<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
------------ ------------
Commission File Number 1-8930
------------------
H. F. AHMANSON & COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0479700
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 Rivergrade Road, Irwindale, California 91706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code. (818) 960-6311
-------------
Exhibit Index appears on page: 28
Total number of sequentially numbered pages: 29
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1996: $.01 par value - 112,512,418 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
The financial statements included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Registrant, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been
made. Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Registrant's latest annual report on Form 10-K. The results for the
periods covered hereby are not necessarily indicative of the operating results
for a full year.
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Assets March 31, 1996 December 31, 1995
- ------ -------------- -----------------
<S> <C> <C>
Cash and amounts due from banks $ 683,480 $ 752,878
Securities purchased under agreements to resell 278,000 381,000
Other short-term investments 14,364 13,278
----------- -----------
Total cash and cash equivalents 975,844 1,147,156
Other investment securities held to
maturity [market value
$2,436 (March 31, 1996) and
$2,484 (December 31, 1995)] 2,445 2,448
Other investment securities available for
sale [amortized cost
$9,250 (March 31, 1996) and
$9,327 (December 31, 1995)] 9,809 9,908
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 402,427 485,938
Mortgage-backed securities (MBS)
held to maturity [market value
$5,783,951 (March 31, 1996) and
$5,965,045 (December 31, 1995)] 5,649,418 5,825,276
MBS available for sale [amortized cost
$10,472,415 (March 31, 1996) and
$10,293,537 (December 31, 1995)] 10,410,053 10,326,866
Loans receivable less allowance for losses of
$385,367 (March 31, 1996) and
$380,886 (December 31, 1995) 30,211,898 30,273,514
Loans held for sale [amortized cost
$264,534 (March 31, 1996) and market value
$992,550 (December 31, 1995)] 259,241 981,865
Accrued interest receivable 223,968 228,111
Real estate held for development and
investment (REI) less allowance for losses of
$286,327 (March 31, 1996)and
$283,748 (December 31, 1995) 230,445 234,855
Real estate owned held for sale (REO)
less allowance for losses of
$37,137 (March 31, 1996) and
$38,080 (December 31, 1995) 225,870 225,566
Premises and equipment 413,487 410,947
Goodwill and other intangible assets 143,981 147,974
Other assets 623,100 229,162
----------- -----------
$49,781,986 $50,529,586
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $33,947,928 $34,244,481
Short-term borrowings under agreements
to repurchase securities sold 1,998,431 3,519,311
Other short-term borrowings 50,000 -
FHLB and other borrowings 9,553,436 8,717,117
Other liabilities 1,170,026 873,313
Income taxes 109,463 118,442
----------- -----------
Total liabilities 46,829,284 47,472,664
Stockholders' equity 2,952,702 3,056,922
----------- -----------
$49,781,986 $50,529,586
=========== ===========
</TABLE>
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the Three
Months Ended March 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Interest income:
Interest on loans $ 574,855 $ 630,791
Interest on MBS 308,354 220,087
Interest and dividends on investments 11,661 43,105
----------- -----------
Total interest income 894,870 893,983
----------- -----------
Interest expense:
Deposits 387,173 439,458
Short-term borrowings 40,230 49,518
FHLB and other borrowings 150,485 109,763
----------- -----------
Total interest expense 577,888 598,739
----------- -----------
Net interest income 316,982 295,244
Provision for loan losses 45,942 26,544
----------- -----------
Net interest income after provision for loan losses 271,040 268,700
----------- -----------
Other income:
Gain on sales of MBS - 603
Gain on sales of loans 15,028 231
Loan servicing income 15,145 12,966
Other fee income 26,819 23,972
Gain on sales of investment securities - 10
Other operating income 3,538 (1,800)
----------- -----------
60,530 35,982
----------- -----------
Other expenses:
General and administrative expenses (G&A) 193,048 182,752
Operations of REI 6,743 1,087
Operations of REO 25,689 21,053
Amortization of goodwill and other intangible assets 3,994 6,911
----------- -----------
229,474 211,803
----------- -----------
Earnings before provision for income taxes and cumulative
effect of accounting change 102,096 92,879
Provision for income taxes 37,341 40,029
----------- -----------
Earnings before cumulative effect of accounting change 64,755 52,850
Cumulative effect of change in accounting for goodwill - (234,742)
----------- -----------
Net earnings (loss) $ 64,755 $ (181,892)
=========== ===========
Earnings (loss) per common share - primary and fully diluted:
Earnings before cumulative effect of accounting change $ 0.45 $ 0.34
Cumulative effect of change in accounting for goodwill - (2.00)
----------- -----------
Net earnings (loss) $ 0.45 $ (1.66)
=========== ===========
Common shares outstanding, weighted average:
Primary 114,781,516 117,143,614
Fully diluted 126,651,898 117,143,614
Return on average assets 0.51% (1.33)%
Return on average equity 8.60% (25.84)%
Return on average tangible equity* 9.60% 9.26 %
Ratio of G&A expenses to average assets 1.53% 1.34 %
<FN>
*Net earnings excluding amortization of goodwill and other intangible assets, and cumulative effect of
change in accounting for goodwill, as a percentage of average equity excluding goodwill and other intangible
assets.
