FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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Commission File Number 1-8930
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H.F. AHMANSON & COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0479700
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 Rivergrade Road, Irwindale, California 91706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code. (818) 960-6311
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Exhibit Index appears on page: 28
Total number of sequentially numbered pages: 29
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 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 .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1994: $.01 par value - 117,090,158
shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
The financial statements included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Registrant, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been
made. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Registrant believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Registrant's latest annual report on Form 10-K. The results for the
periods covered hereby are not necessarily indicative of the operating
results for a full year.
H.F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
ASSETS September 30, 1994 December 31, 1993
- ------ ------------------ -----------------
Cash and amounts due from banks $ 906,102 $ 843,944
Securities purchased under
agreements to resell 2,554,365 2,637,677
Other short-term investments 41,548 48,507
----------- -----------
Total cash and cash equivalents 3,502,015 3,530,128
Other investment securities held
to maturity [market value
$275,321 (September 30, 1994)] 280,378 -
Other investment securities
available for sale [amortized cost
$10,689 (September 30, 1994) and
$11,186 (December 31, 1993)] 10,256 11,524
Investment in stock of Federal Home
Loan Bank (FHLB) 434,652 364,392
Mortgage-backed securities (MBS)
held to maturity [market value
$10,254,640 (September 30, 1994) and
$4,148,131 (December 31, 1993)] 10,535,397 4,064,128
MBS available for sale [amortized cost
$2,622,982 (September 30, 1994) and
$2,818,401 (December 31, 1993)] 2,567,857 2,855,869
Loans receivable less allowance
for losses of
$437,209 (September 30, 1994) and
$438,786 (December 31, 1993) 34,292,259 37,529,079
Loans held for sale [cost
$10,770 (September 30, 1994)
and market value
$175,378 (December 31, 1993)] 10,689 175,289
Accrued interest receivable 205,329 166,848
Real estate held for development and
investment (REI) less allowance
for losses of
$271,327 (September 30, 1994) and
$341,705 (December 31, 1993) 396,604 443,657
Real estate owned held for sale (REO)
less allowance for losses of
$53,069 (September 30, 1994) and
$66,453 (December 31, 1993) 193,243 179,862
Premises and equipment 658,879 673,879
Goodwill and other intangible assets 491,771 428,444
Other assets 317,029 399,403
Income taxes 9,837 48,743
----------- -----------
$53,906,195 $50,871,245
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $40,323,677 $38,018,653
Short-term borrowings under agreements
to repurchase securities sold 2,824,833 4,807,767
Other short-term borrowings - 169,854
FHLB and other borrowings 6,770,960 3,901,724
Other liabilities 1,003,737 1,024,216
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Total liabilities 50,923,207 47,922,214
Stockholders' equity 2,982,988 2,949,031
----------- -----------
$53,906,195 $50,871,245
=========== ===========
H.F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands except per share data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
Interest income:
Interest on real estate loans $ 546,431 $ 662,079 $ 1,682,146 $ 2,019,389
Interest on MBS 196,440 63,286 481,012 193,689
Interest and dividends on investments 39,645 26,231 100,810 71,789
------------ ------------ ------------ ------------
Total interest income 782,516 751,596 2,263,968 2,284,867
------------ ------------ ------------ ------------
Interest expense:
Deposits 324,441 322,192 902,803 991,524
Short-term borrowings 47,911 30,471 143,687 84,113
FHLB and other borrowings 92,255 65,703 212,083 191,007
------------ ------------ ------------ ------------
Total interest expense 464,607 418,366 1,258,573 1,266,644
------------ ------------ ------------ ------------
Net interest income 317,909 333,230 1,005,395 1,018,223
Provision for loan losses 29,432 22,243 138,013 527,077
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 288,477 310,987 867,382 491,146
------------ ------------ ------------ ------------
Other income:
Gain on sales of MBS - 8,996 4,868 12,285
Gain (loss) on sales of loans (943) 13,260 (10,978) 44,722
Loan servicing income 14,091 14,355 45,109 44,876
Other fee income 28,053 29,026 82,352 87,951
Operations of REI (6,093) (1,992) (16,385) (189,370)
Gain on sales of investment securities 147 - 195 -
Other operating income 1,128 1,930 3,230 5,704
------------ ------------ ------------ ------------
36,383 65,575 108,391 6,168
------------ ------------ ------------ ------------
Other expenses:
General and administrative expenses (G&A) 184,717 203,984 562,399 602,299
Operations of REO 20,942 40,457 69,877 172,769
Amortization of goodwill 5,760 6,701 17,741 20,164
------------ ------------ ------------ ------------
211,419 251,142 650,017 795,232
------------ ------------ ------------ ------------
Earnings (loss) before provision for
income taxes (benefit) 113,441 125,420 325,756 (297,918)
Provision for income taxes (benefit) 44,914 55,431 128,333 (109,781)
------------ ------------ ------------ ------------
Net earnings (loss) $ 68,527 $ 69,989 $ 197,423 $ (188,137)
============ ============ ============ ============
Earnings (loss) per common share:
Primary $ 0.48 $ 0.50 $ 1.36 $ (1.82)
Fully diluted 0.47 0.50 1.33 (1.82)
Common shares outstanding, weighted average:
Primary 117,603,333 117,275,683 117,389,875 117,234,088
Fully diluted 129,422,951 124,633,180 129,410,249 117,234,088
Return on average assets 0.52% 0.56% 0.51% (0.50)%
Return on average equity 9.21% 10.09% 8.89% (8.85)%
Return on average tangible equity* 11.63% 13.24% 11.29% (9.45)%
Ratio of G&A expenses to average assets 1.40% 1.63% 1.46% 1.61 %
<FN>
*Net earnings excluding amortization of goodwill as a percentage of average equity excluding goodwill.
H.F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
For the Nine
Months Ended September 30,
-------------------------
1994 1993
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Cash flows from operating activities:
Net earnings (loss) $ 197,423 $ (188,137)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Provision for losses on loans and real estate 180,793 789,017
Proceeds from sales of loans originated for sale 510,854 1,790,567
Loans originated for sale (373,244) (1,530,913)
Loans repurchased from investors (58,171) (202,446)
Other, net 152,376 (96,503)
----------- -----------
Net cash provided by operating activities 610,031 561,585
----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available for sale 405,069 398,414
Proceeds from sales of nonaccrual loans 57,700 925,247
Principal payments on loans 2,397,677 3,322,228
Principal payments on MBS 900,394 677,153
Loans originated for investment (net of refinances) (6,793,820) (5,680,814)
MBS purchased (549,839) (119,907)
Loans purchased (3,435) (1,062,685)
Other investment securities purchased (335,106) (1,240)
Proceeds from sales of REI 66,997 49,529
Proceeds from sales of REO 247,104 452,747
Additions to REI (35,503) (62,921)
Other, net 106,962 22,321
----------- -----------
Net cash used in investing activities (3,535,800) (1,079,928)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 53,672 (1,464,916)
Net deposits purchased 2,251,352 1,093,434
Net increase (decrease) in borrowings maturing in 90 days or less (2,155,751) 734,961
Proceeds from other borrowings 4,433,600 12,199,666
Repayment of other borrowings (1,570,211) (10,731,959)
Net proceeds from issuance of Preferred Stock - 469,135
Dividends to stockholders (115,006) (98,518)
----------- -----------
Net cash provided by financing activities 2,897,656 2,201,803
----------- -----------
Net increase (decrease) in cash and cash equivalents (28,113) 1,683,460
Cash and cash equivalents at beginning of period 3,530,128 1,955,590
----------- -----------
Cash and cash equivalents at end of period $ 3,502,015 $ 3,639,050
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The preceding Condensed Consolidated Financial Statements present
financial data of H.F. Ahmanson & Company and Subsidiaries. As used herein
"Ahmanson" means H.F. Ahmanson & Company, a Delaware corporation, and the
"Company" means Ahmanson and its subsidiaries. The Company is one of the
largest residential real estate-oriented financial services companies in the
United States, and is principally engaged in the savings bank business and
related financial service activities. Home Savings of America, FSB ("Home
Savings"), a wholly owned subsidiary of Ahmanson, is the largest savings
institution in the United States. Certain amounts in prior periods' financial
statements have been reclassified to conform to the current presentation.
