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 March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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Commission File Number 1-8930
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H. F. AHMANSON & COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 95-0479700
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 Rivergrade Road, Irwindale, California 91706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code. (626) 960-6311
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Exhibit Index appears on page: 38
Total number of sequentially numbered pages: 39
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1998: $.01 par value - 109,737,033 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 March 31, 1998 December 31, 1997
- ------ -------------- -----------------
Cash and amounts due from banks $ 732,599 $ 603,797
Federal funds sold and securities purchased under
agreements to resell 227,600 550,200
Other short-term investments 9,364 5,110
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Total cash and cash equivalents 969,563 1,159,107
Other investment securities held to
maturity [market value
$2,426 (March 31, 1998) and
$2,427 (December 31, 1997)] 2,418 2,421
Other investment securities available for
sale [amortized cost
$12,251 (March 31 1998) and
$6,440 (December 31, 1997)] 14,685 7,248
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 521,493 411,978
Mortgage-backed securities (MBS)
held to maturity [market value
$4,405,587 (March 31, 1998) and
$4,365,909 (December 31, 1997)] 4,317,084 4,322,579
MBS available for sale [amortized cost
$9,902,531 (March 31, 1998) and
$8,417,188 (December 31, 1997)] 10,030,865 8,468,812
Loans receivable less allowance for losses of
$480,749 (March 31, 1998) and
$377,351 (December 31, 1997) 35,112,190 30,028,540
Loans held for sale [market value
$881,047 (March 31, 1998) and
$461,620 (December 31, 1997)] 875,889 455,651
Accrued interest receivable 245,487 194,038
Real estate held for development and
investment (REI) less allowance for losses of
$102,086 (March 31, 1998) and
$107,773 (December 31, 1997) 138,237 146,518
Real estate owned held for sale (REO)
less allowance for losses of
$10,676 (March 31, 1998) and
$11,400 (December 31, 1997) 183,174 162,440
Premises and equipment 420,017 364,626
Goodwill and other intangible assets 784,731 280,296
Other assets 903,513 674,498
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$54,519,346 $46,678,752
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Liabilities, Capital Securities of Subsidiary Trust
and Stockholders' Equity
- ---------------------------------------------------
Deposits:
Non-interest bearing $ 1,646,281 $ 1,116,050
Interest bearing 36,716,968 31,152,325
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38,363,249 32,268,375
Securities sold under agreements to repurchase 2,025,000 1,675,000
Other short-term borrowings 801,963 837,861
FHLB and other borrowings 8,428,298 8,316,405
Other liabilities 1,316,874 954,470
Income taxes 180,922 82,732
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Total liabilities 51,116,306 44,134,843
Company-obligated mandatorily redeemable capital
securities, Series A, of subsidiary trust holding
solely Junior Subordinated Deferrable Interest
Debentures of the Company 148,507 148,464
Stockholders' equity 3,254,533 2,395,445
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$54,519,346 $46,678,752
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H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands except per share data)
For the Three Months Ended
March 31,
--------------------------
1998 1997
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Interest income:
Loans $ 632,892 $ 577,533
MBS 256,599 267,673
Investments 13,726 16,897
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Total interest income 903,217 862,103
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Interest expense:
Deposits 387,895 375,139
Short-term borrowings 41,732 33,120
FHLB and other borrowings 132,740 136,225
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Total interest expense 562,367 544,484
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Net interest income 340,850 317,619
Provision for loan losses 8,066 24,223
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Net interest income after provision for loan losses 332,784 293,396
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Noninterest income:
Gain on sales of loans 11,771 7,989
Loan servicing income 21,675 16,748
Banking and other retail service fees 27,709 29,334
Other fee income 19,150 16,381
Gain on sale of retail deposit branch system - 15,956
Other operating income 989 2,461
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Total noninterest income 81,294 88,869
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Noninterest expense:
Compensation and other employee expenses 97,698 95,468
Occupancy expenses 28,692 26,712
Federal deposit insurance premiums and assessments 6,779 6,549
Other general and administrative expenses 83,535 58,044
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Total general and administrative expenses 216,704 186,773
Operations of REI (319) 1,859
Operations of REO 8,007 22,108
Amortization of goodwill and other intangible assets 8,883 6,390
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Total noninterest expense 233,275 217,130
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Income before provision for income taxes 180,803 165,135
Provision for income taxes 66,500 62,042
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Net income $ 114,303 $ 103,093
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Net income attributable to common shares:
Basic $ 107,317 $ 94,685
Diluted $ 111,573 $ 98,998
Income per common share:
Basic $ 1.06 $ 0.94
Diluted $ 0.97 $ 0.87
Common shares outstanding, weighted average:
Basic 101,512,046 100,605,693
Diluted 115,015,982 114,123,176
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued (Unaudited)
For the Three Months Ended
March 31,
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1998 1997
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Return on average assets (1) 0.91% 0.84%
Return on average equity (1) 15.93% 17.21%
Return on average tangible equity (1),(2) 19.34% 19.29%
Efficiency ratio (1),(3) 52.93% 49.14%
<FN>
(1) Excluding the after-tax effects of the Coast charge of $13.7 million and the gain on sale of
the Arizona retail deposit branches of $9.5 million for the three months ended March 31, 1998
and 1997, respectively, the returns on average assets, average equity and average tangible
equity and the efficiency ratio would have been as follows:
</FN>
For the Three Months Ended
March 31,
--------------------------
1998 1997
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Return on average assets 1.02% 0.76%
Return on average equity 17.83% 15.69%
Return on average tangible equity (2) 21.52% 17.66%
Efficiency ratio (3) 47.28% 49.14%
<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).
(3) Represents G&A expenses as a percentage of net interest income plus loan servicing and other
fee income, all on a pre-tax basis.
</FN>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
For the Three Months Ended
March 31,
-----------------------------
1998 1997
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Cash flows from operating activities:
Net income $ 114,303 $ 103,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest capitalized on loans and MBS (negative amortization) (129,949) (20,117)
Provision for losses on loans and real estate 12,697 35,483
Depreciation and amortization 27,377 25,053
Proceeds from sales of loans originated for sale 1,074,972 591,142
Loans originated for sale (1,286,356) (327,695)
Loans repurchased from investors (10,473) (14,716)
Increase in other liabilities 255,156 184,168
Other, net 28,226 (43,029)
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Net cash provided by operating activities 85,953 533,382
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Cash flows from investing activities:
Principal payments on loans 1,523,143 781,154
Principal payments on MBS 505,471 307,883
Loans originated for investment (net of refinances) (810,352) (787,371)
Proceeds from maturities of other investment securities 275 165
Other investment securities purchased (250) (1,187)
Cash and cash equivalents from Coast acquisition 399,423 -
Purchase Great Western stock - (146,832)
Proceeds from sales of REI 41,777 1,495
Proceeds from sales of REO 87,004 121,314
Additions to REI (33,714) (2,871)
Additions to premises and equipment (17,623) (5,341)
Other, net (1,876) 10,217
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Net cash provided by investing activities 1,693,278 278,626
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Cash flows from financing activities:
Net decrease in deposits (305,386) (123,448)
Deposits sold - (251,372)
Decrease in borrowings maturing in 90 days or less (1,211,251) (186,889)
Proceeds from other borrowings 2,527,852 1,408,068
Repayment of other borrowings (2,743,407) (2,171,008)
Redemption of Preferred Stock, Series C (195,000) -
Common stock purchased for treasury (24,082) (75,117)
Dividends to stockholders (28,855) (30,496)
Other, net 11,354 11,185
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Net cash used in financing activities (1,968,775) (1,419,077)
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Net decrease in cash and cash equivalents (189,544) (607,069)
Cash and cash equivalents at beginning of period 1,159,107 1,443,860
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Cash and cash equivalents at end of period $ 969,563 $ 836,791
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H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as
of January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Included in the Company's calculation of comprehensive income is the
unrealized gain (loss) on securities available for sale, net of tax effect.