</FN>
</TABLE>
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For The Three
Months Ended March 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 64,755 $ (181,892)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Provision for losses on loans and real estate 59,422 36,157
Cumulative effect of change in accounting for goodwill - 234,742
Decrease in accrued interest receivable 4,143 52,859
Proceeds from sales of loans held for sale 956,134 43,449
Loans originated for sale (631,777) (53,511)
Increase (decrease) in other liabilities 21,009 (112,527)
Other, net (58,238) (30,888)
----------- -----------
Net cash provided by (used in) operating activities 415,448 (11,611)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available for sale - 139,007
Principal payments on loans 466,255 392,733
Principal payments on MBS 372,830 242,153
Loans originated for investment (net of refinances) (537,211) (1,559,702)
Loans purchased (705) (36,907)
Net redemption (purchase) of FHLB stock 89,386 (22,209)
Proceeds from sales of REO 95,700 74,546
Other, net (25,732) 11,511
----------- -----------
Net cash provided by (used in) investing activities 460,523 (758,868)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits (296,553) 977,539
Net deposits purchased - 37,150
Net decrease in borrowings maturing in 90 days or less (1,015,880) (521,668)
Proceeds from other borrowings 1,638,723 7,404
Repayment of other borrowings (1,258,394) (283,982)
Common stock purchased for treasury (77,517) -
Dividends to stockholders (37,662) (38,368)
----------- -----------
Net cash provided by (used in) financing activities (1,047,283) 178,075
----------- -----------
Net decrease in cash and cash equivalents (171,312) (592,404)
Cash and cash equivalents at beginning of period 1,147,156 2,046,620
----------- -----------
Cash and cash equivalents at end of period $ 975,844 $ 1,454,216
=========== ===========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The preceding Condensed Consolidated Financial Statements present
financial data of H. F. Ahmanson & Company and subsidiaries. As used herein
"Ahmanson" means H. F. Ahmanson & Company, a Delaware corporation, and the
"Company" means Ahmanson and its subsidiaries. The Company is one of the
largest residential real estate-oriented financial services companies in the
United States, and is engaged in the consumer banking business and related
financial service activities. Home Savings of America, FSB ("Home Savings"),
a wholly-owned subsidiary of Ahmanson, is currently the largest savings
institution in the United States. Certain amounts in prior periods' financial
statements have been reclassified to conform to the current presentation.
OVERVIEW
The Company reported earnings for the first quarter of 1996 of $64.8
million, or $0.45 per fully diluted common share, compared to $60.7 million,
or $0.40 per fully diluted common share, earned in the fourth quarter of 1995.
In the first quarter of 1995, the Company recorded a net loss of $181.9
million, or $1.66 per fully diluted common share, which included a $234.7
million charge relating to a change in accounting for goodwill. Excluding
this charge and the related amortization, results for the first quarter of
1995 were earnings of $52.9 million, or $0.34 per fully diluted common share.