OVERVIEW
For the third quarter of 1994, the Company recorded net earnings of $68.5
million, or $0.47 per fully diluted common share, a decline of $5.0 million
from the 1994 second quarter and $1.5 million from the third quarter a year
ago. Third quarter net earnings reflected lower net interest income, due
mainly to the reduction in the net interest margin, and lower gains on sales
of loans and mortgage-backed securities as compared to the same quarter of the
previous year. Partially offsetting these factors were improving asset
quality, reduced general and administrative expenses, and asset growth.
In the first nine months of 1994, the Company earned $197.4 million, or
$1.33 per fully diluted common share.
Net interest income totaled $317.9 million for the third quarter of 1994.
The decline in net interest income from the 1994 second quarter and the third
quarter a year ago is primarily due to the reduction in the net interest
margin from 2.87% in the third quarter of 1993 and 2.81% in the second quarter
of 1994 to 2.56% in the third quarter of 1994. This margin compression
principally reflects the timing difference between the repricing of the
lagging Federal Home Loan Bank Eleventh District Cost of Funds Index, to which
the bulk of the Company's assets are tied, and the repricing of the Company's
deposits and borrowings in the increasing interest rate environment during the
year. Margin compression is expected to continue, especially if interest
rates continue to rise.
The Company continues to reduce nonperforming assets, which fell by $53.4
million in the third quarter to $889.8 million, or 1.65% of total assets at
September 30, 1994. This is the lowest level of nonperforming assets since
November 30, 1990. Loans classified as troubled debt restructurings ("TDR")
rose $56.0 million, largely due to loans that were modified as a result of the
January 17, 1994 Northridge earthquake. Included in the TDR totals at
September 30, 1994 were $24.4 million of single family loans attributable to
the earthquake. The $30 million provision the Company recorded for its
estimated losses from real property damages sustained by borrowers due to the
earthquake has been reviewed, now that substantially all damages have been
quantified, and the allowance is adequate to cover those losses.
The level of delinquent loans, those 30-59 days and 60-89 days past due,
continues to decline. As the credit quality of the loan portfolio improves,
credit costs also continue to decline. Total credit costs (loan loss
provisions and REO expense) in the third quarter of 1994 were $50.4 million
compared to $54.9 million in the second quarter of 1994 and $62.7 million in
the third quarter of 1993. Credit costs for the current quarter were the
lowest since the third quarter of 1991.
The results of operations for real estate held for investment showed a
loss of $6.1 million for the third quarter of 1994. This was largely the
result of additions to the allowance for losses totaling $4.6 million. The
Company is continuing its withdrawal from these real estate development
activities. Real estate assets, net of the allowance for losses of $271.3
million, totaled $396.6 million at September 30, 1994.
The Company's primary loan product, the Adjustable Rate Mortgage ("ARM"),
continues to remain attractive to home purchasers in the present interest rate
environment and has given the Company a competitive marketing advantage. As a
result, the Company funded $2.6 billion of residential mortgages in the third
quarter of 1994, of which 99% were ARMs. Refinances represented 30.5% of the
total third quarter 1994 originations.
In addition, as interest rates have moved higher throughout the first
nine months of 1994, amortization and prepayments on loans and mortgage-backed
securities have slowed, thus contributing to growth in the portfolio on an
annualized basis of 10.5% during the third quarter of 1994.
The Company is exploring the sale of approximately $2.0 billion of fixed-
rate, low balance conventional servicing rights from its portfolio of loans
serviced for investors. The sale of this servicing is being considered to
maximize the efficiency in the Company's servicing operation.
General and administrative expenses both in absolute dollars and as a
percentage of average assets fell from the second quarter of 1994, as the
Company continues to exercise strict control of its operating expenses. The
Company's ratio of G&A to average assets for the third quarter of 1994 was
1.40%.
During the third quarter of 1994, Home Savings purchased or agreed to
purchase approximately $2.8 billion of deposits in 53 branches of six Southern
California thrifts at an average premium of approximately 4.0%. A total of 32
of these branches will be consolidated into nearby Home Savings branches,
increasing the average size and efficiency of those branches. In addition, on
July 25, 1994, Home Savings announced that it had signed an agreement to sell
approximately $1.5 billion of deposits in its 26 Savings of America branches
in Illinois for an average premium in excess of 8.0%. The sale of the
Illinois branch system was completed on November 10, 1994 and will result in
an after-tax gain of approximately $35 million in the fourth quarter of 1994,
after a charge of $21 million for branch real estate and a $26 million
goodwill reduction.
The general and administrative expenses for the third quarter of 1994
include the expenses associated with the Illinois branch system and the
expenses of the acquisition and the operations of 47 branches completed during
the quarter. These savings branch acquisitions will increase the Company's
deposit base and reduce the amount of its more expensive wholesale funding
while maximizing the efficiency of the entire savings system as the resulting
consolidations will contribute to a more efficient branch size.
Total assets at September 30, 1994 were a record $53.9 billion as a
result of the branch purchases mentioned above. These asset totals also
include assets related to the Company's deposits in its Illinois branch system
which were sold in the fourth quarter of 1994.
At September 30, 1994, Home Savings' capital position exceeded all
current and fully phased-in capital requirements mandated by federal law.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income was $317.9 million in the third quarter of 1994, a
decrease of $15.3 million or 5%, and was $1.0 billion in the first nine months
of 1994, a decrease of $12.8 million or 1%, compared to the same periods of
1993. The following tables present the Company's Consolidated Summary of
Average Financial Condition and net interest income for the periods indicated.
Average balances on interest-earning assets and interest-bearing liabilities
are computed on a daily basis and other average balances are computed on a
monthly basis. Interest income and expense and the related average balances
include the effect of discounts or premiums. Nonaccrual loans are included in
the average balances, however, delinquent interest on such loans has been
excluded from interest income.
