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 June 30, 1997
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. (626) 960-6311
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Exhibit Index appears on page: 38
Total number of sequentially numbered pages: 39
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, 1997: $.01 par value - 97,335,863 shares.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
---------------------------------
The condensed consolidated 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
consolidated 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.
These condensed consolidated financial statements should be read in
conjunction with the consolidated 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, 1997 December 31, 1996
- ------ ------------- -----------------
Cash and amounts due from banks $ 515,171 $ 691,578
Federal funds sold and securities purchased under agreements
to resell 376,100 737,500
Other short-term investments 6,120 14,782
----------- -----------
Total cash and cash equivalents 897,391 1,443,860
Other investment securities held to
maturity [market value
$2,418 (June 30, 1997) and
$2,456 (December 31, 1996)] 2,426 2,438
Other investment securities available for
sale [amortized cost
$8,360 (June 30, 1997) and
$8,541 (December 31, 1996)] 9,031 9,159
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 399,306 420,978
Mortgage-backed securities (MBS)
held to maturity [market value
$4,717,413 (June 30, 1997) and
$5,111,367 (December 31, 1996)] 4,714,485 5,066,670
MBS available for sale [amortized cost
$8,932,693 (June 30, 1997) and
$9,359,058 (December 31, 1996)] 8,913,534 9,229,842
Loans receivable less allowance for losses of
$388,287 (June 30, 1997) and
$389,135 (December 31, 1996) 30,429,438 30,723,398
Loans held for sale [market value
$302,537 (June 30, 1997) and
$1,080,046 (December 31, 1996)] 299,315 1,065,760
Accrued interest receivable 203,052 209,839
Real estate held for development and
investment (REI) less allowance for losses of
$112,744 (June 30, 1997) and
$132,432 (December 31, 1996) 146,845 147,851
Real estate owned held for sale (REO)
less allowance for losses of
$25,840 (June 30, 1997) and
$32,137 (December 31, 1996) 195,712 247,577
Premises and equipment 380,917 424,567
Goodwill and other intangible assets 292,713 308,083
Other assets 647,903 602,022
----------- -----------
$47,532,068 $49,902,044
=========== ===========
Liabilities, Capital Securities of Subsidiary Trust
and Stockholders' Equity
- ---------------------------------------------------
Deposits:
Non-interest bearing $ 1,027,650 $ 985,594
Interest bearing 31,714,220 33,788,351
----------- -----------
32,741,870 34,773,945
Securities sold under agreements to repurchase 2,525,000 1,820,000
Other short-term borrowings 539,373 210,529
FHLB and other borrowings 7,979,772 9,549,992
Other liabilities 1,022,887 917,198
Income taxes 111,372 48,918
----------- -----------
Total liabilities 44,920,274 47,320,582
Company-obligated mandatorily redeemable capital securities,
Series A, of subsidiary trust holding solely Junior
Subordinated Deferrable Interest Debentures of the Company 148,378 148,413
Stockholders' equity 2,463,416 2,433,049
----------- -----------
$47,532,068 $49,902,044
=========== ===========
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,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest income:
Loans $ 575,802 $ 559,078 $ 1,153,335 $ 1,133,933
MBS 259,429 296,927 527,102 605,281
Investments 16,271 11,231 33,168 22,892
----------- ----------- ----------- -----------
Total interest income 851,502 867,236 1,713,605 1,762,106
----------- ----------- ----------- -----------
Interest expense:
Deposits 374,187 372,997 749,326 760,170
Short-term borrowings 42,924 36,334 76,044 76,564
FHLB and other borrowings 126,322 146,331 262,547 296,816
----------- ----------- ----------- -----------
Total interest expense 543,433 555,662 1,087,917 1,133,550
----------- ----------- ----------- -----------
Net interest income 308,069 311,574 625,688 628,556
Provision for loan losses 17,989 33,901 42,212 79,843
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 290,080 277,673 583,476 548,713
----------- ----------- ----------- -----------
Noninterest income:
Loss on sales of MBS (74) (29) (74) (29)
Gain on sales of loans 6,137 6,166 14,126 21,194
Loan servicing income 17,078 16,657 33,826 31,802
Banking and other retail service fees 28,525 16,640 57,859 30,863
Other fee income 17,059 14,651 33,440 27,247
Gain on sales of financial service centers 41,610 - 57,566 -
Gain on sales of investment securities 135 - 135 -
Other operating income 1,322 1,915 3,783 5,453
----------- ----------- ----------- -----------
111,792 56,000 200,661 116,530
----------- ----------- ----------- -----------
Noninterest expenses:
Compensation and other employee expenses 84,368 91,468 179,836 188,912
Occupancy expenses 26,647 27,835 53,359 57,073
Federal deposit insurance premiums and assessments 6,269 19,315 12,818 40,139
Other general and administrative expenses 63,180 51,034 121,224 96,576
----------- ----------- ----------- -----------
Total general and administrative expenses (G&A) 180,464 189,652 367,237 382,700
Net acquisition costs 5,475 - 5,475 -
Operations of REI 399 7,535 2,258 14,278
Operations of REO 21,884 27,302 43,992 52,991
Amortization of goodwill and other intangible assets 6,447 3,958 12,837 7,952
----------- ----------- ----------- -----------
214,669 228,447 431,799 457,921
----------- ----------- ----------- -----------
Income before provision for income taxes 187,203 105,226 352,338 207,322
Provision for income taxes 71,547 36,492 133,589 73,833
----------- ----------- ----------- -----------
Net income $ 115,656 $ 68,734 $ 218,749 $ 133,489
=========== =========== =========== ===========
Net income attributable to common shares $ 107,249 $ 56,127 $ 201,934 $ 108,274
=========== =========== =========== ===========
Income per common share:
Primary $ 1.09 $ 0.51 $ 1.99 $ 0.96
Fully diluted $ 1.01 $ 0.50 $ 1.86 $ 0.94
Common shares outstanding, weighted average:
Primary 98,208,190 110,016,213 101,270,618 112,432,758
Fully diluted 110,185,833 122,098,197 113,303,148 124,585,694
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued (Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Return on average assets (1) 0.96% 0.56% 0.90% 0.54%
Return on average equity (1) 19.32% 9.73% 18.27% 9.16%
Return on average tangible equity (1),(2) 21.54% 10.37% 20.42% 9.78%
Efficiency ratio 48.68% 52.75% 48.91% 53.27%
<FN>
(1) Excluding the effects of the gain on sale of the West Coast of Florida financial service centers of $41.6 million and
the net acquisition costs of $5.5 million for the three and six months ended June 30, 1997 and the gain on sale of the
Arizona financial service centers of $16.0 million for the six months ended June 30, 1997, the returns on average
assets, average equity and average tangible equity would have been as follows:
</FN>
For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1997
-------------------------- --------------------------
Return on average assets 0.78% 0.77%
Return on average equity 15.89% 15.90%
Return on average tangible equity (2) 17.86% 17.89%
<FN>
(2) Net income excluding amortization of goodwill and other intangible assets (net of applicable tax) as a percentage of
average equity excluding goodwill and other intangible assets (net of applicable tax).
</FN>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
For The Six
Months Ended June 30,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 218,749 $ 133,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans and real estate 59,343 105,731
Proceeds from sales of loans held for sale 1,667,394 1,657,817
Loans originated for sale (679,189) (1,045,037)
Loans repurchased from investors (33,195) (57,689)
Increase (decrease) in other liabilities 124,380 (103,137)
Other, net (37,413) 20,640
----------- -----------
Net cash provided by operating activities 1,320,069 711,814
----------- -----------
Cash flows from investing activities:
Principal payments on loans 1,661,649 1,112,743
Principal payments on MBS 672,134 848,878
Loans originated for investment (net of refinances) (1,728,924) (1,449,525)
Proceeds from maturities of other investment securities 1,362 -
Purchase of Great Western common stock (163,974) -
Proceeds from sale of Great Western common stock 181,610 -
Proceeds from sales of other investment securities available for sale 400 392
Other investment securities purchased (1,427) (353)
Net redemption of FHLB stock 34,088 89,386
Proceeds from sales of REO 241,502 190,601
Other, net 75,088 (95,371)
----------- -----------
Net cash provided by investing activities 973,508 696,751
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (864,382) (962,550)
Deposits sold (1,167,693) -
Net increase in borrowings maturing in 90 days or less 263,844 324,689
Proceeds from other borrowings 3,377,761 1,968,674
Repayment of other borrowings (4,178,872) (2,179,391)
Common stock purchased for treasury (210,048) (206,578)
Dividends to stockholders (60,656) (73,987)
----------- -----------
Net cash used in financing activities (2,840,046) (1,129,143)
----------- -----------
Net increase (decrease) in cash and cash equivalents (546,469) 279,422
Cash and cash equivalents at beginning of period 1,443,860 1,147,156
----------- -----------
Cash and cash equivalents at end of period $ 897,391 $ 1,426,578
=========== ===========
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 and consumer finance-oriented financial
services companies in the United States, and is engaged in consumer and small
business banking and related financial services activities. Home Savings of
America, FSB ("Home Savings"), a wholly-owned subsidiary of Ahmanson, is
currently one of the largest savings institutions in the United States.
