. If the Executive receives a gross-up payment which turns out to have been excessive, the Executive must pay the Company the excise tax included in the gross-up that the Executive did not, in fact, have to pay, the federal, state, and local income tax gross-up the Executive received with respect to that excise tax amount (to the extent that the Executive is allowed a federal state, or local income tax deductions with respect to the repayment), and interest on the amount the Executive must repay at the rate provided in Code Section 1274(b)(2)(B). (iii) The Executive and the Company agree reasonably to cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits the Executive receives. (iv) If all or part of the gross-up payment described in this Paragraph (d) may not be paid for any reason, and the net amount the Executive would realize would 7 increase by cutting back the amount paid to the Executive so that the Code Section 4999 penalties would not be triggered, then the Executive's payments and benefits shall be cut back in the priority order the Executive designates or, if the Executive fails promptly to designate an order, in the priority order designated by the Company. 7. Expenses -------- Subject to compliance with the Company's normal and customary policies regarding substantiation and verification of business expenses, the Executive is authorized to incur on behalf of the Company, and the Company shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses incurred for promoting, pursuing or otherwise furthering the business of the Company or its affiliates. 8. Fringe Benefits --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, understandings, arrangements or programs now or hereafter generally made available by the Company or its affiliates to executives, key management employees and their families. Nothing paid to or received by the Executive pursuant to this Section 8 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 6 of this Agreement. 9. Vacations --------- The Executive shall be entitled to a minimum of four weeks of vacation time each year during the term of this Agreement, during which vacation time his compensation hereunder shall be paid in full. Such vacation time need not be taken in consecutive periods except as otherwise required by applicable regulations. The Executive shall also be entitled to all paid holidays provided by the Company to its most senior executive officers. 10. Termination ----------- (a) Terminating Events. This Agreement may be terminated or suspended ------------------ prior to the expiration of its term in accordance with the following: (i) Death. This Agreement shall terminate upon the ------ Executive's death. (ii) Disability. In the event that the Executive becomes ---------- disabled within the meaning of the Coast Savings and Loan Pension Plan, and remains so disabled for substantially all of a 180 day period and has not returned to work by the end of 8 such 180 day period, this Agreement shall terminate effective as of the last day of such 180 day period of disability. (iii) Regulatory Suspension. If the Executive is suspended ---------------------- from office and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. In the event that the service of a notice in the manner provided above results in the suspension of any compensation due to the Executive during the term promptly following the dismissal of the charges specified in such notice the Company may, in its discretion, pay to the Executive all compensation that was withheld from him and may, in its discretion, reinstate all of the obligations of the Company suspended hereunder. (iv) Cause. This Agreement shall be subject to termination ----- by the Chief Executive Officer and/or Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the stated duties under this Agreement or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or in the event of a material breach by the Executive of any provision of this Agree-ment. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a written notice informing the Executive that he has been found guilty of misconduct of the type described in this Section 10(a)(iv) and specifying the particulars thereof in detail, and, in the case of misconduct that can be cured, the Executive shall have failed to cure the same within a reasonable period of time thereafter. (v) Regulatory Removal. If the Executive is removed from ------------------ office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Sections 8(3)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)), this agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (vi) Default. If the Company is in default (as defined in -------- Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1)), this Agreement shall terminate as of the date of such default, but this paragraph 10(a)(vi) shall not affect any vested rights of the contracting parties. 9 (vii) Other Regulatory Action. This Agreement may be ------------------------ terminated: (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Company or when the Company is determined by such Director to be in an unsafe and unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (viii) Notice by the Executive. This Agreement may be ------------------------ terminated by the Executive upon ninety (90) days written notice, provided that: (A) a termination by the Executive in the event the Company shall fail to continuously comply, both in form and substance, with each and every of the "assumed conditions of service" as defined in Section 3(c) above shall be deemed a termination by the Company under Section 10(a)(ix) below, and (B) a termination by the Executive during the thirty day period immediately following the one year anniversary of a "change in control" of the Company (as defined in Section 3(f)) shall be deemed a termination by the Company under Section 10(a)(ix) below. (ix) Notice by the Company. This Agreement may be terminated --------------------- at any time by the Executive upon ninety (90) days written notice; provided, however, that a termination of this Agreement under this Section 10(a)(ix) shall not reduce the remaining Term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 10(b)(iv). (b) Compensation and Benefits Payable By the Company Upon Termination. ----------------------------------------------------------------- Compensation and benefits shall be payable by the Company upon a termination of this Agreement in accordance with the following: (i) In the event of a termination of this Agreement under Section 10(a)(i) (due to the Executive's death), the spouse, heirs or estate of the Executive shall continue to receive the compensation specified in Section 6 and the Executive's spouse and/or dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by such spouse or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (ii) In the event of a termination of this Agreement under Section 10(a)(ii) (due to the disability of the Executive), the Executive, or his duly appointed personal repre- 10 sentatives, shall continue to receive the compensation specified in Section 6 and the Executive, his spouse and/or his dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (iii) In the event of a termination of this Agreement under Sections 10(a)(iii)-(viii) (due to a termination of the Executive for cause, regulatory removal or suspension, default by the Company, other regulatory action of notice by the Executive, excluding a deemed termination by the Company under Section 10(a)(ix)), the Company's obligation to provide the compensation and benefits specified in Sections 6, 7 and 8 herein shall terminate as of the effective date of such termination (subject to potential reinstatement in the case of a regulatory suspension, as provided in Section 10(a)(v). (iv) In the event of a termination of this Agreement under Section 10(a)(ix) (due to termination of the Executive without cause, including a deemed termination by the Company under Section 10(a)(ix)) the Company shall make a lump sum payment to the Executive (or his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value, based on a discount rate equal to the then current Eleventh District Cost of Funds Index, of the future compensation payable to the Executive under Section 6 of this Agreement. Such lump sum payment shall be made within thirty days following the date of such termination. In addition, following any such termination the Company shall continue to provide the Executive, his spouse and/or his dependents with the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or his dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement. 11. Definition of "Affiliate" ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereafter, directly or indirectly, controls, is controlled by, or is under common control with the Company, including without limitation, any service corporation of the Company. 11 12. Nonassignment ------------- (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and its assigns. As used in this Agreement, the term "successor" shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, conversion or other corporate reorganization involving the Company, acquires all or substantially all of the assets or business of the Company. This Agreement may not be assigned by the Company without the prior written consent of the Executive. (b) Neither the Executive nor his wife or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Company shall not be bound thereby and shall be relieved of its liability under this Agreement by making payments in accordance with this Agreement to the parties designated to receive payments under this Agreement. 13. Successors ---------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all amounts payable hereunder shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided written notice to the Company specifying a different beneficiary or beneficiaries (which notices may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 14. Waiver And Modification ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transaction hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 12 15. Governing Law; Severability --------------------------- This Agreement shall be governed by and construed in accordance with the laws of California. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 16. Arbitration ----------- Any dispute or controversy under or in connection with this Agreement as well as any differences which may arise between the Company and the Executive during or following the Executive's employment with the Company shall be settled exclusively in accordance with the provisions of The Coast Federal Bank Mutual Agreement to Arbitrate Claims ("the Arbitration Agreement"), a copy of which is attached hereto marked "Exhibit A" and incorporated by reference herein, except that the provisions of the Arbitration Agreement as appearing on page 5 under the heading of "Not an Employment Agreement" are not made a part of or incorporated within this Employment Agreement. The provisions of this Employment Agreement shall exclusively govern the nature of the Executive's employment with the Company. 17. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): TO THE COMPANY; Coast Federal Bank, Federal Savings Bank 1000 Wilshire Boulevard, 22nd Floor Los Angeles, CA 90017 Attention: General Counsel TO THE EXECUTIVE: The most recent address of the Executive as shown in the personnel records of the Company. The date of such personal delivery or the date three days after such mailing shall be deemed to be the effective date of such notice, demand or communication. 13 18. Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. 