FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 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
-----------------------------------------------------
(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: 37
Total number of sequentially numbered pages: 38
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1997: $.01 par value - 94,411,284 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 September 30, 1997 December 31, 1996
- ------ ------------------ -----------------
Cash and amounts due from banks $ 476,023 $ 691,578
Federal funds sold and securities purchased under
agreements to resell 186,200 737,500
Other short-term investments 6,141 14,782
----------- -----------
Total cash and cash equivalents 668,364 1,443,860
Other investment securities held to
maturity [market value
$2,427 (September 30, 1997) and
$2,456 (December 31, 1996)] 2,423 2,438
Other investment securities available for
sale [amortized cost
$7,048 (September 30, 1997) and
$8,541 (December 31, 1996)] 7,920 9,159
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 405,603 420,978
Mortgage-backed securities (MBS)
held to maturity [market value
$4,533,238 (September 30, 1997) and
$5,111,367 (December 31, 1996)] 4,519,608 5,066,670
MBS available for sale [amortized cost
$8,641,434 (September 30, 1997) and
$9,359,058 (December 31, 1996)] 8,637,351 9,229,842
Loans receivable less allowance for losses of
$380,368 (September 30, 1997) and
$389,135 (December 31, 1996) 30,306,445 30,723,398
Loans held for sale [market value
$380,094 (September 30, 1997) and
$1,080,046 (December 31, 1996)] 377,471 1,065,760
Accrued interest receivable 199,098 209,839
Real estate held for development and
investment (REI) less allowance for losses of
$111,930 (September 30, 1997) and
$132,432 (December 31, 1996) 147,035 147,851
Real estate owned held for sale (REO)
less allowance for losses of
$14,688 (September 30, 1997) and
$32,137 (December 31, 1996) 188,060 247,577
Premises and equipment 368,825 424,567
Goodwill and other intangible assets 286,385 308,083
Other assets 684,569 602,022
----------- -----------
$46,799,157 $49,902,044
=========== ===========
Liabilities, Capital Securities of Subsidiary Trust
and Stockholders' Equity
- ---------------------------------------------------
Deposits:
Non-interest bearing $ 1,032,733 $ 985,594
Interest bearing 31,414,584 33,788,351
----------- -----------
32,447,317 34,773,945
Securities sold under agreements to repurchase 2,325,000 1,820,000
Other short-term borrowings 817,897 210,529
FHLB and other borrowings 7,433,026 9,549,992
Other liabilities 1,156,333 917,198
Income taxes 84,806 48,918
----------- -----------
Total liabilities 44,264,379 47,320,582
Company-obligated mandatorily redeemable capital securities,
Series A, of subsidiary trust holding solely Junior
Subordinated Deferrable Interest Debentures of the Company 148,421 148,413
Stockholders' equity 2,386,357 2,433,049
----------- -----------
$46,799,157 $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 Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest income:
Loans $ 579,925 $ 567,001 $ 1,733,260 $ 1,700,934
MBS 249,926 283,568 777,028 888,849
Investments 17,625 17,406 50,793 40,298
----------- ----------- ----------- -----------
Total interest income 847,476 867,975 2,561,081 2,630,081
----------- ----------- ----------- -----------
Interest expense:
Deposits 365,641 377,011 1,114,967 1,137,181
Short-term borrowings 48,130 32,035 124,174 108,599
FHLB and other borrowings 130,870 152,693 393,417 449,509
----------- ----------- ----------- -----------
Total interest expense 544,641 561,739 1,632,558 1,695,289
----------- ----------- ----------- -----------
Net interest income 302,835 306,236 928,523 934,792
Provision for loan losses 14,868 35,783 57,080 115,626
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 287,967 270,453 871,443 819,166
----------- ----------- ----------- -----------
Noninterest income:
Loss on sales of MBS - - (74) (29)
Gain on sales of loans 698 3,307 14,824 24,501
Loan servicing income 16,119 18,114 49,945 49,916
Banking and other retail service fees 29,217 19,116 87,076 49,979
Other fee income 16,210 15,270 49,650 42,517
Gain on sales of financial service centers - - 57,566 -
Gain on sales of investment securities 181 313 315 313
Other operating income 1,701 1,140 5,485 6,593
----------- ----------- ----------- -----------
64,126 57,260 264,787 173,790
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and other employee expenses 88,603 88,970 268,439 277,882
Occupancy expenses 25,291 36,972 78,650 94,045
Federal deposit insurance premiums and assessments 6,235 19,227 19,053 59,366
SAIF recapitalization - 243,862 - 243,862
Other general and administrative expenses 61,939 59,231 183,163 155,807
----------- ----------- ----------- -----------
Total general and administrative expenses (G&A) 182,068 448,262 549,305 830,962
Net acquisition costs - - 5,475 -
Operations of REI 1,008 19,295 3,266 33,573
Operations of REO 14,115 25,225 58,107 78,216
Amortization of goodwill and other intangible assets 6,452 3,955 19,289 11,907
----------- ----------- ----------- -----------
203,643 496,737 635,442 954,658
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (benefit) 148,450 (169,024) 500,788 38,298
Provision for income taxes (benefit) 52,911 (89,546) 186,500 (15,713)
----------- ----------- ----------- -----------
Net income (loss) $ 95,539 $ (79,478) $ 314,288 $ 54,011
=========== =========== =========== ===========
Net income (loss) attributable to common shares:
Primary $ 87,132 $ (90,776) $ 289,065 $ 17,497
Fully diluted $ 91,444 $ (90,776) $ 302,003 $ 17,497
Income (loss) per common share:
Primary $ 0.89 $ (0.85) $ 2.89 $ 0.16
Fully diluted $ 0.84 $ (0.85) $ 2.69 $ 0.16
Common shares outstanding, weighted average:
Primary 97,504,568 106,282,651 100,042,957 110,750,825
Fully diluted 109,476,541 106,282,651 112,361,080 110,750,825
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued (Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
Return on average assets (1) 0.81% (0.65)% 0.87% 0.15%
Return on average equity (1) 15.85% (11.77)% 17.50% 2.53%
Return on average tangible equity (1),(2) 17.75% (11.79)% 19.58% 2.95%
Efficiency ratio (1) 49.97% 124.96 % 49.26% 77.14%
<FN>
(1) Excluding the effects of the gains on sales of the West Florida financial service centers of $41.6 million
and Arizona financial service centers of $16.0 million and the net acquisition costs of $5.5 million for the nine
months ended September 30, 1997, and the SAIF recapitalization of $243.9 million and First Interstate Bank charges
of $14.0 million for the three and nine months ended September 30, 1996, the returns on average assets, average
equity and average tangible equity and the efficiency ratio would have been as follows:
</FN>
For the Nine Months Ended
