FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 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: 39
Total number of sequentially numbered pages: 40
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 .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1998: $.01 par value - 112,747,641 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Registrant, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Registrant believes that the disclosures
are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Registrant's latest annual report on Form 10-K. The results
for the periods covered hereby are not necessarily indicative of the operating
results for a full year.
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
Assets June 30, 1998 December 31, 1997
- ------ ------------- -----------------
Cash and amounts due from banks $ 689,940 $ 603,797
Federal funds sold and securities purchased under
agreements to resell 343,000 550,200
Other short-term investments 11,142 5,110
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Total cash and cash equivalents 1,044,082 1,159,107
Other investment securities held to
maturity [market value
$2,423 (June 30, 1998) and
$2,427 (December 31, 1997)] 2,415 2,421
Other investment securities available for
sale [amortized cost
$12,407 (June 30, 1998) and
$6,440 (December 31, 1997)] 14,040 7,248
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 529,572 411,978
Mortgage-backed securities (MBS)
held to maturity [market value
$4,116,280 (June 30, 1998) and
$4,365,909 (December 31, 1997)] 4,032,604 4,322,579
MBS available for sale [amortized cost
$9,439,028 (June 30, 1998) and
$8,417,188 (December 31, 1997)] 9,664,988 8,468,812
Loans receivable less allowance for losses of
$471,911 (June 30, 1998) and
$377,351 (December 31, 1997) 34,287,923 30,028,540
Loans held for sale [market value
$645,371 (June 30, 1998) and
$461,620 (December 31, 1997)] 638,497 455,651
Accrued interest receivable 234,737 194,038
Real estate held for development and
investment (REI) less allowance for losses of
$93,334 (June 30, 1998) and
$107,773 (December 31, 1997) 136,836 146,518
Real estate owned held for sale (REO)
less allowance for losses of
$9,409 (June 30, 1998) and
$11,400 (December 31, 1997) 154,468 162,440
Premises and equipment 414,868 364,626
Goodwill and other intangible assets 767,541 280,296
Other assets 903,765 674,498
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$52,826,336 $46,678,752
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Liabilities, Capital Securities of Subsidiary Trust
and Stockholders' Equity
- ---------------------------------------------------
Deposits:
Non-interest bearing $ 1,642,045 $ 1,116,050
Interest bearing 35,765,074 31,152,325
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37,407,119 32,268,375
Securities sold under agreements to repurchase 1,650,000 1,675,000
Other short-term borrowings 1,113,000 837,861
FHLB and other borrowings 7,541,270 8,316,405
Other liabilities 1,338,545 954,470
Income taxes 163,866 82,732
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Total liabilities 49,213,800 44,134,843
Company-obligated mandatorily redeemable capital
securities, Series A, of subsidiary trust holding
solely Junior Subordinated Deferrable Interest
Debentures of the Company 148,550 148,464
Stockholders' equity 3,463,986 2,395,445
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$52,826,336 $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 For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
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Interest income:
Loans $ 669,252 $ 575,802 $ 1,302,144 $ 1,153,335
MBS 261,835 259,429 518,434 527,102
Investments 14,095 16,271 27,821 33,168
----------- ----------- ----------- -----------
Total interest income 945,182 851,502 1,848,399 1,713,605
----------- ----------- ----------- -----------
Interest expense:
Deposits 415,547 374,187 803,442 749,326
Short-term borrowings 41,293 42,924 83,025 76,044
FHLB and other borrowings 131,643 126,322 264,383 262,547
----------- ----------- ----------- -----------
Total interest expense 588,483 543,433 1,150,850 1,087,917
----------- ----------- ----------- -----------
Net interest income 356,699 308,069 697,549 625,688
Provision for loan losses 784 17,989 8,850 42,212
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Net interest income after
provision for loan losses 355,915 290,080 688,699 583,476
----------- ----------- ----------- -----------
Noninterest income:
Loss on sales of MBS - (74) - (74)
Gain on sales of loans 12,798 6,137 24,569 14,126
Loan servicing income 16,624 17,078 38,299 33,826
Banking and other retail service fees 30,368 28,525 58,077 57,859
Other fee income 23,253 17,059 42,403 33,440
Gain on sale of retail deposit branch
systems - 41,610 - 57,566
Gain on sales of investment securities 350 135 350 135
Other operating income 3,160 1,322 4,149 3,783
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Total noninterest income 86,553 111,792 167,847 200,661
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and other employee expenses 93,958 84,368 191,656 179,836
Occupancy expenses 26,389 26,647 55,081 53,359
Federal deposit insurance premiums and
assessments 7,757 6,269 14,536 12,818
Other general and administrative expenses 71,927 63,180 155,462 121,224
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Total general and administrative expenses 200,031 180,464 416,735 367,237
Net acquisition costs - 5,475 - 5,475
Operations of REI 1,173 399 854 2,258
Operations of REO 7,620 21,884 15,627 43,992
Amortization of goodwill and other
intangible assets 13,914 6,447 22,797 12,837
----------- ----------- ----------- -----------
Total noninterest expense 222,738 214,669 456,013 431,799
----------- ----------- ----------- -----------
Income before provision for income taxes 219,730 187,203 400,533 352,338
Provision for income taxes 82,400 71,547 148,900 133,589
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Net income $ 137,330 $ 115,656 $ 251,633 $ 218,749
=========== =========== =========== ===========
Net income attributable to common shares:
Basic $ 133,426 $ 107,249 $ 240,743 $ 201,934
Diluted $ 137,330 $ 111,561 $ 248,903 $ 210,559
Income per common share:
Basic $ 1.21 $ 1.11 $ 2.27 $ 2.03
Diluted $ 1.12 $ 1.01 $ 2.09 $ 1.86
Common shares outstanding, weighted average:
Basic 110,544,030 96,602,800 106,117,457 99,559,185
Diluted 123,148,072 110,022,428 119,139,883 113,084,856
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued (Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
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Return on average assets (1) 1.02% 0.96% 0.97% 0.90%
Return on average equity (1) 16.50% 19.32% 16.36% 18.27%
Return on average tangible equity (1),(2) 21.86% 21.54% 20.72% 20.42%
Efficiency ratio (1), (3) 46.85% 48.68% 49.83% 48.91%
<FN>
(1) The following table summarizes the returns on average assets, average equity and average
tangible equity and the efficiency ratio excluding certain gains and expenses. The three
months ended June 30, 1997 excludes the after-tax effects of the gain on sales of the West
Florida retail deposit branch system of $24.6 million and net acquisition costs of $3.2
million. The six months ended June 30, 1998 excludes the after-tax effects of the Coast
charge of $13.7 million. The six months ended June 30, 1997 excludes the after-tax effects
of the gains on sales of the Arizona and West Florida retail deposit branches of $34.1
million and net acquisition costs of $3.2 million.