Certain amounts in prior periods' financial statements have been reclassified
to conform to the current presentation.
OVERVIEW
The Company reported net income of $115.7 million, or $1.01 per fully
diluted common share, for the second quarter of 1997. Results for the quarter
include an after-tax gain of $24.6 million, or $0.22 per fully diluted common
share, on the sale of the Company's 12 financial service centers on the West
Coast of Florida ("West Florida gain"), and a net after-tax cost of $3.2
million, or $0.03 per fully diluted common share, as a result of its proposed
merger with Great Western Financial Corporation ("net Great Western costs").
That proposal was withdrawn on June 4, 1997. Excluding the West Florida gain
and net Great Western costs, net income for the second quarter of 1997 would
have been $94.3 million, or $0.82 per fully diluted common share.
For the second quarter of 1996, net income was $68.7 million, or $0.50
per fully diluted common share and for the first quarter of 1997, net income
was $103.1 million, or $0.87 per fully diluted common share. Results for the
first quarter of 1997 include an after-tax gain on the sale of the Company's
Arizona financial service centers ("Arizona gain") of $9.5 million, or $0.08
per fully diluted common share. Excluding the Arizona gain, net income for
the first quarter of 1997 would have been $93.6 million, or $0.79 per fully
diluted common share. Net income increased 68% from the second quarter of
1996 while earnings per share increased 102% as a result of the Company's
ongoing stock purchase program. Return on average equity for the second
quarter of 1997, second quarter of 1996 and first quarter of 1997 was 19.3%,
9.7% and 17.2%, respectively, and excluding the Arizona and West Florida gains
and net Great Western costs, return on average equity would have been 15.9%
for the second quarter of 1997 and 15.6% for the first quarter of 1997.
For the first six months of the 1997, the Company had net income of
$218.7 million, or $1.86 per fully diluted common share, compared to $133.5
million, or $0.94 per fully diluted common share, for the first six months of
1996. Excluding the Arizona and West Florida gains and net Great Western
costs, net income would have been $187.9 million, or $1.59 per fully diluted
common share for the first six months of 1997. Return on average equity for
the first six months of 1997 was 18.3%, and would have been 15.9% without the
Arizona and West Florida gains and the net Great Western costs, compared to
9.2% for the first six months of 1996.
Cash earnings per share are based on the number of weighted average
shares utilized in the computation of the Company's fully diluted earnings per
share, with amortization of goodwill and other intangibles (net of applicable
taxes) added back to net income. The Company's cash earnings per share are
not necessarily comparable to similarly titled measures reported by other
companies. Cash earnings per fully diluted share were $1.05 in the second
quarter of 1997, and would have been $0.85 without the West Florida gain and
net Great Western costs, compared to $0.51 in the second quarter of 1996.
Cash earnings per fully diluted share were $1.93 in the first six months of
1997, and would have been $1.65 without the Arizona and West Florida gains and
net Great Western costs, compared to $0.98 in the first six months of 1996.
RESULTS OF OPERATIONS
Net interest income totaled $308.1 million for the second quarter of
1997, compared to $311.6 million in the second quarter of 1996, and $317.6
million in the first quarter of 1997. A lower level of interest-earning
assets contributed towards the decline in net interest income, partially due
to the sale of $550.6 million of adjustable rate mortgage ("ARM") loans tied
to the 11th District Cost of Funds Index in the second quarter of 1997. In
the second quarter of 1997, the average net interest margin was 2.66%,
compared to 2.63% in the second quarter of 1996, and 2.64% in the first
quarter of 1997.
Noninterest income, excluding the West Florida gain, was $70.2 million in
the second quarter of 1997, compared to $56.0 million in the second quarter of
1996 and $72.9 million (excluding the Arizona gain of $16.0 million) in the
first quarter of 1997. In the second quarter of 1997, the Company sold its 12
financial service centers on the West Coast of Florida. The Company continues
to operate 27 financial service centers on the East Coast of Florida with
deposits of $3.4 billion at June 30, 1997.
General and administrative ("G&A") expenses were $180.5 million in the
second quarter of 1997, compared to $189.7 million in the second quarter of
1996 and $186.8 million in the first quarter of 1997.
The efficiency ratio, defined by the Company as G&A expenses as a
percentage of net interest income, loan servicing fees, banking and other
retail fees and other fee income, was 48.7% in the second quarter of 1997,
compared to 52.8% and 49.1% in the second quarter of 1996 and the first
quarter of 1997, respectively. For the first six months of 1997, the
Company's efficiency ratio was 48.9%, compared to 53.3% for the first six
months of 1996.
NET GREAT WESTERN COSTS
Results for the second quarter of 1997 include $23.1 million of pre-tax
legal, printing, advisory and other expenses associated with the Great Western
proposal. These costs were largely offset when the Company sold the 3.6
million Great Western common shares it had purchased in connection with the
proposal. The sales resulted in a pre-tax gain of $17.6 million.
CREDIT COSTS/ASSET QUALITY
Total credit costs, defined by the Company as the provision for loan
losses and expenses for the operations of REO, continued their improving
trend, decreasing in the second quarter of 1997 by 35% from the second quarter
of 1996 and 14% from the first quarter of 1997. Credit costs were $39.9
million during the second quarter of 1997, compared to $61.2 million in the
1996 second quarter and $46.3 million in the first quarter of 1997. Net loan
charge-offs for the second quarter of 1997 totaled $17.4 million, compared to
$36.8 million in the second quarter of 1996 and $25.7 million in the first
quarter of 1997.
During the second quarter of 1997, nonperforming assets ("NPAs"), which
consist of nonaccrual loans and REO, declined by $102 million, the fifth
consecutive quarterly decline. Cumulatively, NPAs have declined $335 million,
or 33%, since February 1996. At June 30, 1997, NPAs totaled $690.5 million,
or 1.45% of total assets, compared to $953.7 million, or 1.93% at June 30,
1996, and $792.7 million, or 1.63% at March 31, 1997. NPAs decreased every
month during the second quarter of 1997: $41 million in April, $36 million in
May and $25 million in June. Loans classified as troubled debt restructurings
("TDRs") were $214.6 million at June 30, 1997. The ratio of NPAs and TDRs to
total assets was 1.90% at June 30, 1997, compared to 2.29% at June 30, 1996
and 2.06% at March 31, 1997.
At June 30, 1997, the allowances for loan losses and REO were $388.3
million and $25.8 million, respectively. The ratio of allowances for losses
to NPAs equaled 57.8% at June 30, 1997, compared to 42.4% at June 30, 1996 and
50.7% at March 31, 1997.
LOAN ORIGINATIONS
The Company originated $1.1 billion of mortgage loans in the second
quarter of 1997, compared to $1.4 billion in the second quarter of 1996 and
$1.0 billion in the first quarter of 1997. All mortgage loans were originated
through the Company's retail franchise. Of mortgage loans originated in the
second quarter of 1997, 15% were tied to the 11th District Cost of Funds
Index, 31% were fixed rate and the remaining balance were other ARMs. The
Company also funded $224 million in consumer loans during the second quarter
of 1997, compared to $81 million in the second quarter of 1996, and $164
million in the first quarter of 1997. Savings account loans have been
reclassified as part of consumer loans and prior periods have been restated to
reflect the change. The consumer loan portfolio totaled $885 million at June
30, 1997.
CAPITAL
At June 30, 1997, Home Savings' capital ratios exceeded the regulatory
requirements for an institution to be rated "well-capitalized," the highest
regulatory standard.
In the second quarter of 1997, Ahmanson purchased 3.4 million shares of
its common stock at an average price of $39.83 per share, investing $135
million. Between the initiation of the first stock purchase program in early
October 1995 and June 30, 1997, Ahmanson has purchased 22.5 million common
shares, or 19% of the outstanding shares at September 30, 1995, at an average
price of $29.02 per share. At June 30, 1997, Ahmanson had $246 million
remaining of the $250 million authorized for its fourth stock purchase
program. Ahmanson had $279 million in cash at June 30, 1997.