RESULTS OF OPERATIONS
Net interest income totaled $317.0 million for the first quarter of 1996,
compared to $295.2 million in the first quarter of 1995, and $306.9 million in
the fourth quarter of 1995. In the first quarter of 1996, the average net
interest margin was 2.64%, compared to 2.27% in the first quarter of 1995, and
2.54% in the fourth quarter of 1995. At March 31, 1996, the net interest
margin was 2.74%. The increase in the net interest margin during the first
quarter of 1996 was due to a decline in wholesale funding costs, coupled with
a decline in the cost of deposits.
For the first quarter of 1996, other income was $60.5 million, an
increase of $24.5 million from the amount reported in the year ago quarter,
and an increase of $12.3 million from the fourth quarter of 1995. During the
first quarter of 1996, the Company sold $586.0 million of fixed rate loans and
$353.4 million of Adjustable Rate Mortgages ("ARMs") from its held-for-sale
portfolio for a gain of $15.0 million. Fee income from Griffin Financial
Services, the Company's investment and insurance services subsidiary, also
increased from the fourth quarter of 1995.
General and administrative expenses ("G&A") were $193.0 million in the
first quarter of 1996, compared to $182.8 million in the first quarter of 1995
and $199.2 million in the fourth quarter of 1995. In the first quarter of
1996, the Company recorded approximately $5 million of severance expense.
Recent major initiatives such as consumer lending, Project HOME Run (the
reengineering of the real estate loan origination process) and electronic
banking accounted for approximately $6 million of the increase from the first
quarter of 1995. G&A for the first quarter of 1995 included a $5.7 million
refund of Federal Deposit Insurance Corporation premiums.
<PAGE>
The operating efficiency ratio, which measures G&A expenses as a percent
of net interest income and loan servicing and other fee income, was 53.8% in
the first quarter of 1996, compared to 55.0% in the first quarter of 1995 and
57.0% in the fourth quarter of 1995.
During the first quarter of 1996, the Company provided $45.9 million for
loan losses, compared to $26.5 million in the first quarter of 1995 and $37.9
million in the fourth quarter of 1995. Expenses for the operations of
foreclosed real estate amounted to $25.7 million in the first quarter of 1996,
compared to $21.1 million in the first quarter of 1995 and $25.1 million in
the fourth quarter of 1995. Increases in the provision for loan losses and
the operations of foreclosed real estate during the first quarter of 1996 were
due to continued weakness in the Southern California real estate market.
Approximately 25% of total interest-costing liabilities at March 31, 1996
consisted of wholesale liabilities, compared to 25% and 18% at December 31,
1995 and March 31, 1995, respectively.
At March 31, 1996, nonperforming assets ("NPAs") totaled $977.4 million,
or 1.96% of total assets, compared to $878.6 million, or 1.64%, at March 31,
1995, and $949.4 million, or 1.88%, at December 31, 1995. NPAs increased
$44.7 million in January 1996 and $31.1 million in February, then decreased by
$47.8 million in March. Troubled debt restructurings ("TDRs") totaled $168.4
million at March 31, 1996.
Net loan charge-offs for the first quarter of 1996 totaled $41.5 million,
compared to $35.7 million in the first quarter of 1995, and $42.3 million in
the fourth quarter of 1995.
At March 31, 1996, the allowances for loan losses and foreclosed real
estate were $385.4 million and $37.1 million, respectively. The ratio of
allowances for losses to NPAs equaled 41.7% at March 31, 1996, compared to
46.8% at March 31, 1995, and 42.4% at December 31, 1995.
LOAN ORIGINATIONS
The Company originated $1.3 billion of loans in the first quarter of
1996, compared to $1.7 billion in the year-ago quarter. In the first quarter
of 1996, 83% of originated loans were single family mortgages and 43% were
ARMs. Loans to refinance real estate holdings accounted for 44% of the
Company's first quarter 1996 originations, compared to 27% of the Company's
first quarter 1995 originations. Single family originations in California
accounted for 61% of the Company's single family loan production during the
first quarter of 1996. The Company funded $16.6 million in consumer loans
during the quarter and had additional unfunded commitments of $10.0 million at
March 31, 1996. The Company had $66.7 million in applications in the consumer
loan pipeline at March 31, 1996, an increase of $50.8 million from December
31, 1995.
