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, 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
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(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: 35
Total number of sequentially numbered pages: 36
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, 1995: $.01 par value - 117,737,673
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, 1995 December 31, 1994
- ------ ------------------ -----------------
Cash and amounts due from banks $ 645,369 $ 782,678
Securities purchased under
agreements to resell 258,000 952,000
Other short-term investments 13,840 311,942
----------- -----------
Total cash and cash equivalents 917,209 2,046,620
Other investment securities held to
maturity [market value $4,922
(September 30, 1995) and $270,187
(December 31, 1994)] 4,941 276,945
Other investment securities available
for sale [amortized cost $35,252
(September 30, 1995) and $10,670
(December 31, 1994)] 35,460 10,117
Investment in stock of Federal Home
Loan Bank (FHLB) 479,728 439,891
Mortgage-backed securities (MBS)
held to maturity [market value
$16,583,600 (September 30, 1995) and
$10,013,827 (December 31, 1994)] 16,461,464 10,339,864
MBS available for sale [amortized cost
$33,118 (September 30, 1995) and
$2,539,504 (December 31, 1994)] 34,236 2,449,556
Loans receivable less allowance for losses of
$385,289 (September 30, 1995) and
$400,232 (December 31, 1994) 30,830,642 35,992,566
Loans held for sale [market value
$141,155 (September 30, 1995) and
$9,192 (December 31, 1994)] 139,121 9,179
Accrued interest receivable 158,139 212,947
Real estate held for development and
investment (REI) less allowance for losses of
$321,209 (September 30, 1995) and
$333,825 (December 31, 1994) 321,467 313,316
Real estate owned held for sale (REO)
less allowance for losses of
$37,387 (September 30, 1995) and
$44,726 (December 31, 1994) 212,612 161,948
Premises and equipment 483,546 614,817
Goodwill and other intangible assets 152,497 468,542
Other assets 363,728 314,853
Income taxes - 74,621
----------- -----------
$50,594,790 $53,725,782
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $34,617,805 $40,655,016
Short-term borrowings under agreements
to repurchase securities sold 5,487,682 2,253,805
Other short-term borrowings - 100,000
FHLB and other borrowings 6,269,718 6,822,280
Other liabilities 921,647 930,080
Income taxes 226,857 -
----------- -----------
Total liabilities 47,523,709 50,761,181
Stockholders' equity 3,071,081 2,964,601
----------- -----------
$50,594,790 $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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
------------- ------------ ------------ -----------
Interest income:
Interest on loans $ 576,205 $ 546,431 $ 1,822,277 $ 1,682,146
Interest on MBS 333,978 196,440 848,448 481,012
Interest and dividends on investments 38,983 39,645 121,989 100,810
----------- ----------- ----------- -----------
Total interest income 949,166 782,516 2,792,714 2,263,968
----------- ----------- ----------- -----------
Interest expense:
Deposits 504,241 324,441 1,428,477 902,803
Short-term borrowings 37,669 47,911 132,330 143,687
FHLB and other borrowings 92,812 92,255 312,044 212,083
----------- ----------- ----------- -----------
Total interest expense 634,722 464,607 1,872,851 1,258,573
----------- ----------- ----------- -----------
Net interest income 314,444 317,909 919,863 1,005,395
Provision for loan losses 29,175 29,432 81,184 138,013
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 285,269 288,477 838,679 867,382
----------- ----------- ----------- -----------
Other income:
Gain on sales of MBS 2,586 - 11,866 4,868
Gain (loss) on sales of loans (1,021) (943) 989 (10,978)
Loan servicing income 16,688 14,091 44,550 45,109
Other fee income 26,542 28,053 76,896 82,352
Gain on sale of New York retail deposit branch system 514,671 - 514,671 -
Gain on sales of investment securities 142 147 254 195
Other operating income 1,179 1,128 963 3,230
----------- ----------- ----------- -----------
560,787 42,476 650,189 124,776
----------- ----------- ----------- -----------
Other expenses:
General and administrative expenses (G&A) 235,305 184,717 619,362 562,399
Operations of REI 42,148 6,093 45,856 16,385
Operations of REO 21,007 20,942 61,665 69,877
Amortization of goodwill and other intangible assets 8,103 5,760 21,948 17,741
----------- ----------- ----------- -----------
306,563 217,512 748,831 666,402
----------- ----------- ----------- -----------
Earnings before provision for income taxes and
cumulative effect of accounting change 539,493 113,441 740,037 325,756
Provision for income taxes 266,495 44,914 349,800 128,333
----------- ----------- ----------- -----------
Earnings before cumulative effect of accounting change 272,998 68,527 390,237 197,423
Cumulative effect of change in accounting for goodwill - - (234,742) -
----------- ----------- ----------- -----------
Net earnings $ 272,998 $ 68,527 $ 155,495 $ 197,423
=========== =========== =========== ===========
Earnings per common share - primary:
Earnings before cumulative effect of accounting change $ 2.20 $ 0.48 $ 2.99 $ 1.36
Cumulative effect of change in accounting for goodwill - - (1.99) -
----------- ----------- ----------- -----------
Net earnings $ 2.20 $ 0.48 $ 1.00 $ 1.36
=========== =========== =========== ===========
Earnings per common share - fully diluted:
Earnings before cumulative effect of accounting change $ 2.03 $ 0.47 $ 2.80 $ 1.33
Cumulative effect of change in accounting for goodwill - - (1.80) -
----------- ----------- ----------- -----------
Net earnings $ 2.03 $ 0.47 $ 1.00 $ 1.33
=========== =========== =========== ===========
Common shares outstanding, weighted average:
Primary 118,507,477 117,603,333 118,059,572 117,389,875
Fully diluted 130,541,379 129,422,951 130,427,469 129,410,249
Return on average assets 2.04% 0.52% 0.38% 0.51%
Return on average equity 37.72% 9.21% 7.28% 8.89%
Return on average tangible equity* 42.71% 11.63% 21.10% 11.29%
Ratio of G&A expenses to average assets 1.76% 1.40% 1.52% 1.46%
<FN>
*Net earnings excluding amortization of goodwill and other intangible assets, and cumulative effect of 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 Nine
Months Ended September 30,
-------------------------
1995 1994
------------ -----------
Cash flows from operating activities:
Net earnings $ 155,495 $ 197,423
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting for goodwill 234,742 -
Gain on sale of New York retail deposit branch system (514,671) -
Provision for losses on loans and real estate 151,170 180,793
Increase in income tax liabilities 262,650 102,401
Proceeds from sales of loans originated for sale 742,259 510,854
Loans originated for sale (766,248) (373,244)
Other, net (86,972) (8,196)
----------- -----------
Net cash provided by operating activities 178,425 610,031
----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available for sale 2,432,215 405,069
Proceeds from sales of MBS held to maturity 491,100 -
Proceeds from sales of nonaccrual loans - 57,700
Principal payments on MBS 864,523 900,394
Principal payments on loans 1,207,344 2,397,580
Loans originated for investment (net of refinances) (3,811,345) (6,793,723)
MBS purchased (535) (549,839)
Loans purchased (43,667) (3,435)
Proceeds from maturities of other investment securities 253,756 2,500
Proceeds from sales of investment securities available for sale 537 52,995
Other investment securities purchased (6,008) (335,106)
Proceeds from sales of REO 227,771 247,104
Proceeds from sales of premises and equipment 78,212 4,731
Other, net (88,575) 78,230
----------- -----------
Net cash provided by (used in) investing activities 1,605,328 (3,535,800)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 786,921 53,672
Proceeds from deposits purchased 1,299,322 2,251,352
Deposits sold (7,462,847) -
Net increase (decrease) in borrowings maturing in 90 days or less 3,133,877 (2,155,751)
Proceeds from other borrowings 1,174,248 4,433,600
Repayment of other borrowings (1,729,438) (1,570,211)
Dividends to stockholders (115,247) (115,006)
----------- -----------
Net cash provided by (used in) financing activities (2,913,164) 2,897,656
----------- -----------
Net decrease in cash and cash equivalents (1,129,411) (28,113)
Cash and cash equivalents at beginning of period 2,046,620 3,530,128
----------- -----------
Cash and cash equivalents at end of period $ 917,209 $ 3,502,015
=========== ===========
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 third quarter of 1995, the Company reported net earnings of
$273.0 million, or $2.03 per fully diluted common share, compared with $68.5
million, or $0.47 per fully diluted common share, in the same 1994 period.
