FORM 10-Q/A
AMENDMENT NO. 1
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 June 30, 1995
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
------------------------------ ---------------
(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: 30
Total number of sequentially numbered pages: 31
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 June 30, 1995: $.01 par value - 117,482,087 shares.
EXPLANATORY NOTE
This amendment to Form 10-Q on Form 10-Q/A has been prepared to reflect
the Registrant's adoption of Statement of Financial Accounting Standards No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions,"
effective January 1, 1995 for goodwill related to acquisitions prior to
September 30, 1982. The resulting revisions are applicable to Part I -
Financial Information and Exhibits 11 and 27. No other previously filed parts
or exhibits were affected.
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 June 30, 1995 December 31, 1994
- ------ ------------- -----------------
Cash and amounts due from banks $ 687,257 $ 782,678
Securities purchased under
agreements to resell 1,099,000 952,000
Other short-term investments 24,108 311,942
----------- -----------
Total cash and cash equivalents 1,810,365 2,046,620
Other investment securities held to
maturity [market value $259,463
(June 30, 1995) and $270,187
(December 31, 1994)] 259,332 276,945
Other investment securities available
for sale [amortized cost $9,197
(June 30, 1995) and $10,670
(December 31, 1994)] 9,159 10,117
Investment in stock of Federal Home
Loan Bank (FHLB) 472,872 439,891
Mortgage-backed securities (MBS)
held to maturity [market value
$17,604,863 (June 30, 1995) and
$10,013,827 (December 31, 1994)] 17,358,836 10,339,864
MBS available for sale [amortized cost
$879,860 (June 30, 1995) and
$2,539,504 (December 31, 1994)] 881,146 2,449,556
Loans receivable less allowance for
losses of $389,927 (June 30, 1995) and
$400,232 (December 31, 1994) 30,445,955 35,992,566
Loans held for sale [market value
$125,015 (June 30, 1995) and
$9,192 (December 31, 1994)] 123,415 9,179
Accrued interest receivable 153,699 212,947
Real estate held for development and
investment (REI) less allowance for
losses of $331,143 (June 30, 1995) and
$333,825 (December 31, 1994) 313,918 313,316
Real estate owned held for sale (REO)
less allowance for losses of
$35,824 (June 30, 1995) and
$44,726 (December 31, 1994) 191,524 161,948
Premises and equipment 624,988 614,817
Goodwill and other intangible assets 270,787 468,542
Other assets 289,926 314,853
Income taxes 35,761 74,621
----------- -----------
$53,241,683 $53,725,782
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $42,988,665 $40,655,016
Short-term borrowings under agreements
to repurchase securities sold 526,389 2,253,805
Other short-term borrowings 3,452 100,000
FHLB and other borrowings 6,169,705 6,822,280
Other liabilities 722,460 930,080
----------- -----------
Total liabilities 50,410,671 50,761,181
Stockholders' equity 2,831,012 2,964,601
----------- -----------
$53,241,683 $53,725,782
=========== ===========
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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Interest income:
Interest on real estate loans $ 615,281 $ 548,572 $ 1,246,072 $ 1,135,715
Interest on MBS 294,383 160,406 514,470 284,572
Interest and dividends on investments 39,901 33,722 83,006 61,165
----------- ----------- ----------- -----------
Total interest income 949,565 742,700 1,843,548 1,481,452
----------- ----------- ----------- -----------
Interest expense:
Deposits 484,778 287,315 924,236 578,362
Short-term borrowings 45,143 52,441 94,661 95,776
FHLB and other borrowings 109,469 66,063 219,232 119,828
----------- ----------- ----------- -----------
Total interest expense 639,390 405,819 1,238,129 793,966
----------- ----------- ----------- -----------
Net interest income 310,175 336,881 605,419 687,486
Provision for loan losses 25,465 33,069 52,009 108,581
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 284,710 303,812 553,410 578,905
----------- ----------- ----------- -----------
Other income:
Gain on sales of MBS 8,677 - 9,280 4,868
Gain (loss) on sales of loans 1,779 (6,254) 2,010 (10,035)
Loan servicing income 14,896 14,994 27,862 31,018
Other fee income 26,382 27,414 50,354 54,299
Gain on sales of investment securities 102 - 112 -
Other operating income 1,584 725 (216) 2,150
----------- ----------- ----------- -----------
53,420 36,879 89,402 82,300
----------- ----------- ----------- -----------
Other expenses:
General and administrative expenses (G&A) 201,305 185,913 384,057 377,682
Operations of REI 2,621 4,775 3,708 10,292
Operations of REO 19,605 21,857 40,658 48,935
Amortization of goodwill and other
intangible assets 6,934 5,750 13,845 11,981
----------- ----------- ----------- -----------
230,465 218,295 442,268 448,890
----------- ----------- ----------- -----------
Earnings before provision for income taxes and
cumulative effect of accounting change 107,665 122,396 200,544 212,315
Provision for income taxes 43,276 48,855 83,305 83,419
----------- ----------- ----------- -----------
Earnings before cumulative effect of accounting change 64,389 73,541 117,239 128,896
Cumulative effect of change in accounting for goodwill - - (234,742) -
----------- ----------- ----------- -----------
Net earnings (loss) $ 64,389 $ 73,541 $ (117,503) $ 128,896
=========== =========== =========== ===========
Earnings (loss) per common share - primary:
Earnings before cumulative effect of accounting
change $ 0.44 $ 0.52 $ 0.78 $ 0.88
Cumulative effect of change in accounting for
goodwill - - (2.00) -
----------- ----------- ----------- -----------
Net earnings (loss) $ 0.44 $ 0.52 $ (1.22) $ 0.88
=========== =========== =========== ===========
Earnings (loss) per common share - fully diluted:
Earnings before cumulative effect of accounting
change $ 0.43 $ 0.51 $ 0.78 $ 0.87
Cumulative effect of change in accounting for
goodwill - - (2.00) -
----------- ----------- ----------- -----------
Net earnings (loss) $ 0.43 $ 0.51 $ (1.22) $ 0.87
=========== =========== =========== ===========
Common shares outstanding, weighted average:
Primary 118,054,317 117,198,628 117,329,168 117,205,981
Fully diluted 129,932,055 129,071,985 117,329,168 129,102,867
Return on average assets 0.47% 0.58% (0.43)% 0.51%
Return on average equity 9.17% 9.97% (8.35)% 8.72%
Return on average tangible equity* 11.05% 12.51% 10.14% 11.12%
Ratio of G&A expenses to average assets 1.47% 1.46% 1.40% 1.49%
<FN>
*Net earnings excluding amortization of goodwill and other intangible assets, and cumulative effect of the change
in accounting for goodwill, as a percentage of average equity excluding goodwill and other intangible assets.