DEPOSITS
At March 31, 1996, deposits totaled $33.9 billion compared to $41.7
billion at March 31, 1995 and $34.2 billion at December 31, 1995. The $7.8
billion, or 19%, decrease from a year ago principally reflects the purchase of
$1.2 billion in deposits from Household Bank in June 1995, followed by the
September 1995 sale of the New York retail deposit branch system (the "New
York sale") with deposits totaling $8.1 billion.
<PAGE>
CAPITAL
At March 31, 1996, Home Savings of America's capital ratios exceeded all
regulatory requirements for well-capitalized institutions, the highest
regulatory standard. On March 31, 1996, fully phased-in core capital exceeded
the well-capitalized standard by $546 million.
On March 12, 1996, Home Savings redeemed at par $250 million of 10.5%
subordinated debentures. The redemption affected risk-based capital ratios,
but neither tangible nor core capital ratios were affected. Home Savings was
$606 million above the well-capitalized risk-based capital standard at March
31, 1996.
STOCK REPURCHASE PROGRAM
On May 14, 1996, the Company announced that it had completed its initial
$250 million stock repurchase program and that the Board of Directors had
authorized a new stock repurchase program of $150 million. During the initial
program, which was announced on October 3, 1995, the Company purchased 10.4
million shares, or 9% of the outstanding common shares, at an average price of
$23.98 per share.
In addition to its new program to repurchase common stock, the Company
announced that on September 3, 1996, it will redeem at par its 9.60% Preferred
Stock Series B, at $25.00 per Depositary Share, plus accrued and unpaid
dividends to the redemption date. Although the Company does not plan to
replace the preferred issue at this time, the Company may decide to add to its
outstanding preferred stock in the future.
Upon completion of the initial repurchase program, the Company had 107.8
million common shares outstanding.
HOME SAVINGS TO PURCHASE 61 FIRST INTERSTATE BRANCHES
On March 28, 1996, Home Savings announced it had signed a definitive
agreement to purchase 61 branches of First Interstate Bancorp from Wells Fargo
& Company. As of December 31, 1995, these branches had approximately $2.5
billion in deposits and approximately $1.3 billion in mortgage, consumer and
business loans. The purchase price represents a premium of 8.11% on the
deposits. The transaction is subject to regulatory approval and is not
expected to close until the third quarter of 1996.
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $317.0 million in the first quarter of 1996, an
increase of $21.7 million or 7%, compared to $295.2 million in the same period
of 1995. The increase reflects the continued improvement in the net interest
margin which began during the first quarter of 1995.
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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ----------- ------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $30,968,363 $574,855 7.43% $36,199,664 $630,791 6.97%
MBS 16,254,076 308,354 7.59 13,066,555 220,087 6.74
----------- -------- ----------- --------
Total loans and MBS 47,222,439 883,209 7.48 49,266,219 850,878 6.91
Investment securities 799,981 11,661 5.83 2,832,541 43,105 6.09
----------- -------- ----------- --------
Interest-earning assets 48,022,420 894,870 7.45 52,098,760 893,983 6.86
-------- --------
Other assets 2,387,751 2,621,378
----------- -----------
Total assets $50,410,171 $54,720,138
=========== ===========
Interest-costing liabilities:
Deposits $33,924,439 387,173 4.57 $41,341,968 439,458 4.25
----------- -------- ----------- --------
Borrowings:
Short-term 2,671,773 40,230 6.02 3,157,391 49,518 6.27
FHLB and other 9,476,696 150,485 6.35 6,553,498 109,763 6.70
----------- -------- ----------- --------
Total borrowings 12,148,469 190,715 6.28 9,710,889 159,281 6.56
----------- -------- ----------- --------
Interest-costing liabilities 46,072,908 577,888 5.02 51,052,857 598,739 4.69
-------- --------
Other liabilities 1,326,253 852,158
Stockholders' equity 3,011,010 2,815,123
----------- -----------
Total liabilities and
stockholders' equity $50,410,171 $54,720,138
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,949,512 2.43 $ 1,045,903 2.17
=========== ===========
Net interest income/
Net interest margin $316,982 2.64 $295,244 2.27
======== ========
</TABLE>
<PAGE>
The following table presents the changes for the first quarter of 1996
from the first quarter of 1995 of 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 Versus 1995
-------------------------------
Increase/(Decrease) Due to
-------------------------------
Volume Rate Total
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Interest income on:
Loans $(102,955) $47,019 $(55,936)
MBS 58,187 30,080 88,267
Investments (29,678) (1,766) (31,444)
--------- ------- --------
Total interest income (74,446) 75,333 887
--------- ------- --------
Interest expense on:
Deposits (90,094) 37,809 (52,285)
Short-term borrowings (7,376) (1,912) (9,288)
FHLB and other borrowings 46,123 (5,401) 40,722
--------- ------- --------
Total interest expense (51,347) 30,496 (20,851)
--------- ------- --------
Net interest income $ (23,099) $44,837 $ 21,738
========= ======= ========
</TABLE>
Net interest income increased $21.7 million, or 7%, in the first quarter
of 1996 as compared to the first quarter of 1995 due to an increase of 37
basis points in the net interest margin to 2.64% for the first quarter of 1996
from 2.27% for the first quarter of 1995, partially offset by a decrease of
$4.1 billion in average interest-earning assets. The decrease in average
interest-earning assets was principally due to the New York sale in the third
quarter of 1995. As part of the funding of the New York sale, the Company
sold $2.8 billion of MBS and retained the servicing on these MBS.