COMMUNITY REINVESTMENT COMMITMENT
During the first quarter of 1997, the Company announced a community
reinvestment commitment the amount of which assumed the completion of the
Company's proposed merger with Great Western Financial Corporation. Although
the proposed merger did not proceed, the Company remains committed to the
principles contained in the commitment but, as indicated would be the case
when the commitment was announced, at levels commensurate with its existing
deposit base, assets, market share and branch network.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q, and the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, contain certain statements
which, to the extent they do not relate to historical results, are forward
looking. These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward looking statements include, among
others, the following possibilities: (1) competitive pressure among
depository institutions increases significantly; (2) changes in the interest
rate environment reduce interest margins; (3) general economic conditions,
either nationally or in the states in which the Company conducts business, are
less favorable than expected; or (4) legislative or regulatory changes
adversely affect the businesses in which the Company engages. In addition,
certain forward looking statements are based on assumptions of future events
which may not prove to be accurate. Further information on factors which
could affect the financial results of the Company may be included in
subsequent filings by the Company with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $308.1 million for the second quarter of 1997
compared to $311.6 million in the same period of 1996 and was $625.7 million
for the first six months of 1997 compared to $628.6 million for the same
period of 1996. The following table presents 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 deducted from interest income. The average loan balances for
the 1997 periods are presented before the deduction of the allowance for loan
losses and the average MBS balances for the 1997 periods exclude the
unrealized gain or loss on MBS available for sale. The average loan and MBS
balances for the 1996 periods have been restated to be consistent with the
presentation for the 1997 periods. As a result of these changes, the average
rates on loans, MBS, total loans and MBS, total interest-earning assets,
interest rate spread, and net interest margin have also been restated for the
1996 periods.
Three Months Ended June 30,
-----------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ----------- ------- ----------- ---------- --------
(dollars in thousands)
Interest-earning assets:
Loans $31,111,587 $575,802 7.40% $30,757,519 $559,078 7.27%
MBS 14,141,655 259,429 7.34 15,825,136 296,927 7.51
----------- -------- ----------- --------
Total loans and MBS 45,253,242 835,231 7.38 46,582,655 856,005 7.35
Investment securities 974,052 16,271 6.70 741,627 11,231 6.06
----------- -------- ----------- --------
Interest-earning assets 46,227,294 851,502 7.37 47,324,282 867,236 7.33
-------- --------
Other assets 1,874,118 1,864,958
----------- -----------
Total assets $48,101,412 $49,189,240
=========== ===========
Interest-costing liabilities:
Deposits $33,946,754 374,187 4.42 $33,515,453 372,997 4.45
----------- -------- ----------- --------
Borrowings:
Short-term 2,982,506 42,924 5.77 2,452,114 36,334 5.93
FHLB and other 7,741,443 123,145 6.38 9,330,568 146,331 6.27
Trust capital securities 148,350 3,177 8.53 - - -
----------- -------- ----------- --------
Total borrowings 10,872,299 169,246 6.24 11,782,682 182,665 6.20
----------- -------- ----------- --------
Interest-costing liabilities 44,819,053 543,433 4.86 45,298,135 555,662 4.91
-------- --------
Other liabilities 888,383 1,066,079
Stockholders' equity 2,393,976 2,825,026
----------- -----------
Total liabilities and
stockholders' equity $48,101,412 $49,189,240
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,408,241 2.51 $ 2,026,147 2.42
=========== ===========
Net interest income/
Net interest margin $308,069 2.66 $311,574 2.63
======== ========
Six Months Ended June 30,
-----------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ----------- ------- ----------- ---------- --------
(dollars in thousands)
Interest-earning assets:
Loans $31,345,058 $1,153,335 7.36% $31,016,758 $1,133,933 7.31%
MBS 14,305,395 527,102 7.37 16,030,212 605,281 7.55
----------- ---------- ----------- ----------
Total loans and MBS 45,650,453 1,680,437 7.36 47,046,970 1,739,214 7.39
Investment securities 978,941 33,168 6.83 770,804 22,892 5.94
----------- ---------- ----------- ----------
Interest-earning assets 46,629,394 1,713,605 7.35 47,817,774 1,762,106 7.37
--------- ----------
Other assets 1,932,551 1,944,588
----------- -----------
Total assets $48,561,945 $49,762,362
=========== ===========
Interest-costing liabilities:
Deposits $34,306,517 749,326 4.40 $33,719,946 760,170 4.51
----------- --------- ----------- ----------
Borrowings:
Short-term 2,644,764 76,044 5.80 2,561,944 76,564 5.98
FHLB and other 8,167,447 256,190 6.33 9,403,631 296,816 6.31
Trust capital securities 148,356 6,357 8.53 - - -
----------- --------- ----------- ----------
Total borrowings 10,960,567 338,591 6.23 11,965,575 373,380 6.24
----------- --------- ----------- ----------
Interest-costing liabilities 45,267,084 1,087,917 4.84 45,685,521 1,133,550 4.96
--------- ----------
Other liabilities 900,229 1,163,778
Stockholders' equity 2,394,632 2,913,063
----------- -----------
Total liabilities and
stockholders' equity $48,561,945 $49,762,362
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,362,310 2.51 $ 2,132,253 2.41
=========== ===========
Net interest income/
Net interest margin $ 625,688 2.65 $ 628,556 2.63
========== ==========
Net interest income was reduced by provisions for losses on delinquent
interest of $6.3 million and $12.1 million for the second quarter of 1997 and
1996, respectively, related to nonaccrual loans. The provisions had the
effect of reducing the net interest margin by five basis points and 10 basis
points for the second quarter of 1997 and 1996, respectively. Such provisions
were $14.3 million and $27.9 million for the first six months of 1997 and
1996, respectively, reducing net interest margin by six and 12 basis points
for the first six months of 1997 and 1996, respectively.
The following table presents the changes for the second quarter and first
six months of 1997 from the respective periods of 1996 in the Company's
interest income and expense attributable to various categories of its assets
and liabilities 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 practical to allocate precisely the
effects thereof. For purposes of this table, the change due to volume is
initially calculated as the change in average balance multiplied by the
average rate during the preceding year's period and the change due to rate is
calculated as the change in average rate multiplied by the average balance
during the preceding year's period. Any change that remains unallocated after
such calculations is allocated proportionately to changes in volume and
changes in rates.
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1997 Versus 1996 1997 Versus 1996
Increase/(Decrease) Due to Increase/(Decrease) Due to
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
--------- -------- --------- --------- -------- ---------
(in thousands)
Interest income on:
Loans $ 6,550 $ 10,174 $ 16,724 $ 11,786 $ 7,616 $ 19,402
MBS (30,919) (6,579) (37,498) (63,999) (14,180) (78,179)
Investments 3,770 1,270 5,040 6,609 3,667 10,276
-------- -------- --------- --------- -------- ---------
Total interest income (20,599) 4,865 (15,734) (45,604) (2,897) (48,501)
-------- -------- --------- --------- -------- ---------
Interest expense on:
Deposits 2,500 (1,310) 1,190 26,962 (37,806) (10,844)
Short-term borrowings 7,529 (939) 6,590 (7,557) 7,037 (520)
FHLB and other borrowings (25,849) 2,663 (23,186) (41,630) 1,004 (40,626)
Trust capital securities 3,177 - 3,177 6,357 - 6,357
-------- -------- --------- --------- -------- ---------
Total interest expense (12,643) 414 (12,229) (15,868) (29,765) (45,633)
-------- -------- --------- --------- -------- ---------
Net interest income $ (7,956) $ 4,451 $ (3,505) $ (29,736) $ 26,868 $ (2,868)
======== ======== ========= ========= ======== =========
The preceding three tables identify the components of the changes in net
interest income between the second quarter and first six month periods of 1997
and 1996. Net interest income decreased $3.5 million in the second quarter of
1997 compared to the second quarter of 1996 and decreased $2.9 million in the
first six months of 1997 compared to the first six months of 1996. The
declines in net interest income were due to decreases in interest-earning
assets, substantially offset by changes in average interest rates. The
declines in average interest-earning assets were mainly due to loan and MBS
sales and payoffs, in addition to the use of operating cash flows to fund the
Company's ongoing common stock repurchases as it redeploys its excess capital
to enhance stockholder value.
The net interest margin increased three and two basis points in the
second quarter and first six months of 1997, respectively, compared to the
respective periods in 1996. The increase in the margin is primarily due to
the Company's mix of interest-earning assets and interest-costing liabilities
and the lower provisions for losses on delinquent interest. The decrease in
average rates paid on interest-costing liabilities was primarily due to a
decrease in the average cost of deposits, and an increase in deposits as a
percent of total interest-costing liabilities, both primarily related to the
Company's acquisition of the 61 former First Interstate financial service
centers in September 1996. In addition to the lower provision for losses on
delinquent interest, the increase in the yields on loans and MBS for the first
six months of 1997 reflects the Company's increased emphasis in originating
real estate loan products tied to indices other than COFI (see discussion
below) and diversification to consumer and business loan products, which
generally yield a higher interest rate than the Company's real estate loans
and MBS..
The yield on a majority of the Company's interest-earning assets adjust
monthly based on changes in the monthly weighted average cost of funds of
savings institutions headquartered in the Federal Home Loan Bank System
Eleventh District, which comprises California, Arizona and Nevada, as computed
by the Federal Home Loan Bank ("FHLB") of San Francisco ("COFI"). COFI is
currently announced on the last business day of the month following the month
in which such cost of funds was incurred. The Company's ARMs which adjust
based upon changes in COFI ("COFI ARMs") generally commence accruing interest
at the newly announced rate plus the contractual loan factor at the next
payment due date following such announcement.