Three Months Ended September 30,
---------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------ ----------- ---------- ------
(dollars in thousands)
Interest-earning assets:
Loans $34,066,952 $ 546,431 6.42% $39,996,195 $ 662,079 6.62%
MBS 12,744,682 196,440 6.17 3,898,579 63,286 6.49
----------- --------- ----------- ---------
Total loans and MBS 46,811,634 742,871 6.35 43,894,774 725,365 6.61
Investment securities 2,928,082 39,645 5.42 2,555,160 26,231 4.11
----------- --------- ----------- ---------
Interest-earning assets 49,739,716 782,516 6.29 46,449,934 751,596 6.47
--------- ---------
Other assets 3,010,203 3,720,832
----------- -----------
Total assets $52,749,919 $50,170,766
=========== ===========
Interest-bearing liabilities:
Deposits $38,394,311 324,441 3.38 $38,464,824 322,192 3.35
----------- --------- ----------- ---------
Borrowings:
Short-term 4,051,799 47,911 4.73 3,752,726 30,471 3.25
FHLB and other 6,170,347 92,255 5.98 3,769,734 65,703 6.97
----------- --------- ----------- ---------
Total borrowings 10,222,146 140,166 5.48 7,522,460 96,174 5.11
----------- --------- ----------- ---------
Interest-bearing liabilities 48,616,457 464,607 3.82 45,987,284 418,366 3.64
--------- ---------
Other liabilities 1,158,794 1,408,849
Stockholders' equity 2,974,668 2,774,633
----------- -----------
Total liabilities and
stockholders' equity $52,749,919 $50,170,766
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,123,259 2.47 $ 462,650 2.83
=========== ===========
Net interest income/
Net interest margin $ 317,909 2.56 $ 333,230 2.87
========= =========
Nine Months Ended September 30,
---------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ----------- ------ ----------- ----------- -------
(dollars in thousands)
Interest-earning assets:
Loans $35,353,711 $1,682,146 6.34% $39,754,159 $2,019,389 6.77%
MBS 10,119,045 481,012 6.34 3,858,662 193,689 6.69
----------- ---------- ----------- ----------
Total loans and MBS 45,472,756 2,163,158 6.34 43,612,821 2,213,078 6.77
Investment securities 2,902,379 100,810 4.63 2,349,105 71,789 4.07
----------- ---------- ----------- ----------
Interest-earning assets 48,375,135 2,263,968 6.24 45,961,926 2,284,867 6.63
---------- ----------
Other assets 2,977,328 3,859,810
----------- -----------
Total assets $51,352,463 $49,821,736
=========== ===========
Interest-bearing liabilities:
Deposits $37,877,095 902,803 3.18 $38,695,881 991,524 3.42
----------- ---------- ----------- ----------
Borrowings:
Short-term 4,804,645 143,687 3.99 3,469,060 84,113 3.23
FHLB and other 4,602,887 212,083 6.14 3,631,894 191,007 7.01
----------- ---------- ----------- ----------
Total borrowings 9,407,532 355,770 5.04 7,100,954 275,120 5.17
----------- ---------- ----------- ----------
Interest-bearing liabilities 47,284,627 1,258,573 3.55 45,796,835 1,266,644 3.69
---------- ----------
Other liabilities 1,106,208 1,189,681
Stockholders' equity 2,961,628 2,835,220
----------- -----------
Total liabilities and
stockholders' equity $51,352,463 $49,821,736
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,090,508 2.69 $ 165,091 2.94
=========== ===========
Net interest income/
Net interest margin $1,005,395 2.77 $1,018,223 2.95
========== ==========
The following table presents the changes for the third quarter and first
nine months of 1994 from the respective periods of 1993 in the interest income
and expense attributable to various categories of assets and liabilities for
the Company as allocated to changes in average balances and changes in average
rates. Because of numerous and simultaneous changes in both balances and
rates, it is not possible to allocate precisely the effects thereof. For
purposes of this table, the change due to volume is initially calculated as
the change in average balance multiplied by the average rate during the
current period and the change due to rate is calculated as the change in
average rate multiplied by the average balance during the preceding year's
period. Any change that remains unallocated after such calculations is
allocated proportionately to changes in volume and changes in rates.
Three Months Ended September 30, Nine Months Ended September
-------------------------------- -----------------------------
1994 Versus 1993 - 1994 Versus 1993 -
Increase/Decrease Due to Increase/Decrease Due to
--------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
--------- ---------- ---------- ---------- --------- ---------
(in thousands)
Interest income on:
Loans $(95,566) $(20,082) $(115,648) $(209,114) $(128,129) $(337,243)
MBS 136,269 (3,115) 133,154 297,444 (10,121) 287,323
Investments 5,050 8,364 13,414 19,174 9,847 29,021
-------- -------- --------- --------- --------- ---------
Total interest income 45,753 (14,833) 30,920 107,504 (128,403) (20,899)
-------- -------- --------- --------- --------- ---------
Interest expense on:
Deposits (586) 2,835 2,249 (19,427) (69,294) (88,721)
Short-term borrowings 3,541 13,899 17,440 39,855 19,719 59,574
FHLB and other borrowings 35,880 (9,328) 26,552 44,842 (23,766) 21,076
-------- -------- --------- --------- --------- ---------
Total interest expense 38,835 7,406 46,241 65,270 (73,341) (8,071)
-------- -------- --------- --------- --------- ---------
Net interest income $ 6,918 $(22,239) $ (15,321) $ 42,234 $ (55,062) $ (12,828)
======== ======== ========= ========= ========= =========
Net interest income decreased $15.3 million, or 5% in the third quarter
of 1994 as compared to the third quarter of 1993 due to a decrease of 31 basis
points in the net interest margin to 2.56% for the third quarter of 1994 from
2.87% for the third quarter of 1993, partially offset by an increase of $3.3
billion in average interest-earning assets. The decrease of $12.8 million, or
1%, in net interest income for the first nine months of 1994 as compared to
the same period of 1993 reflects a decline of 18 basis points in the net
interest margin to 2.77% for the 1994 period from 2.95% for the 1993 period,
partially offset by an increase of $2.4 billion in average interest-earning
assets. The increases in average interest-earning assets were primarily
funded with interest-bearing liabilities and sales of REO.
Net interest income and the net interest margin continued to benefit from
improvements in the credit quality of the Company's mortgage portfolio.
Provisions for losses of delinquent interest related to nonaccrual loans of
$10.5 million and $11.3 million in the third quarter of 1994 and 1993,
respectively, had the effect of reducing the net interest margin by eight
basis points and 10 basis points in the respective periods. Such provisions
came to $31.9 million in the first nine months of 1994 and $53.2 million in
the first nine months of 1993, reducing the net interest margin by nine basis
points and 16 basis points, respectively.
The compression in the net interest margin for the 1994 third quarter and
nine month periods partially reflects the lag between changes in the monthly
weighted average cost of funds for Federal Home Loan Bank ("FHLB") Eleventh
District savings institutions as computed by the FHLB of San Francisco
("COFI") to which a majority of the Company's interest-earning assets are tied
and changes in the repricing of the Company's interest-bearing liabilities.
The compression was diminished by actions taken in the last half of 1993 and
the first nine months of 1994 to reduce the Company's sensitivity to upward
rate movement, including extending maturities and lengthening interest rate
repricing terms on borrowings, and strategic rate changes on certain deposits.
In addition, the average cost of the deposits acquired during the third
quarter of 1994 is lower than the alternative cost of borrowings. The
Company's cost of funds was 13 basis points and 31 basis points below the
average of COFI of 3.95% during both the respective third quarters of 1994 and
1993. During the first nine months of 1994 and 1993, the Company's cost of
funds was 24 basis points and 43 basis points below the average of COFI of
3.79% and 4.12% for the respective 1994 and 1993 periods.