For the Three September 30,
Months Ended -------------------------
September 30, 1996 1997 1996
------------------ ---------- ----------
Return on average assets 0.60% 0.78% 0.56%
Return on average equity 10.86% 15.99% 9.70%
Return on average tangible equity (2) 11.56% 17.97% 10.34%
Efficiency ratio 53.08% 49.26% 53.20%
<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 Nine Months Ended
September 30,
-----------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
Net income $ 314,288 $ 54,011
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Interest capitalized on loans and MBS (negative amortization) (54,867) (68,591)
Provision for losses on loans and real estate 80,805 171,483
Provision for income taxes (benefit) 186,500 (15,713)
Depreciation and amortization 74,715 69,905
Proceeds from sales of loans originated for sale 2,206,545 2,141,612
Loans originated for sale (1,171,025) (1,310,546)
Loans repurchased from investors (44,962) (77,283)
SAIF recapitalization accrual - 243,862
Increase (decrease) in other liabilities 28,233 (4,192)
Other, net (82,074) (76,675)
----------- -----------
Net cash provided by operating activities 1,538,158 1,127,873
----------- -----------
Cash flows from investing activities:
Principal payments on loans 2,693,824 1,921,407
Principal payments on MBS 1,073,866 1,104,810
Loans originated for investment (net of refinances) (2,729,959) (2,542,657)
Loans purchased (11,683) (1,142,696)
Proceeds from maturities of other investment securities 1,605 1,348
Proceeds from sales of other investment securities available for sale 1,899 12,731
Other investment securities purchased (1,677) (13,333)
Purchase Great Western stock (163,974) -
Proceeds from sales of Great Western stock 181,610 -
Net redemption of FHLB stock 34,088 89,386
Proceeds from sales of REO 332,028 322,820
Goodwill acquired in FIB financial service center acquisition - (185,021)
Net additions to premises and equipment (19,740) (81,350)
Other, net 89,699 1,081
----------- -----------
Net cash provided by (used in) investing activities 1,481,586 (511,474)
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (1,158,935) (733,887)
Proceeds from deposits purchased - 1,888,849
Deposits sold (1,167,693) -
Increase (decrease) in borrowings maturing in 90 days or less 72,368 (959,311)
Proceeds from other borrowings 4,966,561 3,237,427
Repayment of other borrowings (6,044,920) (3,260,421)
Preferred stock redeemed - (175,000)
Common stock purchased for treasury (372,420) (255,308)
Dividends to stockholders (90,201) (110,075)
----------- -----------
Net cash used in financing activities (3,795,240) (367,726)
----------- -----------
Net increase (decrease) in cash and cash equivalents (775,496) 248,673
Cash and cash equivalents at beginning of period 1,443,860 1,147,156
----------- -----------
Cash and cash equivalents at end of period $ 668,364 $ 1,395,829
=========== ===========
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 a residential
real estate and consumer finance-oriented financial services company, 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 $95.5 million, or $0.84 per fully
diluted common share, for the third quarter of 1997. For the third quarter of
1996, net income would have been $73.2 million, or $0.56 per fully diluted
common share, excluding the after-tax charges of $144.4 million, or $1.34 per
fully diluted common share, related to the special assessment to recapitalize
the Savings Association Insurance Fund (the "SAIF charge") and $8.3 million,
or $0.07 per fully diluted common share, related to the acquisition of 61
First Interstate Bank financial service centers (the "FIB charge"). Including
these charges, the Company recorded a net loss of $79.5 million, or $0.85 per
fully diluted common share, for the third quarter of 1996.
Excluding the SAIF and FIB charges for the third quarter of 1996, net
income increased 30% from the third quarter of 1996, while income per share
increased 50% as a result of the Company's ongoing stock purchase program.
Return on average equity for the third quarter of 1997 was 15.9% and would
have been 10.9% for the third quarter of 1996, excluding these charges.
For the first nine months of 1997, net income was $314.3 million, or
$2.69 per fully diluted common share, compared with $54.0 million, or $0.16
per fully diluted common share, for the first nine months of 1996. Results
for the first nine months of 1997 include the after-tax gain of $34.1 million,
or $0.30 per fully diluted common share, on the sales of financial service
centers in West Florida and Arizona, and a net after-tax cost of $3.2 million,
or $0.03 per fully diluted common share, relating to the withdrawn merger
proposal for Great Western Financial Corporation. Results for the first nine
months of 1996 include the effects of the SAIF and FIB charges. Excluding
these items, the Company would have reported net income of $284.4 million, or
$2.41 per fully diluted common share, for the first nine months of 1997 and
net income of $206.7 million, or $1.49 per fully diluted common share, for the
first nine months of 1996. Return on average equity was 17.5% and 2.5% for
the first nine months of 1997 and 1996, respectively. Return on average
equity for the first nine months of 1997 and 1996, excluding these items,
would have been 16.0% and 9.7%, respectively.
RESULTS OF OPERATIONS
Net interest income totaled $302.8 million for the third quarter of 1997,
compared to $306.2 million in the third quarter of 1996, and $308.1 million in
the second quarter of 1997. The slight decline in net interest income during
the third quarter of 1997 is a result of the lower level of average interest-
earning assets during the third quarter of 1997 of $45.5 billion compared to
$47.3 billion for the third quarter of 1996 and $46.2 billion for the second
quarter of 1997. The average net interest margin was 2.70% for the third
quarter of 1997 compared to 2.59% for the third quarter of 1996 and 2.66% for
the second quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $182.1 million in the
third quarter of 1997 compared to $190.4 million in the third quarter of 1996,
excluding the SAIF and FIB charges, and $180.5 million in the second quarter
of 1997.
The efficiency ratio, defined by the Company as G&A expenses as a
percentage of the sum of net interest income, loan servicing income, banking
and other retail fees and other fee income, was 50.0% in the third quarter of
1997, compared to 125.0% and 48.7% in the third quarter of 1996 and the second
quarter of 1997, respectively. The Company's efficiency ratio was 49.3% and
77.1%, for the first nine months of 1997 and 1996, respectively. Excluding
the SAIF and FIB charges, the efficiency ratio for the third quarter and first
nine months of 1996 would have been 53.1% and 53.2%, respectively.