Comprehensive income for the quarters ended March 31, 1998 and 1997 totaled
$160.4 million and $56.1 million, respectively. Accumulated other
comprehensive income at March 31, 1998 totaled $77.2 million and at December
31, 1997 totaled $31.1 million.
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 oriented financial services company, and is engaged
in consumer and 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
MERGER WITH WASHINGTON MUTUAL, INC.
Effective March 16, 1998, Ahmanson and Washington Mutual, Inc.
("Washington Mutual") entered into an Agreement and Plan of Merger, pursuant
to which Ahmanson will merge with and into Washington Mutual.
Pursuant to the merger, Ahmanson's stockholders will receive, in a tax-
free exchange, 1.12 shares of the common stock of Washington Mutual for each
share of Ahmanson Common Stock. Based on the closing price of Washington
Mutual stock on March 16, 1998 (the last trading day before announcement of
the proposal), the exchange ratio would have produced a value of $80.36 for
each share of Ahmanson Common Stock, or a premium of 22.7% over the closing
market price of Ahmanson Common Stock on March 16, 1998. Because the exchange
ratio is fixed, this value will vary as the price of Washington Mutual stock
changes.
The transaction is subject to the approval of the Office of Thrift
Supervision ("OTS") and the stockholders of both Ahmanson and Washington
Mutual.
FINANCIAL RESULTS
Net income for the first quarter of 1998 was $114.3 million, or $0.97 per
diluted common share, compared to $103.1 million, or $0.87 per diluted common
share, for the first quarter of 1997. The first quarter of 1998 results
include an after-tax transaction-related charge (the "Coast charge") of $13.7
million, or $0.12 per diluted common share, associated with the acquisition of
Coast Savings Financial, Inc. ("Coast"), which was consummated on February 13,
1998. The first quarter of 1997 results include the after-tax gain of $9.5
million, or $0.09 per diluted common share, resulting from the sale of Home
Savings' deposit branches in Arizona (the "Arizona gain"). Excluding the
Coast charge and the Arizona gain, net income would have been $128.0 million,
or $1.09 per diluted common share, for the first quarter of 1998 and $93.6
million, or $0.78 per diluted common share, for the first quarter of 1997.
Return on average equity ("ROE") was 15.9% for the first quarter of 1998,
compared to 17.2% for the first quarter of 1997. Excluding the Coast charge
and the Arizona gain, ROE would have been 17.8% and 15.7% for the first
quarters of 1998 and 1997, respectively.
Cash net income is computed by the Company by adding to net income the
amortization of goodwill and core deposit intangibles (net of applicable tax
benefit). Cash net income for the first quarter of 1998 and 1997 was $120.1
million and $106.9 million, respectively. The Company's cash net income may
not be necessarily comparable to similarly titled measures reported by other
companies.
The Company's cash net income per diluted common share, cash return on
average assets and cash return on average tangible equity (cash return on
average equity) and the comparable reported data were as follows:
Cash Reported
----------------- -----------------
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income per diluted common share $ 1.02 $ 0.90 $ 0.97 $ 0.87
Return on average assets 0.96% 0.88% 0.91% 0.84%
Return on average equity 19.34% 19.29% 15.93% 17.21%
Excluding the Coast charge and Arizona gain:
Net income per diluted common share $ 1.14 $ 0.82 $ 1.09 $ 0.78
Return on average assets 1.07% 0.80% 1.02% 0.76%
Return on average equity 21.52% 17.66% 17.83% 15.69%
RESULTS OF OPERATIONS
Net interest income was $340.9 million for the first quarter of 1998,
compared to $317.6 million for the first quarter of 1997 and $306.4 million
for the fourth quarter of 1997. The increases from the year-ago and prior
quarters were due primarily to an increase in the net interest margin, as well
as an increase in average interest-earning assets with the completion of the
Coast acquisition.
The net interest margin for the first quarter of 1998 was 2.77%, an
increase from 2.64% for the first quarter of 1997 and 2.76% for the fourth
quarter of 1997. At March 31, 1998, the net interest margin was 2.81%,
compared to 2.74% at December 31, 1997. The increase in the net interest
margin was due to several factors including increases in the indices to which
substantially all of the real estate loan and MBS portfolios are tied. In
addition, there was an increase in deposits as a percentage of total interest-
costing liabilities and an increase in excess interest-earning assets
primarily as a result of the Coast acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("G&A"), excluding the pre-tax Coast
charge of $23.2 million, totaled $193.5 million for the first quarter of 1998,
compared to $186.8 million for the first quarter of 1997 and $188.2 million
for the fourth quarter of 1997. The Coast charge consisted of expenses
related to the closure and consolidation of certain Home Savings branches,
certain conversion costs, severance, and customer retention and marketing
programs. The increases in G&A, excluding the Coast charge, from the first
quarter of 1997 and the fourth quarter of 1997 are due to a higher volume of
operating expenses associated with the acquisition of Coast.
The efficiency ratio, defined by the Company as G&A expenses as a
percentage of the sum of net interest income plus loan servicing, banking and
other retail service fees and other fee income, was 52.9% and 49.1% for the
first quarters of 1998 and 1997, respectively, and excluding the Coast charge
the efficiency ratio would have been 47.3% for the first quarter of 1998.
CREDIT COSTS/ASSET QUALITY
Credit costs, consisting of the provision for loan losses plus the
expenses for the operations of foreclosed real estate ("REO"), for the first
quarter of 1998 totaled $16.1 million, compared to $46.3 million for the 1997
first quarter and $22.0 million for the 1997 fourth quarter. Credit costs for
the first quarter of 1998 decreased by 65% and 27% from the first and fourth
quarters of 1997, respectively, as the California economy continued to
improve. Net loan charge-offs for the 1998 first quarter totaled $12.5
million, compared to $25.7 million for the first quarter of 1997 and $13.0
million for the fourth quarter of 1997.
At March 31, 1998, nonperforming assets ("NPAs") totaled $703.2 million,
or 1.29% of total assets, compared to $792.7 million, or 1.63%, at March 31,
1997 and $595.3 million, or 1.28%, at December 31, 1997. Included in the
March 31, 1998 NPA total are $117.8 million of NPAs associated with loans and
REO acquired from Coast. Excluding the Coast NPAs, the Company would have
reported a decline in NPAs of $9.9 million from December 31, 1997 principally
related to the payoff of two commercial and industrial real estate loans.
At March 31, 1998, the allowances for loan losses and foreclosed real
estate were $480.7 million and $10.7 million, respectively. The ratio of the
combined allowances for losses to NPAs was 68.8% at March 31, 1998, compared
to 50.7% at March 31, 1997, and 64.1% at December 31, 1997.
LOAN FUNDINGS
In the first quarter of 1998, the Company funded $2.2 billion in loans,
compared to $1.2 billion and $1.8 billion in the first and fourth quarters of
1997, respectively. The Company funded $1.9 billion of residential mortgage
loans in the first quarter of 1998, compared to $984.3 million in the first
quarter of 1997 and $1.5 billion in the fourth quarter of 1997.
Refinancings of residential mortgage loans for the first quarter of 1998
totaled $1.2 billion, or 61.9%, of the total residential mortgage fundings,
compared to $377.5 million, or 38.4%, in the first quarter of 1997 and $685.6
million, or 45.3%, in the fourth quarter of 1997.
The Company also funded $248.3 million in consumer loans during the first
quarter of 1998, compared to $164.0 million in the first quarter of 1997 and
$247.6 million in the fourth quarter of 1997. March 1998 was a significant
month for consumer lending in that it was the first month consumer loan
fundings exceeded $100 million since inception of the program in the second
quarter of 1995.