Third quarter net earnings include an after tax gain of $252.7 million from
the sale of the Company's New York retail deposit branch system (the "New York
sale") on September 22, 1995. The earnings also reflect charges relating to
plans to sell certain Company premises, as well as to its previously announced
program to streamline its mortgage loan origination process. In addition, the
Company added $40 million to its allowance for losses for real estate
investments during the quarter. Excluding the gain on the New York sale and
these charges, net earnings would have been $65.6 million, or $0.44 per fully
diluted common share.
ACCOUNTING CHANGE
In the third quarter, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions," retroactive to the first quarter of 1995,
which eliminated $234.7 million of its goodwill, or $1.80 per fully diluted
common share, from acquisitions prior to September 30, 1982 and resulted in a
restatement of its 1995 first and second quarter earnings. Future annual
earnings are expected to be enhanced by approximately $0.07 per fully diluted
common share as a result of the reduction in goodwill amortization expense.
RESULTS OF OPERATIONS
Net interest income totaled $314.4 million for the third quarter of 1995,
compared to $317.9 million in the third quarter of 1994, and $310.2 million in
the second quarter of 1995. The increase in net interest income from the
second quarter of 1995 was due mainly to the widening of the net interest
margin. For the third quarter of 1995, the net interest margin was 2.47%,
compared to 2.56% in the third quarter of 1994 and 2.38% in the second quarter
of 1995. At September 30, 1995, the net interest margin was 2.60%.
During the third quarter of 1995, the Company provided $29.2 million for
loan losses, compared to $29.4 million in the third quarter of 1994 and $25.5
million in the second quarter of 1995.
In the third quarter of 1995, other income was $560.8 million, compared
to $42.5 million in the year ago quarter and $53.4 million in the second
quarter of 1995. Other income in the third quarter of 1995 would have been
$46.1 million without the gain from the New York sale.
The Company added $40 million to its allowance for losses for real estate
investments due largely to a deterioration, during the quarter, in the value
of a major commercial real estate investment project in California. A recent
review of project plans led to a change in the Company's assessment of the
continued viability of such plans.
General and administrative expenses totaled $235.3 million in the third
quarter of 1995, compared to $184.7 million in the third quarter of 1994 and
$201.3 million in the second quarter of 1995.
In the third quarter of 1995, the Company took a pre-tax charge of $11.0
million relating to planned personnel reductions and other costs associated
with Project HOME Run, the streamlining of its mortgage loan origination
process. As a part of Project HOME Run, the Company plans to consolidate the
processing and underwriting in its nationwide loan offices into two loan
service centers.
In addition, as a result of changes in business plans, the Company has
decided to sell certain of its premises, resulting in a third quarter pretax
charge of $25.7 million to bring the affected properties to fair value.
Pending sale, certain of these assets were transferred from Home Savings to a
real estate investment subsidiary of Ahmanson.
General and administrative expenses as a percentage of average assets
were 1.76% in the third quarter of 1995, reflecting the charges discussed
above, compared to 1.40% in the third quarter of 1994, and 1.47% in the
second quarter of 1995. Without these charges of $36.7 million, the G&A ratio
would have been 1.48%. 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 efficiency ratio was 65.8% in the third quarter of 1995,
compared to 51.3% in the third quarter of 1994 and 57.3% in the second quarter
of 1995. Excluding the adjustments discussed above, the efficiency ratio in
the third quarter of 1995 would have been 55.5%.
ASSET QUALITY
Nonperforming assets increased by $18.1 million during the quarter. At
September 30, 1995, nonperforming assets totaled $916.5 million, or 1.81% of
total assets, compared to $889.8 million or 1.65% of total assets at September
30, 1994, and $898.4 million, or 1.68% of total assets at June 30, 1995. The
increase in the ratio of nonperforming assets to total assets principally
reflects a decrease in total assets at the end of the quarter resulting from
the New York sale.
LOAN ORIGINATIONS
The Company originated $1.5 billion of residential mortgages in the third
quarter of 1995. Production was $2.6 billion in the third quarter of 1994 and
$1.6 billion in the second quarter of 1995. Consumer loan production totaled
$15.7 million during the quarter.
SALE OF NEW YORK RETAIL DEPOSIT BRANCH SYSTEM
On September 22, 1995, the Company's retail branches in New York City,
Long Island and Westchester County, with deposits totaling $8.1 billion, were
sold for approximately $671 million, representing a deposit premium of
approximately 8%.
The Company recorded an after-tax profit from the sale of the New York
branches of $252.7 million, after writing off applicable goodwill and other
intangibles of $106.9 million and other expenses relating to the sale.
STOCK REPURCHASE PROGRAM
On October 3, 1995, the Board of Directors authorized a stock repurchase
program enabling Ahmanson to repurchase up to $250 million of its common stock
and/or convertible preferred stock, from time to time.