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
For The Six
Months Ended June 30,
------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net earnings (loss) $ (117,503) $ 128,896
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Provision for losses on loans and real estate 71,533 136,495
Cumulative effect of change in accounting for goodwill 234,742 -
Proceeds from sales of loans originated for sale 239,438 472,155
Loans originated for sale (312,334) (329,411)
Increase (decrease) in other liabilities (224,482) 74,171
Other, net 16,989 152,933
----------- -----------
Net cash provided by (used in) operating activities (91,617) 635,239
----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available for sale 1,575,783 405,069
Proceeds from sales of nonaccrual loans - 57,700
Principal payments on MBS 487,583 574,186
Principal payments on loans 766,986 1,741,861
Loans originated for investment (net of refinances) (2,812,001) (4,413,198)
MBS purchased (458) (518,810)
Loans purchased (40,376) (1,898)
Proceeds from maturities of other investment securities 22,627 -
Proceeds from sales of investment securities available for sale 165 -
Other investment securities purchased (3,460) (332,630)
Proceeds from sales of REO 155,041 150,895
Other, net (75,087) 75,829
----------- -----------
Net cash provided by (used in) investing activities 76,803 (2,260,996)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 1,044,545 (387,110)
Net deposits purchased 1,289,104 -
Net increase (decrease) in borrowings maturing in 90 days or less (1,823,964) 450,884
Proceeds from other borrowings 122,176 2,110,162
Repayment of other borrowings (776,514) (1,549,564)
Dividends to stockholders (76,788) (76,654)
----------- -----------
Net cash provided by (used in) financing activities (221,441) 547,718
----------- -----------
Net decrease in cash and cash equivalents (236,255) (1,078,039)
Cash and cash equivalents at beginning of period 2,046,620 3,530,128
----------- -----------
Cash and cash equivalents at end of period $ 1,810,365 $ 2,452,089
=========== ===========
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 currently 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 second quarter of 1995, the Company recorded net earnings of
$64.4 million, or $0.43 per fully diluted common share, a decline of $9.2
million from the second quarter of 1994, but an increase of $246.3 million
from a loss in the first quarter of 1995. The Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," as of January 1, 1995. The
overall impact on the Company's financial statements of adopting SFAS No. 72
was the elimination of goodwill related to the Company's thrift institution
acquisitions prior to September 30, 1982. The adoption resulted in the
restatement of earnings previously reported of $62.2 million, or $0.42 per
fully diluted common share in the second quarter of 1995 to $64.4 million, or
$0.43 per fully diluted common share. Second quarter net earnings when
compared to the first quarter of 1995 also reflected higher net interest
income, due mainly to an expansion of 11 basis points in the net interest
margin, higher gains on sales of loans and mortgage-backed securities and
moderately lower credit costs. Partially off-setting these factors were
higher general and administrative expenses.
In the first six months of 1995, the Company had a net loss of $117.5
million, or $1.22 per fully diluted common share, compared to $128.9 million
or $0.87 per fully diluted common share in the first six months of 1994. The
Company's adoption of SFAS No. 72 resulted in a restatement of earnings
previously reported for the first six months of 1995 from $112.9 million, or
$0.78 per fully diluted common share, to the loss of $117.5 million or $1.22
per fully diluted common share.
Net interest income totaled $310.2 million in the second quarter of 1995
compared to $336.9 million in the second quarter of 1994 and $295.2 million in
the first quarter of 1995. For the second quarter of 1995, the net interest
margin was 2.38% compared to 2.81% in the second quarter of 1994 and 2.27% in
the first quarter of 1995. At June 30, 1995 the net interest margin was
2.45%. The Company's funding costs have remained relatively stable, while the
11th District Cost of Funds Index, to which most of the Company's assets are
tied, continued to rise reflecting increases in funding costs in earlier
months. This has lessened the negative effect of the repricing of this
lagging index that the Company experienced late last year and in the first
quarter of 1995 when market rates were rising rapidly.
ASSET QUALITY
At June 30, 1995, nonperforming assets totaled $898.4 million, or 1.69%
of total assets, compared to $943.2 million or 1.83% of total assets at June
30, 1994, and $878.6 million, or 1.64% of total assets, at March 31, 1995.
Troubled debt restructurings totaled $141.3 million at June 30, 1995. The
Company's ratio of allowances for losses to nonperforming assets was 45.6% at
June 30, 1995, compared to 50.5% at June 30, 1994, and 46.7% at March 31,
1995.
During the second quarter of 1995, the Company provided $25.5 million for
loan losses, compared to $33.1 million in the second quarter of 1994 and $26.5
million in the first quarter of 1995. Net loan charge-offs for the second
quarter totaled $26.6 million, compared to $39.1 million in the second quarter
of 1994, and $35.7 million in the first quarter of 1995.
Real estate development assets, net of the allowance for losses, totaled
$313.9 million at June 30, 1995, compared to $411.9 million at June 30, 1994,
and $323.2 million at March 31, 1995. The allowance for losses on real estate
development assets totaled $331.1 million, or 51.3% of gross real estate
assets at June 30, 1995.
OTHER INCOME
In the second quarter of 1995, other income was $53.4 million, compared
to $36.9 million in the second quarter of 1994, and $36.0 million in the first
quarter of 1995. The Company's other income was bolstered by $10.5 million
from the gains on the sale of loans and mortgage-backed securities. All fixed
rate loans are originated for sale. The Company sold $1.4 billion in
adjustable rate mortgage-backed securities available for sale at a gain of
$8.7 million, in preparation for the sale of its New York deposit franchise to
GreenPoint Bank.
Effective April 1, 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights, an Amendment to FASB No 65." The overall
impact on the Company's financial statements of adopting SFAS No. 122 was an
increase in net earnings for the quarter and first six months of 1995 of $1.2
million, or $0.01 per fully diluted common share. Results from prior periods
have not been restated.
OTHER EXPENSES
G&A expenses totaled $201.3 million in the second quarter of 1995,
compared to $185.9 million in the second quarter of 1994 and $182.8 million in
the first quarter of 1995. The majority of the increase in G&A, compared to
the first quarter of 1995, was due to costs associated with various new
business development efforts currently underway, the acquisition and operating
costs of new branch systems, and the fact that the first quarter of 1995
included a rebate of $5.7 million in Federal Deposit Insurance Corporation
("FDIC") premiums.
G&A expenses as a percentage of average assets were 1.47% in the second
quarter of 1995, compared to 1.46% in the second quarter of 1994 and 1.34% in
the first quarter of 1995. For the first six months of 1995, the G&A ratio
was 1.40% compared to 1.49% for the first six months of 1994. Expressed as an
efficiency ratio that measures G&A expenses as a percentage of net interest
income and loan servicing and other fee income, the operating efficiency ratio
was 57.3% in the second quarter of 1995, compared to 49.0% in the second
quarter of 1994 and 55.0% in the first quarter of 1995.
LOAN ORIGINATIONS
The Company originated $1.6 billion of residential mortgages in the
second quarter of 1995, compared to $2.8 billion in the second quarter of 1994
and $1.7 billion in the first quarter of 1995. Of the second quarter 1995
production, 82% were adjustable rate mortgage loans ("ARMs"), compared to 97%
in both the second quarter of 1994 and the first quarter of 1995. In the
second quarter of 1995, 13% of the Company's ARM originations were tied to
U.S. Treasury securities ("Treasury ARMs"), reflecting the Company's goal of
diversifying its mortgage portfolio.
Purchase loans represented 74.4% of the total second quarter 1995
originations, compared to 58.5% in the second quarter of 1994, and 73.2% in
the first quarter of 1995. The Company's pipeline of loans in process totaled
$1.2 billion at June 30, 1995, with 73.1% being ARMs.