The Company believes that its net interest income is somewhat insulated
from interest rate fluctuations primarily due to the adjustable rate nature of
its loan and MBS portfolio. At June 30, 1997, 96% of the Company's loan and
MBS portfolio were ARMs. The Company may experience margin compression when
increases in market rates, such as the increase in the Federal Funds target
rate announced in March 1997, are not immediately reflected in the yields on
the Company's adjustable rate assets or when market conditions cause the
Company to pay higher rates for its funds. The addition in 1996 of new loan
products, the 12 MAT ARMs, tied to the 12-month moving average of the monthly
average one-year constant maturity treasury, and the LAMA loans, tied to the
London Interbank Offered Rate ("LIBOR") 12-month moving average of one-month
LIBOR, was intended to diversify the interest sensitivity profile of the
Company's interest-earning assets. Substantially all ARMs originated since
1981 are contractually limited as to the lifetime maximum interest rates
("rate caps") that may be charged. In the event of sustained significant
increases in rates, such rate caps could prevent the Company from further
increasing rates on certain loans thus contributing to a decrease in the net
interest margin. For information regarding the Company's strategies related
to COFI and limiting its interest rate risk, see "Financial Condition--
Asset/Liability Management."
CREDIT COSTS
PROVISION FOR LOAN LOSSES. The provision for loan losses was $18.0
million for the second quarter of 1997, a decrease of $15.9 million, or 47%,
from $33.9 million for the second quarter of 1996. The provision for loan
losses was $42.2 million for the first six months of 1997, a decrease of $37.6
million, or 47%, from the $79.8 million for the first six months of 1996. The
declines in the provision were due to lower net charge-offs and the continuing
decline in the level of NPAs. For additional information regarding the
allowance for loan losses, see "Financial Condition--Asset Quality--NPAs and
Potential Problem Loans" and "Financial Condition-Asset Quality--Allowance for
Loan Losses."
OPERATIONS OF REO. Losses from operations of REO were $21.9 million for
the second quarter of 1997, a decrease of $5.4 million, or 20%, from losses of
$27.3 million for the second quarter of 1996. The decrease was primarily due
to declines of $5.0 million in the provision for REO losses and $0.8 million
in the net loss on sales of REO. Losses from operations of REO were $44.0
million for the first six months of 1997, a decrease of $9.0 million, or 17%,
from the $53.0 million for the first six months of 1996. The decrease was
primarily due to declines of $7.2 million in the provision for REO losses and
$2.1 million in the net loss on sales of REO properties. For additional
information regarding REO, see "Financial Condition--Asset Quality--NPAs and
Potential Problem Loans."
NONINTEREST INCOME
GAIN ON SALES OF LOANS. During the second quarter of 1997, loans
classified as held for sale totaling $1.1 billion were sold for a pre-tax gain
of $6.1 million compared to loans totaling $694.2 million sold for a pre-tax
gain of $6.2 million for the second quarter of 1996. For the first six months
of 1997, loans held for sale totaling $1.7 billion were sold for a pre-tax
gain of $14.1 million compared to loans totaling $1.6 billion sold for a pre-
tax gain of $21.2 million for the first six months of 1996. The loans sold in
the second quarter and first six months of 1997 and 1996 were as follows
(dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Fixed rate loans $ 496,306 $607,775 $ 736,556 $1,193,745
COFI ARMs 550,581 4,334 864,606 260,524
Treasury ARMs 23,228 82,119 50,106 179,354
---------- -------- ---------- ----------
$1,070,115 $694,228 $1,651,268 $1,633,623
========== ======== ========== ==========
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB No. 125, an
Amendment of FASB No. 125." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on control. Under this approach, after a transfer of
financial assets, the Company will recognize the financial and servicing
assets it controls and the liabilities incurred, and derecognize financial
assets when control has been surrendered and liabilities when extinguished.
SFAS No. 125 provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The
adoption of SFAS No. 125 and SFAS No. 127 had no material effect on the
Company as the Company's prior methods of accounting were generally consistent
with the provisions of these Statements.
The Company capitalizes mortgage servicing rights ("MSR") related to
mortgage loans sold. The total amortized cost of the mortgage loans sold is
allocated to the MSR and the mortgage loans without the MSR based on their
relative fair values. The MSR are periodically reviewed for impairment based
on fair value. Impairment losses, if any, are recognized through a valuation
allowance and charged to loan servicing income. MSR totaling $17.2 million
and $26.6 million were capitalized in the first six months of 1997 and 1996,
respectively. The changes to the valuation allowance included a provision of
$1.0 million and $0.6 million for the first six months of 1997 and 1996,
respectively. There were no charge-offs against this valuation allowance
during the first six months of 1997 and 1996. The valuation allowance for MSR
impairment was $2.1 million as of June 30, 1997.
LOAN SERVICING INCOME. Loan servicing income was $17.1 million for the
second quarter of 1997, an increase of $0.4 million, or 2%, from $16.7 million
for the second quarter of 1996 and was $33.8 million for the first six months
of 1997, an increase of $2.0 million, or 6%, from $31.8 million for the first
six months of 1996. The increase for the first six months of 1997 was
primarily due to a $704.1 million increase in the average portfolio of loans
serviced for investors, partially offset by a decline of five basis points in
the servicing fee rate to 0.66% and the addition of $1.0 million to the
valuation allowance on MSR during the first six months of 1997 compared to the
$0.6 million added to the allowance in the first six months of 1996. At June
30, 1997 and 1996, the portfolio of loans serviced for investors was $14.4
billion and $13.6 billion, respectively.
FEE INCOME. Total fee income, consisting of banking and other retail
service fees and other fee income, was $45.6 million for the second quarter of
1997, an increase of $14.3 million, or 46%, from $31.3 million for the second
quarter of 1996 and was $91.3 million for the first six months of 1997, an
increase of $33.2 million, or 57%, from $58.1 million for the first six months
of 1996.
Banking and other retail service fees were $28.5 million for the second
quarter of 1997, an increase of $11.9 million, or 72%, from $16.6 million for
the second quarter of 1996 and was $57.9 million for the first six months of
1997, an increase of $27.0 million, or 87%, from $30.9 million for the first
six months of 1996. The increases were primarily due to the incremental
volume of fees received related to the business associated with the 61 former
First Interstate Bank financial service centers acquired in the third quarter
of 1996 and the Company's efforts in building fee-based services. These
activities contributed to increases in service charges on deposit accounts of
$12.5 million and $21.9 million for the second quarter and first six months of
1997, respectively.
Fee income from other services was $17.1 million for the second quarter
of 1997, an increase of $2.4 million, or 16%, from $14.7 million for the
second quarter of 1996 and was $33.4 million for the first six months of 1997,
an increase of $6.2 million, or 23%, from $27.2 million for the first six
months of 1996. The higher levels of fee income from other services reflect
increases of $0.3 million and $1.7 million for the second quarter and first
six months of 1997, respectively, in commissions on the higher volume of sales
of investment and insurance services and products. In addition, there were
increases of $2.5 million and $4.5 million for the second quarter and first
six months of 1997, respectively, in other fees.
GAIN ON SALES OF FINANCIAL SERVICE CENTERS. In March 1997, the Company
sold deposits of $251.4 million and branch premises in Arizona resulting in a
pre-tax gain of $16.0 million. In June 1997, the Company sold deposits of
$916.3 million and branch premises on the West Coast of Florida resulting in a
pre-tax gain of $41.6 million. The gains are net of expenses associated with
the sales.
NONINTEREST EXPENSES
G&A EXPENSES. G&A expenses were $180.5 million for the second quarter of
1997, a decrease of $9.2 million, or 5%, from $189.7 million for the second
quarter of 1996 and were $367.2 million for the first six months of 1997, a
decrease of $15.5 million, or 4%, from $382.7 million for the first six months
in 1996. During the first six months of 1997, FDIC assessments declined $27.3
million as a result of the recapitalization of the Savings Association
Insurance Fund in the third quarter of 1996. Partially offsetting this
decline were increases in financial service center operating expenses due to
the acquisition of the 61 former First Interstate Bank financial service
centers in the third quarter of 1996 and other expenses related to the Company
initiatives to offer a greater range of consumer and small business loan
products and services. The efficiency ratio was 48.7% for the second quarter
of 1997 compared to 52.8% for the second quarter of 1996 and was 48.9% for the
first six months of 1997 compared to 53.3% for the first six months of 1996.
NET ACQUISITION COSTS. The Company incurred net pre-tax costs of $5.5
million related to its unsuccessful proposal to acquire Great Western
Financial Corporation. Approximately $23.1 million of legal, printing,
advisory and other expenses were incurred, partially offset by a $17.6 million
gain on the sale of 3.6 million shares of Great Western Financial Corporation
common stock it had purchased in connection with the proposal.