CAPITAL
At September 30, 1995, Home Savings' 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 $314.4 million in the third quarter of 1995, a
decrease of $3.5 million or 1%, and was $919.9 million in the first nine
months of 1995, a decrease of $85.5 million or 9%, 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 and third quarters 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 September 30,
--------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------ ----------- ---------- -------
(dollars in thousands)
Interest-earning assets:
Loans $30,740,453 $576,205 7.50% $34,066,952 $546,431 6.42%
MBS 17,819,246 333,978 7.50 12,744,682 196,440 6.17
----------- -------- ----------- --------
Total loans and MBS 48,559,699 910,183 7.50 46,811,634 742,871 6.35
Investment securities 2,463,031 38,983 6.33 2,928,082 39,645 5.42
----------- -------- ----------- --------
Interest-earning assets 51,022,730 949,166 7.44 49,739,716 782,516 6.29
-------- --------
Other assets 2,591,933 3,010,203
----------- -----------
Total assets $53,614,663 $52,749,919
=========== ===========
Interest-costing liabilities:
Deposits $42,386,182 504,241 4.76 $38,394,311 324,441 3.38
----------- -------- ----------- --------
Borrowings:
Short-term 2,316,567 37,669 6.50 4,051,799 47,911 4.73
FHLB and other 5,229,260 92,812 7.10 6,170,347 92,255 5.98
----------- -------- ----------- --------
Total borrowings 7,545,827 130,481 6.92 10,222,146 140,166 5.48
----------- -------- ----------- --------
Interest-costing liabilities 49,932,009 634,722 5.08 48,616,457 464,607 3.82
-------- --------
Other liabilities 787,361 1,158,794
Stockholders' equity 2,895,293 2,974,668
----------- -----------
Total liabilities and
stockholders' equity $53,614,663 $52,749,919
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,090,721 2.36 $ 1,123,259 2.47
=========== ===========
Net interest income/
Net interest margin $314,444 2.47 $317,909 2.56
======== ========
Nine Months Ended September 30,
----------------------------------------------------------------
1995 1994
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------- ----------- ---------- -------
(dollars in thousands)
Interest-earning assets:
Loans $33,355,052 $1,822,277 7.28% $35,353,711 $1,682,146 6.34%
MBS 15,771,929 848,448 7.17 10,119,045 481,012 6.34
----------- ---------- ----------- ----------
Total loans and MBS 49,126,981 2,670,725 7.25 45,472,756 2,163,158 6.34
Investment securities 2,636,494 121,989 6.17 2,902,379 100,810 4.63
----------- ---------- ----------- ----------
Interest-earning assets 51,763,475 2,792,714 7.19 48,375,135 2,263,968 6.24
---------- ----------
Other assets 2,556,745 2,977,328
----------- -----------
Total assets $54,320,220 $51,352,463
=========== ===========
Interest-costing liabilities:
Deposits $41,856,532 1,428,477 4.55 $37,877,095 902,803 3.18
----------- ---------- ----------- ----------
Borrowings:
Short-term 2,755,283 132,330 6.40 4,804,645 143,687 3.99
FHLB and other 6,033,155 312,044 6.90 4,602,887 212,083 6.14
----------- ---------- ----------- ----------
Total borrowings 8,788,438 444,374 6.74 9,407,532 355,770 5.04
----------- ---------- ----------- ----------
Interest-costing liabilities 50,644,970 1,872,851 4.93 47,284,627 1,258,573 3.55
---------- ----------
Other liabilities 829,047 1,106,208
Stockholders' equity 2,846,203 2,961,628
----------- -----------
Total liabilities and
stockholders' equity $54,320,220 $51,352,463
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,118,505 2.26 $ 1,090,508 2.69
=========== ===========
Net interest income/
Net interest margin $ 919,863 2.37 $1,005,395 2.77
========== ==========
The following table presents the changes for the third quarter and first
nine 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 prior 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 September 30, Nine Months Ended September 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 $(62,720) $ 92,494 $ 29,774 $(109,138) $ 249,269 $ 140,131
MBS 95,158 42,380 137,538 304,366 63,070 367,436
Investments (6,979) 6,317 (662) (12,281) 33,460 21,179
-------- -------- --------- --------- --------- ---------
Total interest income 25,459 141,191 166,650 182,947 345,799 528,746
-------- -------- --------- --------- --------- ---------
Interest expense on:
Deposits 47,460 132,340 179,800 135,976 389,698 525,674
Short-term borrowings (28,124) 17,882 (10,242) (96,935) 85,578 (11,357)
FHLB and other borrowings (16,238) 16,795 557 73,801 26,160 99,961
-------- -------- --------- --------- --------- ---------
Total interest expense 3,098 167,017 170,115 112,842 501,436 614,278
-------- -------- --------- --------- --------- ---------
Net interest income $ 22,361 $(25,826) $ (3,465) $ 70,105 $(155,637) $ (85,532)
======== ======== ========= ========= ========= =========
Net interest income decreased $3.5 million, or 1%, in the third quarter
of 1995 as compared to the third quarter of 1994 due to a decrease of nine
basis points in the net interest margin to 2.47% for the third quarter of 1995
from 2.56% for the third quarter of 1994, partially offset by an increase of
$1.3 billion in average interest-earning assets. The decrease of $85.5
million, or 9%, in net interest income for the first nine months of 1995 as
compared to the same period of 1994 reflects a decline of 40 basis points in
the net interest margin to 2.37% for the 1995 period from 2.77% for the 1994
period, partially offset by an increase of $3.4 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 $9.3 million and $10.5 million in the third quarter of
1995 and 1994, respectively, had the effect of reducing the net interest
margin by seven basis points and eight basis points in the respective periods.
Such provisions came to $35.3 million and $31.9 million in the first nine
months of 1995 and 1994, respectively, reducing the net interest margin for
both periods by nine basis points.
The decreases in the net interest margin for the 1995 third quarter and
nine month periods compared to the prior year's periods reflect both 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"), which is the index for determining the
interest rates on a majority of the Company's interest-earning assets, and
changes in the interest rates on the Company's interest-costing liabilities in
a period of rising interest rates, and to the narrowing of the Company's
funding advantage relative to COFI. However, the net interest margin
increased nine basis points to 2.47% in the third quarter from 2.38% for the
second quarter of 1995, reflecting a continuing rise in yields on the
Company's COFI-indexed assets during the third quarter of 1995 while the
Company's funding costs remained relatively stable. The Company's cost of
funds was five basis points and 13 basis points below the average of COFI of
5.13% and 3.95% during the third quarter of 1995 and 1994, respectively.
During the first nine months of 1995 and 1994, the Company's cost of funds was
12 basis points and 24 basis points below the average of COFI of 5.05% and
3.79% 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 market interest rates or further narrowing of the Company's funding
advantage relative to COFI 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 $29.2 million in the third quarter of
1995, a decrease of $0.2 million or less than 1% from the $29.4 million
provision for the third quarter of 1994. The provision for loan losses was
$81.2 million in the first nine months of 1995, a decrease of $56.8 million or
41% from the $138.0 million provision for the first nine 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 third quarter of 1995, MBS totaling
$641.9 million were sold for a pre-tax gain of $2.6 million. There were no
sales of MBS in the third quarter of 1994. During the first nine months of
1995, MBS totaling $2.2 billion were sold for a pre-tax gain of $11.9 million.
In the first nine months of 1994, the Company sold MBS totaling $400.2 million
for a pre-tax gain of $4.9 million.
During the third quarter of 1995, MBS totaling $715.7 million were sold
as part of the funding of the New York sale, resulting in a pre-tax loss of
$14.0 million included in the gain on the New York sale as a related expense.
Included in these sales of MBS related to the New York sale were MBS
originally designated as held to maturity of $503.3 million, which were sold
at a pre-tax loss of $12.2 million. For additional information see "Financial
Condition - Liquidity and Capital Resources - MBS."
GAIN (LOSS) ON SALES OF LOANS. During the third quarter of 1995, loans
originated for sale totaling $508.6 million were sold for a pre-tax loss of
$1.0 million as compared to such loans totaling $39.6 million sold for a pre-
tax loss of $0.9 million in the third quarter of 1994. In the first nine
months of 1995, loans originated for sale totaling $745.4 million were sold
for a pre-tax gain of $1.0 million compared to such loans totaling $520.2
million sold for a pre-tax loss of $11.0 million in the first nine months of
1994.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an Amendment to FASB No. 65," effective April 1, 1995. Results from
periods prior to April 1, 1995 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 $9.2 million as of
September 30, 1995, which is included in "Other assets" in the Consolidated
Statement of Financial Condition, and increased the gain on sale of loans by
$4.3 million and $6.3 million for the 1995 third quarter and nine month
periods, respectively. The MSR are periodically evaluated for impairment
based on the fair value of the MSR. There was no impairment of these MSR
recognized at September 30, 1995.