In late May 1995, the Company launched its consumer lending program and
took in over 600 home equity loan applications in the second quarter. The
average balance of applications received was $28,000. The Company funded
$544,000 in consumer home equity loans during the quarter. There were
approximately 550 loan applications totaling $15.6 million in the consumer
loan pipeline. A full menu of consumer loan products will be available
through all Home Savings' branches by year-end 1995.
DEPOSIT ACTIVITY
At the end of the second quarter of 1995, the Company had total deposits
of $43.0 billion. Included in that total was $1.2 billion of deposits
acquired from Household Bank on June 16, 1995. In that transaction Home
Savings also acquired 52 branches, 16 of which were consolidated with existing
Home Savings offices.
On May 15, 1995, the Company announced that Home Savings had agreed to
sell its New York retail deposit branch system, consisting of 60 branches and
$8.3 billion in deposits, to GreenPoint Bank for a premium of approximately
$660 million, or 8%. That transaction is subject to regulatory approval and
is expected to close in the third or fourth quarter of 1995.
CAPITAL
The adoption of SFAS No. 72 had no effect on Home Savings' capital
ratios. At June 30, 1995, Home Savings' federal capital ratios continued to
exceed regulatory requirements for well-capitalized institutions, the highest
regulatory standard.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $310.2 million in the second quarter of 1995, a
decrease of $26.7 million or 8%, and was $605.4 million in the first six
months of 1995, a decrease of $82.1 million or 12%, compared to the same
periods of 1994, reflecting compression of the net interest margin. The
compression began to abate in the first quarter of 1995 and the net interest
margin continued to expand during the second quarter of 1995 as yields
increased on the Company's ARM portfolio while the Company's funding costs
were relatively stable.
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-costing 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, and delinquent interest on such loans has been excluded
from interest income.
Three Months Ended June 30,
--------------------------------------------------------------
1995 1994
------------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------ ----------- ---------- ------
(dollars in thousands)
Interest-earning assets:
Loans $33,185,030 $ 615,281 7.42% $34,881,306 $ 548,572 6.29%
MBS 16,377,757 294,383 7.19 10,223,672 160,406 6.28
----------- --------- ----------- ---------
Total loans and MBS 49,562,787 909,664 7.34 45,104,978 708,978 6.29
Investment securities 2,617,970 39,901 6.10 2,875,652 33,722 4.69
----------- --------- ----------- ---------
Interest-earning assets 52,180,757 949,565 7.28 47,980,630 742,700 6.19
--------- ---------
Other assets 2,457,687 2,921,484
----------- -----------
Total assets $54,638,444 $50,902,114
=========== ===========
Interest-costing liabilities:
Deposits $41,829,971 484,778 4.64 $37,443,943 287,315 3.07
----------- --------- ----------- ---------
Borrowings:
Short-term 2,801,128 45,143 6.45 5,156,044 52,441 4.07
FHLB and other 6,331,260 109,469 6.92 4,250,717 66,063 6.22
----------- --------- ----------- ---------
Total borrowings 9,132,388 154,612 6.77 9,406,761 118,504 5.04
----------- --------- ----------- ---------
Interest-costing liabilities 50,962,359 639,390 5.02 46,850,704 405,819 3.46
--------- ---------
Other liabilities 867,278 1,101,692
Stockholders' equity 2,808,807 2,949,718
----------- -----------
Total liabilities and
stockholders' equity $54,638,444 $50,902,114
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,218,398 2.26 $ 1,129,926 2.73
=========== ===========
Net interest income/
Net interest margin $ 310,175 2.38 $ 336,881 2.81
========= =========
Six Months Ended June 30,
--------------------------------------------------------------
1995 1994
------------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ----------- ------ ----------- ----------- ------
(dollars in thousands)
Interest-earning assets:
Loans $34,684,019 $1,246,072 7.19% $36,007,754 $1,135,715 6.31%
MBS 14,731,303 514,470 6.98 8,784,467 284,572 6.48
----------- --------- ----------- ----------
Total loans and MBS 49,415,322 1,760,542 7.13 44,792,221 1,420,287 6.34
Investment securities 2,724,663 83,006 6.09 2,889,313 61,165 4.23
----------- ---------- ----------- ----------
Interest-earning assets 52,139,985 1,843,548 7.07 47,681,534 1,481,452 6.21
---------- ----------
Other assets 2,539,080 2,960,618
----------- -----------
Total assets $54,679,065 $50,642,152
=========== ===========
Interest-costing liabilities:
Deposits $41,587,318 924,236 4.44 $37,614,200 578,362 3.08
----------- ---------- ----------- ----------
Borrowings:
Short-term 2,978,276 94,661 6.36 5,187,306 95,776 3.69
FHLB and other 6,441,765 219,232 6.81 3,806,168 119,828 6.30
----------- ---------- ----------- ----------
Total borrowings 9,420,041 313,893 6.66 8,993,474 215,604 4.79
----------- ---------- ----------- ----------
Interest-costing liabilities 51,007,359 1,238,129 4.85 46,607,674 793,966 3.41
---------- ----------
Other liabilities 855,725 1,079,717
Stockholders' equity 2,815,981 2,954,761
----------- -----------
Total liabilities and
stockholders' equity $54,679,065 $50,642,152
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,132,626 2.22 $ 1,073,860 2.80
=========== ===========
Net interest income/
Net interest margin $ 605,419 2.32 $ 687,486 2.88
========= ==========
The following table presents the changes for the second quarter and first
six months of 1995 from the respective periods of 1994 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 from period to period, 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 current period change in average balance
multiplied by the average rate during the preceding year's period and the
change due to rate is calculated as the current period 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 June 30, Six Months Ended June 30,
-------------------------------- ----------------------------------
1995 Versus 1994 1995 Versus 1994
Increase/(Decrease) Due to Increase/(Decrease) Due to
--------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- ---------- ---------- ----------
(in thousands)
Interest income on:
Loans $(31,295) $ 98,004 $ 66,709 $ (47,378) $ 157,735 $ 110,357
MBS 110,701 23,276 133,977 207,899 21,999 229,898
Investments (3,912) 10,091 6,179 (5,010) 26,851 21,841
-------- -------- --------- --------- --------- ---------
Total interest income 75,494 131,371 206,865 155,511 206,585 362,096
-------- -------- --------- --------- --------- ---------
Interest expense on:
Deposits 50,780 146,683 197,463 88,689 257,185 345,874
Short-term borrowings (37,989) 30,691 (7,298) (78,640) 77,525 (1,115)
FHLB and other borrowings 35,971 7,435 43,406 89,702 9,702 99,404
-------- -------- --------- --------- --------- ---------
Total interest expense 48,762 184,809 233,571 99,751 344,412 444,163
-------- -------- --------- --------- --------- ---------
Net interest income $ 26,732 $(53,438) $ (26,706) $ 55,760 $(137,827) $ (82,067)
======== ======== ========= ========= ========= =========
Net interest income decreased $26.7 million, or 8%, in the second quarter
of 1995 as compared to the second quarter of 1994 due to a decrease of 43
basis points in the net interest margin to 2.38% for the second quarter of
1995 from 2.81% for the second quarter of 1994, partially offset by an
increase of $4.2 billion in average interest-earning assets. The decrease of
$82.1 million, or 12%, in net interest income for the first six months of 1995
as compared to the same period of 1994 reflects a decline of 56 basis points
in the net interest margin to 2.32% for the 1995 period from 2.88% for the
1994 period, partially offset by an increase of $4.5 billion in average
interest-earning assets. The increases in average interest-earning assets
were primarily funded with interest-costing liabilities.