</FN>
For the Six Months Ended
For the Three June 30,
Months Ended ------------------------
June 30, 1997 1998 1997
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Return on average assets 0.78% 1.02% 0.77%
Return on average equity 15.89% 17.20% 15.90%
Return on average tangible equity (2) 17.86% 21.71% 17.89%
Efficiency ratio (3) 48.68% 47.06% 48.91%
<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 Six Months Ended
June 30,
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1998 1997
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Cash flows from operating activities:
Net income $ 251,633 $ 218,749
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest capitalized on loans (negative amortization) (29,900) (38,124)
Provision for losses on loans and real estate 17,703 60,343
Depreciation and amortization 67,371 50,444
Proceeds from sales of loans originated for sale 2,697,727 1,667,394
Loans originated for sale (2,699,094) (679,189)
Loans repurchased from investors (22,912) (33,195)
Increase in other liabilities 251,595 124,380
Other, net (39,733) (64,252)
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Net cash provided by operating activities 494,390 1,306,550
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Cash flows from investing activities:
Principal payments on loans 3,780,067 1,661,649
Principal payments on MBS 1,236,354 672,134
Loans originated for investment (net of refinances) (2,292,215) (1,728,924)
Cash and cash equivalents from Coast acquisition 399,591 -
Purchase Great Western stock - (163,974)
Proceeds from sale of Great Western common stock - 181,610
Proceeds from sales of REO 176,130 241,502
Other, net (29,816) 109,511
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Net cash provided by investing activities 3,270,111 973,508
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Cash flows from financing activities:
Net decrease in deposits (1,259,847) (864,382)
Deposits sold - (1,167,693)
Increase (decrease) in borrowings maturing in 90 days or less (1,575,214) 263,844
Proceeds from other borrowings 3,308,777 3,377,761
Repayment of other borrowings (4,111,208) (4,178,872)
Redemption of Preferred Stock, Series C (195,000) -
Common stock purchased for treasury (24,082) (210,048)
Dividends to stockholders (57,250) (60,656)
Other, net 34,298 13,519
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Net cash used in financing activities (3,879,526) (2,826,527)
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Net decrease in cash and cash equivalents (115,025) (546,469)
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 $ 1,044,082 $ 897,391
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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 second quarter ended June 30, 1998 and 1997
totaled $194.5 million and $225.8 million, respectively, and for the six
months ended June 30, 1998 and 1997 totaled $354.9 million and $281.9
million, respectively. Accumulated other comprehensive income at June 30,
1998 totaled $134.4 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, 1.68 shares of Washington Mutual common stock (adjusted from
the original exchange ratio of 1.12 shares to account for the effect of
Washington Mutual's 3-for-2 stock split that was effective on June 1, 1998)
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. As of
June 30, 1998, the exchange ratio would have produced a value of $72.98 for
each share of Ahmanson common stock based on the closing price of Washington
Mutual common stock of $43.44. 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. On July 20, 1998, the OTS deemed that the application for merger
approval was informationally complete but had not yet approved or disapproved
the application. Stockholder meetings to vote on approval of the merger have
been scheduled for August 28, 1998 by Ahmanson and Washington Mutual.
FINANCIAL RESULTS
Net income for the second quarter of 1998 was $137.3 million, or $1.12
per diluted common share, compared to $115.7 million, or $1.01 per diluted
common share, for the second quarter of 1997. The results for the second
quarter of 1997 include an after-tax gain of $24.6 million, or $0.22 per
diluted share, resulting from the sale of Home Savings' deposit branch system
on the West Coast of Florida (the "West Florida gain"), and a net after-tax
cost of $3.2 million, or $0.03 per diluted share, as a result of the Company's
proposed merger with Great Western Financial Corporation (the "net acquisition
costs"). That proposal was withdrawn on June 4, 1997. Excluding the West
Florida gain and the net acquisition costs in the second quarter of 1997, net
income would have been $94.3 million or $0.82 per diluted common share.
Return on average equity ("ROE") for the second quarter of 1998 was 16.5%,
compared to 19.3% for the second quarter of 1997. Excluding the West Florida
gain and the net acquisition costs, ROE would have been 15.9% in the second
quarter of 1997.
Net income for the first six months of 1998 was $251.6 million, or $2.09
per diluted common share, compared to $218.7 million, or $1.86 per diluted
common share, for the first six months of 1997. The results for the first six
months of 1998 include an after-tax transaction-related charge (the "Coast
charge") of $13.7 million, or $0.11 per diluted common share, associated with
the acquisition of Coast Savings Financial, Inc. ("Coast"), which was
consummated on February 13, 1998. The results for the first six months of
1997 include an after-tax gain of $9.5 million, or $0.08 per diluted common
share, resulting from the sale of Home Savings' deposit branches in Arizona
(the "Arizona gain"), as well as the West Florida gain and net acquisition
costs (the "1997 items"). Excluding the Coast charge, net income for the
first six months of 1998 would have been $265.3 million, or $2.20 per diluted
common share. Excluding the 1997 items, net income for the first six months
of 1997 would have been $187.9 million, or $1.59 per diluted common share.
ROE for the first six months of 1998 was 16.4%, compared to 18.3% for the
first six months of 1997. Excluding the Coast charge and the 1997 items, ROE
for the first six months of 1998 and 1997 would have been 17.2% and 15.9%,
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 second quarter of 1998 and 1997 was $147.3
million and $119.5 million, respectively, and for the six months ended June
30, 1998 and 1997, was $267.4 million and $226.3 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 ("ROA") and cash return on average tangible equity (cash ROE)
and the comparable reported data were as follows:
Cash Reported
----------------- -----------------
For the Three For the Three
Months Ended Months Ended
June 30, June 30,
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1998 1997 1998 1997
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Net income per diluted common share $ 1.20 $ 1.05 $ 1.12 $ 1.01
ROA 1.12% 1.00% 1.02% 0.96%
ROE 21.86% 21.54% 16.50% 19.32%
Excluding the West Florida gain:
Net income per diluted common share $ 1.20 $ 0.85 $ 1.12 $ 0.82
ROA 1.12% 0.82% 1.02% 0.78%
ROE 21.86% 17.86% 16.50% 15.89%
Cash Reported
----------------- -----------------
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income per diluted common share $ 2.20 $ 1.93 $ 2.09 $ 1.86
ROA 1.04% 0.94% 0.97% 0.90%
ROE 20.72% 20.42% 16.36% 18.27%
Excluding the Coast charge and the 1997 items:
Net income per diluted common share $ 2.34 $ 1.66 $ 2.20 $ 1.59
ROA 1.09% 0.81% 1.02% 0.77%
ROE 21.71% 17.89% 17.20% 15.90%
RESULTS OF OPERATIONS
Net interest income was $356.7 million for the second quarter of 1998,
compared to $308.1 million for the second quarter of 1997 and $340.9 million
for the first quarter of 1998, and was $697.5 million for first six months of
1998, compared to $625.7 million for the first six months of 1997. The
increase in net interest income was a result of an increase in interest-
earning assets, due to the Coast acquisition, and a wider net interest margin.
The average net interest margin was 2.80% for the second quarter of 1998,
compared to 2.66% for the second quarter of 1997 and 2.77% for the first
quarter of 1998, and was 2.79% for the first six months of 1998 compared to
2.65% for the first six months of 1997.
Noninterest income was $86.6 million for the second quarter of 1998, a
decrease of $25.2 million, or 23%, from the $111.8 million for the second
quarter of 1997 and an increase of $5.3 million, or 7%, from the $81.3 million
for the first quarter of 1998. Noninterest income for the first six months of
1998 was $167.8 million, compared to $200.7 million for the first six months
of 1997. The 1997 results include the West Florida and Arizona gains.
Excluding the West Florida gain, noninterest income would have been $70.2
million for the second quarter of 1997. Excluding the West Florida and
Arizona gains, noninterest income would have been $143.1 million for the first
six months of 1997.
During the second quarter of 1998, the Company had a gain on sales of
loans of $12.8 million, compared to gains of $6.1 million and $11.8 million in
the second quarter of 1997 and first quarter of 1998, respectively. The
increased gain on sales resulted from the funding and sale of a greater number
of fixed rate residential loans originated for sale. During the second
quarter of 1998, the Company funded $2.2 billion of single family residential
mortgage loans, 63% of which were fixed rate loans originated for sale.