In addition, the Company funded $35.0 million in business banking loans
in the first quarter of 1998, compared to $14.7 million in the first quarter
of 1997 and $28.6 million in the fourth quarter of 1997. In conjunction with
its business lending, the Company provides an array of cash management
products. In the month of March 1998, the Company sold 891 cash management
products, compared to 152 sales in the month of March 1997.
CAPITAL
At March 31, 1998, Home Savings' capital ratios exceeded the regulatory
requirements for an institution to be rated as "well-capitalized," the highest
regulatory standard.
During the first quarter of 1998, Ahmanson purchased a total of 406,600
shares of its common stock at an average price of $59.23 per share. Between
the initiation of the first stock purchase program in October 1995 and January
13, 1998, Ahmanson purchased 28.0 million common shares, or 24% of its
outstanding shares at September 30, 1995, at an aggregate price of $950.0
million, or an average price of $33.95 per share. Since January 13, 1998,
Ahmanson has not purchased any of its common stock and on March 17, 1998,
Ahmanson announced that it was terminating the stock purchase program as a
result of the proposed merger with Washington Mutual. At March 17, 1998,
Ahmanson held 14,664,142 shares in Treasury after re-issuing 16,263,796
treasury shares to effect the Coast purchase. Ahmanson had $227 million in
cash at March 31,1998.
On March 2, 1998, the Company redeemed at par the entire $195 million of
its 8.40% Preferred Stock, Series C, in accordance with the original terms.
On April 1, 1998, the Company redeemed the $57.5 million in 10% Senior Notes
which Coast had issued.
ACQUISITION OF COAST SAVINGS FINANCIAL, INC.
On February 13, 1998, the Company acquired Coast in a purchase accounting
transaction. At the date of acquisition, Coast had deposits of $6.4 billion
and total assets of $8.9 billion. As provided in the merger agreement, 0.8082
shares of Ahmanson common stock were exchanged for each share of Coast common
stock. Ahmanson reissued 16,263,796 shares of its common stock held in
treasury in exchange for Coast common stock. The value of Ahmanson common
stock issued was approximately $925 million on February 13, 1998. Total
intangible assets created by this transaction were $510 million, including
approximately $85 million recorded as core deposit intangibles which are being
amortized on an accelerated basis over 10 years, with the remaining goodwill
being amortized over 25 years on a straight-line basis.
The Company recorded $121.3 million of pre-tax charges related to the
acquisition of Coast in the first quarter of 1998, including pre-tax
restructuring charges of $23.2 million recorded against earnings. The
remaining $98.1 million of pre-tax charges were recorded as adjustments to
goodwill. The charges recorded as adjustments to goodwill included a $23.5
million writedown on $223 million of certain Coast single family residential
loans which the Company classified as held for sale because the Company did
not have an affirmative intent to hold them until maturity. The remaining
$74.6 million of charges recorded as adjustments to goodwill primarily
represented costs incurred or expected to be incurred in the consolidation of
Coast branches, to provide severance benefits for certain Coast employees, to
convert Coast systems and operations to company standards, and for legal,
accounting and investment banking fees associated with the acquisition.
In addition to the charges mentioned above, the Company reduced the
carrying value of the loans that it has reclassified as held for sale by an
additional $5 million. This writedown was charged against the allowance for
loan losses that was acquired from Coast. As a result of this adjustment and
the $23.5 million charge noted above, the carrying value of the $223 million
of acquired loans that were reclassified to held for sale was reduced to
$194.5 million at March 31, 1998.
Pursuant to the terms of the merger agreement, the Company received
420,457 Contingent Payment Right certificates ("CPR certificates") relating to
Coast stock appreciation rights and performance share awards exercised between
the date of the definitive agreement and the February 13, 1998 closing. The
CPR Certificates represent assignable and transferable undivided beneficial
interests in the assets of the CPR Trust, including a commitment by the
Company to pay to the CPR Trust an amount equal to any proceeds (net of taxes
and expenses, computed under certain assumptions) that Coast Federal Bank,
Federal Savings Bank ("Coast Federal") (formerly a wholly-owned subsidiary of
Coast), or its successors, may receive from pending litigation claims against
the U.S. government relating to the government's alleged breach of its
agreement with respect to Coast Federal's regulatory capital. On February 13,
1998, the CPR certificates were valued at $13.88, or a total of $5.8 million.
On March 31, 1998, the closing price of the CPR certificates on the NASDAQ
exchange was $16.25. The Company intends to dispose of the CPR certificates
in the future.
SALE OF EAST FLORIDA BRANCHES
Over the past several years, the Company has focused on enlarging its
presence and enhancing its market share in its key market of California and
has recognized that there are markets where the Company cannot economically
achieve sufficient market share to be an effective competitor. Such focus
resulted in, among other things, the sale of the Company's retail deposit
branch system in New York in 1995, the sale of three retail branches in Texas
in 1996 and, in 1997, the sale of four retail branches in Arizona and 12
retail branches in western Florida.
On December 4, 1997, the Company announced a definitive agreement to sell
its remaining 27 Florida branches with deposits of $3.3 billion at March 31,
1998. The sale is expected to close in the third quarter of 1998.
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 $340.9 million in the first quarter of 1998, an
increase of $23.3 million, or 7%, from $317.6 million in the first quarter of
1997. 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 are presented before the
deduction of the allowance for loan losses. The average MBS balances exclude
the effect of the unrealized gain or loss on MBS available for sale. The
average MBS balances for the first quarter of 1997 has been restated to be
consistent with the presentation for the first quarter of 1998.
Three Months Ended March 31,
-----------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- -------- ------- ----------- -------- -------
(dollars in thousands)
Interest-earning assets:
Loans $33,695,512 $632,892 7.52% $31,581,124 $577,533 7.31%
MBS 13,600,786 256,599 7.55 14,470,954 267,673 7.40
----------- -------- ----------- --------
Total loans and MBS 47,296,298 889,491 7.53 46,052,078 845,206 7.34
Investment securities 799,101 13,726 6.97 983,885 16,897 6.96
----------- -------- ----------- --------
Interest-earning assets 48,095,399 903,217 7.52 47,035,963 862,103 7.33
-------- --------
Other assets 2,350,796 1,991,631
----------- -----------
Total assets $50,446,195 $49,027,594
=========== ===========
Interest-costing liabilities:
Deposits $35,389,912 387,895 4.45 $34,670,277 375,139 4.39
----------- -------- ----------- --------
Borrowings:
Short-term 2,615,612 41,732 6.47 2,303,269 33,120 5.83
FHLB and other borrowings 8,402,318 129,562 6.25 8,598,184 133,046 6.28
Trust capital securities 148,479 3,178 8.52 148,362 3,179 8.53
----------- -------- ----------- --------
Total borrowings 11,166,409 174,472 6.34 11,049,815 169,345 6.22
----------- -------- ----------- --------
Interest-costing liabilities 46,556,321 562,367 4.90 45,720,092 544,484 4.83
-------- --------
Other liabilities 1,020,573 911,137
Stockholders' equity 2,869,301 2,396,365
----------- -----------
Total liabilities and
stockholders' equity $50,446,195 $49,027,594
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,539,078 2.62 $ 1,315,871 2.50
=========== ===========
Net interest income/
Net interest margin $340,850 2.77 $317,619 2.64
======== ========
Net interest income was reduced by provisions for losses on delinquent
interest of $6.6 million and $8.0 million in the first quarter of 1998 and
1997, respectively, related to nonaccrual loans. The provisions had the
effect of reducing the net interest margin by six basis points and seven basis
points in the respective periods.
The following table presents the changes for the first quarter of 1998
from the first quarter of 1997 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 current period change in average balance multiplied by the average rate
during the preceding year's period and the change due to rate is calculated as
the current period change in average rate multiplied by the average balance
during the preceding year's period. Any change that remains unallocated after
such calculations is allocated proportionately to changes in volume and
changes in rates.