OPERATIONS OF REI. Losses from operations of REI were $0.4 million for
the second quarter of 1997, a decrease of $7.1 million, or 95%, from losses of
$7.5 million for the second quarter of 1996. The decrease was primarily due
to declines of $4.7 million in operating expenses, $1.9 million in losses on
sales of REI and $0.5 million in provision for losses. Losses from operations
of REI were $2.3 million for the first six months 1997, a decrease of $12.0
million, or 84%, from $14.3 million for the first six months of 1996 due
primarily to declines of $6.8 million in operating expenses, $3.7 million in
losses on sales of REI and $1.5 million in provision for losses.
At June 30, 1997, REI totaling $102.7 million were classified as long-
term, consisting of six projects located in California. Other REI totaling
$44.1 million were classified as held for sale, consisting of six projects
located in California which the Company expects to sell in the near term.
There were no specific impairment allowances recognized on these REI assets at
June 30, 1997 as management believes that the general valuation allowance is
adequate to cover impairment.
The Company is continuing its strategy of exiting the real estate
investment business. 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. No new projects have been initiated since
1990.
The Company may establish general valuation allowances based on
management's assessment of the risk of further reductions in carrying values.
The Company's basis for such estimates include project business plans
monitored and approved by management, market studies and other information.
Although management believes the carrying values of the REI and the related
allowance for losses are fairly stated, declines in carrying values and
additions to the allowance for losses could result from continued weakness in
the specific project markets, changes in economic conditions and revisions to
project business plans, which may reflect decisions by the Company to
accelerate the disposition of the properties.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets was $6.4 million for the second quarter
of 1997, an increase of $2.4 million, or 60%, from $4.0 million for the second
quarter of 1996 and was $12.8 million for the first six months of 1997, an
increase of $4.8 million, or 60%, from $8.0 million for the first six months
of 1996, reflecting the amortization of goodwill resulting from the purchase
of the 61 former First Interstate Bank financial service centers in the third
quarter of 1996.
PROVISION FOR INCOME TAXES. The change in the provision for income taxes
primarily reflected the change in pre-tax income between the comparable
periods. The effective tax rates for the second quarters of 1997 and 1996
were 38.2% and 34.7%, respectively, and were 37.9% and 35.6% for the first six
months of 1997 and 1996, respectively, reflecting management's estimate of the
Company's full year tax provision.
FINANCIAL CONDITION
The Company's consolidated assets were $47.5 billion at June 30, 1997, a
decrease of $2.4 billion, or 5%, from $49.9 billion at December 31, 1996. The
gross loan and MBS portfolio decreased $1.8 million, or 4%, to $44.7 billion
during the first six months of 1997, primarily due to sales of and payments on
loans and MBS.
LOAN AND MBS PORTFOLIO
The Company's gross loan and MBS portfolio was as follows (dollars in
thousands):
June 30, 1997 December 31, 1996
------------------------ ------------------------
Portfolio Percent of Portfolio Percent of
Balance Portfolio Balance Portfolio
----------- ---------- ----------- ----------
Real estate loans:
Single family $19,223,668 43.0% $20,443,279 44.0%
Multi-family 9,699,667 21.7 9,557,353 20.6
Commercial and industrial 1,256,375 2.8 1,338,221 2.8
----------- ----- ----------- -----
30,179,710 67.5 31,338,853 67.4
Consumer loans
Home equity 713,154 1.6 595,097 1.3
Other 172,260 0.4 189,862 0.4
----------- ----- ----------- -----
885,414 2.0 784,959 1.7
Small business loans 51,916 0.1 54,481 0.1
----------- ----- ----------- -----
Total loans 31,117,040 69.6 32,178,293 69.2
MBS 13,628,019 30.4 14,296,512 30.8
----------- ----- ----------- -----
Total loans and MBS $44,745,059 100.0% $46,474,805 100.0%
=========== ===== =========== =====
The Company's loan and MBS portfolio is concentrated in the state of
California with approximately 77% of the portfolio secured by properties in
the state. Only one other state, Florida, represents outstanding portfolio
balances greater than 5% of the total. Due to the concentration of the
portfolio in California, the Company has been and will continue to be
impacted, beneficially and adversely, by economic cycles of the state and
future events, and has been and could in the future be adversely affected by
natural disasters, such as earthquakes.
The Company's primary business continues to be the origination of loans
on residential real estate properties, including home equity loans which are
included in consumer loans. The Company's loan originations are summarized as
follows (dollars in thousands):
Six months ended June 30,
------------------------------------------------------
1997 1996
-------------------------- --------------------------
Loan Percent of Loan Percent of
Originations Originations Originations Originations
------------ ------------ ------------ ------------
Real estate loans:
Single family:
Fixed rate $ 695,939 27.5% $1,128,920 39.8%
COFI ARMs 244,904 9.7 825,308 29.1
12 MAT ARMs 470,950 18.6 35,934 1.3
Other Treasury ARMs 87,543 3.5 191,539 6.7
LAMA 83,478 3.3 - -
---------- ----- ---------- -----
1,582,814 62.6 2,181,701 76.9
Multi-family:
Fixed rate 4,530 0.2 79,147 2.8
COFI ARMs 35,893 1.4 448,903 15.8
12 MAT ARMs 408,602 16.2 - -
LAMA 69,311 2.7 - -
---------- ----- ---------- -----
518,336 20.5 528,050 18.6
Consumer loans 388,328 15.4 127,004 4.5
Small business loans 36,795 1.5 - -
---------- ----- ---------- -----
$2,526,273 100.0% $2,836,755 100.0%
========== ===== ========== =====
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 ("Treasury ARMs"). In June 1996, the Company introduced the 12 MAT
ARM and the LAMA loan. For additional information regarding these loan
products, see "Results of Operations--Net Interest Income" and "Financial
Condition--Asset/Liability Management."
At June 30, 1997, the Company was committed to fund the following real
estate loans (dollars in thousands):
June 30, 1997
-------------------------
Outstanding Percent of
Commitments Commitments
----------- -----------
Fixed rate $107,165 30.6%
COFI ARMs 21,926 6.2
12 MAT ARMs 88,564 25.3
Other Treasury ARMs 14,585 4.2
LAMA 118,073 33.7
-------- -----
$350,313 100.0%
======== =====
The Company was also committed to fund $669.6 million of consumer loans
and $68.4 million of small business loans at June 30, 1997. Management
believes it is likely that some of these loan commitments will expire without
being drawn upon. The Company expects to fund such loans from its liquidity
sources.
During the first six months of 1997, approximately 69% of real estate
loan originations were on properties located in California. At June 30, 1997,
approximately 97% of the real estate loan and MBS portfolio was secured by
residential properties, including 75% secured by single family properties.
The real estate loan and MBS portfolio at June 30, 1997 includes
approximately $6.4 billion in loans, or 15% of the portfolio, that were
originated with loan-to-value ("LTV") ratios exceeding 80%. Approximately 10%
of loans originated during the first six months of 1997 had LTV ratios in
excess of 80%, all of which were loans on single family properties, including
3% with LTV ratios in excess of 90%. The Company takes the additional risk of
originating real estate loans with LTV ratios in excess of 80% into
consideration in its loan underwriting and pricing policies.
During the first six months of 1997, the Company originated $388.3
million in consumer loans and $36.8 million in small business loans. At June
30, 1997, the Company's loan portfolio included $885.4 million in consumer
loans and $51.9 million in small business loans. The Company is continuing to
originate consumer loans through its entire distribution network and began
originating small business loans through some of its California financial
service centers in the fourth quarter of 1996 and was offering small business
loans at most of its California financial service centers by the end of the
second quarter of 1997. Both activities are designed to further the Company's
objective of positioning itself as a full-service consumer and small business
bank.
ASSET/LIABILITY MANAGEMENT
The Company's principal objective of asset/liability management is to
maximize net interest income subject to net interest margin volatility and
liquidity constraints. Net interest margin volatility results when the rate
reset (or repricing) characteristics of the Company's assets are materially
different from those of the Company's liabilities. Liquidity risk results
from the mismatching of asset and liability cash flows.
In order to manage the interest rate risk inherent in its portfolios of
interest-earning assets and interest-costing liabilities, the Company
emphasizes the origination of ARMs for retention in the loan and MBS
portfolio, and until recently the majority of originated ARMs were indexed to
COFI. The interest rates on COFI ARMs do not immediately reflect current
market rate movements (referred to as the "COFI lag"). The COFI lag arises
because (1) COFI is determined based on the average cost of all FHLB Eleventh
District member savings institutions' interest-costing liabilities, some of
which do not reprice immediately, and (2) the Company's COFI ARMs reprice
monthly based on changes in the cost of such liabilities approximately two
months earlier. COFI is subject to influences in addition to changes in
market interest rates, such as changes in the roster of FHLB Eleventh District
member savings institutions, the aggregate liabilities and the mix of
liabilities at such institutions, and legislative and regulatory developments
which affect the business of such institutions. Due to the unique
characteristics of COFI, the secondary market for COFI loans and MBS is not as
consistently liquid as it is for various other loans and MBS.