The Company believes that its net interest income is somewhat insulated
from interest rate fluctuations within a fairly wide range primarily due to
the adjustable rate nature of its loan and MBS portfolio. However, additional
increases in rates could contribute to further compression of the net interest
margin. In addition, substantially all ARMs originated since 1981 have
maximum and minimum interest rates and all ARMs originated after 1987 have a
maximum interest rate. Such maximum interest rates could also contribute to
compression of the net interest margin. For information regarding the
Company's strategies related to changes in interest rates, see "Financial
Condition - Asset/Liability Management."
Provision for Loan Losses
For the comparable third quarters of 1994 and 1993, the provisions for
loan losses were $29.4 million and $22.2 million, respectively, an increase of
$7.2 million or 32%. The provision for loan losses was $138.0 million in the
first nine months of 1994 compared to $527.1 million in the nine months of
1993, a decrease of $389.1 million or 74%. The provision for the first nine
months of 1994 includes $30 million representing the Company's estimated
losses from real property damage sustained by its borrowers in the Northridge,
California earthquake in January 1994. The decrease from the 1993 year-to-
date period also reflects, among other things, provisions for losses related
to the second quarter 1993 decision to sell $1.2 billion of nonaccrual single
family loans. For additional information regarding the allowance for loan
losses, see "Financial Condition - Asset Quality - Allowance for Loan Losses."
Other Income
Gain on Sales of MBS. There were no MBS sold during the third quarter of
1994, compared to MBS totaling $306.2 million sold in the third quarter of
1993 for a pre-tax gain of $9.0 million. During the first nine months of
1994, MBS classified as available for sale totaling $400.2 million were sold
for a pre-tax gain of $4.9 million, compared to a pre-tax gain of $12.3
million on sales of MBS totalling $386.1 million in the first nine months of
1993.
Gain (Loss) on Sales of Loans. During the third quarter of 1994, loans
originated for sale totaling $39.6 million were sold for a pre-tax loss of
$0.9 million as compared to such loans totaling $606.2 million sold for a pre-
tax gain of $13.3 million in the third quarter of 1993. In the first nine
months of 1994, loans originated for sale totaling $520.2 million were sold
for a pre-tax loss of $11.0 million compared to such loans totaling $1.7
billion sold for a pre-tax gain of $44.7 million in the first nine months of
1993. The losses in the current year periods reflect the reduced demand in
the secondary market for fixed rate loans, most of which the Company
originates for sale, and adjustments to the gains on loans previously sold
with recourse.
Other Fee Income. Other fee income in the third quarter of 1994 was
$28.1 million, a decrease of $1.0 million or 3%, and was $82.4 million for the
first nine months of 1994, a decrease of $5.6 million or 6%, as compared to
the same periods of 1993. The decreases were primarily due to reductions in
credit card fees resulting from the sale of the credit card portfolio in the
fourth quarter of 1993, commission income from investment and insurance
services and late charges reflecting decreases in loan delinquencies.
Operations of REI. Losses from operations of REI totaled $6.1 million in
the third quarter of 1994, an increase of $4.1 million compared to the third
quarter of 1993 primarily due to an increase of $4.6 million in the provision
for losses. Losses from operations of REI were $16.4 million for the first
nine months of 1994, a decrease of $173.0 million as compared to the same
period of 1993 primarily due to a decrease of $164.5 million in provision for
losses. The Company's net book value of REI decreased $47.1 million or 11% to
$396.6 million at September 30, 1994 from $443.7 million at December 31, 1993.
The allowance for losses on REI was $271.3 million, or 40.6% of gross book
value of REI at September 30, 1994 compared to $341.7 million, or 43.5% of
gross book value of REI at December 31, 1993.
The Company intends to continue its withdrawal from real estate
development activities. While the Company does not intend to acquire new
properties, it intends to develop, hold and/or sell its current properties
depending on economic conditions. While management believes the net
realizable value of REI and the related allowance for losses are fairly
stated, declines in net realizable value and additions to the allowance for
losses could result from continued weakness in specific project markets,
changes in economic conditions and revisions to project business plans, which
may reflect decisions by the Company to accelerate the disposition of the
properties.
Other Expenses
G&A Expenses. G&A expenses totaled $184.7 million, a decrease of $19.3
million or 9%, in the third quarter of 1994 and totaled $562.4 million, a
decrease of $39.9 million or 7%, in the first nine months of 1994 as compared
to the same periods of 1993, reflecting the continued control of operating
expenses and reductions in personnel costs related to lower levels of
nonperforming assets. The decreases in G&A expenses during the current
periods were achieved despite the continuing costs associated with the
Illinois branches sold in November 1994 as well as the costs related to the
branches acquired during the third quarter of 1994. The ratio of G&A expenses
to average assets (the "G&A ratio") decreased to 1.40% in the third quarter of
1994 compared to 1.63% in the third quarter of 1993, reflecting the 9%
decrease in G&A expenses and a 5% increase in average assets. The G&A ratios
for the first nine months of 1994 and 1993 were 1.46% and 1.61%, respectively,
which reflects the 7% decrease in G&A expenses and a 3% increase in average
assets.
Operations of REO. Losses from operations of REO were $20.9 million for
the third quarter of 1994, a decrease of $19.5 million or 48% compared to the
same period of 1993 primarily due to a decrease of $13.6 million in net losses
on REO sales. For the first nine months of 1994, losses from operations of
REO were $69.9 million, a decrease of $102.9 million or 60%, reflecting a
decrease of $54.7 million in the provision for losses, a reduction of $38.8
million in net losses on REO sales and lower operating expenses.
The lower losses in the 1994 periods reflect a reduction in foreclosures
as a result of the sales of nonaccrual loans in 1993 and the first half of
1994 in addition to improving credit quality. For additional information
regarding REO, see "Financial Condition - Asset Quality - Nonperforming Assets
and Potential Problem Loans."
Provision for Income Taxes (Benefit). The changes in the provision for
income taxes (benefit) primarily reflect the changes in pre-tax earnings
(loss) between the comparable periods. The effective tax rates for the third
quarters of 1994 and 1993 were 39.6% and 44.2%, respectively. For the
comparable nine month periods, the effective tax (benefit) rates were 39.4% in
1994 and (36.8)% in 1993, reflecting management's estimate of the Company's
full year tax provision (benefit).
FINANCIAL CONDITION
During the first nine months of 1994 the Company's consolidated assets
increased $3.0 billion or 6% to $53.9 billion from $50.9 billion at December
31, 1993. The increase in total assets reflects the deposits acquired in
the third quarter totaling $2.3 billion and the retention of liquid assets
in anticipation of the sale of the Illinois branches in the fourth quarter
of 1994. If the sale of the Illinois branch system deposits had been
completed in the third quarter of 1994, consolidated assets would have
totaled approximately $52.5 billion at September 30, 1994. The higher level
of total assets also reflects the growth in the loan and MBS portfolio due
to increased originations of ARM loans and a slowing of principal payments
due to rising interest rates.
The Company's primary asset generation business continues to be the
origination of loans on residential real estate properties. The Company
originated $7.7 billion in loans in the first nine months of 1994 compared
to $8.0 billion in the first nine months of 1993. Loans on single family
homes (one-to-four units) accounted for 79% of the total loan origination
volume in the first nine months of 1994, with the balance on multi-family
residential properties, and 94% of all originations were ARMs. Mortgage
refinances accounted for 37.7% of the Company's originations in the first
nine months of 1994.