Included in net interest income were provisions for losses of delinquent
interest related to nonaccrual loans of $15.9 million and $13.1 million in the
first quarter of 1996 and 1995, respectively, which had the effect of reducing
the net interest margin by 13 basis points and 10 basis points in the
respective periods.
<PAGE>
The changes for the first quarter of 1996 in the Company's net interest
margin and net interest income reflect the lag between changes in the monthly
weighted average cost of funds for Federal Home Loan Bank ("FHLB") Eleventh
District savings institutions as computed by the FHLB of San Francisco
("COFI"), to which a majority of the Company's interest-earning assets are
indexed, and changes in the repricing of the Company's interest-costing
liabilities. The Company believes that its net interest income is somewhat
insulated from interest rate fluctuations within a fairly wide range primarily
due to the adjustable rate nature of its loan and MBS portfolio.
As market interest rates declined beginning in early 1995, the Company's
borrowings were managed to take advantage of the decline in market interest
rates while the lag in COFI and the repricing of the Company's ARM portfolio
contributed to an expansion in the net interest margin. The Company's net
interest margin began to improve during the first quarter of 1995 and
increased through the first quarter of 1996 due to a significant decline in
market interest rates during this period. The net interest margin was 2.74%
at March 31, 1996, an increase of 38 basis points from 2.36% at March 31,
1995. The expansion in the net interest margin continued in the first quarter
of 1996 as the Company's wholesale funding and deposit costs declined from the
fourth quarter of 1995 mainly as a result of lower interest rates and partial
reduction of higher costing wholesale liabilities used to fund the New York
sale in September 1995. Approximately 25% of total interest-costing
liabilities at March 31, 1996 consisted of wholesale liabilities, compared to
25% and 18% at December 31, 1995 and March 31, 1995, respectively.
Increases in market interest rates beginning in March 1996, combined with
COFI-based asset yields which lag average changes in funding costs, are
expected to put some pressure on the Company's net interest income and the net
interest margin during the second quarter of 1996.
Substantially all ARMs originated since 1981 have maximum interest rates.
In the event of sustained significant increases in rates, such maximum
interest rates could contribute to a decrease in the net interest margin. For
information regarding the Company's strategies related to COFI and limiting
its interest rate risk, see "Financial Condition--Asset/Liability Management."
PROVISION FOR LOAN LOSSES
The provision for loan losses was $45.9 million in the first quarter of
1996, an increase of $19.4 million or 73%, from the $26.5 million provision
for the first quarter of 1995 and an increase of $8.0 million or 21%, from the
$37.9 million provision for the fourth quarter of 1995. The increase in the
provision during the first quarter of 1996 was due to continuing weakness in
the Southern California real estate market and other factors. For additional
information regarding the allowance for loan losses, see "Financial Condition-
- -Asset Quality--Allowance for Loan Losses."