In addition, provisions for losses of delinquent interest related to
nonaccrual loans of $12.9 million and $10.1 million in the second quarter of
1995 and 1994, respectively, had the effect of reducing the net interest
margin by ten basis points and eight basis points in the respective periods.
Such provisions came to $26.0 million in the first six months of 1995 and
$21.4 million in the first six months of 1994, reducing the net interest
margin by ten basis points and nine basis points, respectively.
The compression in the net interest margin for the 1995 second quarter
and six month periods compared to the prior year's periods principally
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-costing liabilities in a period of rising interest rates,
and narrowing of the Company's funding advantage relative to COFI. However,
the net interest margin expanded 11 basis points to 2.38% in the second
quarter from 2.27% for the first quarter of 1995. During the second quarter
of 1995, the Company's funding costs remained relatively stable while the
yields on COFI-indexed assets continued to rise. The Company's cost of funds
was 11 basis points and 27 basis points below the average of COFI of 5.13% and
3.73% during the second quarter of 1995 and 1994, respectively. During the
first six months of 1995 and 1994, the Company's cost of funds was 16 basis
points and 30 basis points below the average of COFI of 5.01% and 3.71% for
the respective 1995 and 1994 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, increases
in rates could contribute to 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. In the event of sustained significant increases in rates, such
maximum interest rates could also contribute to compression of the net
interest margin. For information regarding the Company's strategies related
to COFI and limiting interest rate risk, see "Financial Condition -
Asset/Liability Management."
PROVISION FOR LOAN LOSSES
The provision for loan losses was $25.5 million in the second quarter of
1995, a decrease of $7.6 million or 23% from the $33.1 million provision for
the second quarter of 1994. The provision for loan losses was $52.0 million
in the first six months of 1995, a decrease of $56.6 million or 52% from the
$108.6 million provision for the first six months of 1994 which included $30
million representing the Company's estimated losses from real property damage
sustained by its borrowers in the Northridge, California earthquake in January
1994. 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. During the second quarter of 1995, MBS totaling
$1.4 billion were sold for a pre-tax gain of $8.7 million. There were no sales
of MBS in the second quarter of 1994. During the first six months of 1995,
MBS totaling $1.6 billion were sold for a pre-tax gain of $9.3 million,
compared to a pre-tax gain of $4.9 million on sales of MBS totaling $400.2
million in the first six months of 1994.
GAIN (LOSS) ON SALES OF LOANS. During the second quarter of 1995, loans
originated for sale totaling $193.5 million were sold for a pre-tax gain of
$1.8 million as compared to such loans totaling $113.1 million sold for a pre-
tax loss of $6.3 million in the second quarter of 1994. In the first six
months of 1995, loans originated for sale totaling $236.8 million were sold
for a pre-tax gain of $2.0 million compared to such loans totaling $480.6
million sold for a pre-tax loss of $10.0 million in the first six months of
1994.
The Company adopted SFAS No. 122 effective April 1, 1995. Results from
prior periods have not been restated. In accordance with SFAS No. 122, the
Company capitalizes mortgage servicing rights ("MSR") related to mortgage
loans originated for sale. The total cost of the mortgage loans originated for
sale is allocated to the MSR and the mortgage loans without the MSR based on
their relative fair values. The MSR are amortized over the servicing period
as a component of net loan servicing income.
The adoption of SFAS No. 122 resulted in MSR of $3.2 million, which is
included in "Other assets" in the Consolidated Statement of Financial
Condition, and increased the "Gain on sale of loans" by $2.0 million for the
1995 second quarter and six month periods. The MSR are periodically evaluated
for impairment based on the fair value of the MSR. There was no impairment of
these MSR recognized at June 30, 1995.
LOAN SERVICING INCOME. During the first six months of 1995 loan
servicing income was $27.9 million, a decrease of $3.2 million or 10% from
$31.0 million in the first six months of 1994. The decrease was primarily due
to a $3.4 billion decline in the average portfolio of loans serviced for
investors, partially offset by an increase of six basis points in the retained
loan yield. The decline in the average portfolio of loans serviced for
investors was primarily due to the sale of servicing rights related to $2
billion of fixed-rate single family loans in the fourth quarter of 1994. At
June 30, 1995 and 1994, the portfolio of loans serviced for investors was
$12.1 billion and $14.2 billion, respectively.
OTHER FEE INCOME. Other fee income was $50.4 million for the first six
months of 1995, a decrease of $3.9 million or 7% from $54.3 million for the
same period of 1994. The decrease was primarily due to a decline of $3.6
million in investment and insurance services commissions.
OTHER OPERATING INCOME. During the first six months of 1995, other
operating income was a net loss of $0.2 million, a decrease of $2.4 million
from income of $2.2 million for the same period of 1994. The decrease was
primarily due to the loss on sale of the remaining Ohio branch amounting to
$1.6 million in the first quarter of 1995.
OTHER EXPENSES
G&A EXPENSES. G&A expenses were $201.3 million in the second quarter of
1995, an increase of $15.4 million or 8% from $185.9 million in the second
quarter of 1994 and were $384.1 million for the first six months of 1995, an
increase of $6.4 million or 2% from $377.7 million for the same period of
1994. The increases were primarily due to costs associated with various new
business development efforts currently underway, the acquisition and operating
costs of new retail deposit branch systems and lower net deferred loan
origination costs related to the lower volume of loans originated during the
1995 periods. The increase in the first six months of 1995 was partially
offset by a $5.7 million rebate of FDIC premiums recorded in the first quarter
of 1995 for the July 1, 1994 semi-annual assessment period.
The ratio of G&A expenses to average assets (the "G&A ratio") was 1.47%
in the second quarter of 1995 compared to 1.46% in the second quarter of 1994,
an increase of one basis point reflecting the 8% increase in G&A expenses,
partially offset by an increase of 7% in average assets. The G&A ratios for
the first six months of 1995 and 1994 were 1.40% and 1.49%, respectively,
which reflects an 8% increase in average assets, partially offset by the 2%
increase in G&A expenses.
OPERATIONS OF REI. Losses from operations of REI were $2.6 million in
the second quarter of 1995, a decrease of $2.2 million or 45% from $4.8
million in the second quarter of 1994. The decrease reflects a net gain on
sales of REI of $0.7 million for the second quarter of 1995, compared to a net
loss on sales of $3.5 million for the second quarter of 1994, and a decrease
in provision for losses of $4.4 million, partially offset by an increase in
net operating expense of $6.4 million. Losses from operations of REI were
$3.7 million for the first six months of 1995, a decrease of $6.6 million or
64% from $10.3 million compared to the same period of 1994 primarily due to
the net gain on sales of $1.2 million for the first six months of 1995
compared to a net loss of $5.6 million for the same period of 1994.
The Company intends to continue its progress toward a withdrawal from
real estate development activities as soon as practicable. Although the
Company does not intend to acquire new properties, it intends to develop, hold
and/or sell its current properties depending on economic conditions. The
Company has certain projects with long-term holding and development periods.