In the first nine months of 1994, 71% of loan originations were on
properties located in California. At September 30, 1994, approximately 96%
of the loan and MBS portfolio was secured by residential properties,
including 79% secured by single family properties.
The following table summarizes the Company's gross mortgage portfolio
by state and property type at September 30, 1994:
Single Family Multi-Family Commercial and
Properties Properties Industrial Properties Total
---------------------- ---------------------- ----------------------- -----------------------
Gross Gross Gross Gross
Mortgage % of Mortgage % of Mortgage % of Mortgage % of
State Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
- ----- ----------- ---------- ----------- ---------- ------------ ---------- ----------- ----------
(dollars in thousands)
California $26,981,943 71.53% $7,491,002 90.12% $1,289,371 71.60% $35,762,316 74.76%
Florida 2,704,938 7.17 23,079 0.28 6,873 0.38 2,734,890 5.72
New York 2,043,832 5.42 295,824 3.56 226,472 12.57 2,566,128 5.36
Illinois 1,758,163 4.66 149,704 1.80 18,348 1.02 1,926,215 4.03
Texas 924,459 2.45 79,523 0.96 41,923 2.33 1,045,905 2.19
Other 3,306,928 8.77 272,701 3.28 217,891 12.10 3,797,520 7.94
----------- ---------- ---------- -----------
$37,720,263 78.86% $8,311,833 17.38% $1,800,878 3.76% $47,832,974 100.00%
=========== ========== ========== ===========
The loan and MBS portfolio includes approximately $6.2 billion in
mortgage loans that were originated with LTV ratios exceeding 80%, or 13.1%
of the portfolio at September 30, 1994. Approximately 23.6% of loans
originated during the first nine months of 1994 had LTV ratios in excess of
80%, including 17.2% with LTV ratios of 90% or greater, all of which were
loans on single family properties. The Company takes the additional risk of
originating loans with LTV ratios in excess of 80% into consideration in its
loan underwriting and pricing policies.
Asset/Liability Management
One of the Company's primary business strategies continues to be the
reduction of volatility in net interest income resulting from changes in
interest rates. This is accomplished by managing the repricing
characteristics of its interest-earning assets and interest-bearing
liabilities. (Interest rate reset provisions of both assets and
liabilities, whether through contractual maturity or through contractual
interest rate adjustment provisions, are commonly referred to as "repricing
terms.")
In order to manage the interest rate risk inherent in its portfolios of
interest-earning assets and interest-bearing liabilities, the Company has
emphasized the origination of COFI ARMs for retention in the loan and MBS
portfolio. At September 30, 1994, 94.8% of the Company's $47.4 billion loan
and MBS portfolio consisted of ARMs principally indexed to COFI, compared to
93.6% of the $44.6 billion loan and MBS portfolio at December 31, 1993. The
average contractual spread above COFI on the Company's COFI ARM portfolio
was 2.42% at September 30, 1994, up four basis points from 2.38% at December
31, 1993.
The Company's basic interest rate risk management strategy includes a
goal of having the combined repricing terms of its interest-bearing
liabilities not differ materially from those of the FHLB Eleventh District
savings institutions in aggregate. Historically, the Company has maintained
its cost of funds at a level below COFI. In a period of rising market
interest rates, the favorable differential between the Company's cost of
funds and COFI could decline, which could result in compression of the
Company's net interest margin. Such a compression occurred during the first
nine months of 1994 and is expected to continue especially if interest rates
continue to rise.
The following table presents the components of the Company's interest
rate sensitive asset and liability portfolios by repricing periods
(contractual maturity as adjusted for frequency of repricing) as of
September 30, 1994:
Repricing Periods
Percent ------------------------------------------------------------------
of Within
Balance Total 6 Months Months 7-12 1-5 Years 5-10 Years Years Over 10
----------- ------- ----------- ----------- ----------- ---------- -------------
(dollars in thousands)
Interest-earning assets:
Investment securities $ 3,321,199 7% $ 3,040,796 $ 6 $ 280,373 $ 24 $ -
Impact of hedging (LIBOR indexed
amortizing swaps) - - (141,631) - 141,631 - -
----------- --- ----------- ----------- ----------- ---------- -----------
Total investment securities 3,321,199 7 2,899,165 6 422,004 24 -
----------- --- ----------- ----------- ----------- ---------- -----------
Loans and MBS
MBS
ARMs 11,891,185 23 11,690,400 200,785 - - -
Other 1,212,069 2 - 25,189 609,574 95,800 481,506
Loans
ARMs 33,048,402 65 31,603,582 48,700 1,396,120 - -
Other 1,254,546 3 248,340 46,769 308,646 302,745 348,046
Impact of hedging (interest
rate swaps) - - 1,444,820 (48,700) (1,396,120) - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total loans and MBS 47,406,202 93 44,987,142 272,743 918,220 398,545 829,552
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-earning assets $50,727,401 100% $47,886,307 $ 272,749 $ 1,340,224 $ 398,569 $ 829,552
=========== === =========== =========== =========== ========== ==========
Interest-bearing liabilities:
Deposits
Transaction accounts $13,959,343 28% $13,959,343 $ - $ - $ - $ -
Term accounts 26,364,334 53 12,346,931 7,311,748 6,687,120 18,353 182
----------- --- ----------- ----------- ----------- ---------- ----------
Total deposits 40,323,677 81 26,306,274 7,311,748 6,687,120 18,353 182
----------- --- ----------- ----------- ----------- ---------- ----------
Borrowings
Short-term 2,824,833 6 2,824,833 - - - -
FHLB and other 6,770,960 13 5,118,759 2,238 659,789 990,174 -
----------- --- ----------- ----------- ----------- ---------- ----------
Total borrowings 9,595,793 19 7,943,592 2,238 659,789 990,174 -
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-bearing
liabilities $49,919,470 100% $34,249,866 $ 7,313,986 $ 7,346,909 $1,008,527 $ 182
=========== === =========== =========== =========== ========== ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-bearing liabilities $ 807,931 $13,636,441 $(7,041,237) $(6,006,685) $ (609,958) $ 829,370
=========== =========== =========== =========== ========== ==========
Cumulative interest sensitivity gap $13,636,441 $ 6,595,204 $ 588,519 $ (21,439) $ 807,931
=========== =========== =========== ========== ==========
Percentage of interest-earning assets
to interest-bearing liabilities 101.62%
Percentage of cumulative interest
sensitivity gap to total assets 1.50%
The following table presents the interest rates and spreads at the end
of the periods indicated:
September 30, December 31,
1994 1993
------------- ------------
Average yield on:
Loans 6.49% 6.53%
MBS 6.41 6.33
Total loans and MBS 6.47 6.50
Investment securities 5.23 3.83
Interest-earning assets 6.39 6.33
Average rate paid on:
Deposits 3.52 3.14
Borrowings:
Short-term 5.17 3.39
FHLB and other 5.89 6.44
Total borrowings 5.68 (1) 4.73 (1)
Interest-bearing liabilities 3.94 3.44
Interest rate spread 2.45 2.89
Net interest margin 2.51 2.95
<FN>
(1) Includes the effect of miscellaneous borrowing costs of approximately
0.25% and 0.46% as of September 30, 1994 and December 31, 1993,
respectively.