19. Entire Agreement ---------------- This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the matters addressed herein. Except as otherwise provided herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the matters addressed herein. 20. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. /s/ NORMAN H. RAIDEN ---------------------------------------------- (the "Executive") COAST FEDERAL BANK, FEDERAL SAVINGS BANK, (the "Company") By /s/ RAY MARTIN ------------------------------------------- Ray Martin Chairman and Chief Executive Officer 14 [LOGO OF COAST FEDERAL BANK] Exhibit A THE COAST FEDERAL BANK MUTUAL AGREEMENT TO ARBITRATE CLAIMS I (also referenced herein as "Employee") recognize that differences may arise between Coast Federal Bank ("the Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. I understand that any reference in this Agreement to the Company will be a reference also to its parent company, all subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, affiliates, and all successors and assigns of any of them. CLAIMS COVERED BY THE AGREEMENT - ------------------------------- The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement are claims that would normally, absent this Agreement, be cognizable by a court of law, and include, but are not limited to, claims of wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded in the following paragraph. CLAIMS NOT COVERED BY THE AGREEMENT - ---------------------------------- Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement. Also not covered are claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as well as claims by the Company for injunctive and/or other equitable relief for matters regarding any loan(s) or savings or checking accounts the Employee may obtain or maintain with the Company, as to which I 1 [LOGO OF COAST FEDERAL BANK] understand and agree that the Company may seek and obtain relief from a court of competent jurisdiction. REQUIRED NOTICE OF ALL CLAIMS - ----------------------------- The Company and Employee agree that, as the first step to starting the arbitration process, the aggrieved party must give written notice of any claim to the other party within the applicable statute of limitation period. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to Human Resources Division of the Company at Coast Federal Bank, 18000 Chatsworth Street, Granada Hills, California, attention Human Resources Director. The Employee will be given written notice at the last recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. REPRESENTATION - -------------- Any party may be represented by an attorney or other representative selected by the party. DISCOVERY - --------- Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. DESIGNATION OF WITNESSES - ------------------------ At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. SUBPOENAS - --------- Each party shall have the right to subpoena witnesses and documents for the arbitration. 2 [LOGO OF COAST FEDERAL BANK] ARBITRATION PROCEDURES - ---------------------- The Company and Employee agree that, except as provided in this Agreement, any arbitration shall be in accordance with either the Employment Arbitration Rules (if such rules cease to exist or are changed by J.A.M.S, the substantive equivalent rules shall be used as determined by the Company) of Judicial Arbitration & Mediation Services, Inc. or, if applicable, the successor organization to Judicial Arbitration Mediation Services, Inc.(hereinafter "J.A.M.S") or the Employment Dispute Resolution Arbitration Rules of the American Arbitration Association (if such rules cease to exist or are changed by A.A.A., the substantive equivalent rules shall be used as determined by the Company) or, if applicable, the successor organization to the American Arbitration Association (hereinafter "A.A.A.",) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ("the Arbitrator"). The determination to use J.A.M.S or A.A.A. as the Arbitrator shall be made solely by the party who did not initiate the claim. The determination to use either J.A.M.S or A.A.A. shall be made by the party who did not initiate the claim within thirty (30) calendar days of receipt by the non complaining party of the written notice of claim as submitted by the complaining party. In the event the noncomplaining party fails to make a determination to utilize either J.A.M.S or A.A.A. and to provide written notice of such determination to use either J.A.M.S or A.A.A. to the aggrieved party within such thirty (30) days period, it shall be conclusively deemed that the arbitration shall be heard by J.A.M.S. The arbitration shall take place in the offices of J.A.M.S or A.A.A., as the case may be, nearest to the city in which I am or was last employed by the Company or such other place as may be mutually agreed in writing between Employee and the Company. The Arbitrator shall be selected as follows. J.A.M.S or A.A.A., as the case may be, shall give each party a list of 11 arbitrators drawn from its panel of labor and employment arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains: The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, J.A.M.S or A.A.A., as the case may be, shall furnish an additional list or lists until an Arbitrator is selected. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The State of California Code of Evidence shall apply. Damages recoverable for claims brought under this agreement include those damages and/or remedies provided by the applicable statutes, which may include punitive damages, back wages, reinstatement and other monetary or equitable damages. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement 3 [LOGO OF COAST FEDERAL BANK] is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the State of California Code of Civil Procedure. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement. The Arbitrator shall render an award and opinion in the form typically tendered in labor arbitrations. ARBITRATION FEES AND COSTS - -------------------------- The Company and I shall equally share the fees and costs of the Arbitrator except, however, if the claim relates to a monetary amount where an amount is less than fifty thousand dollars ($50,000) then the share of the fees and costs of the Arbitrator of the Company and Employee shall be as follows: If the amount of the claim is less than fifty thousands dollars ($50,000) but more than twenty-five thousand dollars ($25,000), the fees and costs of the Arbitrator shall be allocated 66 2/3 for the Company and 33 1/3 for Employee; and if the amount of the claim is less than twenty-five thousand dollars ($25,000) the fees and costs of the Arbitrator shall be allocated 90% for the Company and 10% for the Employee. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party. 4 [LOGO OF COAST FEDERAL BANK] JUDICIAL REVIEW - --------------- Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. REQUIREMENTS FOR MODIFICATION OR REVOCATION - ------------------------------------------- This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. SOLE AND ENTIRE AGREEMENT - ------------------------- This is the complete agreement of the parties on the subject of arbitration of disputes except for any arbitration agreement, if any, existing in connection with any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. CONSTRUCTION - ------------ If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement. CONSIDERATION - ------------- The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. NOT AN EMPLOYMENT AGREEMENT - --------------------------- This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment. 5 [LOGO OF COAST FEDERAL BANK] VOLUNTARY AGREEMENT - ------------------- I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT BY ENTERING INTO THIS AGREEMENT, I AM WAIVING MY RIGHT TO A JURY TRIAL. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. [EMPLOYEE NAME] COAST FEDERAL BANK, Federal Savings Bank - ----------------------------- Signature of Employee ----------------------------- Signature of Authorized Company Representative - ----------------------------- Print Name of Employee ----------------------------- Title of Representative - ----------------------------- Employee Number - ----------------------------- Date 6 EX-10.14 8 JAMES R. BOYLE EMPLOYMENT AGREEMENT 01/01/96 EXHIBIT 10.14 AMENDED and RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into effective as of the first day of January, 1996 between COAST FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered capital stock savings bank organized under the laws of the United States and successor in interest to Coast Savings and Loan Association (the "Company"), and JAMES R. BOYLE (the "Executive"), with reference to the following facts: A. The Executive is currently a Senior Executive Vice President of the Company as well as an officer and/or director of certain affiliates of the Company (the "Affiliates"). The Executive is experienced and knowledgeable in the savings and loan industry and possesses creativity, expertise and initiative that is expected to assist in the development of the business and growth of the Company. B. The Company recognizes that the future growth, profitability and success of the business of the Company will be advanced by the employment of the Executive. The Company desires, therefore, to secure for the Company and its affiliates the benefit of the Executive's experience and ability. In order to obtain the services of the Executive and to maximize the period of his continued availability, the Company desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. An Employment Agreement, dated as of July 1, 1991, (the "1991 Employment Agreement") was previously entered into between the Company and the Executive, and was amended and restated as of January 1, 1993, as further amended by amendments dated January 1, 1994 and June 1, 1994 (the "1993 Employment Agreement"). The Company and the Executive now wish to update, amend and restate the 1993 Employment Agreement. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Employment ---------- The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, on the terms and subject to the conditions hereinafter set forth in this Employment Agreement (hereinafter the "Agreement"). 1 2. Term ---- Subject to the provisions and conditions of this Agreement, the term of this Agreement shall commence on the effective date of this Agreement, and shall continue through December 31, 1997 (referred to herein as the "Initial Term"), provided that such employment term shall be subject to extension(s) pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 10 herein (which defines terminating events). (a) On or before January 1, 1997, and on or before each January 1 thereafter, the Board of Directors of the Company (the "Board") shall review this Agreement and the Executive's performance hereunder and shall determine whether to extend the term of this Agreement for an additional calendar year, thereby extending the remaining term of this Agreement to two (2) calendar years. The Board shall also review the terms upon which this Agreement should be extended as if the Board were approving this Agreement in the first instance. For purposes of this Agreement, a reference to an "extension date" shall pertain to any such January 1 as of which this Agreement is extended to an additional calendar year under the provisions hereof, and a reference to the "term" of this Agreement shall be inclusive of the Initial Term and any extension(s) under the operation of this Section. In the event of any extension(s) hereunder all provisions and conditions of this Agreement shall remain in effect. (b) In the event this Agreement becomes inoperative or is otherwise terminated, all rights and benefits which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any accrued obligation incurred to the other under the operation of this Agreement, including, without limitation, any obligation requiring performance after the date of such termination. (c) In the event of a "change in control" of the Company (as defined in Section 3(f) below), the Initial Term, or any extension thereto as described above, shall be automatically extended so that the then remaining term is three years. 