CREDIT COSTS/ASSET QUALITY
Credit costs were $29.0 million during the third quarter of 1997 compared
to $61.0 million in the third quarter of 1996 and $39.9 million in the second
quarter of 1997. Total credit costs, defined by the Company as the sum of the
provision for loan losses and expenses for the operations of foreclosed real
estate ("REO"), continued to improve, declining 52% from the third quarter of
1996 and 27% from the second quarter of 1997.
During the third quarter of 1997, nonperforming assets ("NPAs") declined
by $35.9 million, the sixth consecutive quarterly decline. NPAs have declined
$370.6 million, or 36%, since their most recent high point in February 1996.
At September 30, 1997, NPAs totaled $654.6 million, or 1.40% of total assets,
compared to $897.6 million, or 1.77%, at September 30, 1996 and $690.5
million, or 1.45%, at June 30, 1997. Loans classified as troubled debt
restructurings ("TDRs") were $213.6 million at September 30, 1997 compared to
$187.3 million and $214.6 million at September 30, 1996 and June 30, 1997,
respectively. The ratio of NPAs and TDRs to total assets was 1.86% at
September 30, 1997 compared to 2.14% at September 30, 1996 and 1.90% at June
30, 1997.
At September 30, 1997, the allowances for loan losses and REO losses were
$380.4 million and $14.7 million, respectively. The ratio of allowances for
losses to NPAs was 59.0% at September 30, 1997 compared to 46.5% at September
30, 1996, and 57.8% at June 30, 1997.
LOAN ORIGINATIONS
The Company originated $1.4 billion of mortgage loans in the third
quarter of 1997 compared to $1.3 billion in the third quarter of 1996 and $1.1
billion in the second quarter of 1997. All mortgage loans were originated
through the Company's retail loan origination system. Due to the Company's
emphasis on diversifying the interest rate sensitivity of its real estate loan
portfolio, the majority of which currently consists of loans tied to the FHLB
11th District Cost of Funds Index, 53.2% of the loans originated during the
third quarter of 1997 were adjustable rate mortgages tied to indices other
than the FHLB 11th District Cost of Funds Index, while 44.1% of originations
were fixed rate and 2.7% were tied to the FHLB 11th District Cost of Funds
Index. The Company also funded $207 million in consumer loans during the
third quarter of 1997 compared to $98 million in the third quarter of 1996 and
$224 million in the second quarter of 1997.
CAPITAL
At September 30, 1997, Home Savings' capital ratios exceeded the
regulatory requirements for an institution to be rated as "well-capitalized,"
the highest regulatory standard.
In the third quarter of 1997, Ahmanson purchased 3.2 million shares of
its common stock at an average price of $50.27 per share, returning $162.4
million to shareholders. Between the initiation of the first stock purchase
program in early October 1995 and September 30, 1997, Ahmanson has purchased
25.8 million common shares, or 22% of its outstanding shares at September 30,
1995, at an average price of $31.68 per share. At September 30, 1997,
Ahmanson had $83.5 million remaining of the $250 million authorized for its
fourth stock purchase program. Ahmanson had $350 million in cash at September
30, 1997.
ACQUISITION OF COAST SAVINGS
On October 6, 1997, the Company announced a definitive agreement to
acquire Coast Savings Financial, Inc. ("Coast"). At September 30, 1997, Coast
had 90 branches in California with $6.4 billion in deposits and $9.0 billion
in assets. The merger agreement calls for the tax-free exchange of 0.8082
shares of Ahmanson common stock for each share of Coast common stock. Coast
shareholders will also retain the right to receive an amount equal to any
proceeds, net of expenses and taxes, in Coast's goodwill litigation against
the U.S. government. This transaction is expected to close in the first
quarter of 1998. The Company estimated that total assets and stockholders'
equity would have been approximately $56 billion and $3 billion, respectively,
if the transaction had closed on September 30, 1997.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains 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 $302.8 million for the third quarter of 1997
compared to $306.2 million in the same period of 1996 and was $928.5 million
for the first nine months of 1997 compared to $934.8 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 September 30,
-----------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------- ----------- ---------- --------
(dollars in thousands)
Interest-earning assets:
Loans $31,013,413 $579,925 7.47% $31,062,794 $567,001 7.30
MBS 13,465,588 249,926 7.42 15,357,160 283,568 7.39
----------- -------- ----------- --------
Total loans and MBS 44,479,001 829,851 7.46 46,419,954 850,569 7.33
Investment securities 1,003,117 17,625 6.97 843,973 17,406 8.25
----------- -------- ----------- --------
Interest-earning assets 45,482,118 847,476 7.45 47,263,927 867,975 7.35
-------- --------
Other assets 1,879,613 1,805,179
----------- -----------
Total assets $47,361,731 $49,069,106
=========== ===========
Interest-costing liabilities:
Deposits $32,713,468 365,641 4.43 $33,661,816 377,011 4.48
----------- -------- ----------- --------
Borrowings:
Short-term 3,100,105 48,130 6.16 2,087,544 32,035 6.14
FHLB and other 7,871,130 127,693 6.44 9,470,132 152,693 6.45
Trust capital securities 148,393 3,177 8.53 - - -
----------- -------- ----------- --------
Total borrowings 11,119,628 179,000 6.39 11,557,676 184,728 6.39
----------- -------- ----------- --------
Interest-costing liabilities 43,833,096 544,641 4.93 45,219,492 561,739 4.97
-------- --------
Other liabilities 1,117,625 1,148,890
Stockholders' equity 2,411,010 2,700,724
----------- -----------
Total liabilities and
stockholders' equity $47,361,731 $49,069,106
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,649,022 2.52 $ 2,044,435 2.38
=========== ===========
Net interest income/
Net interest margin $302,835 2.70 $306,236 2.59
======== ========
Nine Months Ended September 30,
------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ----------- ------- ----------- ---------- -------
(dollars in thousands)
Interest-earning assets:
Loans $31,233,295 $1,733,260 7.40% $31,032,215 $1,700,934 7.30%
MBS 14,022,383 777,028 7.39 15,804,224 888,849 7.50
----------- ---------- ----------- ----------
Total loans and MBS 45,255,678 2,510,288 7.40 46,836,439 2,589,783 7.37
Investment securities 987,088 50,793 6.88 795,372 40,298 6.76
----------- ---------- ----------- ----------
Interest-earning assets 46,242,766 2,561,081 7.39 47,631,811 2,630,081 7.36
---------- ----------
Other assets 1,914,710 1,915,188
----------- -----------
Total assets $48,157,476 $49,546,999
=========== ===========
Interest-costing liabilities:
Deposits $33,769,665 1,114,967 4.41 $33,700,428 1,137,181 4.50
----------- ---------- ----------- ----------
Borrowings:
Short-term 2,798,212 124,174 5.93 2,402,656 108,599 6.03
FHLB and other 8,067,589 383,882 6.36 9,425,960 449,509 6.36
Trust capital securities 148,368 9,535 8.53 - - -
----------- ---------- ----------- ----------
Total borrowings 11,014,169 517,591 6.28 11,828,616 558,108 6.29
----------- ---------- ----------- ----------
Interest-costing liabilities 44,783,834 1,632,558 4.87 45,529,044 1,695,289 4.97
---------- ----------
Other liabilities 979,337 1,176,257
Stockholders' equity 2,394,305 2,841,698
----------- -----------
Total liabilities and
stockholders' equity $48,157,476 $49,546,999
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,458,932 2.52 $ 2,102,767 2.39
=========== ===========
Net interest income/
Net interest margin $ 928,523 2.67 $ 934,792 2.61
========== ==========
Net interest income was reduced by provisions for losses on delinquent
interest of $5.0 million and $9.9 million for the third quarter of 1997 and
1996, respectively, related to nonaccrual loans. The provisions had the
effect of reducing the net interest margin by four basis points and eight
basis points for the third quarter of 1997 and 1996, respectively. Such
provisions were $19.2 million and $37.8 million for the first nine months of
1997 and 1996, respectively, reducing net interest margin by six and 11 basis
points for the first nine months of 1997 and 1996, respectively.