LOAN SERVICING INCOME. During the third quarter of 1995 loan servicing
income was $16.7 million, an increase of $2.6 million or 18% from $14.1
million in the third quarter of 1994. The increase was primarily due to an
increase of eight basis points in the retained loan yield, partially offset by
a decrease of $1.5 billion in the average portfolio of loans serviced for
investors. In the first nine months of 1995 loan servicing income was $44.6
million, a decrease of $0.5 million or 1% from $45.1 million in the first nine
months of 1994. The decrease reflects a decline of $2.8 billion in the
average portfolio of loans serviced for investors, substantially offset by an
increase of seven basis points in the retained loan yield. The declines in
the average portfolio of loans serviced for investors are 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 September 30, 1995 and 1994, the
portfolio of loans serviced for investors was $12.9 billion and $13.7 billion,
respectively.
OTHER FEE INCOME. Other fee income was $76.9 million for the first nine
months of 1995, a decrease of $5.5 million or 7% from $82.4 million for the
same period of 1994. The decrease was primarily due to a decline of $5.0
million in investment and insurance services commissions.
GAIN ON SALE OF NEW YORK RETAIL DEPOSIT BRANCH SYSTEM. In September
1995, the Company sold its deposits totaling $8.1 billion and branch premises
in New York, resulting in a pre-tax gain of $514.7 million. The gain is net
of the write-off of goodwill and other intangibles of $106.9 million and other
expenses associated with the sale. The gain on the New York sale, after
taxes, was $252.7 million.
OTHER OPERATING INCOME. During the first nine months of 1995, other
operating income was $1.0 million, a decrease of $2.2 million from income of
$3.2 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 $235.3 million in the third quarter of
1995, an increase of $50.6 million or 27% from $184.7 million in the third
quarter of 1994. G&A expenses totaled $619.4 million for the first nine
months of 1995, an increase of $57.0 million or 10% from $562.4 million for
the first nine months of 1994. The increases reflect the pre-tax charge of
$11.0 million in the third quarter of 1995 associated with Project HOME Run,
and other costs associated with various new business development efforts. In
addition, as a result of changes in business plans, the Company has decided to
sell certain of its premises, resulting in a third quarter charge of $25.7
million to bring the affected properties to fair value. The increase in G&A
expenses for the first nine months of 1995 was partially offset by $9.0
million of FDIC premium rebates recorded in the first nine months of 1995 and
reductions in the premium assessment rates.
The ratio of G&A expenses to average assets (the "G&A ratio") was 1.76%
in the third quarter of 1995 compared to 1.40% in the third quarter of 1994,
an increase of 36 basis points. The increase reflects the 27% increase in G&A
expenses, partially offset by an increase of 2% in average assets. The G&A
ratios for the first nine months of 1995 and 1994 were 1.52% and 1.46%,
respectively, which reflects the 10% increase in G&A expenses, partially
offset by a 6% increase in average assets.
OPERATIONS OF REI. Losses from operations of REI were $42.1 million in
the third quarter of 1995, an increase of $36.0 million from $6.1 million in
the third quarter of 1994 and were $45.9 million for the first nine months of
1995, an increase of $29.5 million from $16.4 million in the first nine months
of 1994. The increases reflect the provision for losses of $40.0 million
during the third quarter of 1995 due largely to a deterioration in the value
of a major commercial REI project in California. A recent review of the
project's plans led to a change in the Company's assessment of the continued
viability of such plans.
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 $21.0 million in
the third quarter of 1995, a slight increase from $20.9 million for the third
quarter of 1994. For the first nine months of 1995, losses from operations of
REO were $61.7 million, a decrease of $8.2 million or 12% from $69.9 million
for the same period of 1994, reflecting declines of $4.6 million in losses on
sales of REO properties and $3.7 million in the provision for losses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR GOODWILL. The Company adopted SFAS No. 72
effective January 1, 1995 for goodwill related to acquisitions made 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 for
goodwill. The adoption of SFAS No. 72 also resulted in a reversal of $4.3
million in goodwill amortization expense previously reported 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 permitted 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 third
quarter of 1995 was $8.1 million, an increase of $2.3 million or 41% from $5.8
million for the third quarter of 1994. For the first nine months of 1995,
amortization of goodwill and other intangible assets was $21.9 million, an
increase of $4.2 million or 24% from $17.7 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 nine months of 1995, partially
offset by the reductions in the goodwill balance upon the adoption of SFAS No.
72 and the sales of the New York and Illinois retail deposit branch systems.
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 third quarters of 1995 and 1994 were
49.4% and 39.6%, respectively. For the comparable nine month periods, the
effective tax rates were 47.3% in 1995 and 39.4% in 1994, reflecting
management's estimate of the Company's full year tax provision. The effective
tax rates for the 1995 periods also reflect the write-off of $101.8 million in
goodwill, which is not deductible for tax purposes, related to the New York
sale.
FINANCIAL CONDITION
The Company's consolidated assets were $50.6 billion at September 30,
1995, a decrease of $3.1 billion or 6% from $53.7 billion at December 31,
1994. The decrease in assets is primarily due to the New York sale and
related funding transactions. The Company sold $8.1 billion in deposits for a
premium of approximately 8%, as well as the related branch premises. In
addition, goodwill and other intangible assets associated with the branch
system, totaling $106.9 million, were written off. The New York sale was
primarily funded with a combination of new borrowings of $4.7 billion and
sales of MBS of $2.8 billion, including $1.4 billion of MBS sold in the second
quarter of 1995. The Company also utilized funds generated by the acquisition
in the second quarter of 1995 of $1.2 billion in deposits from Household Bank,
FSB. As a result of the sale and related asset disposition and funding
transactions, the Company's total assets declined by $2.9 billion. In
addition, the adoption of SFAS No. 72, effective January 1, 1995, resulted in
a $234.7 million decline in goodwill.
The Company's primary asset generation business continues to be the
origination of loans on residential real estate properties. The Company
originated $4.8 billion in loans in the first nine months of 1995 compared to
$7.7 billion in the first nine months of 1994. Loans on single family homes
(one-to-four units) accounted for 80% of the total mortgage loan origination
volume in the first nine months of 1995, with the balance on multi-family
residential properties, and 82% of total originations were ARMs. In the first
nine months of 1995, 10% of the Company's ARM originations were tied to U.S.
Treasury securities ("Treasury ARMs") and the balance were COFI ARMs. Since
the announcement of the Company's consumer lending program in May 1995, $16.8
million in consumer loans have been funded as of September 30, 1995.
In the first nine months of 1995, 65% of loan originations were on
properties located in California. At September 30, 1995, approximately 97% of
the loan and MBS portfolio was secured by residential properties, including
77% secured by single family properties.
The following table summarizes the Company's gross mortgage portfolio by state
and property type at September 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 $26,171,849 70.81% $8,485,118 92.02% $1,197,824 73.84% $35,854,791 75.01%
Florida 2,637,651 7.14 30,701 0.33 6,247 0.39 2,674,599 5.60
New York 2,001,052 5.41 274,922 2.98 206,198 12.71 2,482,172 5.19
Illinois 1,855,250 5.02 103,929 1.13 18,100 1.12 1,977,279 4.14
Texas 1,120,901 3.03 81,362 0.88 30,256 1.87 1,232,519 2.58
Other 3,172,960 8.59 244,464 2.66 163,540 10.07 3,580,964 7.48
----------- ---------- ---------- ----------- ------
$36,959,663 77.32 $9,220,496 19.29 $1,622,165 3.39 $47,802,324 100.00%
=========== ========== ========== =========== ======
The loan and MBS portfolio includes approximately $7.0 billion in
mortgage loans that were originated with loan to value ("LTV") ratios
exceeding 80%, or 15% of the portfolio at September 30, 1995. Approximately
20% of loans originated during the first nine 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 $386.2 million of these Treasury ARMs
during the first nine months of 1995. At September 30, 1995, 96.7% of the
Company's $47.5 billion loan and MBS portfolio consisted of ARMs indexed
primarily to COFI, compared to 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 248 basis points at September 30, 1995, an
increase of four 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 and third
quarters of 1995 as the Company's cost of funds have remained relatively
stable, while the rise in COFI slowed in early 1995 and then stabilized during
the second and third quarters of 1995.