OTHER INCOME
GAIN (LOSS) ON SALES OF LOANS. During the first quarter of 1996, loans
classified as held for sale totaling $939.4 million were sold for a pre-tax
gain of $15.0 million compared to loans totaling $43.2 million sold for a pre-
tax gain of $0.2 million in the first quarter of 1995. The loans sold in the
first quarter of 1996 consisted of $586.0 million in fixed rate loans, $273.6
million in COFI ARMs, and $79.8 million in ARMs tied to U.S. treasury
securities ("Treasury ARMs"). The loans sold in the first quarter of 1995
were all fixed rate loans. The sales volume of mortgage loans designated for
sale during the comparative periods was influenced by borrower demand for
fixed rate loans, most of which the Company designates for sale in the
secondary market.
<PAGE>
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 122, "Accounting for Mortgage Servicing Rights, an Amendment to FASB No.
65," effective April 1, 1995. Results from periods prior to April 1995 were
not restated. In accordance with SFAS No. 122, the Company capitalizes
mortgage servicing rights ("MSR") related to mortgage loans designated for
sale. The total cost of the mortgage loans designated for sale is allocated
to the MSR and the mortgage loans without the MSR based on their relative fair
values. The MSR are amortized over the projected servicing period and are
periodically reviewed for impairment based on fair value. The fair value of
the MSR, for the purposes of impairment, is measured using a discounted cash
flow analysis based on the Company's estimated servicing costs, market
prepayment rates and market-adjusted discount rates. Impairment losses are
recognized through a valuation allowance. Impairment is measured on a
disaggregated basis based on predominant risk characteristics of the
underlying mortgage loans. The risk characteristics used by the Company for
the purposes of capitalization and impairment evaluation include loan amount,
loan type, loan origination date, loan term and collateral type. MSR of $22.3
million were capitalized in the first quarter of 1996, including MSR of $3.9
million on loans held for sale at March 31, 1996, and increased the gain on
sale of loans by $12.6 million for the first quarter of 1996.
LOAN SERVICING INCOME. Loan servicing income was $15.1 million in the
first quarter of 1996, an increase of $2.1 million or 16% from $13.0 million
in the first quarter of 1995. The increase was primarily due to a $2.1
billion increase in the average portfolio of loans serviced for investors,
partially offset by a decrease of two basis points in the servicing fee rate
to 0.71% and an addition of $0.6 million to the valuation allowance on MSR.
There were no other changes in the valuation allowance during the first
quarter of 1996. At March 31, 1996 and 1995, the portfolio of loans serviced
for investors was $13.6 billion and $11.1 billion, respectively.
OTHER FEE INCOME. Other fee income was $26.8 million in the first
quarter of 1996, an increase of $2.8 million or 12% from $24.0 million for the
first quarter of 1995. The increase was primarily due to an increase of $2.2
million in commissions on the sales of investment and insurance services and
products.
OTHER OPERATING INCOME. Other operating income was $3.5 million in the
first quarter of 1996, an increase of $5.3 million from a net loss of $1.8
million for the first quarter of 1995. The increase was primarily due to non-
recurring refunds totaling $2.3 million recorded in the first quarter of 1996
and the loss on sale of the remaining Ohio branch amounting to $1.6 million in
the first quarter of 1995.
OTHER EXPENSES
G&A EXPENSES. G&A expenses were $193.0 million in the first quarter of
1996, an increase of $10.2 million or 6% from $182.8 million in the first
quarter of 1995. The increase was primarily due to approximately $6 million
of costs associated with major initiatives such as consumer lending,
streamlining the mortgage origination process, investing in a more proactive
sales capability and culture and developing an electronic banking program. In
addition, in the first quarter of 1996 the Company recorded estimated
severance costs of $5 million. In addition, $5.7 million of FDIC premium
refunds were recorded in the first quarter of 1995. The ratio of G&A expenses
to average assets increased to 1.53% in the first quarter of 1996 compared to
1.34% in the first quarter of 1995, reflecting an 8% decrease in average
assets and the 6% increase in G&A expenses.