The following table presents the changes for the third quarter and first
nine 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 Nine Months Ended
September 30, September 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 $ (947) $ 13,871 $ 12,924 $ 10,381 $ 21,945 $ 32,326
MBS (34,789) 1,147 (33,642) (98,949) (12,872) (111,821)
Investments 1,237 (1,018) 219 9,775 720 10,495
-------- -------- --------- --------- -------- ---------
Total interest income (34,499) 14,000 (20,499) (78,793) 9,793 (69,000)
-------- -------- --------- --------- -------- ---------
Interest expense on:
Deposits (8,144) (3,226) (11,370) 2,543 (24,757) (22,214)
Short-term borrowings 15,988 107 16,095 17,320 (1,745) 15,575
FHLB and other borrowings (24,772) (228) (25,000) (65,627) - (65,627)
Trust capital securities 3,177 - 3,177 9,535 - 9,535
-------- -------- --------- --------- -------- ---------
Total interest expense (13,751) (3,347) (17,098) (36,229) (26,502) (62,731)
-------- -------- --------- --------- -------- ---------
Net interest income $(20,748) $ 17,347 $ (3,401) $ (42,564) $ 36,295 $ (6,269)
======== ======== ========= ========= ======== =========
The preceding three tables identify the components of the changes in net
interest income between the third quarter and first nine month periods of 1997
and 1996. Net interest income decreased $3.4 million in the third quarter of
1997 compared to the third quarter of 1996 and decreased $6.3 million in the
first nine months of 1997 compared to the first nine months of 1996. The
slight declines in net interest income were due to lower levels of 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 payments, 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 11 and six basis points in the third
quarter and first nine months of 1997, respectively, compared to the
respective periods in 1996. The increases in the margin are primarily due to
the lower provisions for losses on delinquent interest and the Company's mix
of interest-earning assets and interest-costing liabilities. 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. In addition to the lower
provision for losses on delinquent interest, the increase in the yields on
loans and MBS for the first nine 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 September 30, 1997, 95% of the Company's loan
and MBS portfolio were ARMs, including 85% which were COFI ARMs. At December
31, 1996, 96% were ARMs, including 90% which were COFI ARMs. The Company may
experience margin compression when increases in market rates are not
immediately reflected in the yields on the Company's adjustable and fixed 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 $14.9
million for the third quarter of 1997, a decrease of $20.9 million, or 58%,
from $35.8 million for the third quarter of 1996. The provision for loan
losses was $57.1 million for the first nine months of 1997, a decrease of
$58.5 million, or 51%, from the $115.6 million for the first nine months of
1996. The declines in the provision were due to 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 $14.1 million for
the third quarter of 1997, a decrease of $11.1 million, or 44%, from losses of
$25.2 million for the third quarter of 1996. The decrease was due to declines
of $4.6 million in the net loss on sales of REO, $3.3 million in operating
costs and $3.2 million in the provision for REO losses. Losses from operations
of REO were $58.1 million for the first nine months of 1997, a decrease of
$20.1 million, or 26%, from the $78.2 million for the first nine months of
1996. The decrease was due to declines of $10.4 million in the provision for
REO losses, $6.7 million in the net loss on sales of REO and $3.0 million in
operating costs. For additional information regarding REO, see "Financial
Condition--Asset Quality--NPAs and Potential Problem Loans."
NONINTEREST INCOME
GAIN ON SALES OF LOANS. During the third quarter of 1997, loans
classified as held for sale totaling $538.0 million were sold for a pre-tax
gain of $0.7 million compared to loans totaling $477.5 million sold for a pre-
tax gain of $3.3 million for the third quarter of 1996. For the first nine
months of 1997, loans held for sale totaling $2.2 billion were sold for a pre-
tax gain of $14.8 million compared to loans totaling $2.1 billion sold for a
pre-tax gain of $24.5 million for the first nine months of 1996.
The loans sold in the third quarter and first nine months of 1997 and
1996 were as follows (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
Fixed rate loans $439,264 $278,804 $1,175,820 $1,472,549
COFI ARMs 1,133 158,599 865,739 419,123
Treasury ARMs 97,590 40,085 147,696 219,439
-------- -------- ---------- ----------
$537,987 $477,488 $2,189,255 $2,111,111
======== ======== ========== ==========
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 or securitized as MBS available for sale. The total
amortized cost of the mortgage loans sold or securitized 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.
Potential impairment losses, if any, are recognized through a valuation
allowance and charged to loan servicing income. MSR totaling $29.0 million
and $29.7 million were capitalized in the first nine months of 1997 and 1996,
respectively. The changes to the valuation allowance included a provision of
$1.5 million and $0.6 million for the first nine months of 1997 and 1996,
respectively. There were no charge-offs against this valuation allowance
during the first nine months of 1997 and 1996. The valuation allowance for
MSR impairment was $2.6 million as of September 30, 1997.