Asset Quality
Nonperforming Assets and Potential Problem Loans. A loan is generally
placed on nonaccrual status when the Company becomes aware that the borrower
has entered bankruptcy proceedings and the loan is delinquent, or when the
loan is past due 90 days as to either principal or interest. The Company
considers a loan to be impaired when, based upon current information and
events, it believes it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
effective January 1, 1993. SFAS No. 114 does not apply to loans the Company
collectively evaluates for impairment. The Company's impaired loans within
the scope of SFAS No. 114 include nonaccrual multi-family and commercial and
industrial real estate loans ("major loans"), excluding those collectively
reviewed for impairment; TDRs; and performing major loans and major loans
less than 90 days delinquent ("other impaired major loans") which the
Company believes will be collected in full, but which the Company believes
it is probable will not be collected in accordance with the contractual
terms of the loans. The Company continues to accrue interest on TDRs and
other impaired major loans since full payment of principal and interest is
expected and such loans are performing or less than 90 days delinquent and
therefore do not meet the criteria for nonaccrual status. The Company bases
the measurement of loan impairment on the fair value of the loans'
collateral properties in accordance with SFAS No. 114.
In October 1994 the Financial Accounting Standards Board ("FASB")
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which amends SFAS No. 114. SFAS No. 118
permits creditors such as the Company to use methods other than those
prescribed by SFAS No. 114 for recognizing interest income on impaired
loans. There are additional disclosures regarding impaired loans and
related interest income required by SFAS No. 118, which is effective for
fiscal years beginning after December 15, 1994. The Company will implement
SFAS No. 118 effective December 31, 1994. Since the Company records loan
impairment in the allowance for loan losses based on the value of the
underlying real estate collateral, management does not expect the
implementation of SFAS No. 118 to have a material effect on the Company's
financial statements.
At September 30, 1994, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled
$339.0 million and the total allowance for losses related to such loans was
$41.8 million, compared to the recorded investment of $746.5 million and the
related allowance for losses of $81.3 million at December 31, 1993.
The following table presents nonperforming assets (nonaccrual loans and
REO), TDRs and other impaired major loans by type as of the dates indicated:
September 30, December 31, Increase
1994 1993 (Decrease)
----------- ----------- ----------
(dollars in thousands)
Nonaccrual loans:
Single family $ 531,224 $ 568,550 $ (37,326)
Multi-family 131,853(1) 139,157(1) (7,304)
Commercial and industrial
real estate 33,490(2) 72,693(2) (39,203)
--------- --------- ---------
696,567 780,400 (83,833)
--------- --------- ---------
REO:
Single family 139,088 99,744 39,344
Multi-family 36,861 50,081 (13,220)
Commercial and industrial
real estate 17,294 30,037 (12,743)
--------- --------- ---------
193,243 179,862 13,381
--------- --------- ---------
Total nonperforming assets:
Single family 670,312 668,294 2,018
Multi-family 168,714 189,238 (20,524)
Commercial and industrial
real estate 50,784 102,730 (51,946)
--------- --------- ---------
Total $ 889,810 $ 960,262 $ (70,452)
========= ========= =========
TDRs:
Single family $ 27,424 $ - $ 27,424
Multi-family 91,673 73,271 18,402
Commercial and industrial
real estate 34,525 27,480 7,045
--------- --------- ---------
Total $ 153,622 $ 100,751 $ 52,871
========= ========= =========
Other impaired major loans:
Multi-family $ 19,006 $ 118,276 $ (99,270)
Commercial and industrial
real estate 14,892 272,768 (257,876)
--------- --------- ---------
$ 33,898 $ 391,044 $(357,146)
========= ========= =========
Ratio of nonperforming assets
to total assets 1.65% 1.89%
========= =========
Ratio of nonperforming assets
and TDRs to total assets 1.94% 2.09%
========= ========
Ratio of allowances for
losses on loans and REO to
nonperforming assets 52.00% 49.21%
========= ========
<FN>
(1) Includes net recorded investment of impaired multi-family loans under SFAS No. 114
totaling $84.1 million and $109.9 million at September 30, 1994 and December 31,
1993, respectively.
(2) Includes net recorded investment of impaired commercial and industrial real estate
loans under SFAS No. 114 totaling $24.8 million and $62.7 million at September 30,
1994 and December 31, 1993, respectively.
The following table presents nonperforming assets, TDRs and other
impaired major loans by state at September 30, 1994:
Nonperforming Assets
----------------------------------------------------
Commercial Other
and Impaired
Single Family Multi-Family Industrial Major
Residential Residential Real Estate Total TDRs Loans
------------- ------------ ----------- --------- ---------- ----------
(in thousands)
California $537,460 $152,974 $35,267 $725,701 $ 59,634 $20,014
Florida 32,364 - 785 33,149 5,347 -
New York 37,097 958 4,556 42,611 44,684 4,876
Illinois 12,869 3,270 5,300 21,439 27,275 -
Texas 7,891 649 307 8,847 5,994 -
Other 42,631 10,863 4,569 58,063 10,688 9,008
-------- -------- ------- -------- -------- -------
$670,312 $168,714 $50,784 $889,810 $153,622 $33,898
======== ======== ======= ======== ======== =======
Total nonperforming assets were $889.8 million at September 30, 1994,
or a ratio of nonperforming assets to total assets of 1.65%, a decrease of
7% during the first nine months of 1994 from $960.3 million, or 1.89% of
total assets, at December 31, 1993. Single family nonperforming assets were
$670.3 million, an increase of $2.0 million or less than 1% during the first
nine months of 1994 primarily due to an increase of $55.2 million in
California REO, substantially offset by a decrease of $46.2 million in
nonaccrual loans secured by California properties primarily due to the sale
of $44.6 million in nonaccrual loans during the second quarter of 1994.
Included in California single family nonperforming assets at September 30,
1994 are $63.7 million in nonaccrual loans related to the Northridge
earthquake.
Multi-family nonperforming assets totaled $168.7 million, a decrease of
$20.5 million or 11% during the first nine months of 1994 primarily due to
decreases in New York and New Jersey totaling $22.1 million which includes
the first quarter 1994 sale of nonaccrual loans totaling $12.3 million.
Commercial and industrial real estate nonperforming assets totaled $50.8
million, a decrease of $51.9 million or 51% during the first nine months of
1994 reflecting a decrease of $10.8 million in California, and decreases in
New York and New Jersey totaling $28.9 million which includes the first
quarter 1994 sale of nonaccrual loans totaling $14.3 million. Nonperforming
assets at September 30, 1994 include $49.0 million in nonaccrual multi-
family loans resulting from the Northridge earthquake.
TDRs at September 30, 1994 totaled $153.6 million, an increase of $52.9
million or 52% during the first nine months of 1994 primarily due to an
increase of $35.2 million in TDRs secured by properties in California, of
which $28.0 million resulted from the Northridge earthquake. The Northridge
earthquake led to single family, multi-family and commercial and industrial
TDRs of $24.4 million, $1.4 million and $2.2 million, respectively, at
September 30, 1994. TDRs increased in New York by $8.1 million and $22.4
million on loans secured by multi-family properties and commercial and
industrial properties, respectively, but decreased in Illinois by $11.5
million on loans secured by multi-family properties during the first nine
months of 1994.