Three Months Ended March 31,
1998 Versus 1997
---------------------------------
Increase/(Decrease) Due to
---------------------------------
Volume Rate Total
--------- -------- ---------
(in thousands)
Interest income on:
Loans $ 38,737 $16,622 $ 55,359
MBS (16,706) 5,632 (11,074)
Investments (3,195) 24 (3,171)
-------- ------- --------
Total interest income 18,836 22,278 41,114
-------- ------- --------
Interest expense on:
Deposits 7,692 5,064 12,756
Short-term borrowings 4,759 3,853 8,612
FHLB and other borrowings (2,880) (604) (3,484)
Trust capital securities 3 (4) (1)
-------- ------- --------
Total interest expense 9,574 8,309 17,883
-------- ------- --------
Net interest income $ 9,262 $13,969 $ 23,231
======== ======= ========
Net interest income in the first quarter of 1998 increased $23.2 million
compared to the first quarter of 1997 due mainly to favorable changes in
interest rates and to an increase in interest-earning assets which was
partially offset by an increase in interest-costing liabilities.
The net interest margin increased to 2.77% for the quarter ended March
31, 1998 from 2.64% for the quarter ended March 31, 1997. The increase in the
net interest margin was primarily due to increases in indices to which
substantially all the real estate loan and MBS portfolios are tied, an
increase in deposits as a percentage of total interest-costing liabilities and
an increase in excess interest-earning assets.
The Company experienced continued strengthening of its net interest
margin during the first quarter of 1998 as evidenced by the difference between
the net interest margin at March 31, 1998 of 2.81% compared to 2.74% at
December 31, 1997 and the average for the first quarter of 1998 of 2.77%
compared to 2.64% for the first quarter of 1997. During the first quarter of
1998, the Company's net interest margin benefited from increases in the
Federal Home Loan Bank 11th District Cost of Funds, LAMA and 12 MAT indices,
the three major indices to which substantially all of the real estate loan and
MBS portfolios are tied (see discussion of LAMA and 12 MAT indices below).
The increase in deposits as a percentage of total interest-costing
liabilities during the first quarter of 1998 compared to the first quarter of
1997 and fourth quarter of 1997 also contributed to the increase in the net
interest margin. As a result of the acquisition of Coast, average deposits
increased to $35.4 billion, or 76.0%, of interest-costing liabilities for the
quarter ended March 31, 1998 compared to $34.7 billion, or 75.8%, for the
quarter ended March 31, 1997 and $32.4 billion, or 75.0%, for the quarter
ended December 31, 1997.
Additionally, the increase in the net interest margin during the first
quarter of 1998 compared to the first quarter of 1997 was due to a $223.2
million increase in the excess of average interest-earning assets over
interest-costing liabilities during this period. The discontinuance of the
Company's stock purchase program coupled with the earnings of the Company and
the issuance of stock in connection with the acquisition of Coast were major
contributing factors to an increase in stockholders' equity and thus an
increase in excess interest-earning assets.
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 adjustable rate
mortgages ("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.
In 1996, the Company introduced two adjustable rate loan products, 12 MAT
ARMs, tied to the 12-month moving average of the monthly average one-year
constant maturity treasury, and LAMA loans, tied to the London Interbank
Offered Rate ("LIBOR") 12-month moving average of one-month LIBOR, to
diversify the interest sensitivity profile of the Company's interest-earning
assets. The Company also offers loans which provide for interest rates that
adjust based upon changes in the yields of certain U.S. Treasury securities
("other Treasury ARMs"). The timing and degree of changes in rates on 12 MAT
ARMs and LAMA loans provide a better match than COFI ARMs to the changes in
rates of certain of the Company's interest-costing liabilities.
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 March 31, 1998 and December 31, 1997, 95% of
the Company's loan and MBS portfolio were ARMs, including 83% 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 conditions cause the Company to pay higher than
market rates for its funds. For information regarding the Company's
strategies related to COFI and limiting its interest rate risk, see "Financial
Condition--Asset/Liability Management and Market Risk."
CREDIT COSTS
PROVISION FOR LOAN LOSSES. The provision for loan losses was $8.1
million for the first quarter of 1998, a decrease of $16.1 million, or 67%,
from $24.2 million for the first quarter of 1997. The decline in the
provision was due to the continuing improvement in the California economy and
California real estate market. 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 $8.0 million for
the first quarter of 1998, a decrease of $14.1 million, or 64%, from losses of
$22.1 million for the first quarter of 1997. The decrease was due to gains on
sale of REO in the first quarter of 1998 of $0.3 million compared to losses of
$4.3 million in the first quarter of 1997 and to declines of $5.9 million in
operating costs and $3.6 million in the provision for REO losses. For
additional information regarding REO, see "Financial Condition--Asset Quality-
- -NPAs and Potential Problem Loans."
NONINTEREST INCOME
GAIN ON SALES OF LOANS. During the first quarter of 1998 and 1997, the
Company sold loans and recognized gains on sales of loans as follows (in
thousands):
Three Months Ended
March 31,
---------------------
1998 1997
---------- --------
Book value of loans sold:
Fixed rate $1,036,076 $240,250
COFI ARMs 147 314,025
12 MAT and other Treasury ARMs 26,350 26,878
LAMA 625 -
---------- --------
$1,063,198 $581,153
========== ========
Pre-tax gain on sale of loans:
Fixed rate $ 11,580 $ 5,125
COFI ARMs 22 2,364
12 MAT and other Treasury ARMs 162 500
LAMA 7 -
---------- --------
$ 11,771 $ 7,989
========== ========
The Company intends to sell the majority of its fixed rate mortgage
originations and certain ARM originations in the secondary market.
The Company capitalizes mortgage servicing rights ("MSR") when the
related mortgage loans are sold or securitized as MBS available for sale. The
MSR are amortized in proportion to and over the period of estimated loan
servicing income. The MSR are periodically reviewed for impairment based on
their fair value and potential impairment losses, if any, are recognized
through a valuation allowance and a charge to loan servicing income.
Impairment is measured on a disaggregated basis based on predominant risk
characteristics of the underlying mortgage loans. The risk characteristics
used by the Company for the purposes of capitalization and impairment
evaluation include loan amount, loan type, loan origination date, loan term,
the state where the collateral is located and collateral type. MSR totaling
$10.1 million and $12.9 million were capitalized in the first quarter of 1998
and 1997, respectively. MSR totaling $27.6 million was acquired from Coast
during the first quarter of 1998. The changes to the valuation allowance
included a provision of $1.0 million for the first quarter of 1997. There was
no addition to the valuation allowance in the first quarter of 1998 and no
charge-offs against this valuation allowance during the first quarters of 1998
and 1997. The valuation allowance for MSR impairment was $5.5 million as of
March 31, 1998.
LOAN SERVICING INCOME. Loan servicing income was $21.7 million for the
first quarter of 1998, an increase of $5.0 million, or 30%, from $16.7 million
for the first quarter of 1997. The increase in the first quarter of 1998 was
due mainly to the acquisition of Coast's loan servicing operations, partially
offset by an increase in amortization of MSR as a result of an increase in the
related servicing asset. At March 31, 1998, the portfolio of loans serviced
for investors was $17.2 billion with a gross retained spread of 0.66% compared
to $14.0 billion and 0.66% at March 31, 1997.
FEE INCOME. Total fee income, consisting of banking and other retail
service fees plus other fee income, was $46.9 million for the first quarter of
1998, an increase of $1.2 million, or 3%, from $45.7 million for the first
quarter of 1997.
Banking and other retail service fees decreased $1.6 million, or 5%, from
$29.3 million for the first quarter of 1997 to $27.7 million for the first
quarter of 1998. The decrease in the first quarter of 1998 was due to
decreases of $1.5 million in service charges on deposit accounts and $0.8
million in other retail banking fees, partially offset by an increase in ATM
fees of $0.7 million.