3. Position And Duties ------------------- (a) Subject to the provisions and conditions contained herein, the Company hereby engages the Executive and the Executive hereby agrees to render services to the Company as a Senior Executive Vice President of the Company and as an executive officer of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. As a Senior Executive Vice President, the Executive shall have responsibility 2 and authority to do and perform or cause to be performed such services, acts or things as shall, from time to time, be specifically delegated to him by the Company's Chief Executive Officer, including supervision of employees and consultants, in a manner consistent with policies established from time to time by the Company's Chief Executive Officer and/or Board. In the performance of such duties, the Executive shall be required to report to the Chief Executive Officer, such other executive officers as the Chief Executive Officer of the Company shall designate and, as appropriate, to the Board. (b) Subject to the provisions and conditions contained herein, the Executive agrees that during the term hereof he shall, as long as he shall be elected, serve on the Boards of Directors of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) Executive's obligation to render any of the services and performances set forth above in Sections 3(a) and 3(b) is expressly conditioned upon the Company's compliance, at all times during the term of this Agreement, with all of the following: (i) the Company shall fully comply with its obligations to the Executive under the terms of this Agreement including, without limitation, its obligation respecting rate of compensation and fringe benefits; (ii) in the event of a "change in control" of the Company (as defined in Section 3(f) below): (A) the Executive shall be provided with the right to continue to serve in the position of Senior Executive Vice President of the Company (or in such other capacity as the parties hereto shall mutually agree); (B) the Executive shall be provided with the right to continue to serve as an officer and/or director of all Affiliates, as well as any affiliates of the Company of which the Executive becomes an officer or director subsequent to the date of this Agreement, subject to the Company's unrestricted right to liquidate, reorganize or otherwise eliminate its interest in any of its affiliates; (C) the Executive shall be provided with the right to continue to fully exercise all responsibilities and duties of office which the Executive is exercising as an officer of the Company or its affiliates as of the date of this Agreement; and (D) the Executive shall not be assigned any duties inconsistent with or in limitation of the powers of the Executive contemplated by this Section 3. The aforesaid conditions to Executive's obligation to continue to serve hereunder are cumulatively referred to hereafter as "assumed conditions of service". (d) The Executive agrees that during the term hereof he shall devote substantially all of his regular business time solely and exclusively to the business of the Company, whether such business is operated directly by the Company or through one or more affiliates of the Company. The Executive agrees that during the term of this Agreement, he will not, directly or indirectly, 3 provide services on behalf of any competitive financial institution, any insurance association or agency, any mortgage or loan broker or any other competitive entity or on behalf of any subsidiary or affiliate of any such competitive entity, as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term of this Agreement the ownership of more than 1% of the outstanding equity interest in any such competitive entity. Subject to the foregoing, the Executive may serve on Boards of Directors of unaffiliated corporations, subject to advance approval by the Chief Executive Officer and such approved service shall be presumed for these purposes to be of benefit to the association. The Executive shall diligently carry out his responsibilities under this Agreement, it being hereby agreed by the association that the Executive may engage in personal business and investment activities, including real estate investments; provided further, that, except as expressly set forth above, nothing contained herein shall be construed as preventing the Executive from making personal investments in the stocks, securities and obligations of other financial institutions. (e) The Company reserves the right to elect, from time to time, any person to its Board of Directors, to appoint any person as an officer of the Company and to remove any of its officers and directors, without exception, in any manner and upon the basis or bases presently or subsequently provided for by its Charter and Bylaws, provided however, that except when expressly provided herein to the contrary, any such removal shall not relieve the Company from any of its existing obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the Chief Executive Officer's authority to retain, supervise or remove Company personnel, or to change, from time to time, the duties, responsibilities and authority of the Executive. (f) For the purpose of this Agreement, a change in control of the Company shall mean the acquisition by any person or entity of control of the Company, or any entity controlling the Company, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in Section 10(a) (vii) below, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Company or any organization controlling the Company receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 4 percent of the Voting Stock of the Company or any entity controlling the Company, or obtains control of the election of a majority of the directors of the Company or any entity controlling the Company. (g) During and after the term of this Agreement, the Executive shall not disclose to any person (other than an employee or agent of the Company or any affiliate entitled to receive the same) any confidential information relating to the business of the Company or any affiliate and obtained by him while providing services to the Company, without the consent of the Board, or until such information ceases to be confidential. Notwithstanding the foregoing, the Executive shall not be precluded from disclosures respecting the Company where made pursuant to compulsory legal process or when otherwise required by an appropriate government agency. 4. Place of Performance -------------------- In connection with his employment by the Company, the executive shall at all times be entitled to an office at the principal executive offices of the Company, presently located in Los Angeles, California, and/or at such other office of the Company as the Chief Executive Officer shall, in his sole discretion, deem to be in the best interest of the Company. In the event the Company shall transfer the Executive to a location that is 20 or more miles further from his principal residence than the office to which the Executive was assigned on the effective date of this Agreement, the Company shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Exec-utive against, and reimburse the Executive for, any loss incurred as a result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence and the higher of (a) the Executive's aggregate investment in such residence for (b) the fair market value of such residence as determined by a real estate appraiser designated by the Company) in connection with any such change in residence. 5. Working Facilities ------------------ The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and service as are presently or may hereafter be furnished to the most senior executive officers of the Company. 5 6. Compensation ------------ (a) As compensation for the performance of Executive's services hereunder, inclusive of services as an officer or director of the Company's affiliates, the Company shall pay to the Executive in accordance with its normal payroll practices a monthly salary (the "Monthly Base Salary") in such amount as shall be determined from time to time by the Board of Directors of the Company (or a duly authorized committee or representative thereof) and set forth in the Executive's personnel file. For the purposes of this Agreement, the Monthly Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any deferred compensation plan maintained by the Company. (b) The Monthly Base Salary payable to the Executive during any calendar year during the term of this Agreement (including extensions) subsequent to 1993 shall in no event be less than the highest Monthly Base Salary received by the Executive during calendar year 1993. Nothing contained herein, however, shall be construed as requiring the Company to raise, from time to time, the amount of the Executive's Monthly Base Salary or to award the Executive with additional bonuses or incentive compensation during the term of this Agreement, and any such raises, bonuses or incentive compensation shall be awarded at the sole discretion of the Company's Chief Executive Officer and/or Board. (c) In the event the Executive's Monthly Base Salary is increased during the term of this Agreement, the minimum Monthly Base Salary payable to the Executive subsequent to the date of such increase shall be the Monthly Base Salary as so increased, unless the Executive otherwise agrees. In the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein) during the term of this Agreement, the Monthly Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the aggregate amount of Monthly Base Salary and (ii) one-twelfth (1/12) of the aggregate amount of any "discretionary bonuses" attributable to one of the last two bonus computation years that ended on or before the change in control, whichever is higher. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to the Company's Executive Senior Management Incentive Program, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 8 herein (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Company's Board of Directors. 