LOAN SERVICING INCOME. Loan servicing income was $16.1 million for the
third quarter of 1997, a decrease of $2.0 million, or 11%, from $18.1 million
for the third quarter of 1996 and was $49.9 million for the first nine months
of both 1997 and 1996. The decrease for the third quarter of 1997 compared to
the third quarter of 1996 was primarily due to a decline of three basis points
in the servicing fee rate to 0.66%, partially offset by a $808.7 million
increase in the average portfolio of loans serviced for investors. At
September 30, 1997 the portfolio of loans serviced for investors was $14.2
billion with a gross retained spread of 0.66% compared to $13.5 billion and
0.70% at September 30, 1996.
FEE INCOME. Total fee income, consisting of banking and other retail
service fees plus other fee income, was $45.4 million for the third quarter of
1997, an increase of $11.0 million, or 32%, from $34.4 million for the third
quarter of 1996 and was $136.7 million for the first nine months of 1997, an
increase of $44.2 million, or 48%, from $92.5 million for the first nine
months of 1996.
Banking and other retail service fees increased $10.1 million, or 53%,
from $19.1 million for the third quarter of 1996 to $29.2 million for the
third quarter of 1997 and increased of $37.1 million, or 74%, from $50.0
million for the first nine months of 1996 to $87.1 million for the first nine
months of 1997 due to increases in service charges on deposit accounts of $7.3
million and $29.2 million for the third quarter and first nine months of 1997,
respectively. These increases were primarily due to the incremental volume of
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.
Fee income from other services was $16.2 million for the third quarter of
1997, an increase of $0.9 million, or 6%, from $15.3 million for the third
quarter of 1996 and was $49.7 million for the first nine months of 1997, an
increase of $7.2 million, or 17%, from $42.5 million for the first nine months
of 1996. For the first nine months of 1997, the higher levels of fee income
reflect increases of $1.8 million in commissions on the higher volume of sales
of investment and insurance services and products and $5.3 million in other
mortgage-related 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 in West Florida resulting in a pre-tax gain
of $41.6 million. The gains are net of expenses associated with the sales.
NONINTEREST EXPENSE
G&A EXPENSES. G&A expenses were $182.1 million for the third quarter of
1997, a decrease of $266.2 million, or 59%, from $448.3 million for the third
quarter of 1996 and were $549.3 million for the first nine months of 1997, a
decrease of $281.7 million, or 34%, from $831.0 million for the first nine
months of 1996. G&A expenses for the third quarter and first nine months of
1996 include the SAIF charge of $243.9 million. During the third quarter and
first nine months of 1997, FDIC assessments declined $13.0 million and $40.3
million, respectively, as a result of the recapitalization of the SAIF.
Partially offsetting these declines 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 Company initiatives to offer a greater range of consumer and small
business loan products and services. In addition, the Company recognized
approximately $14.0 million in FIB charges in the third quarter of 1996. The
efficiency ratio was 50.0% for the third quarter of 1997 compared to 125.0%
for the third quarter of 1996 and was 49.3% for the first nine months of 1997
compared to 77.1% for the first nine months of 1996. Excluding the SAIF and
FIB charges, the efficiency ratio would have been 53.1% and 53.2% for the
third quarter and first nine months of 1996, respectively.
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 the Company had purchased in connection with the proposal.
OPERATIONS OF REI. Losses from operations of REI were $1.0 million for
the third quarter of 1997, a decrease of $18.3 million, or 95%, from losses of
$19.3 million for the third quarter of 1996. Losses from operations of REI
were $3.3 million for the first nine months 1997, a decrease of $30.3 million,
or 90%, from $33.6 million for the first nine months of 1996. The declines in
the 1997 periods are due primarily to recognition, in the third quarter of
1996, of a $19.0 million addition to the allowance for losses principally due
to a revision in the business plan for the disposition of one commercial
project. In addition, there were declines in operating expenses of $6.3
million and in losses on sales of REI of $2.3 million during the first nine
months of 1997.
At September 30, 1997, REI totaling $65.0 million were classified as
long-term, consisting of five projects located in California. Other REI
totaling $82.0 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 September 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 $6.5 million for the third quarter of
1997, an increase of $2.5 million, or 63%, from $4.0 million for the third
quarter of 1996 and was $19.3 million for the first nine months of 1997, an
increase of $7.4 million, or 62%, from $11.9 million for the first nine 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 (BENEFIT). The changes in the provision for
income taxes (benefit) primarily reflected the changes in pre-tax income
(loss) between the comparable periods. The effective tax (benefit) rates for
the third quarters of 1997 and 1996 were 35.6% and (53.0)%, respectively, and
were 37.2% and (41.0)% for the first nine months of 1997 and 1996,
respectively, reflecting management's estimate of the Company's full year tax
provision. The tax benefits recorded in the third quarter and the first nine
months of 1996 include a $19.0 million reduction in the Company's valuation
allowance for deferred taxes related to the Company's development of tax
planning strategies that would be implemented, if necessary, to realize the
excess tax bases in certain investments.
FINANCIAL CONDITION
The Company's consolidated assets were $46.8 billion at September 30,
1997, a decrease of $3.1 billion, or 6%, from $49.9 billion at December 31,
1996. The gross loan and MBS portfolio decreased $2.3 billion, or 5%, to
$44.2 billion during the first nine 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):
September 30, 1997 December 31, 1996
------------------------ ------------------------
Portfolio Percent of Portfolio Percent of
Balance Portfolio Balance Portfolio
----------- ---------- ----------- ----------
Real estate loans:
Single family $19,070,656 43.1% $20,443,279 44.0%
Multi-family 9,805,137 22.2 9,557,353 20.6
Commercial and industrial 1,166,928 2.6 1,338,221 2.8
----------- ----- ----------- -----
30,042,721 67.9 31,338,853 67.4
Consumer loans:
Home equity 785,143 1.8 595,097 1.3
Other 179,168 0.4 189,862 0.4
----------- ----- ----------- -----
964,311 2.2 784,959 1.7
Small business loans 57,252 0.1 54,481 0.1
----------- ----- ----------- -----
Total loans 31,064,284 70.2 32,178,293 69.2
MBS 13,156,959 29.8 14,296,512 30.8
----------- ----- ----------- -----
Total loans and MBS $44,221,243 100.0% $46,474,805 100.0%
=========== ===== =========== =====
At September 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 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.