Fee income from other services was $19.2 million for the first quarter of
1998, an increase of $2.8 million, or 17%, from $16.4 million for the first
quarter of 1997. The increase was primarily due to increases of $2.2 million
in mortgage-related fees, $0.3 million in debit card-related fees and $0.3
million in other fees.
GAIN ON SALE 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. The gain was net of expenses associated with
the sale.
NONINTEREST EXPENSE
GENERAL & ADMINISTRATIVE EXPENSES. G&A expenses were $216.7 million for
the first quarter of 1998, an increase of $29.9 million, or 16%, from $186.8
million for the first quarter of 1997. The increase in G&A expenses was
mainly due to the pre-tax Coast charges of $23.2 million related to the
closure and consolidation of certain Home Savings branches, certain conversion
costs, severance and customer retention and marketing programs recognized in
connection with the acquisition of Coast. The increase in G&A also reflects a
higher volume of operating expenses associated with the net addition of 40
Coast branches.
The efficiency ratio was 52.9% for the first quarter of 1998 compared to
49.1% for the first quarter of 1997. Excluding the Coast charges in the first
quarter of 1998, the efficiency ratio would have been 47.3%.
OPERATIONS OF REI. Income from operations of REI were $0.3 million for
the first quarter of 1998, an increase of $2.2 million from losses of $1.9
million for the first quarter of 1997. The change was primarily due to
declines of $2.0 million in provision for losses and $0.2 million in operating
expenses.
During the first quarter of 1998, the Company sold an office building
located in Charlotte, North Carolina at a price equal to recorded value. The
Company also purchased property in Ventura County, California, as part of its
planned disposition of the Ahmanson Ranch.
At March 31, 1997, REI, consisting of six projects totaling $66.7
million, were classified as long-term. Other REI, consisting of four projects
totaling $71.5 million, were classified as held for sale. Included in REI
held for sale was the Ahmanson Ranch, which totaled $68.7 million at March 31,
1998. There were no specific impairment allowances recognized on these REI
assets at March 31, 1998 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 $8.9 million for the first quarter of
1998, an increase of $2.5 million, or 39%, from $6.4 million for the first
quarter of 1997, reflecting the amortization of goodwill and core deposit
intangible resulting from the acquisition of Coast.
PROVISION FOR INCOME TAXES. The changes in the provision for income
taxes primarily reflected the changes in pre-tax income between the comparable
periods. The effective tax rates for the first quarter of 1998 and 1997 were
36.8% and 37.6%, respectively, reflecting management's estimate of the
Company's full year tax provision.
FINANCIAL CONDITION
The Company's consolidated assets were $54.5 billion at March 31, 1998,
an increase of $7.8 billion, or 17%, from $46.7 billion at December 31, 1997.
The increase is due mainly to the acquisition of Coast in February 1998, which
added approximately $8.9 billion of assets and $6.4 billion of deposits,
partially offset by a decrease in the loan and MBS portfolio primarily due to
sales of and payments on loans and MBS.
LOAN AND MBS PORTFOLIO
The Company's loan and MBS portfolio was as follows (in thousands):
March 31, 1998 December 31, 1997
-------------- -----------------
Portfolio Portfolio
Balance Balance
----------- -----------
Real estate loans:
Residential loans:
Single family $22,889,290 $18,714,254
Multi-family 10,791,909 9,859,143
Commercial and industrial 1,479,157 1,128,320
----------- -----------
35,160,356 29,701,717
Consumer loans:
Home equity 953,324 860,573
Savings account secured 66,852 65,256
Other 138,869 121,511
----------- -----------
1,159,045 1,047,340
Business banking loans 80,563 65,738
Other loans 27,320 25,862
----------- -----------
Total loans 36,427,284 30,840,657
Deferred loan costs and interest 16,009 11,606
Unearned premiums 25,535 9,279
Allowance for loan losses (480,749) (377,351)
----------- -----------
Loans receivable 35,988,079 30,484,191
MBS 14,347,949 12,791,391
----------- -----------
Total loans and MBS $50,336,028 $43,275,582
=========== ===========
The increase in loans and MBS is due mainly to the acquisition of Coast
loans and MBS totaling $8.1 billion, a majority of which were tied to COFI.
At March 31, 1998, 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 81% of the portfolio secured by properties in
the state. No other state 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 real estate loan and MBS portfolio at March 31, 1998 includes
approximately $6.5 billion in mortgage loans that were originated with loan-
to-value ("LTV") ratios exceeding 80%, or 13% of the portfolio at March 31,
1998. The majority of the higher LTV loans in the portfolio at March 31, 1998
were secured by single family properties. 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.
The Company's primary business continues to be the funding of loans on
residential real estate properties. The Company's loan fundings are
summarized as follows (dollars in thousands):
Three months ended March 31,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Loan Percent of Loan Percent of
Fundings Fundings Fundings Fundings
---------- ---------- ---------- ----------
Real estate loans:
Single family:
Fixed rate $1,321,855 59.6% $ 349,850 30.1%
COFI ARMs 38,167 1.7 82,205 7.1
12 MAT ARMs 245,821 11.1 242,910 20.9
Other Treasury ARMs 20,483 0.9 38,214 3.3
LAMA 63,341 2.9 2,477 0.2
---------- ----- ---------- -----
1,689,667 76.2 715,656 61.6
Multi-family:
Fixed rate 40,336 1.8 4,530 0.4
COFI ARMs 5,908 0.3 26,460 2.3
12 MAT ARMs 149,807 6.7 231,149 19.9
LAMA 47,971 2.2 6,519 0.5
---------- ----- ---------- -----
244,022 11.0 268,658 23.1
Consumer loans:
Home equity 185,281 8.3 85,103 7.3
Savings account secured 23,552 1.1 28,448 2.4
Other 39,461 1.8 50,411 4.3
---------- ----- ---------- -----
248,294 11.2 163,962 14.0
Business banking loans 34,950 1.6 14,693 1.3
---------- ----- ---------- -----
$2,216,933 100.0% $1,162,969 100.0%
========== ===== ========== =====
During the first three months of 1998, approximately 71% of real estate
loan fundings were on properties located in California compared to 70% during
the first three months of 1997.
The Company is continuing to originate consumer loans through its entire
distribution network. The Company began originating business banking loans
through some of its California branches in the fourth quarter of 1996 and was
offering business banking loans at most of its California branches 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 and Market Risk."
At March 31, 1998, the Company was committed to fund the following loans
(dollars in thousands):
March 31, 1998
-------------------------
Outstanding Percent of
Commitments Commitments
----------- -----------
Real estate loans:
Fixed rate $ 378,699 59.8%
COFI ARMs 2,742 0.4
12 MAT ARMs 185,393 29.3
Other Treasury ARMs 3,935 0.6
LAMA 62,362 9.9
---------- -----
$ 633,131 100.0%
========== =====
Consumer loans:
Home equity:
Line of credit $ 616,441 57.3%
Loans 30,454 2.8
Unsecured lines of credit 426,407 39.7
Secured lines of credit 858 0.1
Other 1,341 0.1
---------- -----
$1,075,501 100.0%
========== =====
Business banking loans $ 127,842 100.0%
========== =====
The Company expects to fund such loans from its liquidity sources. It is
likely that some of these loan commitments will expire without being drawn
upon.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
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. The Company manages
various market risks in the ordinary course of business, including interest
rate risk, liquidity risk and credit risk.
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
portfolios. Until late 1996, 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 majority of 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.