6 (d) The Executive shall receive a gross-up payment if the payments and benefits under this Agreement and all other contracts, arrangements, or programs, in the aggregate, exceed the maximum amount that may be paid to the Executive without triggering golden parachute penalties under Section 280G and related provisions of the Code. The gross-up amount will be an amount which, after payment by the Executive of all income and excise taxes on the gross-up payment, equals the excise taxes the Executive must pay under Code Section 4999 with respect to the payments and benefits for which the Executive is receiving the gross-up payment. (i) All determinations needed to apply this Section 6(d) shall be made in good faith by the Company's independent auditors. The independent auditors shall assume that the Executive pays federal income taxes at the highest marginal tax rate in the calendar year in which the gross-up payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence when the Executive's employment terminated, net of the maximum reduction in federal income taxes which could be obtained from deduction of those state and local taxes. (ii) If the Executive's gross-up payment turns out to have been insufficient (for example, because the Executive receives payments which were not expected when the gross-up payment was calculated), the Company will pay the Executive an additional gross-up payment which, on an after tax basis, shall be sufficient to cover both the extra Code Section 4999 excise taxes the Executive owes and any interest, penalties, or additions the Executive must pay because of the miscalculation of the Executive's excise tax liability. If the Executive receives a gross-up payment which turns out to have been excessive, the Executive must pay the Company the excise tax included in the gross-up that the Executive did not, in fact, have to pay, the federal, state, and local income tax gross-up the Executive received with respect to that excise tax amount (to the extent that the Executive is allowed a federal state, or local income tax deductions with respect to the repayment), and interest on the amount the Executive must repay at the rate provided in Code Section 1274(b)(2)(B). (iii) The Executive and the Company agree reasonably to cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits the Executive receives. (iv) If all or part of the gross-up payment described in this Paragraph (d) may not be paid for any 7 reason, and the net amount the Executive would realize would increase by cutting back the amount paid to the Executive so that the Code Section 4999 penalties would not be triggered, then the Executive's payments and benefits shall be cut back in the priority order the Executive designates or, if the Executive fails promptly to designate an order, in the priority order designated by the Company. 7. Expenses -------- Subject to compliance with the Company's normal and customary policies regarding substantiation and verification of business expenses, the Executive is authorized to incur on behalf of the Company, and the Company shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses incurred for promoting, pursuing or otherwise furthering the business of the Company or its affiliates. 8. Fringe Benefits --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, understandings, arrangements or programs now or hereafter generally made available by the Company or its affiliates to executives, key management employees and their families. Nothing paid to or received by the Executive pursuant to this Section 8 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 6 of this Agreement. 9. Vacations --------- The Executive shall be entitled to a minimum of four weeks of vacation time each year during the term of this Agreement, during which vacation time his compensation hereunder shall be paid in full. Such vacation time need not be taken in consecutive periods except as otherwise required by applicable regulations. The Executive shall also be entitled to all paid holidays provided by the Company to its most senior executive officers. 10. Termination ----------- (a) Terminating Events. This Agreement may be terminated or suspended ------------------ prior to the expiration of its term in accordance with the following: (i) Death. This Agreement shall terminate upon the ----- Executive's death. (ii) Disability. In the event that the Executive becomes ---------- disabled within the meaning of the Coast Savings and Loan Pension Plan, and remains so disabled for substantially 8 all of a 180 day period and has not returned to work by the end of such 180 day period, this Agreement shall terminate effective as of the last day of such 180 day period of disability. (iii) Regulatory Suspension. If the Executive is suspended --------------------- from office and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. In the event that the service of a notice in the manner provided above results in the suspension of any compensation due to the Executive during the term promptly following the dismissal of the charges specified in such notice the Company may, in its discretion, pay to the Executive all compensation that was withheld from him and may, in its discretion, reinstate all of the obligations of the Company suspended hereunder. (iv) Cause. This Agreement shall be subject to termination ----- by the Chief Executive Officer and/or Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the stated duties under this Agreement or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or in the event of a material breach by the Executive of any provision of this Agree-ment. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a written notice informing the Executive that he has been found guilty of misconduct of the type described in this Section 10(a)(iv) and specifying the particulars thereof in detail, and, in the case of misconduct that can be cured, the Executive shall have failed to cure the same within a reasonable period of time thereafter. (v) Regulatory Removal. If the Executive is removed from ------------------- office and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Sections 8(3)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)), this agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (vi) Default. If the Company is in default (as defined in -------- Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1)), this Agreement shall terminate as of the date of such default, but this paragraph 10(a)(vi) shall not affect any vested rights of the contracting parties. 9 (vii) Other Regulatory Action. This Agreement may be ----------------------- terminated: (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Company or when the Company is determined by such Director to be in an unsafe and unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (viii) Notice by the Executive. This Agreement may be ------------------------ terminated by the Executive upon ninety (90) days written notice, provided that: (A) a termination by the Executive in the event the Company shall fail to continuously comply, both in form and substance, with each and every of the "assumed conditions of service" as defined in Section 3(c) above shall be deemed a termination by the Company under Section 10(a)(ix) below, and (B) a termination by the Executive during the thirty day period immediately following the one year anniversary of a "change in control" of the Company (as defined in Section 3(f)) shall be deemed a termination by the Company under Section 10(a) (ix) below. (ix) Notice by the Company. This Agreement may be --------------------- terminated at any time by the Executive upon ninety (90) days written notice; provided, however, that a termination of this Agreement under this Section 10(a)(ix) shall not reduce the remaining Term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 10(b)(iv). (b) Compensation and Benefits Payable By the Company Upon Termination. ------------------------------------------------------------------ Compensation and benefits shall be payable by the Company upon a termination of this Agreement in accordance with the following: (i) In the event of a termination of this Agreement under Section 10(a)(i) (due to the Executive's death), the spouse, heirs or estate of the Executive shall continue to receive the compensation specified in Section 6 and the Executive's spouse and/or dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by such spouse or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (ii) In the event of a termination of this Agreement under Section 10(a)(ii) (due to the disability of the 10 Executive), the Executive, or his duly appointed personal repre-sentatives, shall continue to receive the compensation specified in Section 6 and the Executive, his spouse and/or his dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agree-ment, notwithstanding such termination. (iii) In the event of a termination of this Agreement under Sections 10(a)(iii)-(viii) (due to a termination of the Executive for cause, regulatory removal or suspension, default by the Company, other regulatory action of notice by the Executive, excluding a deemed termination by the Company under Section 10(a)(ix)), the Company's obligation to provide the compensation and benefits specified in Sections 6, 7 and 8 herein shall terminate as of the effective date of such termination (subject to potential reinstatement in the case of a regulatory suspension, as provided in Section 10(a)(v). (iv) In the event of a termination of this Agreement under Section 10(a)(ix) (due to termination of the Executive without cause, including a deemed termination by the Company under Section 10(a)(ix)) the Company shall make a lump sum payment to the Executive (or his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value, based on a discount rate equal to the then current Eleventh District Cost of Funds Index, of the future compensation payable to the Executive under Section 6 of this Agreement. Such lump sum payment shall be made within thirty days following the date of such termination. In addition, following any such termination the Company shall continue to provide the Executive, his spouse and/or his dependents with the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or his dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement. 11. Definition of "Affiliate" ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereafter, directly or indirectly, controls, is controlled by, or is under common control with the Company, including without limitation, any service corporation of the Company. 11 12. Nonassignment ------------- (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and its assigns. As used in this Agreement, the term "successor" shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, conversion or other corporate reorganization involving the Company, acquires all or substantially all of the assets or business of the Company. This Agreement may not be assigned by the Company without the prior written consent of the Executive. (b) Neither the Executive nor his wife or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Company shall not be bound thereby and shall be relieved of its liability under this Agreement by making payments in accordance with this Agreement to the parties designated to receive payments under this Agreement. 13. Successors ---------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all amounts payable hereunder shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided written notice to the Company specifying a different beneficiary or beneficiaries (which notices may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 14. Waiver And Modification ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transaction hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 12 15. Governing Law; Severability --------------------------- This Agreement shall be governed by and construed in accordance with the laws of California. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 16. Arbitration ----------- Any dispute or controversy under or in connection with this Agreement as well as any differences which may arise between the Company and the Executive during or following the Executive's employment with the Company shall be settled exclusively in accordance with the provisions of The Coast Federal Bank Mutual Agreement to Arbitrate Claims ("the Arbitration Agreement"), a copy of which is attached hereto marked "Exhibit A" and incorporated by reference herein, except that the provisions of the Arbitration Agreement as appearing on page 5 under the heading of "Not an Employment Agreement" are not made a part of or incorporated within this Employment Agreement. The provisions of this Employment Agreement shall exclusively govern the nature of the Executive's employment with the Company. 17. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): TO THE COMPANY; Coast Federal Bank, Federal Savings Bank 1000 Wilshire Boulevard, 22nd Floor Los Angeles, CA 90017 Attention: General Counsel TO THE EXECUTIVE: The most recent address of the Executive as shown in the personnel records of the Company. The date of such personal delivery or the date three days after such mailing shall be deemed to be the effective date of such notice, demand or communication. 13 18. Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. 19. Entire Agreement ---------------- This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the matters addressed herein. Except as otherwise provided herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the matters addressed herein. 20. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. /s/ JAMES R. BOYLE ---------------------------------------------- (the "Executive") COAST FEDERAL BANK, FEDERAL SAVINGS BANK, (the "Company") By /s/ RAY MARTIN -------------------------------------------- Ray Martin Chairman and Chief Executive Officer 14 [LOGO OF COAST FEDERAL BANK] Exhibit A THE COAST FEDERAL BANK MUTUAL AGREEMENT TO ARBITRATE CLAIMS I (also referenced herein as "Employee") recognize that differences may arise between Coast Federal Bank ("the Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. I understand that any reference in this Agreement to the Company will be a reference also to its parent company, all subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, affiliates, and all successors and assigns of any of them. CLAIMS COVERED BY THE AGREEMENT - ------------------------------- The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement are claims that would normally, absent this Agreement, be cognizable by a court of law, and include, but are not limited to, claims of wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded in the following paragraph. CLAIMS NOT COVERED BY THE AGREEMENT - ---------------------------------- Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement. Also not covered are claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as well as claims by the Company for injunctive and/or other equitable relief for matters regarding any loan(s) or savings or checking accounts the Employee may obtain or maintain with the Company, as to which I 1 [LOGO OF COAST FEDERAL BANK] understand and agree that the Company may seek and obtain relief from a court of competent jurisdiction. REQUIRED NOTICE OF ALL CLAIMS - ----------------------------- The Company and Employee agree that, as the first step to starting the arbitration process, the aggrieved party must give written notice of any claim to the other party within the applicable statute of limitation period. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to Human Resources Division of the Company at Coast Federal Bank, 18000 Chatsworth Street, Granada Hills, California, attention Human Resources Director. The Employee will be given written notice at the last recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. REPRESENTATION - -------------- Any party may be represented by an attorney or other representative selected by the party. DISCOVERY - --------- Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. DESIGNATION OF WITNESSES - ------------------------ At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. SUBPOENAS - --------- Each party shall have the right to subpoena witnesses and documents for the arbitration. 2 [LOGO OF COAST FEDERAL BANK] ARBITRATION PROCEDURES - ---------------------- The Company and Employee agree that, except as provided in this Agreement, any arbitration shall be in accordance with either the Employment Arbitration Rules (if such rules cease to exist or are changed by J.A.M.S, the substantive equivalent rules shall be used as determined by the Company) of Judicial Arbitration & Mediation Services, Inc. or, if applicable, the successor organization to Judicial Arbitration Mediation Services, Inc.(hereinafter "J.A.M.S") or the Employment Dispute Resolution Arbitration Rules of the American Arbitration Association (if such rules cease to exist or are changed by A.A.A., the substantive equivalent rules shall be used as determined by the Company) or, if applicable, the successor organization to the American Arbitration Association (hereinafter "A.A.A.",) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ("the Arbitrator"). The determination to use J.A.M.S or A.A.A. as the Arbitrator shall be made solely by the party who did not initiate the claim. The determination to use either J.A.M.S or A.A.A. shall be made by the party who did not initiate the claim within thirty (30) calendar days of receipt by the non complaining party of the written notice of claim as submitted by the complaining party. In the event the noncomplaining party fails to make a determination to utilize either J.A.M.S or A.A.A. and to provide written notice of such determination to use either J.A.M.S or A.A.A. to the aggrieved party within such thirty (30) days period, it shall be conclusively deemed that the arbitration shall be heard by J.A.M.S. The arbitration shall take place in the offices of J.A.M.S or A.A.A., as the case may be, nearest to the city in which I am or was last employed by the Company or such other place as may be mutually agreed in writing between Employee and the Company. The Arbitrator shall be selected as follows. J.A.M.S or A.A.A., as the case may be, shall give each party a list of 11 arbitrators drawn from its panel of labor and employment arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains: The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, J.A.M.S or A.A.A., as the case may be, shall furnish an additional list or lists until an Arbitrator is selected. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The State of California Code of Evidence shall apply. Damages recoverable for claims brought under this agreement include those damages and/or remedies provided by the applicable statutes, which may include punitive damages, back wages, reinstatement and other monetary or equitable damages. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement 3 [LOGO OF COAST FEDERAL BANK] is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the State of California Code of Civil Procedure. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement. The Arbitrator shall render an award and opinion in the form typically tendered in labor arbitrations. ARBITRATION FEES AND COSTS - -------------------------- The Company and I shall equally share the fees and costs of the Arbitrator except, however, if the claim relates to a monetary amount where an amount is less than fifty thousand dollars ($50,000) then the share of the fees and costs of the Arbitrator of the Company and Employee shall be as follows: If the amount of the claim is less than fifty thousands dollars ($50,000) but more than twenty-five thousand dollars ($25,000), the fees and costs of the Arbitrator shall be allocated 66 2/3 for the Company and 33 1/3 for Employee; and if the amount of the claim is less than twenty-five thousand dollars ($25,000) the fees and costs of the Arbitrator shall be allocated 90% for the Company and 10% for the Employee. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party. 4 [LOGO OF COAST FEDERAL BANK] JUDICIAL REVIEW - --------------- Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. REQUIREMENTS FOR MODIFICATION OR REVOCATION - ------------------------------------------- This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. SOLE AND ENTIRE AGREEMENT - ------------------------- This is the complete agreement of the parties on the subject of arbitration of disputes except for any arbitration agreement, if any, existing in connection with any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. CONSTRUCTION - ------------ If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement. CONSIDERATION - ------------- The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. NOT AN EMPLOYMENT AGREEMENT - --------------------------- This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment. 5 [LOGO OF COAST FEDERAL BANK] VOLUNTARY AGREEMENT - ------------------- I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT BY ENTERING INTO THIS AGREEMENT, I AM WAIVING MY RIGHT TO A JURY TRIAL. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. [EMPLOYEE NAME] COAST FEDERAL BANK, Federal Savings Bank /s/ JAMES R. BOYLE - ----------------------------- Signature of Employee ----------------------------- Signature of Authorized Company /s/ JAMES R. BOYLE Representative - ----------------------------- Print Name of Employee ----------------------------- Title of Representative - ----------------------------- Employee Number - ----------------------------- Date 6 EX-10.16 9 JAMES F. BARRITT EMPLOYMENT AGREEMENT 01/01/96 EXHIBIT 10.16 AMENDED AND RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into effective as of the first day of January, 1996 between COAST FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered capital stock savings bank organized under the laws of the United States and successor in interest to Coast Savings and Loan Association (the "Company"), and JAMES F. BARRITT (the "Executive"), with reference to the following facts: A. The Executive is currently a Senior Executive Vice President of the Company as well as an officer and/or director of certain affiliates of the Company (the "Affiliates"). The Executive is experienced and knowledgeable in the savings and loan industry and possesses creativity, expertise and initiative that is expected to assist in the development of the business and growth of the Company. B. The Company recognizes that the future growth, profitability and success of the business of the Company will be advanced by the employment of the Executive. The Company desires, therefore, to secure for the Company and its affiliates the benefit of the Executive's experience and ability. In order to obtain the services of the Executive and to maximize the period of his continued availability, the Company desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. An Employment Agreement, dated as of August 23, 1993, was previously entered into between the Company and the Executive and was amended by amendments dated January 1, 1994 and June 1, 1994 (the "1993 Employment Agreement"). The Company and the Executive now wish to update, amend and restate the 1993 Employment Agreement. NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Employment ---------- The Company hereby agrees to employ the Executive and the Executive hereby accepts employment with the Company, on the terms and subject to the conditions hereinafter set forth in this Employment Agreement (hereinafter the "Agreement"). 