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 has increasingly emphasized the origination of other
ARM loan products, such as 12 MAT ARMs and LAMA loans, over COFI ARMs in an
effort to diversify the interest rate sensitivity of its loan portfolio. The
introduction of these new loan products and the sale of certain COFI ARMs is
intended to diversify the interest sensitivity and liquidity profile of the
Company's interest-earning assets and over time reduce interest income
volatility. However, due to the long-time emphasis on originating COFI ARMs
and their predominant balance in the current portfolio, benefits from loans
tied to other indices will be realized slowly over time. At June 30, 1997,
approximately 87% of the Company's $44.7 billion gross loan and MBS portfolio
consisted of COFI ARMs, compared to approximately 90% of the $46.5 billion
gross loan and MBS portfolio at December 31, 1996. For information regarding
the Company's loan diversification, see "Financial Condition--Loan and MBS
Portfolio."
Residential real estate lending is and will continue to be a key
component of the Company's business. The First Interstate Bank financial
service centers acquisition in the third quarter of 1996 accelerated the
Company's progress in building its portfolio of consumer and small business
loans which generally earn higher rates of interest and have maturities
shorter than residential real estate loans. However, the origination of
consumer and small business loans involves risks different from those
associated with originating residential real estate loans. For example,
credit risk associated with consumer and small business loans is generally
higher than for mortgage loans, the sources and level of competition may be
different and, compared to residential real estate lending, consumer and small
business lending is a relatively new business for the Company. These
different risk factors are considered in the underwriting and pricing
standards established for consumer and small business loans.
The Company's approach to managing interest rate risk includes the
changing of repricing terms and spreading of maturities on term deposits and
other interest-costing liabilities. The Company manages the maturities of its
borrowings to balance changes in the demand for deposit maturities. The
Company has adopted a strategy to increase the percentage of transaction
accounts in its deposit portfolio, which the Company believes is a steady
funding source having less sensitivity to changes in market interest rates
than other funding sources.
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,
1997:
Repricing Periods
Percent -----------------------------------------------------------------
of Within 7-12 1-5 5-10 Years
Balance Total 6 Months Months Years Years Over 10
----------- ------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
Interest-earning assets:
Investment securities $ 792,983 2% $ 790,557 $ - $ 2,426 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (62,668) 38,680 23,988 - -
----------- --- ----------- ----------- ----------- ----------- -----------
Total investment securities 792,983 2 727,889 38,680 26,414 - -
----------- --- ----------- ----------- ----------- ----------- -----------
Loans and MBS
MBS
ARMs 13,291,305 29 13,291,305 - - - -
Other 336,714 1 - 3 2,264 37 334,410
Loans
ARMs 29,083,071 64 27,313,319 487,102 946,946 37,257 298,447
Other 1,645,682 4 146,073 - - - 1,499,609
Impact of hedging (interest
rate swaps) - - 88,450 (88,450) - - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total loans and MBS 44,356,772 98 40,839,147 398,655 949,210 37,294 2,132,466
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-earning assets $45,149,755 100% $41,567,036 $ 437,335 $ 975,624 $ 37,294 $2,132,466
=========== === =========== =========== =========== =========- ==========
Interest-costing liabilities:
Deposits
Transaction accounts $10,656,433 24% $10,656,433 $ - $ - $ - $ -
Term accounts 22,085,437 50 9,882,751 8,060,185 4,133,499 8,899 103
----------- --- ----------- ----------- ----------- ---------- ----------
Total deposits 32,741,870 74 20,539,184 8,060,185 4,133,499 8,899 103
----------- --- ----------- ----------- ----------- ---------- ----------
Borrowings
Short-term 3,064,373 7 2,914,373 150,000 - - -
FHLB and other 7,979,772 18 5,202,868 1,464,382 892,286 376,582 43,654
Capital securities of
subsidiary trust 148,378 1 - - - 148,378 -
----------- --- ----------- ----------- ----------- ---------- ----------
Total borrowings 11,192,523 26 8,117,241 1,614,382 892,286 524,960 43,654
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-costing
liabilities $43,934,393 100% $28,656,425 $ 9,674,567 $ 5,025,785 $ 533,859 $ 43,757
=========== === =========== =========== =========== ========== ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,215,362 $12,910,611 $(9,237,232) $(4,050,161) $ (496,565) $2,088,709
=========== =========== =========== =========== ========== ==========
Cumulative interest sensitivity gap $12,910,611 $ 3,673,379 $ (376,782) $ (873,347) $1,215,362
=========== =========== =========== ========== ==========
Percentage of hedge-adjusted
interest-earning assets to
interest-costing liabilities 102.77%
Percentage of cumulative interest
sensitivity gap to total assets 2.56%
ASSET QUALITY
NPAS AND POTENTIAL PROBLEM LOANS. When a borrower fails to make a
required payment on a loan and does not cure the delinquency promptly, the
loan is characterized as delinquent. The procedural steps necessary for
foreclosure vary from state to state, but generally if the loan is not
reinstated within certain periods specified by statute and no other workout
arrangements satisfactory to the lender are entered into, the property
securing the loan can be acquired by the lender. Although the Company
generally relies on the underlying property to satisfy foreclosed loans, in
certain circumstances and when permitted by law, the Company may seek to
obtain deficiency judgments against the borrowers. The Company reviews loans
for impairment in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures." Impaired loans,
as defined by the Company, include nonaccrual major loans (i.e., multi-family
and commercial and industrial loans) which are not collectively reviewed for
impairment, troubled debt restructurings ("TDRs") 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 NPAs, TDRs and other impaired major loans,
net of related specific loss allowances, by type as of the dates indicated:
June 30, December 31, Increase
1997 1996 (Decrease)
----------- ------------ ----------
(dollars in thousands)
Nonaccrual loans:
Single family $448,123 $537,243 $ (89,120)
Multi-family 28,251 44,972 (16,721)
Commercial and industrial real estate 15,664 14,837 827
Consumer 2,722 1,410 1,312
Small business - 199 (199)
-------- -------- ---------
Total $494,760 $598,661 $(103,901)
======== ======== =========
REO:
Single family $164,594 $214,720 $ (50,126)
Multi-family 22,241 19,239 3,002
Commercial and industrial real estate 8,877 13,618 (4,741)
-------- -------- ---------
Total $195,712 $247,577 $ (51,865)
======== ======== =========
Total NPAs:
Single family $612,717 $751,963 $(139,246)
Multi-family 50,492 64,211 (13,719)
Commercial and industrial real estate 24,541 28,455 (3,914)
Consumer 2,722 1,410 1,312
Small business - 199 (199)
-------- -------- ---------
Total $690,472 $846,238 $(155,766)
======== ======== =========
TDRs:
Single family $143,088 $ 91,422 $ 51,666
Multi-family 39,737 58,027 (18,290)
Commercial and industrial real estate 31,785 36,186 (4,401)
-------- -------- ---------
Total $214,610 $185,635 $ 28,975
======== ======== =========
Other impaired major loans:
Multi-family $116,686 $ 96,383 $ 20,303
Commercial and industrial real estate 17,192 17,949 (757)
-------- -------- ---------
Total $133,878 $114,332 $ 19,546
======== ======== =========
Ratio of NPAs to total assets 1.45% 1.70%
======== ========
Ratio of NPAs and TDRs to total assets 1.90% 2.07%
======== ========
Ratio of allowances for losses
on loans and REO to NPAs 57.81% 47.96%
======== ========
The following table presents NPAs, TDRs and other impaired major loans by
state at June 30, 1997:
NPAs
-------------------------------------------------
Real Estate
-----------------------------
Other
Commercial Impaired
Single Multi- and Major
Family Family Industrial Consumer Total TDRs Loans
-------- ------- ---------- -------- -------- -------- --------
(in thousands)
California $465,383 $48,354 $14,720 $2,675 $531,132 $161,775 $117,136
New York 40,387 1,527 3,573 - 45,487 33,102 5,786
Florida 36,149 - 234 - 36,383 3,087 -
Texas 10,981 354 187 - 11,522 2,310 1,217
Other 59,817 257 5,827 47 65,948 14,336 9,739
-------- ------- ------- ------ -------- -------- --------
$612,717 $50,492 $24,541 $2,722 $690,472 $214,610 $133,878
======== ======= ======= ====== ======== ======== ========
Total NPAs were $690.5 million at June 30, 1997, or a ratio of NPAs to
total assets of 1.45%, a decrease of $155.7 million, or 18%, during the first
six months of 1997 from $846.2 million, or 1.70% of total assets at December
31, 1996. The major reasons for the decrease in NPAs during the first six
months of 1997 were continuing improvement in the California economy and
California real estate market and the Company's continuing efforts to improve
the collection process.