During the second quarter of 1998, banking and other retail service fees
and other fee income was $53.6 million, compared to $45.6 million for the
second quarter of 1997 and $46.9 million for the first quarter of 1998. Total
banking and other retail service fees and other fee income in the second
quarter of 1998 reflects higher banking and loan fees as a result of the
addition of the Coast customer base to the existing Home Savings network and
increased fee income from the sales of nondeposit products by Griffin
Financial Services.
General and administrative ("G&A") expenses were $200.0 million for the
second quarter of 1998, compared to $180.5 million for the second quarter of
1997 and $216.7 million for the first quarter of 1998, and were $416.7 million
for the first six months of 1998, compared to $367.2 million for the first six
months of 1997. Excluding the pre-tax Coast charge of $23.2 million related
to severance, the closure and consolidation of certain Coast and Home Savings
branches, data processing conversion costs and other integration costs, such
as, customer retention and marketing programs, G&A expenses would have been
$193.5 million and $393.5 million for the first quarter and first six months
of 1998, respectively. The increase in G&A expenses reflects the additional
expenses associated with the acquired Coast branch network. By the end of the
second quarter of 1998, the Company realized substantially all of the expected
cost savings from the Coast acquisition.
The efficiency ratio, defined by the Company as G&A expenses as a
percentage of net interest income, loan servicing and other fee income, was
46.9% in the second quarter of 1998, compared to 48.7% and 52.9% in the second
quarter of 1997 and the first quarter of 1998, respectively, and for the first
six months of 1998, the Company's efficiency ratio was 49.8%, compared to
48.9% for the first six months of 1997. Excluding the Coast charge, the
efficiency ratio would have been 47.3% and 47.1% for the first quarter and
first six months of 1998, respectively.
CREDIT COSTS/ASSET QUALITY
Credit costs, consisting of the provision for loan losses plus the
expenses for the operations of foreclosed real estate ("REO") continued their
improving trend in the second quarter of 1998 as a result of the California
economy. Credit costs declined by 48% from the first quarter of 1998 and 79%
from the second quarter of 1997. Credit costs were $8.4 million for the
second quarter of 1998, compared to $39.9 million for the second quarter of
1997 and $16.1 million for the first quarter of 1998. Net loan charge-offs
for the second quarter of 1998 totaled $9.6 million, compared to $17.4 million
for the second quarter of 1997 and $12.5 million for the first quarter of
1998. Approximately $5.2 million of the second quarter 1998 charge-offs were
from previously established specific reserves.
During the second quarter, nonperforming assets ("NPAs") declined by
$59.0 million, to $644.2 million, and were 1.22% of total assets at June 30,
1998, compared to $703.2 million, or 1.29%, at March 31, 1998. The $644.2
million of NPAs at June 30, 1998, which includes the effect of the Coast
acquisition, was $46.3 million lower than the $690.5 million at June 30, 1997,
which did not include any Coast related NPAs. Loans classified as troubled
debt restructurings ("TDRs") were $262.5 million at June 30, 1998. The ratio
of NPAs and TDRs to total assets was 1.72% at June 30, 1998, compared to 1.90%
at June 30, 1997.
At June 30, 1998, the allowances for loan losses and REO were $471.9
million and $9.4 million, respectively. The ratio of allowances for losses to
NPAs was 73.6% at June 30, 1998, compared to 57.8% at June 30, 1997 and 68.8%
at March 31, 1998.
LOAN FUNDINGS
During the second quarter of 1998, the Company funded $2.9 billion in
loans compared to $1.4 billion in the second quarter of 1997 and $2.2 billion
in the first quarter of 1998.
The Company funded $2.6 billion of residential mortgage loans in the
second quarter of 1998, compared to $1.1 billion in the second quarter of 1997
and $1.9 billion in the first quarter of 1998. All mortgage loans were funded
through the Company's retail franchise. The $2.6 billion of real estate
mortgage loans funded during the second quarter of 1998 consisted of $1.5
billion in fixed rate loans, substantially all of which were sold into the
secondary market, and $1.1 billion of adjustable rate mortgages ("ARMs") which
are being held in portfolio.
The ARM fundings during the second quarter of 1998 were offset by an
increase in prepayments as borrowers took advantage of lower interest rates to
refinance into fixed rate loans. The computed prepayment rate ("CPR") of
loans for a period is defined by the Company as loan principal payments
received during such period in excess of the normal scheduled principal
payments, expressed as an annualized percentage of the principal balance of
such loans at the beginning of the period. The CPR is based on the Company's
historical data and is not a projection of future prepayments. The Company's
three month and twelve month CPRs at June 30, 1998 for loans indexed to the
Eleventh District Cost of Funds increased to 22% and 16%, respectively, from
14% and 12%, respectively, at December 31, 1997.
The Company also funded $306.8 million in consumer loans during the
second quarter of 1998, compared to $224.4 million in the second quarter of
1997, and $248.3 million in the first quarter of 1998. In June 1998, the
Company funded $108.6 million in consumer loans, its highest month ever. The
consumer loan portfolio totaled $1.3 billion at June 30, 1998.
CAPITAL
At June 30, 1998, Home Savings' capital ratios exceeded the regulatory
requirements for an institution to be rated as "well-capitalized," the highest
regulatory standard.
On July 16, 1998 the Company announced that it is redeeming its 6%
Cumulative Convertible Preferred Stock, Series D, at $51.50 per Depositary
Share, plus accrued and unpaid dividends to and including the redemption date.
Each Depositary Share is convertible into 2.05465 shares of the Company's
common stock at any time prior to the close of business on August 24, 1998.
The redemption date is set for September 1, 1998.
SALE OF EAST FLORIDA BRANCHES
The sale of the Company's 27 East Coast Florida branches, with $3.2
billion in deposits, was consummated on July 16, 1998 for an after-tax gain of
approximately $165 million. That gain will be reflected in the third quarter
1998 results.
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 $356.7 million in the second quarter of 1998, an
increase of $48.6 million, or 16%, from $308.1 million for the second quarter
of 1997 and was $697.5 million for the first six months of 1998, an increase
of $71.8 million, or 11%, from $625.7 million for the first six months 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.