No new projects have been initiated since 1990. Although management believes
the net realizable value ("NRV") of REI and the related allowance for losses
are fairly stated, declines in NRV and additions to the allowance for losses
could result from continued weakness in the specific project markets, changes
in economic conditions, changes in the Company's cost of funds and revisions
to project business plans, which may reflect decisions by the Company to
accelerate the disposition of the properties.
OPERATIONS OF REO. Losses from operations of REO were $19.6 million in
the second quarter of 1995, a decrease of $2.3 million or 10% from $21.9
million for the second quarter of 1994. The decrease was primarily due to
declines of $1.6 million in net losses on sales. For the first six months of
1995, losses from operations of REO were $40.7 million, a decrease of $8.3
million or 17% from $48.9 million for the same period of 1994, reflecting
declines of $4.2 million in losses on sales of REO properties and $4.0 million
in the provision for losses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE. The Company adopted SFAS No. 72 effective
January 1, 1995 for goodwill related to acquisitions prior to September 30,
1982. As a result, the Company wrote off goodwill totaling $234.7 million as
a cumulative effect of the change in accounting. The adoption of SFAS No. 72
also resulted in a reversal of $2.2 million in goodwill amortization expense
previously reported for the second quarter of 1995 and $4.3 million for the
first six months of 1995. Results from periods prior to the first quarter of
1995 have not been restated. SFAS No. 72 requires, among other things, that
to the extent the fair value of liabilities assumed exceeds the fair value of
assets resulting from the acquisition of banking or thrift institutions
initiated after September 30, 1982, the resulting goodwill recognized shall be
amortized over a period no longer than the estimated remaining life of the
acquired long-term interest-earning assets. The adoption of SFAS No. 72 for
goodwill related to acquisitions of banking or thrift institutions prior to
September 30, 1982 is permissible but not required. The Company has been
accounting for acquisitions initiated subsequent to September 30, 1982 in
accordance with SFAS No. 72.
Amortization of goodwill and other intangible assets for the second
quarter of 1995 was $6.9 million, an increase of $1.2 million or 21% from $5.8
million for the second quarter of 1994. For the first six months of 1995
amortization of goodwill and other intangible assets was $13.8 million, an
increase of $1.9 million or 16% from $12.0 million for the same period of
1994, reflecting a net increase in the core deposit premium related to
deposits acquired in late 1994 and the first six months of 1995, partially
offset by the reduction in the goodwill balance upon the adoption of SFAS No.
72.
PROVISION FOR INCOME TAXES. The changes in the provision for income
taxes primarily reflect the changes in pre-tax earnings between the comparable
periods. The effective tax rates for the second quarters of 1995 and 1994
were 40.2% and 39.9%, respectively. For the comparable six month periods, the
effective tax rates were 41.5% in 1995 and 39.3% in 1994, reflecting
management's estimate of the Company's full year tax provision.
FINANCIAL CONDITION
The Company's consolidated assets were $53.2 billion at June 30, 1995, a
decrease of $484.1 million or less than 1% from $53.7 billion at December 31,
1994. The Company's primary asset generation business continues to be the
origination of loans on residential real estate properties. The Company
originated $3.3 billion in loans in the first six months of 1995 compared to
$5.2 billion in the first six months of 1994. Loans on single family homes
(one-to-four units) accounted for 78% of the total loan origination volume in
the first six months of 1995, with the balance on multi-family residential
properties, and 89% of total originations were ARMs. In the first six months
of 1995, 8% of the Company's ARM originations were Treasury ARMs.
In the first six months of 1995, 66% of loan originations were on
properties located in California. At June 30, 1995, approximately 97% of the
loan and MBS portfolio was secured by residential properties, including 78%
secured by single family properties.
The following table summarizes the Company's gross mortgage portfolio by
state and property type at June 30, 1995:
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 $26,724,056 69.61% $8,330,033 91.72% $1,231,325 74.09% $36,285,414 73.85%
Florida 2,903,485 7.56 27,917 0.31 6,308 0.38 2,937,710 5.98
New York 2,165,806 5.64 285,632 3.15 208,909 12.57 2,660,347 5.41
Illinois 1,977,048 5.15 105,768 1.16 18,129 1.09 2,100,945 4.28
Texas 1,154,763 3.01 82,252 0.91 30,301 1.82 1,267,316 2.58
Other 3,465,014 9.03 250,039 2.75 166,999 10.05 3,882,052 7.90
----------- ---------- ---------- ----------- ------
$38,390,172 78.14 $9,081,641 18.48 $1,661,971 3.38 $49,133,784 100.00%
=========== ========== ========== =========== ======
The loan and MBS portfolio includes approximately $6.8 billion in
mortgage loans that were originated with loan to value ("LTV") ratios
exceeding 80%, or 14% of the portfolio at June 30, 1995. Approximately 20% of
loans originated during the first six months of 1995 had LTV ratios in excess
of 80%, all of which were loans on single family properties including 6% with
LTV ratios in excess of 90%. 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-costing
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-costing liabilities, the Company has
emphasized the origination of COFI ARMs for retention in the loan and MBS
portfolio. During late 1994 the Company began offering ARMs which provide for
interest rates that adjust based upon changes in the yields of U. S. Treasury
securities. The Company originated $236.5 million of these Treasury ARMs
during the first six months of 1995. At June 30, 1995, 95.1% of the Company's
$48.8 billion loan and MBS portfolio consisted of ARMs indexed primarily to
COFI, unchanged from 95.1% of the $48.8 billion loan and MBS portfolio at
December 31, 1994. The average factor above COFI on the Company's COFI ARM
portfolio was 247 basis points at June 30, 1995, up three basis points from
244 basis points at December 31, 1994.
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, or
become negative, which could result in compression of the Company's interest
rate margin. Such a compression occurred in the rising interest rate
environment during 1994. The margin compression began to improve during the
first quarter of 1995, with continuing improvement in the second quarter of
1995 as the Company's cost of funds have remained relatively stable, while
COFI continued to rise.
The Company's basic interest rate risk management strategy includes a
goal of having the combined repricing terms of its interest-costing
liabilities not differ materially from those of the FHLB Eleventh District
savings institutions in aggregate. The Company's approach to managing
interest rate risk in an environment where market interest rates are believed
to have the potential to rise includes the extension of repricing terms and
the spreading of clustered maturities on term deposits and other interest-
costing liabilities, combined with emphasis on more responsive assets,
including diversification away from COFI on certain interest-earning assets.