Because 12 MAT and LAMA are moving averages of historic interest rates, the
interest rates on 12 MAT ARMs and LAMA loans do not immediately reflect market
interest rate movements. However, the timing and degree of changes in rates
on 12 MAT ARMs and LAMA loans provide a better match than COFI ARMs to the
changes in rates of certain of the Company's interest-costing liabilities, in
part because 12 MAT and LAMA are not normally subject to influences other than
changes in market interest rates. The emphasis on these other ARM loan
products is intended to diversify the interest sensitivity and liquidity
profile of the Company's interest-earning assets. 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 March 31, 1998, approximately 83% of the Company's $50.8
billion gross loan and MBS portfolio consisted of COFI ARMs, unchanged from
the percentage at December 31, 1997. For information regarding the Company's
loan diversification, see "Financial Condition--Loan and MBS Portfolio."
The FIB branch acquisition in the third quarter of 1996 accelerated the
Company's progress in building its portfolio of consumer and business banking
loans which generally earn higher rates of interest and have maturities
shorter than residential real estate loans. The acquisition of Coast will
extend the Company's efforts in these business lines. However, the
origination of consumer and business banking loans involves risks different
from those associated with originating residential real estate loans. For
example, credit risk associated with consumer and business banking 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 business banking 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 business banking 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 lower
costing funding source than other funding sources. At March 31, 1998,
transaction accounts comprised 35% of the deposit base compared to 32% at
March 31, 1997. A portion of this increase is due to the Company's "money
market index account," which was introduced in the third quarter of 1997.
This new product offers depositors some of the liquidity of a transaction
account, with a higher interest rate, but at a lower cost to the Company than
its traditional term accounts. The Company's money market index account
balance was $2.3 billion at March 31, 1998 compared to $1.4 billion at
December 31, 1997. For additional information regarding these and other
transactions, see "Results of Operations--Net Interest Income" and "Financial
Condition--Liquidity and Capital Resources."
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 March 31, 1998 are as follows (dollars in
thousands):
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 $ 775,560 2% $ 773,142 $ - $ 2,418 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (19,020) 19,020 - - -
----------- --- ----------- ----------- ----------- ----------- ----------
Total investment securities 775,560 2 754,122 19,020 2,418 - -
----------- --- ----------- ----------- ----------- ----------- ----------
Loans and MBS
MBS
ARMs 14,024,218 27 13,985,652 38,566 - - -
Other 323,731 1 - - 1,597 - 322,134
Loans
ARMs 33,572,791 65 31,928,452 568,858 760,568 53,297 261,616
Other 2,415,288 5 183,659 - - - 2,231,629
----------- --- ----------- ----------- ----------- ----------- ----------
Total loans and MBS 50,336,028 98 46,097,763 607,424 762,165 53,297 2,815,379
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-earning assets $51,111,588 100% $46,851,885 $ 626,444 $ 764,583 $ 53,297 $2,815,379
=========== === =========== =========== =========== =========== ==========
Interest-costing liabilities:
Deposits
Transaction accounts $13,363,700 27% $13,363,700 $ - $ - $ - $ -
Term accounts 24,999,549 50 15,131,443 7,433,447 2,424,805 9,804 50
----------- --- ----------- ----------- ----------- ----------- ----------
Total deposits 38,363,249 77 28,495,143 7,433,447 2,424,805 9,804 50
----------- --- ----------- ----------- ----------- ----------- ----------
Borrowings
Short-term 2,826,963 6 2,051,963 775,000 - - -
FHLB and other 8,428,298 17 4,809,508 1,977,745 1,325,410 254,767 60,868
Capital securities of
subsidiary trust 148,507 - - - - 148,507 -
----------- --- ----------- ----------- ----------- ----------- ----------
Total borrowings 11,403,768 23 6,861,471 2,752,745 1,325,410 403,274 60,868
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-costing
liabilities $49,767,017 100% $35,356,614 $10,186,192 $ 3,750,215 $ 413,078 $ 60,918
=========== === =========== =========== =========== =========== ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,344,571 $11,495,271 $(9,559,748) $(2,985,632) $ (359,781) $2,754,461
=========== =========== =========== =========== =========== ==========
Cumulative interest sensitivity gap $11,495,271 $ 1,935,523 $(1,050,109) $(1,409,890) $1,344,571
=========== =========== =========== =========== ==========
Percentage of hedge-adjusted
interest-earning assets to
interest-costing liabilities 102.70%
Percentage of cumulative interest
sensitivity gap to total assets 2.47%
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments.
Interest rate swaps and other derivative instruments may be used to manage
interest rates, duration and other credit and market risks. The Company does
not hold or issue derivative financial instruments for trading purposes. The
Company currently utilizes certain off-balance sheet financial instruments,
including forward sales of and options to sell loans and MBS, to help manage
its interest rate exposure with respect to fixed rate loans (or loans with
certain periods at a fixed rate) in its loan origination pipeline and in its
portfolio.
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. As the Company believes that the
derivative financial instrument disclosures contained within the notes to the
consolidated financial statements included in its Annual Report on Form 10-K
for the year 1997 substantially conform with requirements of these amendments,
no interim period disclosure has been provided herein.
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, TDRs and other impaired major loans. Other impaired major loans
are major loans which are less than 90 days delinquent 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 and which may be dependent upon operation and/or sale of the collateral
property for repayment.
The Company's NPAs, troubled debt restructurings ("TDRs") and other
impaired major loans, net of related specific loss allowances, by type as of
the dates indicated were as follows (dollars in thousands):
March 31, December 31, Increase
1998 1997 (Decrease)
------------- ------------ ----------
Nonaccrual loans:
Single family $448,104 $376,421 $ 71,683
Multi-family 44,391 20,631 23,760
Commercial and industrial real estate 23,461 32,171 (8,710)
Consumer 4,020 3,608 412
Business banking 25 67 (42)
-------- -------- --------
Total $520,001 $432,898 $ 87,103
======== ======== ========
REO:
Single family $148,345 $137,114 $ 11,231
Multi-family 23,384 15,657 7,727
Commercial and industrial real estate 11,445 9,669 1,776
-------- -------- --------
Total $183,174 $162,440 $ 20,734
======== ======== ========
Total NPAs:
Single family $596,449 $513,535 $ 82,914
Multi-family 67,775 36,288 31,487
Commercial and industrial real estate 34,906 41,840 (6,934)
Consumer 4,020 3,608 412
Business banking 25 67 (42)
-------- -------- --------
Total $703,175 $595,338 $107,837
======== ======== ========
TDRs:
Single family $168,747 $162,257 $ 6,490
Multi-family 51,792 32,636 19,156
Commercial and industrial real estate 60,366 17,406 42,960
-------- -------- --------
Total $280,905 $212,299 $ 68,606
======== ======== ========
Other impaired major loans:
Multi-family $126,167 $107,814 $ 18,353
Commercial and industrial real estate 19,595 36,816 (17,221)
-------- -------- --------
Total $145,762 $144,630 $ 1,132
======== ======== ========
Ratio of NPAs to total assets 1.29% 1.28%
======== ========
Ratio of NPAs and TDRs to total assets 1.81% 1.73%
======== ========
Ratio of allowances for losses
on loans and REO to NPAs 68.84% 64.07%
======== ========
The Company's NPAs, TDRs and other impaired major loans by state at March
31, 1998 were as follows (in thousands):
NPAs
-----------------------------------------------------------
Real Estate
-----------------------------
Other
Commercial Impaired
Single Multi- and Business Major
Family Family Industrial Consumer Banking Total TDRs Loans
-------- ------- ---------- -------- -------- -------- -------- --------
California $460,677 $65,376 $30,380 $3,792 $25 $560,250 $239,280 $133,278
New York 35,014 655 1,263 - - 36,932 14,521 2,610
Florida 36,398 - - - - 36,398 5,679 -
Texas 8,390 379 - - - 8,769 1,262 1,217
Other 55,970 1,365 3,263 228 - 60,826 20,163 8,657
-------- ------- ------- ------ --- -------- -------- --------
$596,449 $67,775 $34,906 $4,020 $25 $703,175 $280,905 $145,762
======== ======= ======= ====== === ======== ======== ========
Total NPAs were $703.2 million at March 31, 1998, or a ratio of NPAs to
total assets of 1.29%, an increase of $107.9 million, or 18%, during the first
three months of 1998 from $595.3 million, or 1.28% of total assets, at
December 31, 1997. At March 31, 1998, $117.8 million of NPAs related to loans
and REO acquired from Coast. Excluding these NPAs, the Company would have
reported a decline in NPAs of $9.9 million from December 31, 1997 principally
related to the payoff of two commercial and industrial loans.