Three Months Ended June 30,
--------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- -------- ------- ----------- -------- -------
(dollars in thousands)
Interest-earning assets:
Loans $35,918,112 $669,252 7.45% $31,111,587 $575,802 7.40%
MBS 13,989,423 261,835 7.49 14,141,655 259,429 7.34
----------- -------- ----------- --------
Total loans and MBS 49,907,535 931,087 7.46 45,253,242 835,231 7.38
Investment securities 787,208 14,095 7.18 974,052 16,271 6.70
----------- -------- ----------- --------
Interest-earning assets 50,694,743 945,182 7.46 46,227,294 851,502 7.37
-------- --------
Other assets 2,920,309 1,874,118
----------- -----------
Total assets $53,615,052 $48,101,412
=========== ===========
Interest-costing liabilities:
Deposits $38,008,434 415,547 4.39 $33,946,754 374,187 4.42
----------- -------- ----------- --------
Borrowings:
Short-term 2,775,559 41,293 5.97 2,982,506 42,924 5.77
FHLB and other borrowings 8,024,170 128,465 6.42 7,741,443 123,145 6.38
Trust capital securities 148,522 3,178 8.52 148,350 3,177 8.53
----------- -------- ----------- --------
Total borrowings 10,948,251 172,936 6.34 10,872,299 169,246 6.24
----------- -------- ----------- --------
Interest-costing liabilities 48,956,685 588,483 4.82 44,819,053 543,433 4.86
-------- --------
Other liabilities 1,329,115 888,383
Stockholders' equity 3,329,252 2,393,976
----------- -----------
Total liabilities and
stockholders' equity $53,615,052 $48,101,412
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,738,058 2.64 $ 1,408,241 2.51
=========== ===========
Net interest income/
Net interest margin $356,699 2.80 $308,069 2.66
======== ========
Six Months Ended June 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ------- ----------- ---------- --------
(dollars in thousands)
Interest-earning assets:
Loans $34,812,952 $1,302,144 7.48% $31,345,058 $1,153,335 7.36%
MBS 13,796,178 518,434 7.52 14,305,395 527,102 7.37
----------- ---------- ----------- ----------
Total loans and MBS 48,609,130 1,820,578 7.49 45,650,453 1,680,437 7.36
Investment securities 793,122 27,821 7.07 978,941 33,168 6.83
----------- ---------- ----------- ----------
Interest-earning assets 49,402,252 1,848,399 7.49 46,629,394 1,713,605 7.35
--------- ----------
Other assets 2,637,125 1,932,551
----------- -----------
Total assets $52,039,377 $48,561,945
=========== ===========
Interest-costing liabilities:
Deposits $36,706,407 803,442 4.41 $34,306,517 749,326 4.40
----------- --------- ----------- ----------
Borrowings:
Short-term 2,696,028 83,025 6.21 2,644,764 76,044 5.80
FHLB and other 8,212,200 258,027 6.34 8,167,447 256,190 6.33
Trust capital securities 148,501 6,356 8.52 148,356 6,357 8.53
----------- --------- ----------- ----------
Total borrowings 11,056,729 347,408 6.34 10,960,567 338,591 6.23
----------- --------- ----------- ----------
Interest-costing liabilities 47,763,136 1,150,850 4.86 45,267,084 1,087,917 4.84
--------- ----------
Other liabilities 1,199,144 900,229
Stockholders' equity 3,077,097 2,394,632
----------- -----------
Total liabilities and
stockholders' equity $52,039,377 $48,561,945
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,639,116 2.63 $ 1,362,310 2.51
=========== ===========
Net interest income/
Net interest margin $ 697,549 2.79 $ 625,688 2.65
========== ==========
Net interest income includes the effect of provisions for losses on
delinquent interest of $4.6 million and $6.3 million for the second quarter of
1998 and 1997, respectively, related to nonaccrual loans. The provisions had
the effect of reducing the net interest margin by four basis points and five
basis points in the respective periods. Such provisions were $11.2 million
and $14.3 million for the first six months of 1998 and 1997, respectively,
reducing net interest margin by five and six basis points for the first six
months of 1998 and 1997, respectively.
The following table presents the changes for the second quarter and first
six months of 1998 from the comparative periods 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 June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1998 Versus 1997 1998 Versus 1997
Increase/(Decrease) Due to Increase/(Decrease) Due to
--------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
--------- -------- --------- --------- -------- ---------
(in thousands)
Interest income on:
Loans $ 89,534 $ 3,916 $ 93,450 $129,696 $19,113 $148,809
MBS (2,677) 5,083 2,406 (20,241) 11,573 (8,668)
Investments (3,474) 1,298 (2,176) (6,562) 1,215 (5,347)
-------- ------- -------- -------- ------- --------
Total interest income 83,383 10,297 93,680 102,893 31,901 134,794
-------- ------- -------- -------- ------- --------
Interest expense on:
Deposits 43,847 (2,487) 41,360 52,413 1,703 54,116
Short-term borrowings (3,259) 1,628 (1,631) 1,502 5,479 6,981
FHLB and other borrowings 4,541 779 5,320 1,426 411 1,837
Trust capital securities 5 (4) 1 6 (7) (1)
-------- ------- -------- -------- ------- --------
Total interest expense 45,134 (84) 45,050 55,347 7,586 62,933
-------- ------- -------- -------- ------- --------
Net interest income $ 38,249 $10,381 $ 48,630 47,546 24,315 71,861
======== ======= ======== ======== ======= ========
The yield on a majority of the Company's interest-earning assets adjust
monthly based on changes in the monthly weighted average cost of funds of
savings institutions headquartered in the Federal Home Loan Bank System
Eleventh District, which comprises California, Arizona and Nevada, as computed
by the Federal Home Loan Bank ("FHLB") of San Francisco ("COFI"). COFI is
currently announced on the last business day of the month following the month
in which such cost of funds was incurred. The Company's ARMs which adjust
based upon changes in COFI ("COFI ARMs") generally commence accruing interest
at the newly announced rate plus the contractual loan factor at the next
payment due date following such announcement.
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 Company believes that 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.
Net interest income in the second quarter of 1998 increased by $48.6
million, or 16%, compared with the second quarter of 1997 as a result of
increases in both the average balance of interest-earning assets and the net
interest margin. Average interest-earning assets were $4.5 billion higher in
the second quarter of 1998 than the comparable period of 1997 due to the
acquisition of approximately $8.1 billion of interest-earning assets from
Coast in February of 1998. Without the addition of the Coast interest-earning
assets, the Company would have experienced a decrease in interest-earning
assets as a result of paydowns on loans and MBS in excess of the loans
originated by the Company for its portfolio. The decrease in fixed rate
mortgage interest rates beginning in the fourth quarter of 1997 and continuing
through the second quarter of 1998 significantly influenced the Company's
ability to maintain its portfolio asset size due to high levels of prepayments
by borrowers converting primarily into fixed rate mortgages. While the Company
enjoyed the benefits of higher loan originations resulting from significant
refinancing activity and an increase in the home purchase market, 63% of its
single family originations in the second quarter of 1998 were fixed rate loans
which the Company normally sells in the secondary market rather than retain in
its portfolio.
In the second quarter of 1998 the Company's net interest margin increased
to 2.80% from 2.66% in the second quarter of 1997 and 2.77% in the first
quarter of 1998. Despite the decrease in general market interest rates, the
Company's yield on its loan and MBS portfolios increased by eight basis points
in the second quarter of 1998 compared with the second quarter of 1997. This
increase was primarily the result of an increase in the real estate loan and
MBS portfolio yield attributable to an increase in the average Eleventh
District FHLB COFI in the second quarter of 1998 compared with the second
quarter of 1997. The increase in the three month average of COFI between the
respective second quarters, despite general decreases in market interest
rates, reflects the inherent lag in calculating and reporting COFI by the
FHLB. Despite the Company's emphasis on originating non-COFI indexed loans
during the last two years, approximately 84% of the real estate loan and MBS
portfolio as of June 30, 1998 were indexed to COFI. Over 90% of the loans and
MBS added in the Coast acquisition were indexed to COFI.
The Company's net interest margin also benefited in the second quarter of
1998 by a reduction in the overall rate paid on interest-costing liabilities.
The average cost of liabilities in the second quarter of 1998 decreased by
four basis points compared with the second quarter of 1997 due primarily to an
increase in the proportion of funding from deposits, which generally have
interest rates lower than those of borrowed funds. Additionally, excess
interest-earning assets increased in the second quarter of 1998 by $329.8
million compared with the second quarter of 1997. The discontinuance of the
Company's stock repurchase program, the stock issued in connection with the
Coast acquisition and the retention of earnings not paid as dividends were all
contributing factors to the increase in equity and the corresponding increase
in excess interest-earning assets between the respective second quarters of
1998 and 1997. The net interest margin will be affected by the sale of the
East Florida branches as the Company replaces the deposits sold with wholesale
borrowed funds. Deposits comprised 78% of interest-costing liabilities at
June 30, 1998 and is estimated to comprise approximately 72% after the sale of
the East Florida branches.