As a result of the New York sale and the related funding transactions the
Company may experience temporary increases in its cost of funds, with the
favorable differential to COFI continuing to decline or becoming negative.
Such increases in the Company's cost of funds are expected to be offset by
reductions in G&A expenses and goodwill amortization.
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 an emphasis on acquiring assets more
responsive to interest rate changes, 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 September
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 $ 791,969 2% $ 763,674 $ 6 $ 28,289 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (116,409) - 116,409 - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total investment securities 791,969 2 647,265 6 144,698 - -
----------- --- ----------- ----------- ----------- ---------- ----------
Loans and MBS
MBS
ARMs 16,086,275 33 16,086,275 - - - -
Other 409,425 1 - - 1,020 3,505 404,900
Loans
ARMs 29,791,296 62 28,774,036 349,000 668,260 - -
Other 1,178,467 2 250,795 91,078 384,056 240,036 212,502
Impact of hedging (interest
rate swaps) - - 1,017,260 (349,000) (668,260) - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total loans and MBS 47,465,463 98 46,128,366 91,078 385,076 243,541 617,402
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-earning assets $48,257,432 100% $46,775,631 $ 91,084 $ 529,774 $ 243,541 $ 617,402
=========== === =========== =========== =========== ========== ==========
Interest-costing liabilities:
Deposits
Transaction accounts $ 9,644,067 21% $ 9,644,067 $ - $ - $ - $ -
Term accounts 24,973,738 54 15,710,354 5,941,074 3,309,684 12,585 41
----------- --- ----------- ----------- ----------- ---------- ----------
Total deposits 34,617,805 75 25,354,421 5,941,074 3,309,684 12,585 41
----------- --- ----------- ----------- ----------- ---------- ----------
Borrowings
Short-term 5,487,682 12 4,616,649 871,033 - - -
FHLB and other 6,269,718 13 3,174,739 631,707 1,711,439 737,063 14,770
----------- --- ----------- ----------- ----------- ---------- ----------
Total borrowings 11,757,400 25 7,791,388 1,502,740 1,711,439 737,063 14,770
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-bearing
liabilities $46,375,205 100% $33,145,809 $ 7,443,814 $ 5,021,123 $ 749,648 $ 14,811
=========== === =========== =========== =========== ========== ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,882,227 $13,629,822 $(7,352,730) $(4,491,349) $ (506,107) $ 602,591
=========== =========== =========== =========== ========== ==========
Cumulative interest sensitivity gap $13,629,822 $ 6,277,092 $ 1,785,743 $1,279,636 $1,882,227
=========== =========== =========== ========== ==========
Percentage of hedge-adjusted
interest-earning assets
to interest-costing liabilities 104.06%
Percentage of cumulative interest
sensitivity gap to total assets 3.72%
The following table presents the interest rates and spreads at the end of
the periods indicated:
September 30, December 31,
1995 1994
------------ ------------
Average yield on:
Loans 7.51% 6.74%
MBS 7.62 6.63
Total loans and MBS 7.55 6.71
Investment securities 5.45 5.85
Interest-earning assets 7.52 6.68
Average rate paid on:
Deposits 4.73 4.05
Borrowings:
Short-term 5.97 6.38
FHLB and other 6.55 6.65
Total borrowings 6.28 (1) 6.58 (1)
Interest-costing liabilities 5.12 4.52
Interest rate spread 2.40 2.16
Net interest margin 2.60 2.24
<FN>
(1) Includes the effect of miscellaneous borrowing costs of approximately
0.20% and 0.27% as of September 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.
Loans are reviewed for impairment either on an individual loan-by-loan
basis or collectively on an aggregate basis with similar loans depending upon
the characteristics of the loans. 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 which are reviewed
individually for impairment 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:
September 30, December 31, Increase
1995 1994 (Decrease)
------------ ----------- -----------
(dollars in thousands)
Nonaccrual loans:
Single family $ 604,646 $ 568,808 $ 35,838
Multi-family 72,371 69,856 2,515
Commercial and industrial
real estate 26,908 42,362 (15,454)
--------- --------- ---------
703,925 681,026 22,899
--------- --------- ---------
REO:
Single family 183,777 135,357 48,420
Multi-family 13,333 14,181 (848)
Commercial and industrial
real estate 15,502 12,410 3,092
--------- --------- ---------
212,612 161,948 50,664
--------- --------- ---------
Total nonperforming assets:
Single family 788,423 704,165 84,258
Multi-family 85,704 84,037 1,667
Commercial and industrial
real estate 42,410 54,772 (12,362)
--------- --------- ---------
Total $ 916,537 $ 842,974 $ 73,563
========= ========= =========
TDRs:
Single family $ 42,724 $ 21,885 $ 20,839
Multi-family 65,108 56,824 8,284
Commercial and industrial
real estate 41,977 42,656 (679)
--------- --------- ---------
Total $ 149,809 $ 121,365 $ 28,444
========= ========= =========
Other impaired major loans:
Multi-family $ 17,580 $ 10,652 $ 6,928
Commercial and industrial
real estate 8,170 1,506 6,664
--------- --------- ---------
$ 25,750 $ 12,158 $ 13,592
========= ========= =========
Ratio of nonperforming assets
to total assets 1.81% 1.57%
========= =========
Ratio of nonperforming assets
and TDRs to total assets
2.11% 1.79%
========= =========
Ratio of allowances for
losses on loans and REO to
nonperforming assets 44.31% 50.12%
========= =========
The amount of the net recorded investment in impaired loans for which
there is a related specific allowance for losses was $99.6 million, net of an
allowance of $36.0 million, at September 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 loans collectively
reviewed for impairment) was $246.2 million and $204.5 million at September
30, 1995 and December 31, 1994, respectively.
The following table presents nonperforming assets, TDRs and other
impaired major loans by state at September 30, 1995:
Nonperforming Assets
----------------------------------------------------
Commercial Other
and Impaired
Single Family Multi-Family Industrial Major
Residential Residential Real Estate Total TDRs Loans
------------- ------------ ----------- --------- ----------- ----------
(in thousands)
California $643,456 $72,806 $30,318 $746,580 $ 87,922 $24,723
Florida 34,642 - 180 34,822 419 -
New York 47,216 5,306 4,413 56,935 39,960 -
Illinois 15,600 3,182 5,300 24,082 615 -
Texas 7,970 556 - 8,526 6,424 -
Other 39,539 3,854 2,199 45,592 14,469 1,027
-------- ------- ------- -------- -------- -------
$788,423 $85,704 $42,410 $916,537 $149,809 $25,750
======== ======= ======= ======== ======== =======
Total nonperforming assets were $916.5 million at September 30, 1995, or
a ratio of nonperforming assets to total assets of 1.81%, an increase of $73.6
million or 9% during the first nine months of 1995 from $843.0 million, or
1.57% of total assets, at December 31, 1994. Single family nonperforming
assets were $788.4 million at September 30, 1995, an increase of $84.3 million
or 12% from December 31, 1994 primarily due to increases in California REO of
$45.1 million and nonaccrual loans secured by California and New York
properties of $31.2 million and $7.0 million, respectively.