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 June 30,
1995:
Repricing Periods
Percent --------------------------------------------------------------
of Within Years
Balance Total 6 Months Months 7-12 1-5 Years 5-10 Years Over 10
----------- ------- ----------- ----------- ----------- ---------- ---------
(dollars in thousands)
Interest-earning assets:
Investment securities $ 1,864,471 4% $ 1,607,635 $ - $ 256,836 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (124,419) - 124,419 - -
----------- --- ----------- ----------- ----------- --------- --------
Total investment securities 1,864,471 4 1,483,216 - 381,255 - -
----------- --- ----------- ----------- ----------- --------- --------
Loans and MBS
MBS
ARMs 17,122,105 34 17,122,105 - - - -
Other 1,117,877 2 21,329 62,206 560,206 44,625 429,511
Loans
ARMs 29,306,310 58 28,062,450 425,400 818,460 - -
Other 1,263,060 2 240,019 48,591 315,099 305,527 353,824
Impact of hedging (interest
rate swaps) - - 1,243,860 (425,400) (818,460) - -
----------- --- ----------- ----------- ----------- --------- --------
Total loans and MBS 48,809,352 96 46,689,763 110,797 875,305 350,152 783,335
----------- --- ----------- ----------- ----------- --------- --------
Total interest-earning assets $50,673,823 100% $48,172,979 $ 110,797 $ 1,256,560 $ 350,152 $783,335
=========== === =========== =========== =========== ========= ========
Interest-costing liabilities:
Deposits
Transaction accounts $12,775,073 26% $12,775,073 $ - $ - $ - $ -
Term accounts 30,213,592 61 17,375,497 8,898,165 3,924,253 15,636 41
----------- --- ----------- ----------- ----------- --------- --------
Total deposits 42,988,665 87 30,150,570 8,898,165 3,924,253 15,636 41
----------- --- ----------- ----------- ----------- --------- --------
Borrowings
Short-term 529,841 1 529,841 - - - -
FHLB and other 6,169,705 12 3,310,954 694,581 1,339,262 818,152 6,756
----------- --- ----------- ----------- ----------- --------- --------
Total borrowings 6,699,546 13 3,840,795 694,581 1,339,262 818,152 6,756
----------- --- ----------- ----------- ----------- --------- --------
Total interest-bearing
liabilities $49,688,211 100% $33,991,365 $ 9,592,746 $ 5,263,515 $ 833,788 $ 6,797
=========== === =========== =========== =========== ========= ========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 985,612 $14,181,614 $(9,481,949) $(4,006,955) $(483,636) $776,538
=========== =========== =========== =========== ========= ========
Cumulative interest sensitivity gap $14,181,614 $ 4,699,665 $ 692,710 $ 209,074 $985,612
=========== =========== =========== ========= ========
Percentage of hedge-adjusted
interest-earning assets
to interest-costing liabilities 101.98%
Percentage of cumulative interest
sensitivity gap to total assets 1.85%
The following table presents the interest rates and spreads at the end of
the periods indicated:
June 30, December 31,
1995 1994
-------- ------------
Average yield on:
Loans 7.48% 6.74%
MBS 7.33 6.63
Total loans and MBS 7.42 6.71
Investment securities 6.01 5.85
Interest-earning assets 7.37 6.68
Average rate paid on:
Deposits 4.72 4.05
Borrowings:
Short-term 6.70 6.38
FHLB and other 6.99 6.65
Total borrowings 6.97 (1) 6.58 (1)
Interest-costing liabilities 5.02 4.52
Interest rate spread 2.35 2.16
Net interest margin 2.45 2.24
<FN>
(1) Includes the effect of miscellaneous borrowing costs of approximately
0.32% and 0.27% as of June 30, 1995 and December 31, 1994, 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.
For the Company, loans collectively reviewed for impairment include all
single family loans and performing multi-family and commercial and industrial
real estate loans ("major loans") under $2 million, excluding loans which are
individually reviewed based on specific criteria, such as delinquency, debt
coverage, LTV ratio and condition of collateral property. The Company's
impaired loans within the scope of such individual review include nonaccrual
major loans (excluding those collectively reviewed for impairment), troubled
debt restructurings ("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 following table presents nonperforming assets (nonaccrual loans and
REO), TDRs and other impaired major loans, net of related specific loss
allowances, by type as of the dates indicated:
June 30, December 31, Increase
1995 1994 (Decrease)
----------- ----------- -----------
(dollars in thousands)
Nonaccrual loans:
Single family $ 570,577 $ 568,808 $ 1,769
Multi-family 101,217 69,856 31,361
Commercial and industrial
real estate 35,117 42,362 (7,245)
--------- --------- ---------
706,911 681,026 25,885
--------- --------- ---------
REO:
Single family 166,163 135,357 30,806
Multi-family 18,008 14,181 3,827
Commercial and industrial
real estate 7,353 12,410 (5,057)
--------- --------- ---------
191,524 161,948 29,576
--------- --------- ---------
Total nonperforming assets:
Single family 736,740 704,165 32,575
Multi-family 119,225 84,037 35,188
Commercial and industrial
real estate 42,470 54,772 (12,302)
--------- --------- ---------
Total $ 898,435 $ 842,974 $ 55,461
========= ========= =========
TDRs:
Single family $ 37,844 $ 21,885 $ 15,959
Multi-family 60,906 56,824 4,082
Commercial and industrial
real estate 42,516 42,656 (140)
--------- --------- ---------
Total $ 141,266 $ 121,365 $ 19,901
========= ========= =========
Other impaired major loans:
Multi-family $ 11,231 $ 10,652 $ 579
Commercial and industrial
real estate 4,820 1,506 3,314
--------- --------- ---------
$ 16,051 $ 12,158 $ 3,893
========= ========= =========
Ratio of nonperforming assets
to total assets 1.69% 1.57%
========= =========
Ratio of nonperforming assets
and TDRs to total assets
1.95% 1.79%
========= =========
Ratio of allowances for
losses on loans and REO to
nonperforming assets 45.57% 50.12%
========= =========
The amount of the net recorded investment in impaired loans for which
there is a related specific allowance for losses was $104.8 million, net of an
allowance of $34.8 million, at June 30, 1995 and $71.0 million, net of an
allowance of $29.9 million, at December 31, 1994. The Company's total net
recorded investment in impaired loans (excluding those collectively reviewed
for impairment) was $245.8 million and $204.5 million at June 30, 1995 and
December 31, 1994, respectively.
The following table presents nonperforming assets, TDRs and other
impaired major loans by state at June 30, 1995:
Nonperforming Assets
----------------------------------------------------
Commercial Other
and Impaired
Single Family Multi-Family Industrial Major
Residential Residential Real Estate Total TDRs Loans
------------- ------------ ----------- --------- -------------- -----------
(in thousands)
California $598,390 $106,390 $30,814 $735,594 $78,185 $15,024
Florida 30,434 - 179 30,613 419 -
New York 42,990 4,109 2,358 49,457 40,281 -
Illinois 16,319 3,611 5,300 25,230 1,533 -
Texas 9,181 473 - 9,654 6,565 -
Other 39,426 4,642 3,819 47,887 14,283 1,027
-------- -------- ------- -------- -------- -------
$736,740 $119,225 $42,470 $898,435 $141,266 $16,051
======== ======== ======= ======== ======== =======
Total nonperforming assets were $898.4 million at June 30, 1995, or a
ratio of nonperforming assets to total assets of 1.69%, an increase of $55.5
million or 7% during the first six months of 1995 from $843.0 million, or
1.57% of total assets, at December 31, 1994. Single family nonperforming
assets were $736.7 million at June 30, 1995, an increase of $32.6 million or
5% primarily due to increases in California REO of $26.5 million and
nonaccrual loans secured by California properties of $4.8 million.
Multi-family nonperforming assets were $119.2 million at June 30, 1995,
an increase of $35.2 million or 42% during the first six months of 1995
primarily due to increases in California ($27.9 million), Illinois ($3.1
million) and New Jersey ($1.5 million). Commercial and industrial real estate
nonperforming assets were $42.5 million at June 30, 1995, a decrease of $12.3
million or 22% during the first six months of 1995 primarily due to declines
in California ($7.5 million), New York ($3.3 million) and New Jersey ($1.1
million).