Single family NPAs were $596.4 million at March 31, 1998, an increase of
$82.9 million, or 16%, during the first three months of 1998 from $513.5
million at December 31, 1997, primarily due to single family NPAs relating to
loans acquired from Coast of $80.5 million. Multi-family NPAs totaled $67.8
million at March 31, 1998, an increase of $31.5 million, or 87%, during the
first three months of 1998 from $36.3 million at December 31, 1997, primarily
due to multi-family NPAs relating to loans acquired from Coast of $22.6
million and other increases in California ($7.6 million). Commercial and
industrial real estate NPAs totaled $34.9 million at March 31, 1998, a
decrease of $6.9 million, or 17%, during the first three months of 1998 from
$41.8 million at December 31, 1997, primarily due to the payoff of two
commercial and industrial loans in California, partially offset by commercial
and industrial NPAs related to loans acquired from Coast of $14.8 million.
TDRs were $280.9 million at March 31, 1998, an increase of $68.6 million,
or 32%, during the first three months of 1998 from $212.3 million at December
31, 1997 primarily due to multi-family and commercial and industrial TDRs
relating to loans acquired from Coast of $30.3 million and $43.0 million,
respectively.
Other impaired major loans at March 31, 1998 were $145.8 million, an
increase of $1.2 million, or less than 1%, during the first three months of
1998 from $144.6 million at December 31, 1997 primarily due to multi-family
loans relating to loans acquired from Coast of $20.6 million, partially offset
by decreases in multi-family loans and commercial and industrial loans of $2.3
million and $17.2 million, respectively.
The recorded investment in all impaired loans was as follows (in
thousands):
March 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investment Losses Investment Investment Losses Investment
---------- --------- ---------- ---------- --------- ----------
With specific allowances $402,804 $73,346 $329,458 $330,412 $55,392 $275,020
Without specific allowances 133,557 - 133,557 103,352 - 103,352
-------- ------- -------- -------- ------- --------
$536,361 $73,346 $463,015 $433,764 $55,392 $378,372
======== ======= ======== ======== ======= ========
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 $70.9 million of single family REO and $14.6 million of multi-
family and commercial and industrial REO in the first three months of 1998.
In the first three months of 1997, the Company sold $108.6 million of single
family REO and $15.8 million of multi-family and commercial and industrial
REO.
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 March 31, 1998. 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 of the 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 (dollars in thousands):
Three Months Ended
March 31,
---------------------
1998 1997
-------- --------
Beginning balance $377,351 $389,135
Allowance for loan losses
acquired from Coast 107,830 -
Provision for loan losses 8,066 24,223
-------- --------
493,247 413,358
-------- --------
Charge-offs:
Single family (10,225) (24,230)
Multi-family (5,840) (9,624)
Commercial and industrial real estate - (239)
Consumer (2,902) (762)
Business banking (328) -
-------- --------
(19,295) (34,855)
-------- --------
Recoveries:
Single family 2,683 7,214
Multi-family 1,079 1,689
Commercial and industrial real estate 3,010 249
Business banking 25 33
-------- --------
6,797 9,185
-------- --------
Net charge-offs (12,498) (25,670)
-------- --------
Ending balance $480,749 $387,688
======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.11% 0.22%
==== ====
The declines in the provision for loan losses and gross charge-offs
during the first quarter of 1998 are due to lower levels of the Company's NPAs
and delinquent loans, excluding Coast related NPAs and delinquent loans. The
continuing improvement in the California economy and California real estate
market has contributed to the significant improvement in the Company's credit
costs.
The allocation of the Company's allowance for loan losses by loan and MBS
category and the allocated allowance as a percent of the loan and MBS category
at the dates indicated are as follows (dollars in thousands):
March 31, 1998 December 31, 1997
--------------------- ---------------------
Allowance Allowance
as Percent as Percent
of Loan of Loan
and MBS and MBS
Allowance Category Allowance Category
--------- ---------- --------- ----------
Single family $207,535 0.56% $174,459 0.55%
Multi-family 187,786 1.74 143,977 1.46
Commercial and industrial real estate 62,652 4.25 40,713 3.62
Consumer 17,976 1.47 13,402 1.21
Business banking 4,800 5.95 4,800 7.28
-------- --------
$480,749 0.95 $377,351 0.86
======== ========
The increase in the allowance for loan losses at March 31, 1998 is due
mainly to the acquisition of Coast. The increase in the allocation of
allowance for loan losses in the multi-family and commercial and industrial
portfolios is due to the increase in NPAs and TDRs in these portfolios related
to loans acquired from Coast. 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 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 an average daily
balance of liquid assets in each calendar quarter of not less than four
percent of either (1) its liquidity base at the end of the preceding quarter,
or (2) the average daily balance of its liquidity base during the preceding
quarter. Home Savings has elected to calculate its average liquidity ratio
using the first method. For March 1998 the average liquidity ratio of Home
Savings was 10.64%.
Each of the Company's sources of liquidity is influenced by various
uncertainties beyond the control of the Company. Scheduled loan payments are
a relatively stable source of funds, while loan prepayments and deposit flows
vary widely in reaction to market conditions, primarily market interest rates.
Asset sales are influenced by general market interest rates and other 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 three months of 1998 cash of $2.1
billion was used to fund loans. Principal payments on loans were $1.5 billion
for the first three months of 1998, an increase of $784.3 million, or 106%,
from $738.9 million for the first three months of 1997. During the first
three months of 1998 the Company sold loans totaling $1.1 billion. At March
31, 1998, the Company had $875.9 million of loans held for sale. The loans
designated for sale included $661.3 million of fixed rate loans, $193.9
million in COFI ARMs and $20.7 million of 12 MAT and other Treasury ARMs.
Loans designated for sale at March 31, 1998 include loans totaling $194.5
million acquired from Coast. For information regarding the Company's loan
sales, see "Results of Operations--Noninterest Income--Gain on Sales of
Loans."
MBS. The Company designates certain MBS as available for sale. At March
31, 1998, the Company had $10.0 billion of MBS available for sale, comprised
of $9.7 billion of ARM MBS and $282.7 million of fixed rate MBS. These MBS
had an unrealized gain of $128.3 million at March 31, 1998. The unrealized
gain is due mainly to temporary market-related conditions and the Company
expects no significant effect on its future interest income.
DEPOSITS. Deposits were $38.4 billion at March 31, 1998, an increase of
$6.1 billion, or 19%, from $32.3 billion at December 31, 1997, mainly due to
the acquisition of Coast in February 1998 with $6.4 billion of deposits.
Excluding this transaction, there was a net deposit outflow of $297.7 million
primarily due to maturities of term accounts which have more sensitivity to
market interest rates than transaction accounts. Term deposits decreased
$996.8 million during the first three months of 1998, while transaction
accounts increased $699.1 million during the same period. The Company manages
its borrowings to balance changes in deposits.
Over the past several years, the Company has focused on enlarging its
presence and enhancing its market share in its key market of California and
has recognized that there are markets where the Company cannot economically
achieve sufficient market share to be an effective competitor. Such focus
resulted in, among other things, the sale of the Company's retail deposit
branch system in New York in 1995, the sale of three retail branches in Texas
in 1996 and, in 1997, the sale of four retail branches in Arizona and 12
retail branches in western Florida. In December 1997, the Company announced a
definitive agreement to sell its remaining 27 Florida branches with deposits
of approximately $3.3 billion at March 31, 1998. The sale is expected to
close in the third quarter of 1998.