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):
Nine months ended September 30,
------------------------------------------------------
1997 1996
-------------------------- --------------------------
Loan Percent of Loan Percent of
Originations Originations Originations Originations
------------ ------------ ------------ ------------
Real estate loans:
Single family:
Fixed rate $1,281,928 31.2% $1,387,549 33.0%
COFI ARMs 270,142 6.6 1,006,660 23.9
12 MAT ARMs 590,028 14.3 488,226 11.6
Other Treasury ARMs 139,630 3.4 265,732 6.3
LAMA 319,250 7.8 42 -
---------- ----- ---------- -----
2,600,978 63.3 3,148,209 74.8
Multi-family:
Fixed rate 12,952 0.3 83,257 2.0
COFI ARMs 47,570 1.2 672,854 16.0
12 MAT ARMs 500,813 12.2 18,516 0.4
LAMA 286,952 7.0 58,626 1.4
---------- ----- ---------- -----
848,287 20.7 833,253 19.8
Consumer loans 595,417 14.5 224,815 5.3
Small business loans 61,288 1.5 4,739 0.1
---------- ----- ---------- -----
$4,105,970 100.0% $4,211,016 100.0%
========== ===== ========== =====
During the first nine months of 1997, approximately 70% of real estate
loan originations were on properties located in California compared to 68%
during the first nine months of 1996. 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.
The Company is continuing to originate consumer loans through its entire
distribution network. The Company 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 financial services company.
For additional information regarding these loan products, see "Results of
Operations--Net Interest Income" and "Financial Condition--Asset/Liability
Management."
At September 30, 1997, the Company was committed to fund the following
real estate loans (dollars in thousands):
September 30, 1997
-------------------------
Outstanding Percent of
Commitments Commitments
----------- -----------
Fixed rate $159,864 41.6%
COFI ARMs 7,118 1.9
12 MAT ARMs 71,923 18.7
Other Treasury ARMs 9,730 2.5
LAMA 135,624 35.3
-------- -----
$384,259 100.0%
======== =====
The Company was also committed to fund $738.8 million of consumer loans
and $83.2 million of small business loans at September 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.
The real estate loan and MBS portfolio at September 30, 1997 includes
approximately $6.2 billion in loans, or 14% of the portfolio, that were
originated with loan-to-value ("LTV") ratios exceeding 80%. Approximately 9%
of loans originated during the first nine 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.
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. 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.
The Company offers and increasingly emphasizes 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
emphasis on these other ARM 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 September 30,
1997, approximately 85% of the Company's $44.2 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 September
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 $ 608,287 1% $ 605,864 $ - $ 2,423 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (57,154) 35,021 22,133 - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total investment securities 608,287 1 548,710 35,021 24,556 - -
----------- --- ----------- ----------- ----------- ---------- ----------
Loans and MBS
MBS
ARMs 12,830,007 29 12,830,007 - - - -
Other 326,952 1 - 2 2,044 - 324,906
Loans
ARMs 28,854,189 65 27,334,267 395,980 807,311 26,657 289,974
Other 1,829,727 4 157,096 - - - 1,672,631
Impact of hedging (interest
rate swaps) - - 40,800 (40,800) - - -
----------- --- ----------- ----------- ----------- ---------- ----------
Total loans and MBS 43,840,875 99 40,362,170 355,182 809,355 26,657 2,287,511
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-earning assets $44,449,162 100% $40,910,880 $ 390,203 $ 833,911 $ 26,657 $2,287,511
=========== === =========== =========== =========== ========== ==========
Interest-costing liabilities:
Deposits
Transaction accounts $10,719,331 25% $10,719,331 $ - $ - $ - $ -
Term accounts 21,727,986 50 10,705,052 7,787,345 3,227,358 8,131 100
----------- --- ----------- ----------- ----------- ---------- ----------
Total deposits 32,447,317 75 21,424,383 7,787,345 3,227,358 8,131 100
----------- --- ----------- ----------- ----------- ---------- ----------
Borrowings
Short-term 3,142,897 7 3,142,897 - - - -
FHLB and other 7,433,026 17 4,846,021 1,096,926 941,350 501,189 47,540
Capital securities of
subsidiary trust 148,421 1 - - - 148,421 -
----------- --- ----------- ----------- ----------- ---------- ----------
Total borrowings 10,724,344 25 7,988,918 1,096,926 941,350 649,610 47,540
----------- --- ----------- ----------- ----------- ---------- ----------
Total interest-costing
liabilities $43,171,661 100% $29,413,301 $ 8,884,271 $ 4,168,708 $ 657,741 $ 47,640
=========== === =========== =========== =========== ========== ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,277,501 $11,497,579 $(8,494,068) $(3,334,797) $ (631,084) $2,239,871
=========== =========== =========== =========== ========== ==========
Cumulative interest sensitivity gap $11,497,579 $ 3,003,511 $ (331,286) $ (962,370) $ 1,277,501
=========== =========== =========== ========== ==========
Percentage of hedge-adjusted
interest-earning assets to
interest-costing liabilities 102.96%
Percentage of cumulative interest
sensitivity gap to total assets 2.73%
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:
September 30, December 31, Increase
1997 1996 (Decrease)
------------- ------------ ----------
(dollars in thousands)
Nonaccrual loans:
Single family $407,490 $537,243 $(129,753)
Multi-family 22,978 44,972 (21,994)
Commercial and industrial real estate 32,911 14,837 18,074
Consumer 3,116 1,410 1,706
Small business 37 199 (162)
-------- -------- ---------
Total $466,532 $598,661 $(132,129)
======== ======== =========
REO:
Single family $158,044 $214,720 $ (56,676)
Multi-family 19,982 19,239 743
Commercial and industrial real estate 10,034 13,618 (3,584)
-------- -------- ---------
Total $188,060 $247,577 $ (59,517)
======== ======== =========
Total NPAs:
Single family $565,534 $751,963 $(186,429)
Multi-family 42,960 64,211 (21,251)
Commercial and industrial real estate 42,945 28,455 14,490
Consumer 3,116 1,410 1,706
Small business 37 199 (162)
-------- -------- ---------
Total $654,592 $846,238 $(191,646)
======== ======== =========
TDRs:
Single family $162,249 $ 91,422 $ 70,827
Multi-family 31,261 58,027 (26,766)
Commercial and industrial real estate 20,099 36,186 (16,087)
-------- -------- ---------
Total $213,609 $185,635 $ 27,974
======== ======== =========
Other impaired major loans:
Multi-family $117,859 $ 96,383 $ 21,476