Multi-family nonperforming assets were $85.7 million at September 30,
1995, an increase of $1.7 million or 2% during the first nine months of 1995
primarily due to increases in Illinois ($2.6 million), New York ($2.1 million)
and New Jersey ($1.5 million) offset by a decline in California ($5.7
million). Commercial and industrial real estate nonperforming assets were
$42.4 million at September 30, 1995, a decrease of $12.4 million or 23% during
the first nine months of 1995 primarily due to declines in California ($8.0
million), New Jersey ($2.7 million) and New York ($1.3 million).
TDRs were $149.8 million at September 30, 1995, an increase of $28.4
million or 23% from $121.4 million at December 31, 1994 primarily due to
increases in TDRs secured by properties in California ($28.2 million) and New
Jersey ($1.0 million), partially offset by a decrease in Illinois ($3.0
million). Other impaired major loans totaled $25.8 million at September 30,
1995, an increase of $13.6 million or 112% from $12.2 million at December 31,
1994 primarily due to a $16.8 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 $212.6 million of single family REO and
$66.4 million of multi-family and commercial and industrial REO in the first
nine 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 September 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 Nine Months Ended
September 30, September 30,
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- ---------
(dollars in thousands)
Beginning balance $389,927 $447,098 $400,232 $438,786
Provision for loan losses 29,175 29,432 81,184 138,013
-------- -------- -------- --------
419,102 476,530 481,416 576,799
-------- -------- -------- --------
Charge-offs:
Single family (19,736) (22,276) (63,899) (78,923)
Multi-family (10,242) (21,747) (33,582) (58,375)
Commercial and industrial
real estate (8,754) (5,266) (17,103) (31,387)
-------- -------- -------- --------
(38,732) (49,289) (114,584) (168,685)
Recoveries 4,919 9,968 18,457 29,095
-------- -------- -------- --------
Net charge-offs (33,813) (39,321) (96,127) (139,590)
-------- -------- -------- --------
Ending balance $385,289 $437,209 $385,289 $437,209
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.28% 0.34% 0.26% 0.41%
==== ==== ==== ====
Gross charge-offs on commercial and industrial real estate loans for the
first nine months of 1995 include $6.3 million resulting from the foreclosure
of one property in California. During the first nine 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:
September 30, 1995 December 31, 1994
-------------------- --------------------
% of Loan % of Loan
and MBS and MBS
Allowance Portfolio Allowance Portfolio
--------- --------- --------- ---------
(dollars in thousands)
Single family $175,000 0.47% $165,000 0.42%
Multi-family 155,395 1.69 160,232 1.88
Commercial and
industrial
real estate 54,894 3.40 75,000 4.34
-------- --------
$385,289 0.81 $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 $2.2 billion at September 30, 1995, increased $81.5 million or
4% from December 31, 1994. The increase is primarily due to MBS sales of $2.9
billion, a net increase in borrowings of $2.6 billion and the creation of $1.4
billion of liquidity-qualifying MBS, substantially offset by a net decrease of
$6.0 billion in deposits during the first nine months of 1995. The liquidity
portfolio decreased $1.1 billion or 33% from $3.3 billion at June 30, 1995
primarily due to the use of excess liquidity as part of funding the New York
sale.
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
1995 the average liquidity and average short-term liquidity ratios of Home
Savings were 9.26% and 5.93%, 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 nine months of 1995 were principal
payments and prepayments on loans and MBS, proceeds from short-term borrowings
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, excluding the New
York sale, has been to fund internally generated mortgage loans. During the
first nine months of 1995 cash of $4.6 billion was used to originate loans.
Gross loan originations of $4.8 billion in the first nine months of 1995
included $3.5 billion of COFI ARMs with an average factor of 274 basis points
above COFI, $386.2 million of Treasury ARMs, $860.8 million of fixed rate
mortgage loans and $16.8 million of consumer loans. Fixed rate loans
originated and designated for sale represented approximately 19% of single
family loan originations in the first nine months of 1995. Principal payments
on loans were $1.2 billion in the first nine months of 1995, a decrease of
$1.2 billion or 50% from $2.4 billion in the first nine months of 1994.
During the first nine months of 1995 the Company sold loans totaling
$745.4 million. The Company designates certain loans as held for sale,
including most of its fixed rate originations. At September 30, 1995 the
Company had $139.1 million of loans held for sale.
At September 30, 1995 the Company was committed to fund mortgage loans
totaling $572.3 million, of which $360.8 million or 63% were COFI ARMs, $54.9
million or 10% were Treasury ARMs and $156.6 million or 27% were fixed rate
loans. The Company expects to fund such loans from its liquidity sources.
MBS. During the first nine months of 1995 the Company sold $2.4 billion
of MBS available for sale, comprised of $2.2 billion of ARM MBS and $240.3
million of fixed rate MBS. Such sales included $2.1 billion of ARM MBS and
$212.4 million of fixed rate MBS sold during the second and third quarters of
1995 in preparation for the New York sale. The Company designates certain MBS
as available for sale. At September 30, 1995 the Company had $34.2 million of
MBS available for sale.
During the third quarter of 1995, the Company sold $503.3 million of MBS
originally intended to be held to maturity. The sale of these MBS was a
result of the New York sale and was necessary for the Company to maintain its
interest rate risk position following this major disposition as permitted by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Such sales of MBS included $464.6 million in fixed rate MBS and
$38.7 million in ARM MBS.
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.
The Financial Accounting Standards Board ("FASB") is considering a one-
time opportunity for institutions to reclassify securities from the "held to
maturity" designation to the "available for sale" designation prior to
December 31, 1995. Such reclassified securities would then be adjusted to
fair value in accordance with SFAS No. 115. The potential impact on the
Company's Statement of Financial Condition cannot be determined until the FASB
has issued its guidance on this classification issue.
DEPOSITS. Savings deposits were $34.6 billion at September 30, 1995, a
decrease of $6.0 billion or 15% from $40.7 billion at December 31, 1994,
primarily reflecting deposits sold of $8.1 billion in the New York sale,
partially offset by deposits purchased of $1.3 billion and a net deposit
inflow of $786.9 million.
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% during the first nine 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 certain higher costing borrowings.
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, 1995, 77% of the Company's total deposits
were in California, compared to 62% at December 31, 1994.
BORROWINGS. Borrowings totaled $11.8 billion at September 30, 1995, an
increase of $2.6 billion or 28% from $9.2 billion at December 31, 1994,
reflecting an increase in short-term borrowings of $3.1 billion, partially
offset by reductions in FHLB and other borrowings of $552.6 million. The
increase in short-term borrowings is primarily due to the funding of the New
York sale.
In August 1995, the Company fully paid a maturing note which had an
outstanding balance of $79.9 million and an effective interest rate of 8.38%.
In September 1995, the Company redeemed $72.5 million of 10 1/4% Subordinated
Notes at par.
In the first nine months of 1995, the Company had three issuances of
medium term notes totaling $160 million. The notes will mature in three to
seven years and have a weighted average interest rate of 7.11%. Such
borrowings will be used for general corporate purposes.