Net interest income increased by $71.9 million, or 11%, for the first six
months of 1998 compared to the same period of 1997. The increase for the six
month period resulted from increases in interest-earning assets in 1998 as a
result of the Coast acquisition and an increase in the net interest margin to
2.79% for the first six months of 1998 compared to 2.65% for the same period
of 1997. For the first six months of 1998 the average yield on loans and MBS
increased by 13 basis points and the average rate paid on interest-costing
liabilities increased by two basis points. Loan and MBS yields were higher in
the first six months of 1998 compared with the first six months of 1997 as a
result of an increase in the average COFI, to which a substantial portion of
all the loan and MBS portfolios are still indexed. The net interest margin
for the first six months of 1998 also benefited from an increase of $276.8
million in excess interest-earning assets compared to the first six months of
1997.
At June 30, 1998, 95% of the Company's loan and MBS portfolio were ARMs,
including 81% which were COFI ARMs. At December 31, 1997, 95% were ARMs,
including 83% which were COFI ARMs. The Company believes that its net
interest income growth in 1998 was constrained by the interest rate
environment of the last six to nine month period. The relatively flat yield
curve and the resulting narrow range between short-term and long-term rates on
the yield curve have contributed to the compression of the spread between
asset yields and funding costs. Due to the low interest rates recently
available on fixed rate mortgage loans and the narrow range between short-term
and long-term interest rates (frequently referred to as a flat yield curve),
borrowers have been displaying a preference for fixed rate mortgage loans
compared to ARMs. This preference has been manifested by prepayments of ARMs
in the Company's portfolio by borrowers refinancing into fixed rate mortgage
loans (which the Company generally does not retain in its portfolio) and by
difficulty in originating new ARMs. In response, the Company periodically has
made pricing concessions on certain of its ARM products.
The Company may experience further margin compression should the yield
curve become even flatter or if further increases in market rates are not
immediately reflected in the yields on the Company's adjustable and fixed rate
assets or if 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 $0.8
million for the second quarter of 1998, a decrease of $17.2 million, or 96%,
from $18.0 million for the second quarter of 1997. The provision for loan
losses was $8.9 million for the first six months of 1998, a decrease of $33.3
million, or 79% from $42.2 million for the first six months 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 $7.6 million for
the second quarter of 1998, a decrease of $14.3 million, or 65%, from losses
of $21.9 million for the second quarter of 1997. The decrease was due to
declines in operating costs of $7.8 million, losses on sale of REO of $3.9
million and provision for REO losses of $2.6 million. Losses from operations
of REO were $15.6 million for the first six months of 1998, a decrease of
$28.4 million, or 65%, from losses of $44.0 million for the first six months
of 1997. The decrease was due to declines in operating costs of $13.7
million, losses on sale of REO of $8.4 million and provision for REO losses of
$6.3 million. For additional information regarding REO, see "Financial
Condition--Asset Quality--NPAs and Potential Problem Loans."
NONINTEREST INCOME
GAIN ON SALES OF LOANS. During the second quarter of 1998 and 1997 and
the first six months of 1998 and 1997, the Company sold loans and recognized
gains on sales of loans as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Book value of loans sold:
Fixed rate $1,590,337 $ 496,306 $2,626,413 $ 736,556
COFI ARMs - 550,581 147 864,606
12 MAT and other Treasury ARMs 19,620 23,228 45,970 50,106
LAMA - - 625 _
---------- ---------- ---------- ----------
$1,609,957 $1,070,115 $2,673,155 $1,651,268
========== ========== ========== ==========
Pre-tax gain (loss) on sales of loans:
Fixed rate $ 12,643 $ (2,009) $ 24,223 $ 3,116
COFI ARMs - 7,904 22 10,268
12 MAT and other Treasury ARMs 155 242 317 742
LAMA - - 7 -
---------- ---------- ---------- ----------
$ 12,798 $ 6,137 $ 24,569 $ 14,126
========== ========== ========== ==========
The Company intends to continue selling 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
interest rate, loan term, the state where the collateral is located and
collateral type. MSR totaling $27.3 million and $17.2 million were
capitalized in the first six months 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 six months of 1997. There was no addition to the
valuation allowance in the first six months of 1998 and no charge-offs against
this valuation allowance during the first six months of 1998 and 1997. The
valuation allowance for MSR impairment was $5.5 million as of June 30, 1998.
LOAN SERVICING INCOME. Loan servicing income was $16.6 million for the
second quarter of 1998, a decrease of $0.5 million, or 3%, from $17.1 million
for the second quarter of 1997 and was $38.3 million for the first six months
of 1998, an increase of $4.5 million, or 13%, from $33.8 million for the first
six months of 1997. The increase for the first six months 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 June 30, 1998, the portfolio of loans serviced
for investors was $17.0 billion with a gross retained spread of 0.67% compared
to the $14.4 billion portfolio and 0.67% gross retained spread at June 30,
1997. Approximately $3.1 billion of loans serviced for investors were
acquired from Coast.
FEE INCOME. Total fee income, consisting of banking and other retail
service fees plus other fee income, was $53.6 million for the second quarter
of 1998, an increase of $8.0 million, or 18%, from $45.6 million for the
second quarter of 1997 and was $100.5 million for the first six months of
1998, an increase of $9.2 million, or 10%, from $91.3 million for the first
six months of 1997.
Banking and other retail service fees were $30.4 million for the second
quarter of 1998, an increase of $1.9 million, or 7%, from $28.5 million for
the second quarter of 1997 and were $58.1 million for the first six months of
1998, an increase of $0.2 million, or less than 1%, from $57.9 million for the
first six months of 1997. Both the second quarter of 1998 and the first six
months of 1998 benefited from the Coast acquisition which was partially offset
by the loss of fee income from the sale of the Arizona and West Florida retail
branches. The increase in the second quarter of 1998 was due to an increase
of $1.9 million in service charges on deposit accounts.
Fee income from other services was $23.3 million for the second quarter
of 1998, an increase of $6.2 million, or 36%, from $17.1 million for the
second quarter of 1997. The increase was primarily due to increases of $3.3
million in mortgage-related fees, due partially to the increase in loan
prepayments, $2.0 million in commissions on the sales of investment and
insurance products and services and $0.6 million in debit card-related fees.
Fee income from other services was $42.4 million for the first six months of
1998, an increase of $9.0 million, or 27%, from $33.4 million for the first
six months of 1997. The increase was primarily due to increases of $5.5
million in mortgage-related fees, due partially to the increase in loan
prepayments, $2.0 million in commissions on the sales of investment and
insurance products and services and $1.0 million in debit card-related fees.
GAIN ON SALE OF RETAIL DEPOSIT BRANCH SYSTEMS. In March 1997, the
Company sold deposits of $251.4 million and branch premises in Arizona
resulting in a pre-tax gain of $16.0 million. In June 1997, the Company sold
deposits of $916.3 million and branch premises on the West Coast of Florida
resulting in a pre-tax gain of $41.6 million. The gains were net of expenses
associated with the sales.