1 2. Term ---- Subject to the provisions and conditions of this Agreement, the term of this Agreement shall commence on the effective date of this Agreement, and shall continue through December 31, 1997 (referred to herein as the "Initial Term"), provided that such employment term shall be subject to extension(s) pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 10 herein (which defines terminating events). (a) On or before January 1, 1997, and on or before each January 1 thereafter, the Board of Directors of the Company (the "Board") shall review this Agreement and the Executive's performance hereunder and shall determine whether to extend the term of this Agreement for an additional calendar year, thereby extending the remaining term of this Agreement to two (2) calendar years. The Board shall also review the terms upon which this Agreement should be extended as if the Board were approving this Agreement in the first instance. For purposes of this Agreement, a reference to an "extension date" shall pertain to any such January 1 as of which this Agreement is extended to an additional calendar year under the provisions hereof, and a reference to the "term" of this Agreement shall be inclusive of the Initial Term and any extension(s) under the operation of this Section. In the event of any extension(s) hereunder all provisions and conditions of this Agreement shall remain in effect. (b) In the event this Agreement becomes inoperative or is otherwise terminated, all rights and benefits which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any accrued obligation incurred to the other under the operation of this Agreement, including, without limitation, any obligation requiring performance after the date of such termination. (c) In the event of a "change in control" of the Company (as defined in Section 3(f) below), the Initial Term, or any extension thereto as described above, shall be automatically extended so that the then remaining term is three years. 3. Position And Duties ------------------- (a) Subject to the provisions and conditions contained herein, the Company hereby engages the Executive and the Executive hereby agrees to render services to the Company as a Senior Executive Vice President of the Company and as an executive officer of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. As a Senior Executive Vice President, the Executive shall have responsibility and authority to do and perform or cause to be performed such 2 services, acts or things as shall, from time to time, be specifically delegated to him by the Company's Chief Executive Officer, including supervision of employees and consultants, in a manner consistent with policies established from time to time by the Company's Chief Executive Officer and/or Board. In the performance of such duties, the Executive shall be required to report to the Chief Executive Officer, such other executive officers as the Chief Executive Officer of the Company shall designate and, as appropriate, to the Board. (b) Subject to the provisions and conditions contained herein, the Executive agrees that during the term hereof he shall, as long as he shall be elected, serve on the Boards of Directors of such of the Company's affiliates as the parties hereto shall mutually agree, inclusive of affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) Executive's obligation to render any of the services and performances set forth above in Sections 3(a) and 3(b) is expressly conditioned upon the Company's compliance, at all times during the term of this Agreement, with all of the following: (i) the Company shall fully comply with its obligations to the Executive under the terms of this Agreement including, without limitation, its obligation respecting rate of compensation and fringe benefits; (ii) in the event of a "change in control" of the Company (as defined in Section 3(f) below): (A) the Executive shall be provided with the right to continue to serve in the position of Senior Executive Vice President of the Company (or in such other capacity as the parties hereto shall mutually agree); (B) the Executive shall be provided with the right to continue to serve as an officer and/or director of all Affiliates, as well as any affiliates of the Company of which the Executive becomes an officer or director subsequent to the date of this Agreement, subject to the Company's unrestricted right to liquidate, reorganize or otherwise eliminate its interest in any of its affiliates; (C) the Executive shall be provided with the right to continue to fully exercise all responsibilities and duties of office which the Executive is exercising as an officer of the Company or its affiliates as of the date of this Agreement; and (D) the Executive shall not be assigned any duties inconsistent with or in limitation of the powers of the Executive contemplated by this Section 3. The aforesaid conditions to Executive's obligation to continue to serve hereunder are cumulatively referred to hereafter as "assumed conditions of service". (d) The Executive agrees that during the term hereof he shall devote substantially all of his regular business time solely and exclusively to the business of the Company, whether such business is operated directly by the Company or through one or more affiliates of the Company. The Executive agrees that during the term of this Agreement, he will not, directly or indirectly, provide services on behalf of any competitive financial 3 institution, any insurance association or agency, any mortgage or loan broker or any other competitive entity or on behalf of any subsidiary or affiliate of any such competitive entity, as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term of this Agreement the ownership of more than 1% of the outstanding equity interest in any such competitive entity. Subject to the foregoing, the Executive may serve on Boards of Directors of unaffiliated corporations, subject to advance approval by the Chief Executive Officer and such approved service shall be presumed for these purposes to be of benefit to the association. The Executive shall diligently carry out his responsibilities under this Agreement, it being hereby agreed by the association that the Executive may engage in personal business and investment activities, including real estate investments; provided further, that, except as expressly set forth above, nothing contained herein shall be construed as preventing the Executive from making personal investments in the stocks, securities and obligations of other financial institutions. (e) The Company reserves the right to elect, from time to time, any person to its Board of Directors, to appoint any person as an officer of the Company and to remove any of its officers and directors, without exception, in any manner and upon the basis or bases presently or subsequently provided for by its Charter and Bylaws, provided however, that except when expressly provided herein to the contrary, any such removal shall not relieve the Company from any of its existing obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the Chief Executive Officer's authority to retain, supervise or remove Company personnel, or to change, from time to time, the duties, responsibilities and authority of the Executive. (f) For the purpose of this Agreement, a change in control of the Company shall mean the acquisition by any person or entity of control of the Company, or any entity controlling the Company, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action specified in Section 10(a) (vii) below, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of Directors ("Voting Stock") of the Company or any organization controlling the Company receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Company or any entity controlling the Company, or 4 obtains control of the election of a majority of the directors of the Company or any entity controlling the Company. (g) During and after the term of this Agreement, the Executive shall not disclose to any person (other than an employee or agent of the Company or any affiliate entitled to receive the same) any confidential information relating to the business of the Company or any affiliate and obtained by him while providing services to the Company, without the consent of the Board, or until such information ceases to be confidential. Notwithstanding the foregoing, the Executive shall not be precluded from disclosures respecting the Company where made pursuant to compulsory legal process or when otherwise required by an appropriate government agency. 4. Place of Performance -------------------- In connection with his employment by the Company, the executive shall at all times be entitled to an office at the principal executive offices of the Company, presently located in Los Angeles, California, and/or at such other office of the Company as the Chief Executive Officer shall, in his sole discretion, deem to be in the best interest of the Company. In the event the Company shall transfer the Executive to a location that is 20 or more miles further from his principal residence than the office to which the Executive was assigned on the effective date of this Agreement, the Company shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Exec-utive against, and reimburse the Executive for, any loss incurred as a result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence and the higher of (a) the Executive's aggregate investment in such residence for (b) the fair market value of such residence as determined by a real estate appraiser designated by the Company) in connection with any such change in residence. 5. Working Facilities ------------------ The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and service as are presently or may hereafter be furnished to the most senior executive officers of the Company. 5 6. Compensation ------------ (a) As compensation for the performance of Executive's services hereunder, inclusive of services as an officer or director of the Company's affiliates, the Company shall pay to the Executive in accordance with its normal payroll practices a monthly salary (the "Monthly Base Salary") in such amount as shall be determined from time to time by the Board of Directors of the Company (or a duly authorized committee or representative thereof) and set forth in the Executive's personnel file. For the purposes of this Agreement, the Monthly Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any deferred compensation plan maintained by the Company. (b) The Monthly Base Salary payable to the Executive during any calendar year during the term of this Agreement (including extensions) subsequent to 1996 shall in no event be less than the highest Monthly Base Salary received by the Executive during calendar year 1996. Nothing contained herein, however, shall be construed as requiring the Company to raise, from time to time, the amount of the Executive's Monthly Base Salary or to award the Executive with additional bonuses or incentive compensation during the term of this Agreement, and any such raises, bonuses or incentive compensation shall be awarded at the sole discretion of the Company's Chief Executive Officer and/or Board. (c) In the event the Executive's Monthly Base Salary is increased during the term of this Agreement, the minimum Monthly Base Salary payable to the Executive subsequent to the date of such increase shall be the Monthly Base Salary as so increased, unless the Executive otherwise agrees. In the event of a "change in control" of the Company (as such term is defined in Section 3(f) herein) during the term of this Agreement, the Monthly Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the aggregate amount of Monthly Base Salary and (ii) one-twelfth (1/12) of the aggregate amount of any "discretionary bonuses" attributable to one of the last two bonus computation years that ended on or before the change in control, whichever is higher. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to the Company's Executive Senior Management Incentive Program, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 8 herein (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Company's Board of Directors. 