CAPITAL. Stockholders' equity was $3.1 billion at September 30, 1995, an
increase of $106.5 million or 4% from December 31, 1994. The increase is
primarily due to net earnings of $155.5 million and a net increase of $53.2
million to a net unrealized gain on securities available for sale, partially
offset by dividends paid to common and preferred stockholders of $115.2
million. The net unrealized gain on securities available for sale at
September 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 investment. 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 September 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
September 30, 1995:
Balance Ratio
---------- -------
(dollars in thousands)
Tangible capital (to adjusted total assets) $3,168,598 6.31%
Core capital (to adjusted total assets) 3,174,307 6.32
Core capital (to risk-weighted assets) 3,174,307 10.03
Total risk-based capital 4,105,636 12.97
The regulatory capital requirements applicable to Home Savings are
continuing to become more stringent as the amount of Home Savings' investment
in real estate investment 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 September 30, 1995 the capital ratios computed on this more
stringent, "fully phased-in" basis were 6.29% for tangible capital (to
adjusted total assets), 6.30% for core capital (to adjusted total assets),
9.99% for core capital (to risk-weighted assets) and 12.93% for risk-based
capital.
In October 1995, Ahmanson announced a stock repurchase program with the
intent to repurchase up to $250 million of its outstanding common and/or
convertible preferred stock from time to time. On October 30, 1995, Home
Savings paid a special cash dividend of $250 million to Ahmanson in order to
fund the stock repurchase program. If the dividend had been paid as of
September 30, 1995, Home Savings' capital ratios, on a fully phased-in
basis, would have been approximately 5.79% for tangible capital (to adjusted
total assets), 5.80% for core capital (to adjusted total assets), 9.20% for
core capital (to risk-weighted assets) and 12.14% for risk-based capital.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995 the FASB 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.
LEGISLATIVE MATTERS
INTRODUCTION
Substantial alterations in the current banking regulatory structure and
the deposit insurance system have been proposed in several bills now pending
in Congress. These bills are the banking Budget Reconciliation
Recommendations for Fiscal Year 1996 as agreed to by conferees from the Senate
and House Banking Committees (the "Reconciliation Bill"), the Thrift Charter
Conversion Act of 1995 (H.R. 2363) (the "Charter Conversion Bill") and the
Thrift Charter Conversion Tax Act of 1995 (the "House Tax Bill"). The
following discussion of the proposed legislation is based upon information
available to the Company as of November 13, 1995. The Company cannot predict
whether or when any of the proposed legislation will be enacted or what
provisions any enacted legislation may contain.
The Reconciliation Bill is being proposed as part of the Congressional
balanced budget program (the "Budget Bill") and therefore is limited to
addressing issues which have an effect on the Federal budget. It provides for
the recapitalization of the Savings Association Insurance Fund ("SAIF") by a
special assessment on SAIF deposits, merger of the SAIF and the Bank Insurance
Fund ("BIF") if all savings associations become banks, and payment of the
interest on bonds issued by the Financing Corporation ("FICO") by BIF and SAIF
proportionately based upon the amount of deposits insured by each fund. The
House Tax Bill will be included in the overall Budget Bill if conferees from
the House of Representatives and the Senate agree to do so. The
Reconciliation Bill, together with the other components of the overall Budget
Bill, is subject to a final Congressional vote, after which the Budget Bill
will be forwarded to President Clinton for approval. President Clinton has
previously indicated his intention to veto the Budget Bill for reasons
unrelated to the provisions addressing financial institutions. If the Budget
Bill is vetoed, it is not clear whether Congress would re-examine all the
provisions of that Bill or only those provisions to which the President has
expressed objections.
The Charter Conversion Bill has a broader scope than the Reconciliation
Bill. Senate Banking Committee Chairman D'Amato has agreed to introduce the
Charter Conversion Bill and to bring the bill before his committee for action
in 1996. The Charter Conversion Bill would eliminate savings associations as
separately regulated entities. It would terminate the Federal savings
association charter and convert all Federal savings associations to either
national banks or state-chartered banks or savings associations. The Home
Owners' Loan Act, the primary body of law governing the incorporation and
operation of Federal savings associations, would be repealed and the Office of
Thrift Supervision (the "OTS"), the primary regulator of Federal and state
savings associations, would be eliminated and its responsibilities transferred
to the Office of the Comptroller of the Currency (the "OCC"), the Federal
Deposit Insurance Corporation (the "FDIC"), or the Federal Reserve Board (the
"FRB").
DEPOSIT INSURANCE DIFFERENTIAL
Home Savings is a BIF-member institution. Home Savings' deposits are
treated in part as SAIF-insured and in part as BIF-insured. The BIF and the
SAIF are both administered by the FDIC. During 1995, Home Savings paid
deposit insurance premiums to the SAIF on its SAIF-insured deposits and to the
BIF on its BIF-insured deposits.
As provided in 1991 legislation, deposits insured by the SAIF and
deposits insured by the BIF have been assessed based on the same matrix rate
schedule, resulting in assessments ranging between 23 and 31 basis points of
covered deposits depending upon the capital levels and regulatory risk rating
of each insured depository institution. Congress has mandated that
assessments for each fund remain computed at a rate of at least 23 basis
points until the fund reaches the statutorily designated reserve ratio ("DRR")
of 1.25%. The DRR is defined as the ratio of the fund's net worth to the
amount of its total insured deposit liabilities. The FDIC determined that the
BIF reached its DRR as of the end of May 1995 and thereafter reduced
assessments on BIF deposits to an average of approximately 4 basis points,
retroactively effective as of June 1, 1995. The FDIC has projected that the
SAIF will not be recapitalized to its DRR of 1.25% before 2002. Accordingly,
the FDIC retained the existing SAIF assessment rate schedule.
The reduction of BIF assessment rates without a corresponding reduction
in SAIF assessment rates could provide institutions whose deposits are
exclusively or primarily BIF-insured, such as most commercial banks, a
competitive advantage over institutions whose deposits are primarily SAIF-
insured, such as Home Savings. In recognition of this premium disparity, the
Reconciliation Bill proposes to recapitalize the SAIF to its DRR of 1.25% by
means of a special one-time assessment on SAIF-insured deposits (the "Special
Assessment").
THE SPECIAL ASSESSMENT
The Special Assessment would be due on January 2, 1996. The FDIC is to
determine the special assessment rate. Recently published estimates indicate
that the assessment rate may be approximately 80 basis points. Upon payment
of the Special Assessment, it is anticipated that the FDIC will reduce the
semi-annual SAIF assessment matrix rate schedule to parallel the revised BIF
schedule.
The amount of the Special Assessment is expected to be deductible under
the Internal Revenue Code (the "Tax Code").
OAKAR BANKS
Under the Reconciliation Bill, BIF-member institutions that hold both
SAIF- and BIF-insured deposits (so-called "Oakar Banks") may receive a
reduction in their special assessment. Although Home Savings is an Oakar
Bank, it would not be eligible for the reduction proposed by the
Reconciliation Bill because the Bill requires that an Oakar Bank's BIF
deposits have exceeded its SAIF deposits on June 30, 1995, a test that Home
Savings does not meet.
PAYMENT OF THE INTEREST ON THE FICO BONDS
FICO was created in 1987 to raise funds for the Federal Savings and Loan
Insurance Corporation (the "FSLIC"), the predecessor to the SAIF. FICO issued
a series of 30-year noncallable bonds (the "FICO Bonds") totaling $8.17
billion to fund the FSLIC. Currently, the annual net interest cost of these
bonds, approximately $780 million, is solely the responsibility of SAIF-
insured institutions.