TDRs were $141.3 million at June 30, 1995, an increase of $19.9 million
or 16% from $121.4 million at December 31, 1994 primarily due to increases in
TDRs secured by properties in California ($18.5 million) and New Jersey ($1.1
million). Other impaired major loans totaled $16.1 million at June 30, 1995,
an increase of $3.9 million or 32% from $12.2 million at December 31, 1994
primarily due to a $7.1 million increase in such loans secured by properties
in California, partially offset by a decrease of $1.7 million in New York.
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 $145.7 million of single family REO and
$40.2 million of multi-family and commercial and industrial REO in the first
six months of 1995. In addition, the Company may, from time to time, offer
packages of nonperforming assets for competitive bids.
ALLOWANCE FOR LOAN LOSSES. Management believes the Company's allowance
for loan losses is adequate at June 30, 1995. The Company's process for
evaluating the adequacy of the allowance for loan losses has three basic
elements: first, the identification of impaired loans; second, the
establishment of appropriate loan loss allowances once individual specific
impaired loans are identified; and third, a methodology for estimating loan
losses based on the inherent risk in the remainder 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(dollars in thousands)
Beginning balance $391,105 $453,137 $400,232 $438,786
Provision for loan losses 25,465 33,069 52,009 108,581
-------- -------- -------- --------
416,570 486,206 452,241 547,367
-------- -------- -------- --------
Charge-offs:
Single family (19,441) (30,582) (44,163) (56,647)
Multi-family (13,211) (17,468) (23,340) (36,628)
Commercial and industrial
real estate (1,090) (4,931) (8,349) (26,121)
-------- -------- -------- --------
(33,742) (52,981) (75,852) (119,396)
Recoveries 7,099 13,873 13,538 19,127
-------- -------- -------- --------
Net charge-offs (26,643) (39,108) (62,314) (100,269)
-------- -------- -------- --------
Ending balance $389,927 $447,098 $389,927 $447,098
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.22% 0.35% 0.25% 0.45%
==== ==== ==== ====
Gross charge-offs on commercial and industrial real estate loans for the
first six months of 1995 include $6.3 million resulting from the foreclosure
of one property in California. During the first six months of 1994, sales of
nonaccrual loans resulted in charge-offs of $6.0 million on single family
properties, $8.7 million on multi-family properties and $13.4 million on
commercial and industrial properties.
The following table sets forth the allocation of the Company's allowance
for loan losses by the percent of loans and MBS in each category at the dates
indicated:
June 30, 1995 December 31, 1994
-------------------- --------------------
% of Loan % of Loan
and MBS and MBS
Allowance Portfolio Allowance Portfolio
--------- --------- --------- ---------
(dollars in thousands)
Single family $175,000 0.45% $165,000 0.42%
Multi-family 154,999 1.71 160,232 1.88
Commercial and
industrial
real estate 59,928 3.62 75,000 4.34
-------- --------
$389,927 0.79 $400,232 0.81
======== ========
It is possible that the Company's delinquent loans, nonaccrual loans,
TDRs and other impaired major 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
investment securities and MBS which are not committed, pledged or required to
liquidate specific liabilities. The liquidity portfolio, totaling
approximately $3.3 billion at June 30, 1995, increased $1.2 billion or 54%
from December 31, 1994 primarily due to a net increase of $2.3 billion in
deposits and the creation of $1.4 billion of liquidity-qualifying MBS,
partially offset by a net reduction in borrowings of $2.5 billion during the
first six months of 1995. 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 June 1995 the average liquidity and average short-term liquidity
ratios of Home Savings were 5.61% and 3.36%, 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 and increases in deposits and borrowings.
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 six months of 1995 were an increase
in deposits, principal payments and prepayments on loans and MBS and proceeds
from sales of loans and MBS.
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 market 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 size, credit rating, the availability of
acceptable collateral and other market-driven 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.
LOANS RECEIVABLE. The Company's primary use of cash is to fund
internally generated mortgage loans. During the first six months of 1995 cash
of $3.1 billion was used to originate loans. Gross loan originations of $3.3
billion in the first six months of 1995 included $2.7 billion of COFI ARMs
with an average factor of 277 basis points above COFI, $236.5 million of
Treasury ARMs and $347.2 million of fixed rate loans. Fixed rate loans
originated and designated for sale represented approximately 11% of single
family loan originations in the first six months of 1995. Principal payments
on loans were $767.0 million in the first six months of 1995, a decrease of
$974.9 million or 56% from $1.7 billion in the first six months of 1994.
During the first six months of 1995 the Company sold loans totaling
$236.8 million. The Company designates certain loans as held for sale,
including most of its fixed rate originations. At June 30, 1995 the Company
had $123.4 million of loans held for sale.
At June 30, 1995 the Company was committed to fund mortgage loans
totaling $589.3 million, of which $392.0 million or 66% were COFI ARMs, $39.4
million or 7% were Treasury ARMs and $157.9 million or 27% were fixed rate
loans. The Company expects to fund such loans from its liquidity sources.
MBS. During the first six months of 1995 the Company sold $1.6 billion
of MBS available for sale, comprised of $1.5 billion of ARM MBS and $27.9
million of fixed rate MBS. Such sales included $1.4 billion of ARM MBS sold
during the second quarter of 1995 in preparation for the pending sale of the
Company's New York deposit franchise to GreenPoint Bank. The Company
designates certain MBS as available for sale. At June 30, 1995 the Company
had $881.1 million of MBS available for sale.
In May 1995 the Company securitized $6.4 billion of COFI ARMs into
Federal Home Loan Mortgage Corporation collateralized mortgage obligations.
An additional $1.0 billion of ARMs were securitized into private placement
mortgage pass-through securities during the first quarter of 1995. These MBS
increase the Company's access to less expensive collateralized borrowings.
The Company has the intent and ability to hold these MBS until maturity.
DEPOSITS. Savings deposits were $43.0 billion at June 30, 1995, an
increase of $2.3 billion or 6% from $40.7 billion at December 31, 1994,
primarily reflecting deposits purchased of $1.3 billion and a net deposit
inflow of $1.0 billion. On June 16, 1995, the Company completed the purchase
of $1.2 billion in deposits from Household Bank, FSB for a deposit premium of
approximately 4%. As a result of this purchase, the Company acquired 52
retail branches in Southern California of which 16 were consolidated with
existing Home Savings branches. The Company also purchased deposits totaling
$64.3 million from three other California financial institutions, for an
average deposit premium of approximately 2%, and sold deposits totaling $10.2
million in its remaining Ohio branch during the first six months of 1995. In
addition, the net deposit inflow reflected the Company's strategy to increase
certain term and money market deposit accounts by increasing rates offered on
such deposits and reducing higher costing short-term borrowings.
On May 15, 1995, Home Savings announced that it had signed a definitive
agreement with GreenPoint Bank to sell its New York retail deposit branch
system, with deposits totaling approximately $8.3 billion in 60 branches as of
June 30, 1995. The purchase price represents a deposit premium of
approximately $660 million or 8%. Goodwill and other intangibles associated
with the branches, totaling approximately $110.3 million at June 30, 1995,
will be written off. The estimated after-tax gain, net of related expenses
and goodwill write-off, will be approximately $240 million.