6 (d) The Executive shall receive a gross-up payment if the payments and benefits under this Agreement and all other contracts, arrangements, or programs, in the aggregate, exceed the maximum amount that may be paid to the Executive without triggering golden parachute penalties under Section 280G and related provisions of the Code. The gross-up amount will be an amount which, after payment by the Executive of all income and excise taxes on the gross-up payment, equals the excise taxes the Executive must pay under Code Section 4999 with respect to the payments and benefits for which the Executive is receiving the gross-up payment. (i) All determinations needed to apply this Section 6(d) shall be made in good faith by the Company's independent auditors. The independent auditors shall assume that the Executive pays federal income taxes at the highest marginal tax rate in the calendar year in which the gross-up payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence when the Executive's employment terminated, net of the maximum reduction in federal income taxes which could be obtained from deduction of those state and local taxes. (ii) If the Executive's gross-up payment turns out to have been insufficient (for example, because the Executive receives payments which were not expected when the gross-up payment was calculated), the Company will pay the Executive an additional gross-up payment which, on an after tax basis, shall be sufficient to cover both the extra Code Section 4999 excise taxes the Executive owes and any interest, penalties, or additions the Executive must pay because of the miscalculation of the Executive's excise tax liability. If the Executive receives a gross-up payment which turns out to have been excessive, the Executive must pay the Company the excise tax included in the gross-up that the Executive did not, in fact, have to pay, the federal, state, and local income tax gross-up the Executive received with respect to that excise tax amount (to the extent that the Executive is allowed a federal state, or local income tax deductions with respect to the repayment), and interest on the amount the Executive must repay at the rate provided in Code Section 1274(b)(2)(B). (iii) The Executive and the Company agree reasonably to cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties with respect to payments or benefits the Executive receives. (iv) If all or part of the gross-up payment described in this Paragraph (d) may not be paid for any reason, and the net amount the Executive would realize would increase by cutting back the amount paid to the Executive so that the Code Section 4999 penalties would not be triggered, then the 7 Executive's payments and benefits shall be cut back in the priority order the Executive designates or, if the Executive fails promptly to designate an order, in the priority order designated by the Company. 7. Expenses -------- Subject to compliance with the Company's normal and customary policies regarding substantiation and verification of business expenses, the Executive is authorized to incur on behalf of the Company, and the Company shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses incurred for promoting, pursuing or otherwise furthering the business of the Company or its affiliates. 8. Fringe Benefits --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, understandings, arrangements or programs now or hereafter generally made available by the Company or its affiliates to executives, key management employees and their families. Nothing paid to or received by the Executive pursuant to this Section 8 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 6 of this Agreement. 9. Vacations --------- The Executive shall be entitled to a minimum of four weeks of vacation time each year during the term of this Agreement, during which vacation time his compensation hereunder shall be paid in full. Such vacation time need not be taken in consecutive periods except as otherwise required by applicable regulations. The Executive shall also be entitled to all paid holidays provided by the Company to its most senior executive officers. 10. Termination ----------- (a) Terminating Events. This Agreement may be terminated or suspended ------------------ prior to the expiration of its term in accordance with the following: (i) Death. This Agreement shall terminate upon the Executive's ----- death. (ii) Disability. In the event that the Executive becomes disabled ---------- within the meaning of the Coast Savings and Loan Pension Plan, and remains so disabled for substantially all of a 180 day period and has not returned to work by the end of such 180 day period, this Agreement shall terminate effective as of the last day of such 180 day period of disability. 8 (iii) Regulatory Suspension. If the Executive is suspended from --------------------- office and/or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Company's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. In the event that the service of a notice in the manner provided above results in the suspension of any compensation due to the Executive during the term promptly following the dismissal of the charges specified in such notice the Company may, in its discretion, pay to the Executive all compensation that was withheld from him and may, in its discretion, reinstate all of the obligations of the Company suspended hereunder. (iv) Cause. This Agreement shall be subject to termination by the ----- Chief Executive Officer and/or Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the stated duties under this Agreement or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or in the event of a material breach by the Executive of any provision of this Agree- ment. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a written notice informing the Executive that he has been found guilty of misconduct of the type described in this Section 10(a)(iv) and specifying the particulars thereof in detail, and, in the case of misconduct that can be cured, the Executive shall have failed to cure the same within a reasonable period of time thereafter. (v) Regulatory Removal. If the Executive is removed from office ------------------ and/or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Sections 8(3)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)), this agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (vi) Default. If the Company is in default (as defined in Section ------- 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1)), this Agreement shall terminate as of the date of such default, but this paragraph 10(a)(vi) shall not affect any vested rights of the contracting parties. (vii) Other Regulatory Action. This Agreement may be terminated: ----------------------- (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation 9 enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Company or when the Company is determined by such Director to be in an unsafe and unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (viii) Notice by the Executive. This Agreement may be terminated by ----------------------- the Executive upon ninety (90) days written notice, provided that: (A) a termination by the Executive in the event the Company shall fail to continuously comply, both in form and substance, with each and every of the "assumed conditions of service" as defined in Section 3(c) above shall be deemed a termination by the Company under Section 10(a)(ix) below, and (B) a termination by the Executive during the thirty day period immediately following the one year anniversary of a "change in control" of the Company (as defined in Section 3(f)) shall be deemed a termination by the Company under Section 10(a)(ix) below. (ix) Notice by the Company. This Agreement may be terminated at --------------------- any time by the Executive upon ninety (90) days written notice; provided, however, that a termination of this Agreement under this Section 10(a)(ix) shall not reduce the remaining Term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 10(b)(iv). (b) Compensation and Benefits Payable By the Company Upon Termination. ----------------------------------------------------------------- Compensation and benefits shall be payable by the Company upon a termination of this Agreement in accordance with the following: (i) In the event of a termination of this Agreement under Section 10(a)(i) (due to the Executive's death), the spouse, heirs or estate of the Executive shall continue to receive the compensation specified in Section 6 and the Executive's spouse and/or dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by such spouse or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (ii) In the event of a termination of this Agreement under Section 10(a)(ii) (due to the disability of the Executive), the Executive, or his duly appointed personal repre-sentatives, shall continue to receive the compensation specified in Section 6 and the Executive, his spouse and/or his dependents shall continue to receive the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the 10 Executive, his spouse and/or dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement, notwithstanding such termination. (iii) In the event of a termination of this Agreement under Sections 10(a)(iii)-(viii) (due to a termination of the Executive for cause, regulatory removal or suspension, default by the Company, other regulatory action of notice by the Executive, excluding a deemed termination by the Company under Section 10(a)(ix)), the Company's obligation to provide the compensation and benefits specified in Sections 6, 7 and 8 herein shall terminate as of the effective date of such termination (subject to potential reinstatement in the case of a regulatory suspension, as provided in Section 10(a)(v). (iv) In the event of a termination of this Agreement under Section 10(a)(ix) (due to termination of the Executive without cause, including a deemed termination by the Company under Section 10(a)(ix)) the Company shall make a lump sum payment to the Executive (or his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value, based on a discount rate equal to the then current Eleventh District Cost of Funds Index, of the future compensation payable to the Executive under Section 6 of this Agreement. Such lump sum payment shall be made within thirty days following the date of such termination. In addition, following any such termination the Company shall continue to provide the Executive, his spouse and/or his dependents with the medical insurance benefits previously provided pursuant to Section 8 (subject to payment by the Executive, his spouse and/or his dependents of any premium co-payment then required by the terms of the Company's group medical insurance policy) for the balance of the then remaining term of this Agreement. 11. Definition of "Affiliate" ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereafter, directly or indirectly, controls, is controlled by, or is under common control with the Company, including without limitation, any service corporation of the Company. 11 12. Nonassignment ------------- (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and its assigns. As used in this Agreement, the term "successor" shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, conversion or other corporate reorganization involving the Company, acquires all or substantially all of the assets or business of the Company. This Agreement may not be assigned by the Company without the prior written consent of the Executive. (b) Neither the Executive nor his wife or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Company shall not be bound thereby and shall be relieved of its liability under this Agreement by making payments in accordance with this Agreement to the parties designated to receive payments under this Agreement. 