Single family NPAs were $612.7 million at June 30, 1997, a decrease of
$139.3 million, or 19%, during the first six months of 1997 from $752.0
million at December 31, 1996, primarily due to a decrease of $127.3 million in
NPAs secured by properties in California. Multi-family NPAs totaled $50.5
million at June 30, 1997, a decrease of $13.7 million, or 21%, during the
first six months of 1997 from $64.2 million at December 31, 1996 primarily due
to declines in California ($10.3 million) and New York ($0.9 million).
Commercial and industrial real estate NPAs totaled $24.5 million at June 30,
1997, a decrease of $4.0 million, or 14%, during the first six months of 1997
from $28.5 million at December 31, 1996, primarily due to a decrease in
California of $4.5 million.
TDRs were $214.6 million at June 30, 1997, an increase of $29.0 million,
or 16%, during the first six months of 1997 from $185.6 million at December
31, 1996, primarily due to an increase in single family TDRs, primarily in
California ($41.9 million), partially offset by a decrease in multi-family
TDRs, primarily in California ($8.0 million) and Texas ($6.0 million). The
increase in single family TDRs is due to the Company's decision in the second
quarter of 1996 to increase the length of time a TDR must perform in
accordance with the terms of the modification agreement before the Company
reclassifies the loan from a TDR to a performing loan and also reflects, in
part, the Company's efforts to improve collections on loans by working with
borrowers to modify payment plans as a preferable alternative to nonpayment
and eventual foreclosure.
The increase of $19.6 million, or 17%, in other impaired major loans,
from $114.3 million at December 31, 1996 to $133.9 million at June 30, 1997,
was primarily due to an increase of $16.2 million in such loans secured by
properties in California.
The recorded investment in all impaired loans were as follows:
June 30, 1997 December 31, 1996
--------------------------------- ---------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investment Losses Investment Investment Losses Investment
---------- --------- ---------- ---------- --------- ----------
(in thousands)
With specific allowances $348,331 $61,037 $287,294 $305,321 $58,876 $246,445
Without specific allowances 85,894 - 85,894 89,491 - 89,491
-------- ------- -------- -------- ------- --------
$434,225 $61,037 $373,188 $394,812 $58,876 $335,936
======== ======= ======== ======== ======= ========
The Company is continuing its efforts to reduce the amount of its NPAs by
aggressively pursuing loan delinquencies through the collection, workout and
foreclosure processes and, if foreclosed, disposing rapidly of the REO. The
Company sold $215.3 million of single family REO and $31.7 million of multi-
family and commercial and industrial REO in the first six months of 1997. In
the first six months of 1996, the Company sold $198.3 million of single family
REO and $47.2 million of multi-family and commercial and industrial REO. In
addition, the Company may, from time to time, offer packages of NPAs for
competitive bids.
ALLOWANCE FOR LOAN LOSSES. Management believes the Company's allowance
for loan losses as determined through periodic analysis of the loan portfolio
was adequate at June 30, 1997. The Company's process for evaluating the
adequacy of the allowance for loan losses includes the identification and
detailed review of impaired loans; an assessment and overall quality and
inherent risk in the loan portfolio, and consideration of loss experience and
trends in problem loans, as well as current economic conditions and trends.
Based upon this process, 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(dollars in thousands)
Beginning balance $387,688 $385,367 $389,135 $380,886
Provision for loan losses 17,989 33,901 42,212 79,843
-------- -------- -------- --------
405,677 419,268 431,347 460,729
-------- -------- -------- --------
Charge-offs:
Single family (20,175) (28,936) (44,405) (58,512)
Multi-family (5,423) (15,458) (15,047) (33,429)
Commercial and industrial real estate (1,367) (4,707) (1,606) (5,283)
Consumer (950) (6) (1,712) (20)
Small business (157) - (157) -
-------- -------- -------- --------
(28,072) (49,107) (62,927) (97,244)
-------- -------- -------- --------
Recoveries:
Single family 8,822 10,278 16,036 14,854
Multi-family 1,511 2,019 3,200 3,502
Commercial and industrial real estate 349 27 598 644
Small business - - 33 -
-------- -------- -------- --------
10,682 12,324 19,867 19,000
-------- -------- -------- --------
Net charge-offs (17,390) (36,783) (43,060) (78,244)
-------- -------- -------- --------
Ending balance $388,287 $382,485 $388,287 $382,485
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.15% 0.32% 0.19% 0.33%
==== ==== ==== ====
The decrease in the provision for loan losses and gross charge-offs
during the first six months of 1997 is due to the declines in NPAs and
delinquency levels since the first six months of 1996. During the first six
months of 1997, NPAs declined $155.8 million, reaching their lowest level
since September 1990. At June 30, 1997, single family loans delinquent 60 to
89 days, which management believes are a key leading indicator of future
single family NPAs and credit costs, were $91.4 million, compared to $120.8
million at December 31, 1996. The recent economic upturn in California has
contributed to the significant improvement in the Company's credit costs.
The following table sets forth the allocation of the Company's allowance
for loan losses by loan and MBS category and the allocated allowance as a
percent of each loan and MBS category at the dates indicated:
June 30, 1997 December 31, 1996
--------------------- ---------------------
Allowance Allowance
as Percent as Percent
of Loan of Loan
and MBS and MBS
Allowance Category Allowance Category
--------- ---------- --------- ----------
(dollars in thousands)
Single family $176,003 0.54% $176,120 0.51%
Multi-family 148,634 1.53 153,933 1.60
Commercial and industrial real estate 48,512 3.86 45,065 3.37
Consumer 10,338 1.17 9,217 1.17
Small business 4,800 9.25 4,800 8.81
-------- --------
$388,287 0.87 $389,135 0.84
======== ========
Although the Company believes it has a sound basis for its estimate of
the appropriate allowance for loan losses, actual charge-offs and the level of
NPAs incurred in the future are highly dependent upon the economies of the
areas in which the Company lends and upon future events, including natural
disasters. Management believes that the principal risk factor which could
potentially require an increase in the allowance for loan losses would be the
slowing or reversal of recent improvements in the residential purchase market
in California, particularly in Southern California, the Company's primary
lending market.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability or financial flexibility to
adjust its future cash flows to meet the demands of depositors and borrowers
and to fund operations on a timely and cost-effective basis. Sources of
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. Positive cash flows are also generated through the
sale of MBS, loans and other assets for cash. Sources of liquidity may also
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 Company actively manages its liquidity needs by selecting
asset and liability maturity mixes that best meet its projected needs and by
maintaining the ability to raise additional funds as needed.
Liquidity as defined by the Office of Thrift Supervision ("OTS") for Home
Savings consists of cash, cash equivalents and certain marketable securities
which are not committed, pledged or required to liquidate specific
liabilities. Regulations of the OTS currently 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 1997 the average
liquidity and average short-term liquidity ratios of Home Savings were 5.17%
and 2.00%, respectively.
Each of the Company's sources of liquidity are 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 market
conditions beyond the control of the Company. 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.
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. During the first six months of 1997 cash of $2.4
billion was used to originate loans. Principal payments on loans were $1.7
billion for the first six months of 1997, an increase of $548.9 million, or
49%, from $1.1 billion for the first six months of 1996. During the first six
months of 1997 the Company sold loans totaling $1.7 billion. At June 30,
1997, the Company had $299.3 million of loans held for sale. The loans
designated for sale included $191.5 million of fixed rate loans, $98.1 million
of Treasury ARMs and $9.7 million in COFI ARMs. For information regarding the
Company's loan sales, see "Results of Operations--Non Interest Income--Gain on
Sales of Loans."
MBS. During the first six months of 1997, the Company sold $9.9 million
of fixed rate MBS available for sale. The Company designates certain MBS as
available for sale. At June 30, 1997 the Company had $8.9 billion of MBS
available for sale, comprised of $8.6 billion of ARM MBS and $292.4 million of
fixed rate MBS. These MBS had an unrealized loss of $19.2 million at June 30,
1997 and $129.2 million at December 31, 1996. The decrease in the net
unrealized loss on MBS available for sale is largely due to the Company's
change in methodology to recognize the fair value of MSR associated with the
MBS. The unrealized loss is due mainly to temporary market-related conditions
and the Company expects no significant effect on its future interest income.
DEPOSITS. Deposits were $32.7 billion at June 30, 1997, a decrease of
$2.1 billion, or 6%, from $34.8 billion at December 31, 1996, partially due to
the Arizona and West Florida financial service center sales which closed
during the first six months of 1997. Excluding these transactions, there was
a net deposit outflow of $864.4 million primarily due to maturities of term
accounts which have more sensitivity to market interest rates than transaction
accounts. The Company manages its borrowings to balance changes in deposits.
Excluding the Arizona and West Coast Florida financial service center
sales, transaction accounts decreased $365.2 million during the first six
months of 1997, while term deposits decreased $499.2 million during the same
period. Transaction accounts comprised 33% of the deposit base at June 30,
1997, compared to 30% at June 30, 1996.