NONINTEREST EXPENSE
GENERAL & ADMINISTRATIVE EXPENSES. G&A expenses were $200.0 million for
the second quarter of 1998, an increase of $19.5 million, or 11%, from $180.5
million for the second quarter of 1997 and were $416.7 million for the first
six months of 1998, an increase of $49.5 million, or 13%, from $367.2 million
for the first six months. The increase in G&A expenses reflects a higher
volume of operating expenses associated with the net addition of 40 Coast
branches. In addition, the increase in G&A expenses in the first six months
of 1998 also reflects pre-tax Coast charges of $23.2 million related to
severance, the closure and consolidation of certain Home Savings branches,
data processing conversion costs, and other integration costs, including
customer retention and marketing programs, recognized in connection with the
acquisition of Coast. The following table presents the activity and remaining
balance of the Coast acquisition related restructuring reserves (in
thousands):
Reserve Activity Between Reserve
Balance at April 1 and Balance at
March 31, 1998 June 30, 1998 June 30, 1998
-------------- ---------------- -------------
Severance and
employee benefits $ 1,196 $ 893 $ 303
Occupancy 3,335 339 2,996
Equipment 2,351 2,351 -
Data processing
conversion costs 5,406 2,288 3,118
Other integration costs 10,871 8,709 2,162
------- ------- ------
$23,159 $14,580 $8,579
======= ======= ======
Management believes the restructuring reserve balance at June 30, 1998 is
adequate.
The efficiency ratio was 46.9% for the second quarter of 1998 compared to
48.7% for the second quarter of 1997 and was 49.8% for the first six months of
1998 compared to 48.9% for the first six months of 1997. Excluding the Coast
charges in the first six months of 1998, the efficiency ratio would have been
47.1%.
NET ACQUISITION COSTS. The Company incurred net pre-tax costs of $5.5
million in the second quarter of 1997 related to its unsuccessful proposal to
acquire Great Western Financial Corporation. Approximately $23.1 million of
legal, printing, advisory and other expenses were incurred, partially offset
by a $17.6 million gain on the sale of 3.6 million shares of Great Western
Financial Corporation common stock purchased in connection with the proposal.
OPERATIONS OF REI. Losses from operations of REI were $1.2 million for
the second quarter of 1998, an increase of $0.8 million from losses of $0.4
million for the second quarter of 1997 due mainly to higher operating
expenses. Losses from operations of REI were $0.9 million for the first six
months 1998, a decrease of $1.4 million, or 61%, from $2.3 million for the
first six months of 1997 due primarily to declines of $2.0 million in
provision of losses and $0.5 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 June 30, 1998, REI, consisting of six projects totaling $66.4 million,
were classified as long-term. Other REI, consisting of three projects
totaling $70.4 million, were classified as held for sale. Included in REI
held for sale was the Ahmanson Ranch, which totaled $68.6 million at June 30,
1998. There were no specific impairment allowances recognized on these REI
assets at June 30, 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 $13.9 million for the second quarter
of 1998, an increase of $7.5 million from $6.4 million for the second quarter
of 1997, and was $22.8 million for the first six months of 1998, an increase
of $10.0 million, or 78%, from $12.8 million for the first six months 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 second quarter of 1998 and 1997 were
37.5% and 38.2%, respectively, and for the first six months of 1998 and 1997
were 37.2% and 37.9%, respectively, reflecting management's estimate of the
Company's full year tax provision.
FINANCIAL CONDITION
The Company's consolidated assets were $52.8 billion at June 30, 1998, an
increase of $6.1 billion, or 13%, from $46.7 billion at December 31, 1997.
The increase is due 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 due to payments on loans
and MBS. The increase in loan and MBS payments during the first six months of
1998 is primarily due to an interest rate environment which encourages
borrowers to refinance ARM loans into fixed rate loans which the Company sells
in the secondary market. The Company's three month and twelve month CPRs at
June 30, 1998 for COFI-indexed loans increased to 22% and 16%, respectively,
from 14% and 12%, respectively, at December 31, 1997.
LOAN AND MBS PORTFOLIO
The Company's loan and MBS portfolio was as follows (in thousands):
June 30, 1998 December 31, 1997
------------- -----------------
Real estate loans:
Residential loans:
Single family $21,827,182 $18,714,254
Multi-family 10,723,486 9,859,143
Commercial and industrial 1,404,154 1,128,320
----------- -----------
33,954,822 29,701,717
Consumer loans:
Home equity 1,069,220 860,573
Savings account secured 60,106 65,256
Other 136,516 121,511
----------- -----------
1,265,842 1,047,340
Business banking loans 97,849 65,738
Other loans 33,824 25,862
----------- -----------
Total loans 35,352,337 30,840,657
Deferred loan costs and interest 22,589 11,606
Unearned premiums 23,405 9,279
Allowance for loan losses (471,911) (377,351)
----------- -----------
Loans receivable 34,926,420 30,484,191
MBS 13,697,592 12,791,391
----------- -----------
Total loans and MBS $48,624,012 $43,275,582
=========== ===========
The increase in loans and MBS is due to the acquisition of Coast loans
and MBS totaling $8.1 billion, a majority of which were tied to COFI. At June
30, 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
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 June 30, 1998 includes
approximately $6.0 billion in mortgage loans that were originated with loan-
to-value ("LTV") ratios exceeding 80%, or 13% of the portfolio at June 30,
1998. The majority of these higher LTV loans in the portfolio at June 30,
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):
Six months ended June 30,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Loan Percent of Loan Percent of
Fundings Fundings Fundings Fundings
---------- ---------- ---------- ----------
Real estate loans:
Single family:
Fixed rate $2,782,589 54.3% $ 695,939 27.5%
COFI ARMs 52,369 1.0 244,904 9.7
12 MAT ARMs 891,796 17.4 470,950 18.6
Other Treasury ARMs 29,758 0.6 87,543 3.5
LAMA 93,336 1.8 83,478 3.3
---------- ----- ---------- -----
3,849,848 75.1 1,582,814 62.6
Multi-family:
Fixed rate 77,359 1.5 4,530 0.2
COFI ARMs 8,409 0.2 37,887 1.4
12 MAT ARMs 388,437 7.6 408,602 16.2
LAMA 171,746 3.3 69,311 2.7
---------- ----- ---------- -----
645,951 12.6 520,330 20.5
Consumer loans:
Home equity 422,854 8.2 254,770 10.1
Savings account secured 46,265 0.9 55,329 2.2
Other 86,008 1.7 78,229 3.1
---------- ----- ---------- -----
555,127 10.8 388,328 15.4
Business banking loans 75,782 1.5 36,795 1.5
---------- ----- ---------- -----
$5,126,708 100.0% $2,528,267 100.0%
========== ===== ========== =====
During the first six months of 1998, approximately 73% of real estate
loan fundings were on properties located in California compared to 69% during
the first six months of 1997.
The Company originates consumer loans through its entire distribution
network and originates business banking loans through its California branches.
Both activities are intended 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 June 30, 1998, the Company was committed to fund the following loans
(dollars in thousands):
June 30, 1998
-------------------------
Outstanding Percent of
Commitments Commitments
----------- -----------
Real estate loans:
Fixed rate $ 373,418 54.9%
COFI ARMs 1,553 0.2
12 MAT ARMs 269,428 39.7
Other Treasury ARMs 2,734 0.4
LAMA 32,791 4.8
---------- -----
$ 679,924 100.0%
========== =====
Consumer loans:
Home equity:
Lines of credit $ 695,985 54.9%
Loans 13,114 1.0
Unsecured lines of credit 558,046 44.0
Secured lines of credit 664 0.1
Other 574 -
---------- -----
$1,268,383 100.0%
========== =====
Business banking loans $ 151,496 100.0%
========== =====
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.
To diversify the interest rate sensitivity and liquidity profile of the
Company's interest-earning assets, the Company now offers and emphasizes the
origination of other ARM loan products, such as 12 MAT ARMs and LAMA loans,
over COFI ARMs. 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 Company
believes that 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. 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 are being realized slowly as the composition of the loan and
MBS portfolio changes. At June 30, 1998, approximately 81% of the Company's
$49.1 billion gross loan and MBS portfolio consisted of COFI ARMs, compared to
approximately 83% of the $43.7 billion gross loan and MBS portfolio at
December 31, 1997. For information regarding the Company's loan
diversification, see "Financial Condition--Loan and MBS Portfolio."