At March 31, 1998, 85% of the Company's deposits were in California
compared to 82% at December 31, 1997.
BORROWINGS. Borrowings totaled $11.3 billion at March 31, 1998, an
increase of $426.0 million, or 4%, during the first three months of 1998 from
$10.8 billion at December 31, 1997, reflecting increases in securities sold
under agreements to repurchase of $350.0 million and in FHLB and other
borrowings of $111.9 million, partially offset by a decline in short-term
borrowings of $35.9 million. The net increase in borrowings is mainly due to
the acquisition of Coast in February 1998.
In February 1998, the Company issued a medium term note for $100 million
which will mature on February 21, 2001, bearing an interest rate of 5.88%.
During the first quarter of 1998, medium term notes totaling $130 million
matured. In April 1998, the Company redeemed all of the $57.5 million in 10%
Senior Notes which had been issued by Coast.
CAPITAL. During the first three months of 1998, Ahmanson returned
capital to stockholders by purchasing 406,600 shares of its common stock. On
March 2, 1998, the Company redeemed at par the entire $195 million of its
8.40% Series C Preferred Stock, in accordance with the original terms.
Stockholders' equity was $3.3 billion at March 31, 1998, an increase of
$859.1 million, or 36%, from $2.4 billion at December 31, 1997. The increase
is primarily due to the value of common shares issued to acquire Coast in
February 1998 of approximately $925.1 million, net income of $114.3 million
and an increase of $46.1 million in the net unrealized gain on securities
available for sale, partially offset by the redemption of the Series C
Preferred Stock of $195 million, dividends paid to common and preferred
stockholders of $28.8 million and payments of $24.1 million to purchase the
Company's common stock. The net unrealized gain on securities available for
sale at March 31, 1998 was $77.2 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 their 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 March 31, 1998, Home Savings exceeded the regulatory standards
required to be considered well-capitalized. Home Savings' capital amounts
and ratios at March 31, 1998 were as follows (dollars in thousands):
Well-
Capitalized Capitalized
Amount Ratio Standard
----------- ------- -----------
Tangible capital (to adjusted total assets) $3,178,794 5.96% N/A
Core capital (to adjusted total assets) 3,181,871 5.97 5.00%
Core capital (to risk-weighted assets) 3,181,871 9.28 6.00
Total risk-based capital (to risk-weighted assets) 4,051,438 11.81 10.00
ACCOUNTING DEVELOPMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. SFAS No. 130 establishes standards for reporting of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. For
information regarding comprehensive income, see "Note to the Condensed
Consolidated Financial Statements."
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" as of January 1, 1998. 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 beginning in 1999. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
the Company for its December 31, 1998 financial statements, with comparative
information for earlier years to be restated.
The Company adopted SFAS No. 132, "Employers Disclosures About Pensions
and Other Postretirement Benefits" as of January 1, 1998. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits; requires additional information on changes in the benefit
obligations and fair values of plan assets; and eliminates certain disclosures
required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination of Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 is
effective for the Company for its December 31, 1998 financial statements, with
comparative information for earlier years to be restated.
TAX CONTINGENCY
The Company's financial statements do not contain any benefit related to
the Company's determination 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 March 31, 1998, 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 March 31, 1998 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 IRS field team recently informed the Company of their
intent to request a Technical Advice Memorandum from the IRS National Office
regarding the 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.
HOME SAVINGS GOODWILL LITIGATION
On August 31, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") was enacted. Among other things, FIRREA raised the
minimum capital requirements for savings institutions and required a phase-out
of the amount of supervisory goodwill which could be included in satisfying
certain regulatory capital requirements. The exclusion of supervisory
goodwill from regulatory capital led many savings institutions to either
replace the lost capital by issuing new qualifying debt or equity securities
or reduce assets. On August 31, 1989, Home Savings had supervisory goodwill
totaling $572.0 million resulting from its prior acquisitions of 18 savings
institutions in Florida, Missouri, Texas, Illinois, New York and Ohio. In
September 1992, Home Savings filed a lawsuit against the U.S. government for
unspecified damages involving supervisory goodwill related to its acquisitions
of troubled savings institutions from 1981 to 1988.
In March 1998, the U.S. government conceded that Home Savings had
contracts with the U.S. government and that the U.S. government took actions
that were inconsistent with those contracts. These contracts relate to Home
Savings' purchase of troubled savings institutions in Florida, Missouri, Texas
and Illinois and the purchase of Century Federal Savings of New York, which
resulted in unamortized supervisory goodwill of $374.8 million as of August
31, 1989. The government denied both the existence of additional contracts
and any action inconsistent with a contract in connection with Home Savings'
purchase of savings institutions in Ohio and The Bowery Savings Bank of New
York, which resulted in unamortized supervisory goodwill of $197.2 million as
of August 31, 1989.
The U.S. government's response represents a concession of liability and
is not a concession that Home Savings was damaged by the U.S. government's
breach of contract. In addition, there has been no determination as to the
amount of damages that Home Savings may have sustained as a result of the
breach of contract. Home Savings is continuing to pursue its case with
respect to supervisory goodwill claims including those for The Bowery Savings
Bank and savings institutions in Ohio.
If the proposed merger with Washington Mutual is consummated, Home
Savings' rights in its litigation against the U.S. government will become an
asset of Washington Mutual.
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 to date 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. Approximately $2.8 million has been expensed the
during first quarter of 1998 and $11.6 million for the project in total
through the first quarter of 1998.
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.
11 Statement of Computation of Income per Share.
27 Financial Data Schedule. *
(b) Reports on Form 8-K.
Date of Report Items Reported
January 15, 1998 ITEM 5. OTHER EVENTS.
On January 15, 1998, H. F. Ahmanson & Company
(the "Registrant") issued a press release
reporting its results of operations during the
quarter and year ended December 31, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated January 15, 1997
reporting results of operations during the
quarter and year ended December 31, 1997.
January 27, 1998 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Investor presentation materials to be
used at one or more presentations for analysts
and investors commencing on January 27, 1998.
February 13, 1998 ITEM 5. OTHER EVENTS.
On February 13, 1998, the Registrant issued a
press release announcing that its acquisition
of Coast Savings Financial, Inc., parent
company of Coast Federal Bank, was completed.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated February 13, 1998.
February 20, 1998 ITEM 5. OTHER EVENTS.
On February 20, 1998, the Registrant executed
a Purchase Agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated relating to the
issuance of the Registrant's Medium-Term Notes,
Series A.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
1.1 Purchase Agreement, dated February 20, 1998,
relating to Medium-Term Notes, Series A, by and
between the Registrant and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
March 18, 1998 ITEM 5. OTHER EVENTS.
On March 16, 1998 the Registrant and Washington
Mutual, Inc. ("Washington Mutual") entered into
an agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which the Registrant
will merge with and into Washington Mutual (the
"Merger").
On March 17, 1998, the Registrant issued a press
release announcing that its Board of Directors
had terminated its remaining stock repurchase
program.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
2 Agreement and Plan of Merger, dated as of
March 16, 1998, by and between the Registrant
and Washington Mutual.
4.1 Rights Agreement, dated as of November 7,
1997 between the Registrant and First Chicago
Trust Company of New York, as rights agent.
4.2 Amendment to Rights Agreement, dated as
of March 16, 1998, to Rights Agreement, dated
as of November 7, 1997 between the Registrant
and First Chicago Trust Company of New York,
as rights agent.
10 Stock Option Agreement, dated as of March 16,
1998 by and between the Registrant and
Washington Mutual.
20.1 Joint press release, dated March 17, 1998
20.2 The Registrant's press release, dated
March 17, 1998.
* Filed electronically with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1998 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. 39
27 Financial Data Schedule. *
* Filed electronically with the Securities and Exchange Commission.