At June 30, 1997, 82% of the Company's deposits were in California
compared to 79% at December 31, 1996. The Company may engage in additional
financial service center purchases and sales to consolidate its presence in
its key strategic markets.
BORROWINGS. Borrowings totaled $11.0 billion at June 30, 1997, a
decrease of $536.4 million, or 5%, during the first six months of 1997 from
$11.6 billion at December 31, 1996, reflecting a decline in FHLB and other
borrowings of $1.6 billion, partially offset by an increase in short-term
borrowings of $1.0 billion.
In March 1997, the Company issued two medium term notes totaling $80
million which will mature on March 24, 1998, bearing an interest rate of
6.15%. In April 1997, the Company issued two medium term notes totaling $100
million which will mature within two years and bear a weighted average
interest rate of 6.26%. The funds were used for general corporate purposes.
CAPITAL. The Company reviews its use of capital with a goal of
maximizing stockholder value and makes decisions regarding the total amount
and alternate forms of capital to maintain. During the first six months of
1997, Ahmanson returned capital to stockholders by purchasing 5.5 million
shares of its common stock. Stockholders' equity increased $30.4 million to
$2.5 billion at June 30, 1997. The increase is primarily due to net income of
$218.7 million and a decrease of $63.2 million in the net unrealized loss on
securities available for sale, partially offset by payments of $210.0 million
to purchase the Company's common stock and dividends paid to common and
preferred stockholders of $60.7 million. The net unrealized loss on
securities available for sale at June 30, 1997 was $11.0 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.
At June 30, 1997, Home Savings exceeded the regulatory standards required
to be considered well-capitalized. The following table shows the capital
amounts and ratios of Home Savings at June 30, 1997:
Well-
Capital Capitalized
Amount Ratio Standard
---------- ------- -----------
(dollars in thousands)
Tangible capital
(to adjusted total assets) $2,705,194 5.78% N/A
Core capital
(to adjusted total assets) 2,708,868 5.78 5.00%
Core capital
(to risk-weighted assets) 2,708,868 8.91 6.00
Total risk-based capital
(to risk-weighted assets) 3,376,600 11.10 10.00
ACCOUNTING DEVELOPMENTS
In February 1997 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 simplifies the standards for
computing and presenting earnings per share ("EPS") previously prescribed by
Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS No.
128 replaces primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in issuance of common
stock that then shared in earnings. SFAS No. 128 also requires dual
presentation of basic and diluted EPS on the face of the income statement and
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS No. 128
is effective for financial statements issued for periods ending after December
15, 1997 and earlier application is not permitted. If the Company had adopted
SFAS No. 128 as of January 1, 1997, proforma basic EPS for the second quarter
and first six months of 1997 would have been $1.11 and $2.03, respectively,
and proforma diluted EPS would have been $1.01 and $1.86, respectively.
In February 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 consolidates existing reporting
standards for disclosing information about an entity's capital structure.
SFAS No. 129 also supersedes previously issued accounting statements. SFAS
No. 129 must be adopted for financial statements for periods ending after
December 15, 1997. The impact on the Company of adopting SFAS No. 129 is not
expected to be material as the Company's existing disclosures are generally in
compliance with the disclosure requirements in SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The impact on the Company of adopting SFAS No. 130
is not expected to be material to the Company's existing disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
to report information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997, with comparative information for earlier years to be
restated. The Company is currently assessing the effect of adopting SFAS No.
131.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting
policies for derivative financial instruments in the footnotes to the
financial statements. In addition, the amendments expand existing disclosure
requirements to include quantitative and qualitative information about market
risk inherent in market risk sensitive instruments. The required quantitative
and qualitative information are to disclosed outside the financial statements
and related notes thereto. The enhanced accounting policy disclosure
requirements are effective for the quarter ended June 30, 1997. As the
Company believes that the derivative financial instrument disclosures
contained within the notes to the financial statements of its 1996 Form 10-K
substantially conform with the accounting policy requirements of these
amendments, no further interim period disclosure has been provided. The rule
amendments that require expanded disclosure of quantitative and qualitative
information about market risk are effective with the 1997 Form 10-K.
TAX CONTINGENCY
The Company's financial statements do not contain any benefit related to
the Company's determination in 1996 that it is entitled to the deduction of
the tax bases in certain state branching rights when the Company sells its
deposit branch businesses, thereby abandoning such branching rights in those
states. The Company's position is that the tax bases result from the tax
treatment of property received as assistance from the Federal Savings and Loan
Insurance Corporation ("FSLIC") in conjunction with FSLIC-assisted
transactions. From 1981 through 1985, the Company acquired thrift
institutions in six states through FSLIC-assisted transactions. The Company's
position is that assistance received from the FSLIC included out-of-state
branching rights valued at approximately $740 million. As of June 30, 1997,
the Company had sold its deposit branching businesses and abandoned such
branching rights in four of these states, the first of which was Missouri in
1993. The potential tax benefit related to these abandonments as of June 30,
1997 could approach $167 million. The potential deferred tax benefit related
to branching rights not abandoned could approach $130 million.
The Internal Revenue Service ("IRS") is currently examining the Company's
federal income tax returns for the years 1990 through 1993, including the
Company's proposed adjustment related to the abandonment of its Missouri
branching rights. The Company, after consultation with its tax advisors,
believes that its position with respect to the tax treatment of these rights
is the correct interpretation under the tax and regulatory law. However, the
Company also believes that its position has never been directly addressed by
any judicial or administrative authority. It is therefore impossible to
predict either the IRS response to the Company's position, or if the IRS
contests the Company's position, the ultimate outcome of litigation that the
Company is prepared to pursue. Because of these uncertainties, the Company
cannot presently determine if any of the above described tax benefits will
ever be realized and there is no assurance to that effect. Therefore, in
accordance with generally accepted accounting principles, the Company does not
believe it is appropriate at this time to reflect these tax benefits in its
financial statements. This position will be reviewed by the Company from time
to time as these uncertainties are resolved.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual Meeting of Stockholders of Registrant was held
on April 21, 1997.
Proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
there was no solicitation in opposition to management's
nominees as listed in the proxy statement and all of such
nominees were elected. There were no directors, other than
those elected at the meeting, whose term of office continued
after the meeting. The votes cast for and withheld with
respect to each nominee were as follows:
Nominee For Withheld
-------------------- ---------- ----------
Byron Allumbaugh 89,944,355 293,369
Harold A. Black 89,940,218 297,506
Richard M. Bressler 88,823,963 1,413,761
David R. Carpenter 89,960,310 277,414
Phillip D. Matthews 89,974,707 263,017
Richard L. Nolan 89,937,618 300,106
Delia M. Reyes 89,940,718 297,006
Charles R. Rinehart 89,962,720 275,004
Frank M. Sanchez 89,943,383 294,341
Elizabeth A. Sanders 89,949,065 288,659
Arthur W. Schmutz 89,908,396 329,328
William D. Schulte 89,947,665 290,059
Bruce G. Willison 89,966,777 270,947
The votes cast for and against approval of a stockholder's
precatory resolution relating to lending to disadvantaged
groups and the number of abstentions, were as follows:
For Against Abstentions
---------- ---------- -----------
5,815,575 75,002,491 2,215,106
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
11 Statement of Computation of Income per Share.
27 Financial Data Schedule. *
(b) Reports on Form 8-K.
Date of Report Items Reported
April 8, 1997 ITEM 5. OTHER EVENTS.
On April 8, 1997, H. F. Ahmanson & Company (the
"Registrant") issued a press release reporting
its results of operations during the quarter
ended March 31, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated April 8, 1997
reporting results of operations during the
quarter ended March 31, 1997.
April 28, 1997 ITEM 5. OTHER EVENTS.
Beginning April 28, 1997, certain officers of
the Registrant gave presentations for analysts
and investors relating to the Registrant's
business and strategy and its proposal for a
tax-free merger of the Registrant and Great
Western Financial Corporation, a Delaware
corporation ("GWF"), pursuant to which each
outstanding share of common stock of GWF would
be converted into between 1.10 and 1.20 shares
of common stock of the Registrant (the "Ahmanson
Proposal"), and a competing proposal for a
merger of Washington Mutual, Inc., a Washington
corporation, with GWF.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Investor presentation materials used by
the Registrant in connection with meetings held
with analysts and investors to discuss the
Ahmanson Proposal.
May 19, 1997 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Investor presentation materials used by
the Registrant in connection with meetings held
with analysts and investors to discuss the
Ahmanson Proposal.
June 4, 1997 ITEM 5. OTHER EVENTS.
On June 4, 1997, the Registrant announced it had
withdrawn its offer to merge with GWF and would
terminate all pending litigation and other
actions related to its proposal to merge with
GWF.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated June 4, 1997.
* Filed electronically with the Securities and Exchange Commission.
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: August 8, 1997 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 Income per Share. 39
27 Financial Data Schedule. *
* Filed electronically with the Securities and Exchange Commission.