13. Successors ---------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all amounts payable hereunder shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided written notice to the Company specifying a different beneficiary or beneficiaries (which notices may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 14. Waiver And Modification ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transaction hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 12 15. Governing Law; Severability --------------------------- This Agreement shall be governed by and construed in accordance with the laws of California. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 16. Arbitration ----------- Any dispute or controversy under or in connection with this Agreement as well as any differences which may arise between the Company and the Executive during or following the Executive's employment with the Company shall be settled exclusively in accordance with the provisions of The Coast Federal Bank Mutual Agreement to Arbitrate Claims ("the Arbitration Agreement"), a copy of which is attached hereto marked "Exhibit A" and incorporated by reference herein, except that the provisions of the Arbitration Agreement as appearing on page 5 under the heading of "Not an Employment Agreement" are not made a part of or incorporated within this Employment Agreement. The provisions of this Employment Agreement shall exclusively govern the nature of the Executive's employment with the Company. 17. Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): TO THE COMPANY; Coast Federal Bank, Federal Savings Bank 1000 Wilshire Boulevard, 22nd Floor Los Angeles, CA 90017 Attention: General Counsel TO THE EXECUTIVE: The most recent address of the Executive as shown in the personnel records of the Company. The date of such personal delivery or the date three days after such mailing shall be deemed to be the effective date of such notice, demand or communication. 13 18. Headings -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. 19. Entire Agreement ---------------- This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the matters addressed herein. Except as otherwise provided herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the matters addressed herein. 20. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. /s/ JAMES R. BARRITT ---------------------------------------------- (the "Executive") COAST FEDERAL BANK, FEDERAL SAVINGS BANK, (the "Company") By /s/ RAY MARTIN ------------------------------------------- Ray Martin Chairman and Chief Executive Officer 14 [LOGO OF COAST FEDERAL BANK] Exhibit A THE COAST FEDERAL BANK MUTUAL AGREEMENT TO ARBITRATE CLAIMS I (also referenced herein as "Employee") recognize that differences may arise between Coast Federal Bank ("the Company") and me during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure. I understand that any reference in this Agreement to the Company will be a reference also to its parent company, all subsidiary and affiliated entities, all benefit plans, the benefit plans' sponsors, fiduciaries, administrators, affiliates, and all successors and assigns of any of them. CLAIMS COVERED BY THE AGREEMENT - ------------------------------- The Company and I mutually consent to the resolution by arbitration of all claims or controversies ("claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement are claims that would normally, absent this Agreement, be cognizable by a court of law, and include, but are not limited to, claims of wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded in the following paragraph. CLAIMS NOT COVERED BY THE AGREEMENT - ---------------------------------- Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement. Also not covered are claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as well as claims by the Company for injunctive and/or other equitable relief for matters regarding any loan(s) or savings or checking accounts the Employee may obtain or maintain with the Company, as to which I 1 [LOGO OF COAST FEDERAL BANK] understand and agree that the Company may seek and obtain relief from a court of competent jurisdiction. REQUIRED NOTICE OF ALL CLAIMS - ----------------------------- The Company and Employee agree that, as the first step to starting the arbitration process, the aggrieved party must give written notice of any claim to the other party within the applicable statute of limitation period. Written notice to the Company, or its officers, directors, employees or agents, shall be sent to Human Resources Division of the Company at Coast Federal Bank, 18000 Chatsworth Street, Granada Hills, California, attention Human Resources Director. The Employee will be given written notice at the last recorded in my personnel file. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested. REPRESENTATION - -------------- Any party may be represented by an attorney or other representative selected by the party. DISCOVERY - --------- Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. DESIGNATION OF WITNESSES - ------------------------ At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. SUBPOENAS - --------- Each party shall have the right to subpoena witnesses and documents for the arbitration. 2 [LOGO OF COAST FEDERAL BANK] ARBITRATION PROCEDURES - ---------------------- The Company and Employee agree that, except as provided in this Agreement, any arbitration shall be in accordance with either the Employment Arbitration Rules (if such rules cease to exist or are changed by J.A.M.S, the substantive equivalent rules shall be used as determined by the Company) of Judicial Arbitration & Mediation Services, Inc. or, if applicable, the successor organization to Judicial Arbitration Mediation Services, Inc.(hereinafter "J.A.M.S") or the Employment Dispute Resolution Arbitration Rules of the American Arbitration Association (if such rules cease to exist or are changed by A.A.A., the substantive equivalent rules shall be used as determined by the Company) or, if applicable, the successor organization to the American Arbitration Association (hereinafter "A.A.A.",) before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ("the Arbitrator"). The determination to use J.A.M.S or A.A.A. as the Arbitrator shall be made solely by the party who did not initiate the claim. The determination to use either J.A.M.S or A.A.A. shall be made by the party who did not initiate the claim within thirty (30) calendar days of receipt by the non complaining party of the written notice of claim as submitted by the complaining party. In the event the noncomplaining party fails to make a determination to utilize either J.A.M.S or A.A.A. and to provide written notice of such determination to use either J.A.M.S or A.A.A. to the aggrieved party within such thirty (30) days period, it shall be conclusively deemed that the arbitration shall be heard by J.A.M.S. The arbitration shall take place in the offices of J.A.M.S or A.A.A., as the case may be, nearest to the city in which I am or was last employed by the Company or such other place as may be mutually agreed in writing between Employee and the Company. The Arbitrator shall be selected as follows. J.A.M.S or A.A.A., as the case may be, shall give each party a list of 11 arbitrators drawn from its panel of labor and employment arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains: The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, J.A.M.S or A.A.A., as the case may be, shall furnish an additional list or lists until an Arbitrator is selected. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. The State of California Code of Evidence shall apply. Damages recoverable for claims brought under this agreement include those damages and/or remedies provided by the applicable statutes, which may include punitive damages, back wages, reinstatement and other monetary or equitable damages. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement 3 [LOGO OF COAST FEDERAL BANK] is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the State of California Code of Civil Procedure. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement. The Arbitrator shall render an award and opinion in the form typically tendered in labor arbitrations. ARBITRATION FEES AND COSTS - -------------------------- The Company and I shall equally share the fees and costs of the Arbitrator except, however, if the claim relates to a monetary amount where an amount is less than fifty thousand dollars ($50,000) then the share of the fees and costs of the Arbitrator of the Company and Employee shall be as follows: If the amount of the claim is less than fifty thousands dollars ($50,000) but more than twenty-five thousand dollars ($25,000), the fees and costs of the Arbitrator shall be allocated 66 2/3 for the Company and 33 1/3 for Employee; and if the amount of the claim is less than twenty-five thousand dollars ($25,000) the fees and costs of the Arbitrator shall be allocated 90% for the Company and 10% for the Employee. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party. 4 [LOGO OF COAST FEDERAL BANK] JUDICIAL REVIEW - --------------- Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. REQUIREMENTS FOR MODIFICATION OR REVOCATION - ------------------------------------------- This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement. SOLE AND ENTIRE AGREEMENT - ------------------------- This is the complete agreement of the parties on the subject of arbitration of disputes except for any arbitration agreement, if any, existing in connection with any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement. CONSTRUCTION - ------------ If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement. CONSIDERATION - ------------- The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other. NOT AN EMPLOYMENT AGREEMENT - --------------------------- This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment. 5 [LOGO OF COAST FEDERAL BANK] VOLUNTARY AGREEMENT - ------------------- I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT BY ENTERING INTO THIS AGREEMENT, I AM WAIVING MY RIGHT TO A JURY TRIAL. I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO. [EMPLOYEE NAME] COAST FEDERAL BANK, Federal Savings Bank - ----------------------------- Signature of Employee ----------------------------- Signature of Authorized Company Representative - ----------------------------- Print Name of Employee ----------------------------- Title of Representative - ----------------------------- Employee Number - ----------------------------- Date 6 EX-23.1 10 CONSENT OF KPMG PEAT MARWICK LLP CONSENT OF INDEPENDENT AUDITORS We consent to incorporation by reference in Post-Effective Amendment No. 2 to Registration Statement No. 33-24950 on Form S-4 of Coast Savings Financial Inc. of our report dated January 23, 1996, relating to the consolidated statement of financial condition of Coast Savings Financial Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995, annual report on Form 10-K of Coast Savings Financial Inc. KPMG Peat Marwick LLP Los Angeles, California March 27, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
9 0000841074 COAST SAVINGS FINANCIAL INC 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 119,717 0 30,394 0 0 72,785 0 5,531,496 65,000 8,251,680 6,123,472 1,385,523 117,438 207,813 0 0 186 417,248 8,251,680 469,864 23,688 119,629 613,181 280,895 412,130 201,051 40,000 (110) 167,033 51,637 32,802 0 0 32,802 1.72 1.71 2.47 81,351 17,590 30,500 0 85,000 42,000 2,000 82,000 82,000 0 0
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