The Company intends to fund the sale with excess liquidity and a
combination of new borrowings and disposition of securities. The Company will
also utilize funds generated from the acquisition of the $1.2 billion in
deposits from Household Bank. As a result of the sale and related funding
transactions, the Company's total assets are expected to decline by
approximately $3.0 billion.
Excluding the after-tax gain on sale of the New York branch system, the
effect of the transactions on future operations is expected to be
approximately earnings neutral. Future deployment of capital generated by the
transaction is expected to be accretive to earnings per share. Reductions in
the Company's net interest income and fee income are expected to be offset by
reductions in G&A expenses and goodwill amortization. The sale is subject to
regulatory approval and is expected to be completed during the third or fourth
quarter of 1995.
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 June 30, 1995, 63% of the Company's total deposits were
in California, compared to 62% at December 31, 1994.
BORROWINGS. Borrowings totaled $6.7 billion at June 30, 1995, a decrease
of $2.5 billion or 27% from $9.2 billion at December 31, 1994 reflecting
reductions in short-term borrowings of $1.8 billion and FHLB and other
borrowings of $652.6 million.
In the first six months of 1995, the Company had three issuances of
medium term notes totaling $115 million. The notes will mature in three to
seven years and have a weighted average interest rate of 7.42%. Such
borrowings will be used for general corporate purposes.
CAPITAL. Stockholders' equity was $2.8 billion at June 30, 1995, a
decrease of $133.6 million or 5% from December 31, 1994. The decrease is
primarily due to the net loss of $117.5 million, including the write-off of
$234.7 million in goodwill upon adopting SFAS No. 72, and dividends paid to
common and preferred stockholders of $76.8 million, partially offset by a net
change of $53.2 million to a net unrealized gain on securities available for
sale. The net unrealized gain on securities available for sale at June 30,
1995 was $0.7 million.
The OTS has adopted 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 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.
Under OTS regulations which implement the "prompt corrective action"
system mandated by the Federal Deposit Insurance Corporation Improvement Act,
an institution is well capitalized if its ratio of total capital to risk-
weighted assets is 10% or more, its ratio of core capital to risk-weighted
assets is 6% or more, its ratio of core capital to total assets is 5% or more
and it is not subject to any written agreement, order or directive to meet a
specified capital level. At June 30, 1995 Home Savings met these standards.
Home Savings is in compliance with the OTS capital regulations. The
following table shows the capital amounts and ratios of Home Savings at June
30, 1995:
Balance Ratio
---------- -------
(dollars in thousands)
Tangible capital (to adjusted total assets) $2,768,863 5.26%
Core capital (to adjusted total assets) 2,780,690 5.28
Core capital (to risk-weighted assets) 2,780,690 8.41
Total risk-based capital 3,786,137 11.45
The regulatory capital requirements applicable to Home Savings are
continuing to become more stringent as the amount of Home Savings' investment
in real estate development subsidiaries includable in capital is phased out
through July 1, 1996. Home Savings currently meets the requirements of the
OTS regulations assuming the present application of the full phase-out
provisions. At June 30, 1995 the capital ratios computed on this more
stringent, "fully phased-in" basis were 5.20% for tangible capital (to
adjusted total assets), 5.22% for core capital (to adjusted total assets),
8.33% for core capital (to risk-weighted assets) and 11.37% for risk-based
capital.
DEPOSIT INSURANCE
Deposits at Home Savings are insured in part by the Savings Association
Insurance Fund ("SAIF") and in part by the Bank Insurance Fund ("BIF").
During 1994 Home Savings paid deposit insurance premiums to the SAIF and the
BIF ratably based on 91% and 9% of total deposits, respectively. Although the
assessment rate for BIF deposits and SAIF deposits was the same, effective for
the period beginning July 1, 1995 the FDIC has reduced BIF assessment rates,
but not SAIF assessment rates, based on the BIF obtaining a reserve ratio of
1.25%. The lowest assessment rate for BIF deposits was reduced from 0.23% of
covered deposits to 0.04% of covered deposits. This reduction could provide
institutions whose deposits are exclusively or primarily BIF-insured (such as
most commercial banks) competitive advantages over institutions whose deposits
are primarily SAIF-insured (such as Home Savings).
At a Senate Banking Committee hearing held on July 28, 1995, a joint
proposal was presented by the Department of the Treasury, the FDIC and the OTS
regarding capitalizing SAIF so it would have a reserve ratio of 1.25%. The
proposal included a special assessment of approximately 85 to 90 basis points
on all SAIF deposits held as of March 31, 1995, which assessment would be due
on January 1, 1996. Upon payment of the special assessment, an institution's
assessment rate would decrease from 23 basis points to a rate comparable to
the rates for BIF assessments. Weaker institutions could be exempted from the
special assessment but would continue to pay at a higher assessment rate
(between 23 and 31 basis points) for calendar years 1996 through 1999. The
proposal also included a merger of the SAIF and the BIF no later than 1998.
Another key feature of the proposal was to expand the assessment base for
payments on Financing Corporation bonds to include BIF members and not just
SAIF members. The foregoing are proposals which require action by Congress
before they can become effective. There is uncertainly as to whether or when
Congress will act on any of these proposals.
As part of the testimony at the hearing, there was reference to
eliminating distinctions between thrift and bank charters and to the effect
that the Department of the Treasury is developing a comprehensive proposal to
deal with this and related issues. It is too early to tell whether action
will be taken to eliminate charter distinctions or how such changes would be
implemented. If such changes were implemented, they could have a material
impact on the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995 the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, SFAS No. 121
requires that long-lived assets and certain identified intangibles to be
disposed of be reported at the lower of carrying amount or fair value less
costs to sell. SFAS No. 121 must be adopted for financial statements for
fiscal years beginning after December 15, 1995. The impact on the Company of
adopting SFAS No. 121 is not expected to be material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
2 Purchase of Assets and Liability Assumption Agreement, dated
as of May 12, 1995, between Home Savings of America, FSB
and GreenPoint Bank.
10 Consulting Agreement, dated as of November 1, 1994,
between H. F. Ahmanson & Company and Robert M. De Kruif.
11 Statement of Computation of Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Registrant filed with the Commission a Current Report on Form
8-K on April 5, 1995 with respect to the commencement of the
Registrant's medium term note program.
The Registrant filed with the Commission a Current Report on Form
8-K on April 14, 1995 with respect to the Registrant's issuance
of medium term notes.
The Registrant filed with the Commission a Current Report on Form
8-K on May 25, 1995 with respect to the execution of a Purchase
of Assets and Liability Assumption Agreement, dated as of May 12,
1995, between Home Savings of America, FSB and GreenPoint Bank.
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: October 27, 1995 H. F. Ahmanson & Company
/s/ Kevin M. Twomey
-------------------------------
Kevin M. Twomey
Senior 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
-------- ------------ --------------
2 Purchase of Assets and Liability
Assumption Agreement, dated as of
May 12, 1995, between Home Savings
of America, FSB and GreenPoint Bank. *
10 Consulting Agreement, dated as of
November 1, 1994, between H. F. Ahmanson
& Company and Robert M. De Kruif. *
11 Statement of Computation of Earnings
per Share. 31
27 Financial Data Schedule. **
<FN>
* Filed with Form 10-Q previously filed for the quarter ended June 30, 1995.
** Filed electronically with the Securities and Exchange Commission.