Commercial and industrial real estate 17,160 17,949 (789)
-------- -------- ---------
Total $135,019 $114,332 $ 20,687
======== ======== =========
Ratio of NPAs to total assets 1.40% 1.70%
======== ========
Ratio of NPAs and TDRs to total assets 1.86% 2.07%
======== ========
Ratio of allowances for losses
on loans and REO to NPAs 59.03% 47.96%
======== ========
The following table presents NPAs, TDRs and other impaired major loans by
state at September 30, 1997:
NPAs
-----------------------------------------------------------
Real Estate
-----------------------------
Other
Commercial Impaired
Single Multi- and Major
Family Family Industrial Consumer Business Total TDRs Loans
-------- ------- ---------- -------- -------- -------- -------- --------
(in thousands)
California $420,508 $41,882 $37,034 $3,014 $37 $502,475 $170,882 $118,301
New York 38,865 448 1,437 - - 40,750 22,751 5,798
Florida 36,933 - 200 - - 37,133 3,784 -
Texas 10,180 373 188 - - 10,741 1,598 1,217
Other 59,048 257 4,086 102 - 63,493 14,594 9,703
-------- ------- ------- ------ --- -------- -------- --------
$565,534 $42,960 $42,945 $3,116 $37 $654,592 $213,609 $135,019
======== ======= ======= ====== === ======== ======== ========
Total NPAs were $654.6 million at September 30, 1997, or a ratio of NPAs
to total assets of 1.40%, a decrease of $191.6 million, or 23%, during the
first nine 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 nine 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 $565.5 million at September 30, 1997, a decrease
of $186.5 million, or 25%, during the first nine months of 1997 from $752.0
million at December 31, 1996, primarily due to a decrease of $172.2 million in
NPAs secured by properties in California. Multi-family NPAs totaled $43.0
million at September 30, 1997, a decrease of $21.2 million, or 33%, during the
first nine months of 1997 from $64.2 million at December 31, 1996 primarily
due to declines in California ($16.8 million) and New York ($2.0 million).
Commercial and industrial real estate NPAs totaled $42.9 million at September
30, 1997, an increase of $14.4 million, or 51%, during the first nine months
of 1997 from $28.5 million at December 31, 1996, primarily due to an increase
in California of $17.8 million.
TDRs were $213.6 million at September 30, 1997, an increase of $28.0
million, or 15%, during the first nine months of 1997 from $185.6 million at
December 31, 1996, primarily due to an increase in single family TDRs,
primarily in California ($56.4 million), partially offset by a decrease in
multi-family TDRs, primarily in California ($13.3 million) and Texas ($5.6
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. At September 30, 1997, $61.1 million of
single family TDRs were performing loans.
The increase of $20.7 million, or 18%, in other impaired major loans,
from $114.3 million at December 31, 1996 to $135.0 million at September 30,
1997, was primarily due to an increase of $17.3 million in such loans secured
by properties in California.
The recorded investment in all impaired loans was as follows:
September 30, 1997 December 31, 1996
--------------------------------- ---------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investment Losses Investment Investment Losses Investment
---------- --------- ---------- ---------- --------- ----------
(in thousands)
With specific allowances $349,438 $57,884 $291,554 $305,321 $58,876 $246,445
Without specific allowances 78,177 - 78,177 89,491 - 89,491
-------- ------- -------- -------- ------- --------
$427,615 $57,884 $369,731 $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 $303.3 million of single family REO and $43.4 million of multi-
family and commercial and industrial REO in the first nine months of 1997. In
the first nine months of 1996, the Company sold $301.9 million of single
family REO and $71.2 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 September 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(dollars in thousands)
Beginning balance $388,287 $382,485 $389,135 $380,886
Provision for loan losses 14,868 35,783 57,080 115,626
Loan loss allowance for loans acquired - 14,710 - 14,710
-------- -------- -------- --------
403,155 432,978 446,215 511,222
-------- -------- -------- --------
Charge-offs:
Single family (17,308) (26,683) (61,713) (85,195)
Multi-family (4,960) (17,107) (20,007) (50,536)
Commercial and industrial real estate (6,912) (2,154) (8,518) (7,437)
Consumer (1,113) (67) (2,825) (87)
Small business - - (157) -
-------- -------- -------- --------
(30,293) (46,011) (93,220) (143,255)
-------- -------- -------- --------
Recoveries:
Single family 4,659 7,384 20,695 22,238
Multi-family 1,668 2,820 4,868 6,322
Commercial and industrial real estate 1,169 1,119 1,767 1,763
Small business 10 - 43 -
-------- -------- -------- --------
7,506 11,323 27,373 30,323
-------- -------- -------- --------
Net charge-offs (22,787) (34,688) (65,847) (112,932)
-------- -------- -------- --------
Ending balance $380,368 $398,290 $380,368 $398,290
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.20% 0.30% 0.19% 0.32%
==== ==== ==== ====
Net charge-offs for the third quarter of 1997 include a $4.0 million
charge-off of one commercial real estate loan. The declines in the provision
for loan losses and gross charge-offs during the first nine months of 1997 are
due to lower levels of NPAs and delinquent loans since September 30, 1996.
During the first nine months of 1997, NPAs declined $191.6 million, reaching
their lowest level since August 1990. At September 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 $79.4 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:
September 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 0.55% $176,120 0.51%
Multi-family 147,335 1.50 153,933 1.60
Commercial and industrial real estate 41,332 3.54 45,065 3.37
Consumer 10,898 1.13 9,217 1.17
Small business 4,800 8.38 4,800 8.81
-------- --------
$380,368 0.86 $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, such as earthquakes. 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 September 1997 the
average liquidity and average short-term liquidity ratios of Home Savings were
5.12% and 2.04%, 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 nine months of 1997 cash of $3.9
billion was used to originate loans. Principal payments on loans were $2.7
billion for the first nine months of 1997, an increase of $772.4 million, or
40%, from $1.9 billion for the first nine months of 1996. During the first
nine months of 1997 the Company sold loans totaling $2.2 billion. At
September 30, 1997, the Company had $377.5 million of loans held for sale.