The Reconcilation Bill provides that the annual cost of the interest on
the FICO Bonds would be shared proportionately by both SAIF and BIF members.
At present, BIF deposits account for approximately 75% of combined deposits.
THE CHARTER CONVERSION BILL
ELIMINATION OF THE SAVINGS ASSOCIATION CHARTER. The Reconciliation Bill
merges the SAIF and the BIF into one deposit insurance fund as of January 1,
1998. In conjunction with the merger of the insurance funds, the Charter
Conversion Bill eliminates the Federal savings association charter by
requiring that all Federal savings associations convert to national banks or
state chartered savings associations or banks by January 1, 1998.
Alternatively, a Federal savings association would be allowed to liquidate
itself. Any Federal savings association still in existence on January 1,
1998, would be converted to a national bank by operation of law.
GRANDFATHERED POWERS OF CONVERTED SAVINGS ASSOCIATIONS. The Charter
Conversion Bill provides a limited grandfather for existing activities of
Federal savings associations when they convert to banks, but would not permit
a converted savings association to engage in additional activities not
authorized under its bank charter which were permissible for a Federal savings
association on September 13, 1995.
Accordingly, converted Federal savings associations would be permitted to
continue to engage in a number of activities not permissible for national
banks, such as real estate and insurance activities, subject to the
divestiture of all such nonconforming activities within the timeframe set by
the final bill.
BRANCHING POWERS OF CONVERTED SAVINGS ASSOCIATIONS. Federal savings
associations are currently permitted to branch or to establish agencies
nationwide. Furthermore, many Federal savings associations have interstate
branches and branching rights acquired in supervisory transactions during the
1980s and 1990s. In contrast, the law governing the establishment of branches
by banks is more restrictive than for Federal savings associations. However,
as of June 1, 1997, national banks will be permitted to branch into any state
by merger with a bank in that state, except in a state which has elected not
to participate in interstate branching.
Converted savings associations such as Home Savings would be permitted by
the Charter Conversion Bill to retain and operate all branches that the
savings association operated as of September 13, 1995.
With regard to new intrastate and interstate branching, any additional
branching or establishment of branches would be permitted only in conformity
with Federal and state law applicable to national and state banks "without
regard to such branch or agency." Accordingly, converted savings associations
would not be allowed to establish, acquire or operate any additional branches
in a state on the basis of the operation or presence of a grandfathered branch
in that state and would be required to enter a state to establish or acquire a
branch in the manner required of a national bank located in another state.
CONVERSION OF SAVINGS AND LOAN HOLDING COMPANIES TO BANK HOLDING
COMPANIES. Ahmanson is a unitary savings and loan holding company ("SLHC") by
reason of its ownership of Home Savings. As a unitary SLHC, Ahmanson is not
subject to any restrictions on its nonbanking activities as long as Home
Savings continues to meet the qualified thrift lender ("QTL") test, which
generally requires that 65% of Home Savings' assets be held in housing-related
or other specified investments, and as long as Ahmanson does not acquire and
maintain another savings association subsidiary. By contrast, a BHC may
engage only in activities that the FRB has found to be "so closely related to
banking as to be a proper incident thereto."
The Charter Conversion Bill would create a new entity, a qualified BHC
("QBHC"), which would allow a unitary SLHC to continue to operate without
restrictions on its nonbanking activities if it met certain restrictions. The
restrictions would require that: (i) Home Savings continue to meet the QTL
test; (ii) Home Savings continue to comply with all limitations and
restrictions on the types and amounts of loans or investments that were
applicable to savings associations as of the Enactment Date; (iii) the Company
not acquire more than 5% of the shares or assets of any bank or insured
depository institution after September 13, 1995; and (iv) the Company not
engage in a merger, consolidation or similar transaction which would result in
a change in control of the Company.
ELIMINATION OF THE OFFICE OF THRIFT SUPERVISION. Under the Charter
Conversion Bill, the OTS would be eliminated effective January 1, 1998, and
its authority, personnel and property transferred to the appropriate Federal
regulatory agency. The OCC would regulate the savings associations converted
to national banks while the FDIC would continue to regulate state chartered
savings associations and state banks that are not members of the Federal
Reserve system. Accordingly, converted Federal savings associations would
still have one primary regulator, but it would be the OCC. The FDIC would
continue to serve as a back-up regulator by virtue of its insurance of the
converted savings associations' deposits.
The OTS currently regulates savings and loan holding companies. However,
under the Charter Conversion Bill, holding companies of converted savings
associations would be regulated by the FRB, the regulator of BHCs.
The Charter Conversion Bill requires that the FRB regulate QBHCs "in a
manner consistent with the regulation of such companies by the [OTS] . . . and
consistent with safety and soundness of the insured depository institution."
The Committee Report published in connection with the Reconciliation Bill as
considered in the House of Representatives states that the intent of this
provision is to guide the FRB in its regulation of former SLHCs and to ensure
that such companies will be regulated in a manner consistent with the current
regulation of such companies.
OTS INDICES AND COST OF FUNDS INDICES. Elimination of the OTS or
elimination of the savings association charter could result in the elimination
of certain indices, such as COFI, used by the Company to calculate interest
rates on ARMs. Any ARM which does not include contractual provisions defining
an alternative index, or the means by which an alternative index is selected,
will be significantly affected by the elimination of its index unless an
alternative index is specified legislatively.
The Charter Conversion Bill provides for the continued publication of
certain indices now compiled and published by the OTS or for the certification
of substantially similar indices. The bill also provides for the continued
compilation of certain COFI indices compiled and published by any Federal Home
Loan Bank.
THE HOUSE TAX BILL--RECAPTURE OF THE BAD DEBT RESERVE
Under Section 593 of the Tax Code, savings associations are permitted to
retain a reserve for loan losses ("Bad Debt Reserve") on a basis which is not
available to commercial banks with assets in excess of $500 million. Savings
associations converting to banks are required to take the amount of the Bad
Debt Reserve back into income as an adjustment pursuant to a change of
accounting method under Section 481 of the Tax Code and to account for future
loan losses as commercial banks do.
The House Tax Bill provides that amount of the Bad Debt Reserve that must
be recaptured under Section 481 (the "Recapture Amount") is limited to the
amount of increases to the Bad Debt Reserve in tax years after the tax year
ending December 31, 1987. Converted savings associations would be required to
take the Recapture Amount into income ratably over six years. Under a special
rule, if a converted savings association meets a residential loan origination
requirement (the "Residential Loan Test") during the two taxable years
following conversion, the Recapture Amount that would otherwise be required to
be restored to income would be deferred. The converted savings association
would meet the Residential Loan Test if, for any taxable year, the principal
amount of residential loans made by the taxpayer during the year is not less
than the average of the principal amount of such loans over a base period
consisting of the 1990 through 1995 taxable years.
Home Savings has not recorded any financial statement tax liability
relating to its pre-1988 Bad Debt Reserve, in accordance with Accounting
Principles Bulletin No. 23. If Home Savings were required to recapture any of
its Bad Debt Reserve, the related tax liability would have an adverse effect
on the Company's net earnings. Because Home Savings does not have a post-1987
increase to its Bad Debt Reserve, no amount of its Bad Debt Reserve would be
subject to recapture under the House Tax Bill.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
11 Statement of Computation of Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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 13, 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
-------- ------------ -------------
11 Statement of Computation of
Earnings per Share. __
27 Financial Data Schedule *
* Filed electronically with the Securities and Exchange Commission.