Other impaired major loans totaled $33.9 million, net of the related
allowance for loan losses of $8.0 million, at September 30, 1994 compared to
$391.0 million, net of the related allowance for losses of $36.5 million, at
December 31, 1993. Included in other impaired major loans at September 1994
are $4.6 million in multi-family loans and $0.9 million in commercial and
industrial loans related to the Northridge earthquake. The decline of
$357.1 million or 91% in the net recorded investment reflects loans included
in other impaired major loans at December 31, 1993 based on declines in the
fair value of the underlying collateral, but which were not impaired in
accordance with SFAS No. 114 based on the Company's expectation of borrower
performance. Such loans were not included in other impaired major loans at
September 30, 1994.
The Company is continuing its efforts to reduce the amount of its
nonperforming assets by aggressively pursuing loan delinquencies through the
collection, workout and foreclosure processes and, if foreclosed, disposing
rapidly of the REO. The Company sold $222.9 million of single family REO
and $109.8 million of multi-family and commercial and industrial REO in the
first nine months of 1994. In addition, the Company may, from time to time,
offer packages of nonperforming assets for competitive bid.
Allowance for Loan Losses. Management believes the Company's allowance
for loan losses is adequate at September 30, 1994. The Company's process
for evaluating the adequacy of the allowance for loan losses has three basic
elements: first, the identification of problem loans; second, the
establishment of appropriate loan loss allowances once individual specific
problem loans are identified; and third, a methodology for estimating loan
losses based on the inherent risk in the rest of the loan portfolio. Based
upon this process, consideration of the current economic environment and
other factors, management determines what it considers to be an appropriate
allowance for loan losses.
The changes in and a summary by type of the allowance for loan losses are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1994 1993 1994 1993
-------- --------- --------- ---------
(dollars in thousands)
Beginning balance $447,098 $ 437,420 $ 438,786 $434,114
Provision for loan losses 29,432 22,243 138,013 527,077
Allowance for loan losses on loans purchased - - - 20,365
-------- --------- --------- ---------
476,530 459,663 576,799 981,556
-------- --------- --------- ---------
Charge-offs:
Single family (22,276) (2,923) (78,923) (455,152)
Multi-family (21,747) (8,305) (58,375) (47,599)
Commercial and industrial real estate (5,266) (11,337) (31,387) (52,887)
Credit cards - (2,068) - (6,198)
-------- --------- --------- ---------
(49,289) (24,633) (168,685) (561,836)
Recoveries 9,968 7,997 29,095 23,307
-------- --------- --------- ---------
Net charge-offs (39,321) (16,636) (139,590) (538,529)
-------- --------- --------- ---------
Ending balance $437,209 $ 443,027 $ 437,209 $ 443,027
======== ========= ========= =========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.34% 0.15% 0.41% 0.62%(1)
==== ==== ==== ====
<FN>
(1) Excludes charge-offs of $334.3 million related to the 1993 bulk sale of
single family nonaccrual loans, which increased the ratio to 1.65% for the
first nine months of 1993.
September 30, 1994 December 31, 1993
-------------------- ---------------------
% of Loan % of Loan
and MBS and MBS
Allowance Portfolio Allowance Portfolio
--------- --------- --------- ---------
(dollars in thousands)
Single family $166,908 0.44% $155,516 0.43%
Multi-family 177,800 2.14 145,097 2.00
Commercial and industrial
real estate 92,501 5.16 138,173 6.90
-------- --------
$437,209 0.91 $438,786 0.97
======== ========
For the first nine months of 1994 and 1993, gross charge-offs on single
family loans related to sales of nonaccrual loans were $6.0 million and $372.1
million, respectively. Gross charge-offs for the first nine months of 1994
included $8.7 million related to the sale of multi-family nonaccrual loans and
$13.4 million related to the sale of commercial and industrial nonaccrual
loans. The allocation of the allowance for loan losses by type at September
30, 1994 reflects improvement in the commercial and industrial loan portfolio
and the growth in the multi-family loan portfolio. The commercial and
industrial portfolio has diminished in size due to loan principal payments and
the Company's decision in 1988 to discontinue originating new commercial and
industrial loans. The multi-family loan portfolio has increased $1.3 billion
or 18% since the third quarter of 1993 due to multi-family originations which
the Company provides on California properties only. The slow economic
recovery in California combined with continued weakness in certain markets has
also contributed to the higher allocation of the allowance to the multi-family
loan portfolio.
The $30.0 million provision for losses during the first quarter of 1994
related to the Northridge earthquake was based on the Company's appraisals
of its major loan properties and a review of the damage assessment of single
family loan properties in the earthquake area. This information was used in
estimating the probability of foreclosures and the ultimate cost to the
Company. The Company provided assistance to certain borrowers affected by
the earthquake through deferral of loan payments and special loan programs.
The Company permitted borrowers to defer a limited number of loan payments
during the first nine months of 1994 on approximately 2,642 single family
loans with a principal balance of $528.9 million and approximately 438 major
loans with a principal balance of $307.8 million. The Company has also
originated 55 loans with an outstanding principal balance at September 30,
1994 of $2.0 million through special loan programs providing repair or
bridge financial for single family borrowers in the damaged area.
It is possible that the Company's delinquent, nonaccrual, TDRs and
other impaired loans and REO may increase and that the Company may
experience additional losses with respect to its real estate loan portfolio.
Although the Company has taken this possibility into consideration in
establishing its allowance for loan losses, future events may warrant
changes to the allowance.
Liquidity and Capital Resources
Liquidity consists of cash, cash equivalents and certain marketable
securities which are not committed, pledged or required to liquidate
specific liabilities. The liquidity portfolio, totaling approximately $3.6
billion at September 30, 1994, increased $228.6 million or 7% from December
31, 1993 primarily due to net increases of $2.3 billion in deposits and
$716.4 million in borrowings, partially offset by a net increase of $2.8
billion in the loan and MBS portfolio during the first nine months of 1994.
The liquidity portfolio is expected to decrease during the fourth quarter of
1994 due to the sale of the Illinois deposits. Regulations of the Office of
Thrift Supervision ("OTS") require each savings institution to maintain, for
each calendar month, an average daily balance of liquid assets equal to at
least 5% of the average daily balance of its net withdrawable accounts plus
short-term borrowings during the preceding calendar month. OTS regulations
also require each savings institution to maintain, for each calendar month,
an 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 plus short-term borrowings during
the preceding calendar month. For September 1994 the average liquidity and
average short-term liquidity ratios of Home Savings were 5.20% and 4.40%,
respectively.
Sources of additional liquidity consist primarily of positive cash
flows generated from operations, the collection of principal payments and
prepayments on loans and MBS, increases in deposits and borrowings and
issuances of equity securities. Positive cash flows are also generated
through the sale of MBS, loans and other assets for cash. Sources of
borrowings may include borrowings from the FHLB, commercial paper and public
debt issuances, borrowings under reverse repurchase agreements, commercial
bank lines of credit and, under certain conditions, direct borrowings from
the Federal Reserve System. The principal sources of cash inflows during
the first nine months of 1994 were principal payments and prepayments on
loans and MBS, proceeds from sales of loans and MBS and proceeds from short-
term and FHLB and other borrowings.
Each of the Company's sources of liquidity is influenced by various
uncertainties beyond the control of the Company. Scheduled loan payments
are a relatively stable source of funds, while loan prepayments and deposit
flows vary widely in reaction to market conditions, primarily prevailing
interest rates. Asset sales are influenced by general market interest rates
and other unforeseeable market conditions. The Company's ability to borrow
at attractive rates is affected by its credit rating, the availability of
acceptable collateral and other market conditions.