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 are relatively new businesses 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 and asset
repricing characteristics.
The Company has adopted a strategy to increase the percentage of
transaction accounts in its deposit portfolio, which the Company believes are
a lower costing funding source than other funding sources. At June 30, 1998,
transaction accounts comprised 37% of the deposit base compared to 33% at June
30, 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 $3.0 billion at June 30, 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 June 30, 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 $ 900,169 2% $ 892,754 $ - $ 7,415 $ - $ -
Loans and MBS
MBS
ARMs 13,378,701 27 13,354,164 23,203 528 - 806
Other 318,891 1 - - 1,345 - 317,546
Loans
ARMs 32,589,914 65 30,877,932 766,399 603,451 108,680 233,452
Other 2,336,506 5 176,408 - - - 2,160,098
----------- --- ----------- ----------- ----------- --------- ----------
Total loans and MBS 48,624,012 98 44,408,504 789,602 605,324 108,680 2,711,902
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-earning assets $49,524,181 100% $45,301,258 $ 789,602 $ 612,739 $ 108,680 $2,711,902
=========== === =========== =========== =========== ========= ==========
Interest-costing liabilities:
Deposits
Transaction accounts $13,655,473 28% $13,655,473 $ - $ - $ - $ -
Term accounts 23,751,646 50 13,581,230 8,095,235 2,068,443 6,687 51
----------- --- ----------- ----------- ----------- --------- ----------
Total deposits 37,407,119 78 27,236,703 8,095,235 2,068,443 6,687 51
----------- --- ----------- ----------- ----------- --------- ----------
Borrowings
Short-term 2,763,000 6 2,763,000 - - - -
FHLB and other 7,541,270 16 5,297,924 597,007 1,329,991 254,996 61,352
Capital securities of
subsidiary trust 148,550 - - - - 148,550 -
----------- --- ----------- ----------- ----------- --------- ----------
Total borrowings 10,452,820 22 8,060,924 597,007 1,329,991 403,546 61,352
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-costing
liabilities $47,859,939 100% $35,297,627 $ 8,692,242 $ 3,398,434 $ 410,233 $ 61,403
=========== === =========== =========== =========== ========= ==========
Interest-earning assets
more/(less) than
interest-costing liabilities $ 1,664,242 $10,003,631 $(7,902,640) $(2,785,695) $(301,553) $2,650,499
=========== =========== =========== =========== ========= ==========
Cumulative interest sensitivity gap $10,003,631 $ 2,100,991 $ (684,704) $(986,257) $1,664,242
=========== =========== =========== ========= ==========
Percentage of interest-earning
assets to interest-costing
liabilities 103.48%
Percentage of cumulative interest
sensitivity gap to total assets 3.15%
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 rate changes, 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, 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):
June 30, December 31, Increase
1998 1997 (Decrease)
------------- ------------ ----------
Nonaccrual loans:
Single family $420,440 $376,421 $ 44,019
Multi-family 42,413 20,631 21,782
Commercial and industrial real estate 22,817 32,171 (9,354)
Consumer 4,099 3,608 491
Business banking 41 67 (26)
-------- -------- --------
Total $489,810 $432,898 $ 56,912
======== ======== ========
REO:
Single family $121,404 $137,114 $(15,710)
Multi-family 24,464 15,657 8,807
Commercial and industrial real estate 8,600 9,669 (1,069)
-------- -------- --------
Total $154,468 $162,440 $ (7,972)
======== ======== ========
Total NPAs:
Single family $541,844 $513,535 $ 28,309
Multi-family 66,877 36,288 30,589
Commercial and industrial real estate 31,417 41,840 (10,423)
Consumer 4,099 3,608 491
Business banking 41 67 (26)
-------- -------- --------
Total $644,278 $595,338 $ 48,940
======== ======== ========
TDRs:
Single family $161,883 $162,257 $ (374)
Multi-family 46,241 32,636 13,605
Commercial and industrial real estate 54,332 17,406 36,926
-------- -------- --------
Total $262,456 $212,299 $ 50,157
======== ======== ========
Other impaired major loans:
Multi-family $123,064 $107,814 $ 15,250
Commercial and industrial real estate 21,772 36,816 (15,044)
-------- -------- --------
Total $144,836 $144,630 $ 206
======== ======== ========
Ratio of NPAs to total assets 1.22% 1.28%
======== ========
Ratio of NPAs and TDRs to total assets 1.72% 1.73%
======== ========
Ratio of allowances for losses
on loans and REO to NPAs 73.63% 64.07%
======== ========
The Company's NPAs, TDRs and other impaired major loans by state at June
30, 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 $415,364 $61,882 $27,246 $3,902 $41 $508,435 $223,948 $132,403
New York 34,610 250 1,239 - - 36,099 11,243 2,580
Florida 33,284 - - - - 33,284 5,771 -
Texas 8,263 693 369 - - 9,325 689 1,217
Other 50,323 4,052 2,563 197 - 57,135 20,805 8,636
-------- ------- ------- ------ --- -------- -------- --------
$541,844 $66,877 $31,417 $4,099 $41 $644,278 $262,456 $144,836
======== ======= ======= ====== === ======== ======== ========
Total NPAs were $644.3 million at June 30, 1998, or a ratio of NPAs to
total assets of 1.22%, an increase of $49.0 million, or 8%, during the first
six months of 1998 from $595.3 million, or 1.28% of total assets, at December
31, 1997. The increase in NPAs at June 30, 1998 is due to loans and REO
acquired from Coast.
Single family NPAs were $541.8 million at June 30, 1998, an increase of
$28.3 million, or 6%, during the first six months of 1998 from $513.5 million
at December 31, 1997, primarily due to single family NPAs acquired from Coast.
Multi-family NPAs totaled $66.9 million at June 30, 1998, an increase of $30.6
million, or 84%, during the first six months of 1998 from $36.3 million at
December 31, 1997, primarily due to multi-family NPAs acquired from Coast.
Commercial and industrial real estate NPAs totaled $31.4 million at June 30,
1998, a decrease of $10.4 million, or 25%, during the first six 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 acquired from Coast.
TDRs were $262.5 million at June 30, 1998, an increase of $50.2 million,
or 24%, during the first six months of 1998 from $212.3 million at December
31, 1997 primarily due to multi-family and commercial and industrial TDRs
acquired from Coast.
Other impaired major loans at June 30, 1998 were $144.8 million, an
increase of $0.2 million, or less than 1%, during the first six months of 1998
from $144.6 million at December 31, 1997 primarily due to multi-family loans
acquired from Coast, partially offset by declines in commercial and industrial
loans of $15.0 million.