The loans designated for sale included $335.8 million of fixed rate loans,
$41.6 million of Treasury ARMs and $0.1 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. The Company designates certain MBS as available for sale. During
the first nine months of 1997, the Company sold $9.9 million of fixed rate MBS
available for sale. At September 30, 1997 the Company had $8.6 billion of MBS
available for sale, comprised of $8.3 billion of ARM MBS and $283.8 million of
fixed rate MBS. These MBS had an unrealized loss of $4.1 million at September
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 $32.4 billion at September 30, 1997, a decrease
of $2.4 billion, or 7%, 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 nine months of 1997. Excluding these transactions, there was
a net deposit outflow of $1.2 billion primarily due to maturities of term
accounts which have more sensitivity to market interest rates than transaction
accounts. Term deposits decreased $856.7 million during the first nine months
of 1997, while transaction accounts decreased $302.3 million during the same
period. The Company manages its borrowings to balance changes in deposits.
At September 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 $10.6 billion at September 30, 1997, a
decrease of $1.0 billion, or 9%, during the first nine months of 1997 from
$11.6 billion at December 31, 1996, reflecting a decline in FHLB and other
borrowings of $2.1 billion, partially offset by an increase in short-term
borrowings of $1.1 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%. In August 1997, the Company issued $125 million in
subordinated debt which will mature on August 15, 2004 and bears an interest
rate of 6.50%. In the first nine months of 1997, the Company issued term
notes totaling $370.0 million to various brokerage firms. The notes will
mature in one to two years and have a weighted average interest rate of 5.68%.
Such borrowings are being 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 nine months of
1997, Ahmanson returned capital to stockholders by purchasing 8.8 million
shares of its common stock. Stockholders' equity decreased $46.7 million to
$2.4 billion at September 30, 1997. The decrease is primarily due to payments
of $372.4 million to purchase the Company's common stock and dividends paid to
common and preferred stockholders of $90.2 million, partially offset by net
income of $314.3 million and a decrease of $72.2 million in the net unrealized
loss on securities available for sale. The net unrealized loss on securities
available for sale at September 30, 1997 was $1.9 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 September 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 September 30, 1997:
Well-
Capital Capitalized
Amount Ratio Standard
---------- ------- -----------
(dollars in thousands)
Tangible capital
(to adjusted total assets) $2,724,408 5.89% N/A
Core capital
(to adjusted total assets) 2,727,876 5.89 5.00%
Core capital
(to risk-weighted assets) 2,727,876 9.16 6.00
Total risk-based capital
(to risk-weighted assets) 3,516,427 11.81 10.00
COAST SAVINGS ACQUISITION
On October 6, 1997, the Company announced a definitive agreement to
acquire Coast. At September 30, 1997, Coast had 90 branches in California
with $6.4 billion in deposits and $9.0 billion in assets. The merger
agreement calls for the tax-free exchange of 0.8082 shares of Ahmanson common
stock for each share of Coast common stock. Coast shareholders will also
retain the right to receive an amount equal to any proceeds, net of expenses
and taxes, in Coast's goodwill litigation against the U.S. government. The
merger is expected to close in the first quarter of 1998.
The merger will be accounted for as a purchase. Under this method of
accounting, assets and liabilities of Coast will be adjusted to their
estimated fair values and any excess of the purchase price over the fair value
of the assets acquired, net of the fair value of the liabilities assumed, will
be recognized as goodwill. Applicable income tax effects of such adjustments
will be included as a component of the Company's net deferred tax asset with a
corresponding offset to goodwill.
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, pro forma basic EPS for the third quarter
and first nine months of 1997 would have been $0.91 and $2.94, respectively,
and pro forma diluted EPS would have been $0.84 and $2.70, 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 the 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 be 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 Annual Report on
Form 10-K for the year 1996 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 Annual Report on Form 10-K for the year 1997.
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 September 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 September
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.
YEAR 2000
Many computer systems, including most of those used by the Company,
identify dates using only the last two digits of the year. These systems are
unable to distinguish between dates in the year 2000 and dates in the year
1900. That inability (referred to as the "Year 2000 issue"), if not
addressed, could cause these systems to fail or provide incorrect information
after December 31, 1999 or when using dates after December 31, 1999. This in
turn could have a material adverse impact on the Company and its ability to
process customer transactions or provide customer services.
The Company has implemented a process for identifying, prioritizing and
modifying or replacing systems that may be affected by the Year 2000 issue.
The Company is also monitoring the adequacy of the processes and progress of
third party vendors of systems that may be affected by the Year 2000 issue.
While the Company believes its process is designed to be successful, because
of the complexity of the Year 2000 issue, it is possible that the Company's
efforts or those of third party vendors will not be satisfactorily completed
in a timely fashion. In addition, the Company interacts with a number of
other entities, including government entities. The failure of these entities
to address the Year 2000 issue could adversely affect the Company.
The Company currently estimates that its Year 2000 project, including
costs incurred in 1997 and through the year 2000, may cost approximately $45
million. These costs include estimates for employee compensation on the
project team, consultants, hardware and software lease expense and
depreciation of equipment purchased as part of the project. Year 2000 costs
are expensed as incurred and approximately $6.5 million has been expensed in
1997 through the third quarter.
As the Company progresses in addressing the Year 2000 issue, estimates of
costs could change, including as a result of the failure of third party
vendors to address the Year 2000 issue in a timely fashion. However, the
Company's estimated Year 2000 expenses are not expected to result in a dollar
for dollar increase in the Company's overall information systems expenditures
because the Company is likely to initiate fewer other major systems projects
during the pendency of the Year 2000 project.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3 By-laws of H. F. Ahmanson & Company, as amended (Exhibit 3 to
Form 8-K for the event on November 7, 1997).
4 Rights Agreement, dated November 7, 1997, between H. F. Ahmanson
& Company and First Chicago Trust Company of New York, as Rights
Agent (Exhibit 4 to Form 8-K for the event on November 7, 1997).
11 Statement of Computation of Income per Share.
27 Financial Data Schedule. *
(b) Reports on Form 8-K.
Date of Report Items Reported
July 10, 1997 ITEM 5. OTHER EVENTS.
On July 10, 1997, H. F. Ahmanson & Company (the
"Registrant") issued a press release reporting
its results of operations during the quarter
ended June 30, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated July 10, 1997
reporting results of operations during the
quarter ended June 30, 1997.
[FN]
* Filed electronically with the Securities and Exchange Commission.
</FN>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997 H. F. Ahmanson & Company
/s/ Kevin M. Twomey
-------------------------------
Kevin M. Twomey
Vice Chairman of the Board of
Directors 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. 38
27 Financial Data Schedule. *
<FN>
* Filed electronically with the Securities and Exchange Commission.
</FN>