In order to manage the uncertainty inherent in its sources of funds,
the Company continually evaluates alternate sources of funds and maintains
and develops diversity and flexibility in the number and character of such
sources. The effect of a decline in any one source of funds generally can
be offset by use of an alternate source, although potentially at a different
cost to the Company. The Company's diverse geographic presence permits it
to take advantage of favorable sources of funds prevailing on a region-by-
region basis.
Loans Receivable. The Company's primary use of cash is to fund
internally generated mortgage loans. During the first nine months of 1994
cash of $7.2 billion was used to originate loans. Gross loan originations
of $7.7 billion in the first nine months of 1994 included approximately $7.3
billion of ARMs with an average spread of 265 basis points above COFI and
$444.1 million of fixed rate loans. Fixed rate loans originated and
designated for sale represented approximately 5% of single family loan
originations in the first nine months of 1994. Principal payments on loans
decreased 28% to $2.4 billion in the first nine months of 1994 from $3.3
billion in the first nine months of 1993.
During the first nine months of 1994 the Company sold loans totaling
$579.5 million, including sales of nonaccrual loans, net of charge-offs.
The Company designates certain loans as held for sale, including most of its
fixed rate originations. At September 30, 1994 the Company had $10.7
million of loans available for sale.
At September 30, 1994 the Company was committed to fund mortgage loans
totaling $845.0 million, including $834.8 million or 99% in ARMs. The
Company expects to fund such loans from its liquidity sources.
MBS. During the first nine months of 1994 the Company sold $400.2
million of COFI and other MBS and purchased $424.5 million of ARM MBS,
primarily indexed to one-year Treasury notes, and $125.4 million of short-
term fixed rate collateralized mortgage obligations. The Company designates
certain MBS as available for sale, including a significant portion of its
ARM MBS issued or guaranteed by government sponsored enterprises and certain
other MBS. At September 30, 1994 the Company had $2.6 billion of MBS
available for sale.
During the first nine months of 1994 the Company securitized $6.7
billion of ARMs into MBS which can be used as collateral for borrowings.
The Company also securitized $394.5 million of fixed rate single family
mortgages into government agency MBS during the second quarter of 1994. The
Company has the intent and ability to hold these MBS until maturity.
Deposits. Savings deposits totaled $40.3 billion, an increase of $2.3
billion or 6% during the first nine months of 1994 reflecting the purchases
of deposits and a minor net deposit inflow.
During the third quarter of 1994, the Company agreed to sell
approximately $1.5 billion of deposits in its 26 Illinois branches for a
deposit premium in excess of 8.0%. The sale of the Illinois branches was
completed on November 10, 1994. In addition, the Company purchased deposits
totaling $2.3 billion in 47 branches of five Southern California financial
institutions during the current third quarter. In October 1994, Home
Savings completed its purchase of six branches from another Southern
California financial institution, with deposits totaling $546.8 million. A
total of 32 acquired branches will be consolidated into existing Home
Savings branches. The average premium on the above acquisitions was
approximately 4.0%.
The Company intends to continue consideration of branch purchases and
sales as opportunities to consolidate the Company's presence in its key
strategic markets. At September 30, 1994, 59% of the Company's total
deposits were in California compared to 58% in California at December 31,
1993.
Borrowings. Borrowings totaled $9.6 billion, an increase of $716.4
million or 8% during the first nine months of 1994 reflecting a net increase
in FHLB and other borrowings of $2.9 billion, partially offset by a decrease
in short-term borrowings of $2.2 billion.
In February 1994 Home Savings issued $200 million of Floating Rate
Notes due February 9, 1996. In addition, Home Savings borrowed a total of
$4.0 billion in the first nine months of 1994 from the FHLB. These FHLB
Notes are due in 1995 through 1997. In August 1994 the Company issued $125
million of 7.875% Subordinated Notes due in September 2004, at a public
offering price of 99.534%. The Subordinated Notes are not redeemable prior
to maturity. Such borrowings partially offset a decrease in FHLB advances
of $1.4 billion in the first nine months of 1994.
Capital. Stockholders' equity totaled $3.0 billion, an increase of
$34.0 million or 1% during the first nine months of 1994 principally due to
net earnings of $197.4 million, partially offset by dividends paid to common
and preferred stockholders of $115.0 million and an increase of $53.2
million in the net unrealized loss on securities available for sale. The
aggregate unrealized loss at September 30, 1994 was $31.7 million.
The OTS has adopted regulations (the "Capital Regulations") that
contain a three-part capital standard requiring savings institutions to
maintain "core" capital of at least 3% of adjusted total assets, tangible
capital of at least 1.5% of adjusted total assets and risk-based capital of
at least 8% of risk-weighted assets. Special rules govern the ability of
savings institutions to include in their capital computations supervisory
goodwill and investments in subsidiaries engaged in activities not
permissible for national banks, such as real estate development. In
addition, institutions whose exposure to interest-rate risk as determined by
the OTS is deemed to be above normal may be required to hold additional
risk-based capital. Home Savings believes it does not have above-normal
exposure to interest-rate risk.
Home Savings is in compliance with the Capital Regulations. The
following table shows the capital amounts and ratios of Home Savings as
compared to the requirements of the Capital Regulations at September 30,
1994:
September 30, 1994
-------------------------------------------------
Home Savings Capital Requirements
-------------------- --------------------
(dollars in thousands)
Tangible capital $2,605,741 4.92% $ 794,594 1.50%
Core capital $2,804,119 5.29% $1,589,187 3.00%
Risk-based capital $3,878,642 11.88% $2,611,577 8.00%
The regulatory capital requirements applicable to Home Savings will
become more stringent as the amount of Home Savings' supervisory goodwill
and investment in real estate development subsidiaries includable in capital
is phased out through December 31, 1994 and July 1, 1996, respectively.
Home Savings currently meets the requirements of the Capital Regulations
assuming the present application of the full phase-out provisions. At
September 30, 1994 the capital ratios computed on this more stringent,
"fully phased-in" basis were 4.84% for core and tangible capital and 11.23%
for risk-based capital.
If the sale of the Illinois branches had been completed in the third
quarter of 1994, Home Savings' capital ratios at September 30, 1994 would
have been approximately 5.20% for tangible capital, 5.57% for core capital
and 12.20% for risk-based capital. On a fully phased-in basis, core and
tangible capital would have been approximately 5.12% and risk-based capital
would have been approximately 11.56%.
The OTS has proposed certain amendments to the Capital Regulations.
The Company is unable to predict whether, or in what form, the proposed
amendments to the Capital Regulations will ultimately be adopted.
Accordingly, the Company is unable to predict whether Home Savings would be
in compliance with any higher capital requirement resulting from such
amendments.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Registrant filed with the Commission a Current Reort on
Form 8-K dated August 24, 1994 with respect to the
Registrant's issuance of its 7.875% Subordinated Notes due
September 1, 2004.
SIGNATURES
Pursuant to the requirements 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.
Date: November 10, 1994 H. F. Ahmanson & Company
/s/ Kevin M. Twomey
-----------------------------
Kevin M. Twomey
Executive Vice President and
Chief Financial Officer
(Authorized Signer)
/s/ George Miranda
-----------------------------
George Miranda
First Vice President and
Principal Accounting Officer
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
-------- ------------ --------------
11 Statement of Computation of Earnings
per Share. 29