The recorded investment in all impaired loans was as follows (in
thousands):
June 30, 1998 December 31, 1997
--------------------------------- ---------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investment Losses Investment Investment Losses Investment
---------- --------- ---------- ---------- --------- ----------
With specific allowances $375,882 $70,650 $305,232 $330,412 $55,392 $275,020
Without specific allowances 141,120 - 141,120 103,352 - 103,352
-------- ------- -------- -------- ------- --------
$517,002 $70,650 $446,352 $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 $143.2 million of single family REO and $26.9 million of multi-
family and commercial and industrial REO in the first six months of 1998. In
the first six months of 1997, the Company sold $215.3 million of single family
REO and $31.7 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 June 30, 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Beginning balance $480,749 $387,688 $377,351 $389,135
Allowance for loan losses
acquired from Coast - - 107,830 -
Provision for loan losses 784 17,989 8,850 42,212
-------- -------- -------- --------
481,533 405,677 494,031 431,347
-------- -------- -------- --------
Charge-offs:
Single family (9,206) (20,175) (19,431) (44,405)
Multi-family (5,440) (5,423) (11,280) (15,047)
Commercial and industrial real estate (1,563) (1,367) (1,563) (1,606)
Consumer (3,583) (950) (6,485) (1,712)
Business banking (524) (157) (852) (157)
-------- -------- -------- --------
(20,316) (28,072) (39,611) (62,927)
-------- -------- -------- --------
Recoveries:
Single family 5,282 8,822 7,965 16,036
Multi-family 1,925 1,511 3,004 3,200
Commercial and industrial real estate 3,451 349 6,461 598
Business banking 36 - 61 33
-------- -------- -------- --------
10,694 10,682 17,491 19,867
-------- -------- -------- --------
Net charge-offs (9,622) (17,390) (22,120) (43,060)
-------- -------- -------- --------
Ending balance $471,911 $388,287 $471,911 $388,287
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.08% 0.15% 0.09% 0.19%
==== ==== ==== ====
The declines in the provision for loan losses and gross charge-offs
during the second quarter and the first six months of 1998 are due to lower
levels of the Company's NPAs and delinquent loans, excluding Coast related
NPAs and delinquent loans. Approximately $5.2 million of the second quarter
of 1998 charge-offs were from previously established specific reserves. The
continuing improvement in the California economy and California real estate
market has contributed to the significant improvement in the Company's credit
quality.
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):
June 30, 1998 December 31, 1997
--------------------- ---------------------
Allowance Allowance
as Percent as Percent
of Loan of Loan
and MBS and MBS
Allowance Category Allowance Category
--------- ---------- --------- ----------
Single family $206,541 0.58% $174,459 0.55%
Multi-family 180,562 1.69 143,977 1.46
Commercial and industrial real estate 62,714 4.48 40,713 3.62
Consumer 17,294 1.30 13,402 1.21
Business banking 4,800 4.90 4,800 7.28
-------- --------
$471,911 0.96 $377,351 0.86
======== ========
The increase in the allowance for loan losses at June 30, 1998 is due
mainly to the loans acquired from 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. Certain localized
real estate markets in California have recently recorded appreciation in
values to levels at or near the pre-recession highs of the early 1990's.
Management believes that the principal risk factor which could potentially
require an increase in the allowance for loan losses would be the reversal of
the improvements in these and other California residential markets,
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 and private 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 June 1998 the average liquidity ratio of Home
Savings was 7.32%.
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 six months of 1998 cash of $5.0
billion was used to fund loans. Principal payments on loans were $3.8 billion
for the first six months of 1998, an increase of $2.1 billion from $1.7
billion for the first six months of 1997. During the first six months of 1998
the Company sold loans totaling $2.7 billion. At June 30, 1998, the Company
had $638.5 million of loans held for sale. The loans designated for sale
included $503.0 million of fixed rate loans, $128.1 million in COFI ARMs and
$7.4 million of 12 MAT and other Treasury ARMs. 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 June
30, 1998, the Company had $9.7 billion of MBS available for sale, comprised of
$9.4 billion of ARM MBS and $280.2 million of fixed rate MBS. These MBS had
an unrealized gain of $226.0 million at June 30, 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 $37.4 billion at June 30, 1998, an increase of
$5.1 billion, or 16%, from $32.3 billion at December 31, 1997, 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 $1.3 billion
primarily due to maturities of term accounts which have more sensitivity to
market interest rates than transaction accounts. Term deposits decreased $2.2
billion during the first six months of 1998, while transaction accounts
increased $900.8 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. On July 16, 1998, the Company consummated
the sale of its remaining 27 East Florida branches with deposits of
approximately $3.2 billion for an after-tax gain of approximately $165
million.
At June 30, 1998, 85% of the Company's deposits were in California
compared to 82% at December 31, 1997. Excluding the East Florida branches,
93% of the Company's remaining deposits at June 30, 1998 would have been
located in California.
BORROWINGS. Borrowings totaled $10.3 billion at June 30, 1998, a
decrease of $525.0 million, or 5%, during the first six months of 1998 from
$10.8 billion at December 31, 1997, reflecting declines in FHLB and other
borrowings of $775.1 million and in securities sold under agreements to
repurchase of $25.0 million, partially offset by an increase in short-term
borrowings of $275.1 million.
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 six months of 1998, medium term notes totaling $205
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. From January 1, 1998 through January 13, 1998, Ahmanson
purchased 406,600 shares of its common stock. 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. 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 $3.5 billion at June 30, 1998, an increase of
$1.1 billion, or 46%, 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 $251.6 million
and an increase of $103.3 million in the net unrealized gain on securities
available for sale, partially offset by the redemption of the Series C
Preferred Stock of $195.0 million, dividends paid to common and preferred
stockholders of $57.3 million and payments of $24.1 million to purchase the
Company's common stock. The net unrealized gain on securities available for
sale at June 30, 1998 was $134.4 million.
On July 16, 1998, Ahmanson announced that it will redeem, on September 1,
1998, its 6% Cumulative Convertible Preferred Stock, Series D, at $51.50 per
depositary share. Each depositary share is convertible into 2.05465 shares of
Ahmanson's common stock at any time prior to the close of business on August
24, 1998.
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 June 30, 1998, Home Savings exceeded the regulatory standards
required to be considered well-capitalized. Home Savings' capital amounts
and ratios at June 30, 1998 were as follows (dollars in thousands):
Well-
Capital Capitalized
Amount Ratio Standard
----------- ------- -----------
Tangible capital (to adjusted total assets) $3,237,366 6.27% N/A
Core capital (to adjusted total assets) 3,240,251 6.28 5.00%
Core capital (to risk-weighted assets) 3,240,251 9.74 6.00
Total risk-based capital (to risk-weighted assets) 4,104,654 12.34 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial condition and the measurement of those instruments
at fair value. Recognition of changes in fair value will be recognized into
income or as a component of other comprehensive income depending upon the type
of the derivative and its related hedge, if any. SFAS No. 133 is effective
for the Company beginning January 1, 2000.
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 June 30, 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 June 30, 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 9, 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, with
associated 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, with associated 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 $5.2 million was expensed during the
second quarter of 1998 and $16.8 million for the project in total through the
first six months 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
April 22, 1998 ITEM 5. OTHER EVENTS.
On April 22, 1998, H. F. Ahmanson & Company
(the "Registrant") issued a press release
reporting its results of operations during the
quarter ended March 31, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1 Press release dated April 22, 1998
reporting results of operations during the
quarter ended March 31, 1998.
April 23, 1998 ITEM 5. OTHER EVENTS.
On February 13, 1998, H. F. Ahmanson & Company
("Ahmanson") consummated a merger with Coast
Savings Financial, Inc. ("Coast"). Ahmanson is
filing the consolidated statement of financial
condition of Coast and its subsidiaries as of
December 31, 1997 and 1996 and the related
consolidated statements of operations,
stockholders' equity and cash flows for each of
the years in the three-year period ended
December 31, 1997 and the accompanying notes.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
23 Consent of KPMG Peat Marwick LLP.
99 Consolidated statements of financial
condition of Coast and its subsidiaries as of
December 31, 1997 and 1996 and related
consolidated statements of operations,
stockholders' equity and cash flows for each of
the years in the three-year period ended December
31, 1997 and the accompanying notes.
* Filed electronically with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 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. 40
27 Financial Data Schedule. *
* Filed electronically with the Securities and Exchange Commission.