<PAGE>
OPERATIONS OF REI. Losses from operations of REI were $6.7 million in
the first quarter of 1996, an increase of $5.6 million from losses of $1.1
million in the first quarter of 1995. The increase was primarily due to a
$3.0 million general valuation allowance in the first quarter of 1996 and to a
net loss of $1.8 million on sales of REI in the first quarter of 1996 compared
to gains of $0.5 million on such sales in the first quarter of 1995. The
general valuation allowance was established in the first quarter of 1996 based
on management's assessment of the probability of further reductions in
carrying value.
The Company intends to continue its withdrawal from real estate
development activities. Although the Company does not intend to acquire new
properties, it intends to develop, hold and/or sell its current properties
depending on economic conditions. The Company has certain properties with
long-term holding and development periods. Plans are underway for the sale of
several properties in 1996. 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 the 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.
OPERATIONS OF REO. Losses from operations of REO were $25.7 million in
the first quarter of 1996, an increase of $4.6 million or 22% from losses of
$21.1 million for the first quarter of 1995. The increase was primarily due
to increases of $2.6 million in net operating expenses and $1.2 million in net
losses on sales of REO properties. For additional information regarding REO,
see "Financial Condition--Asset Quality--NPAs and Potential Problem Loans."
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE. The Company adopted SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," effective January 1,
1995 for goodwill related to acquisitions prior to September 30, 1982. As a
result, the Company wrote off goodwill totaling $234.7 million as a cumulative
effect of the accounting change. Goodwill resulting from the acquisition of
banking or thrift institutions initiated after September 30, 1982, is being
amortized in accordance with SFAS No. 72 over a period no longer than the
estimated remaining life of the acquired long-term interest-earning assets.
Amortization of goodwill and other intangible assets was $4.0 million for
the first quarter of 1996, a decrease of $2.9 million or 42% from $6.9 million
for the first quarter of 1995, reflecting the reduction in the goodwill
balance resulting from the New York sale.
PROVISION FOR INCOME TAXES. The changes in the provision for income
taxes primarily reflect the changes in pre-tax earnings between the comparable
periods and the nondeductible amortization of goodwill in the first quarter of
1995. The effective tax rates for the first quarter of 1996 and 1995 were
36.6% and 43.1%, respectively, reflecting management's estimate of the
Company's full year tax provision.
<PAGE>
FINANCIAL CONDITION
The Company's consolidated assets were $49.8 billion at March 31, 1996,
a decrease of $747.6 million or 1% from $50.5 billion at December 31, 1995.
The decrease primarily reflects sales of loans during the first quarter of
1996. The loan and MBS portfolio decreased $876.9 million or 2% to $46.5
billion during the first quarter of 1996 primarily due to these loan sales.
The Company's primary asset generation business continues to be the
origination of loans on residential real estate properties. The Company
originated $1.3 billion in loans during the first quarter of 1996 compared to
$1.7 billion during the first quarter of 1995. Loans on single family homes
(one-to-four units) accounted for 83% of the total loan origination volume in
the first quarter of 1996, and 43% of total originations were ARMs. In the
first quarter of 1996, 17% of the Company's ARM originations were Treasury
ARMs and the balance were COFI ARMs.
In the first quarter of 1996, approximately 67% of loan originations were
on properties located in California. At March 31, 1996, approximately 97% of
the loan and MBS portfolio was secured by residential properties, including
77% secured by single family properties.
The following table summarizes the Company's gross mortgage portfolio by
state and property type at March 31, 1996:
<TABLE>
<CAPTION>
Single Family Multi-Family Commercial and
Properties Properties Industrial Properties Total
--------------------- --------------------- ---------------------- ----------------------
Gross Gross Gross Gross
Mortgage % of Mortgage % of Mortgage % of Mortgage % of
State Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----- ----------- --------- ----------- --------- ------------ --------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $25,686,308 71.38% $8,647,050 92.78% $1,146,420 75.01% $35,479,778 75.75%
Florida 2,509,248 6.97 31,668 0.34 3,596 0.24 2,544,512 5.43
New York 1,899,952 5.28 256,780 2.76 188,438 12.33 2,345,170 5.01
Illinois 1,789,005 4.97 96,323 1.03 11,955 0.78 1,897,283 4.05
Texas 1,091,959 3.03 75,384 0.81 28,963 1.89 1,196,306 2.56
Other 3,011,324 8.37 212,584 2.28 149,069 9.75 3,372,977 7.20
----------- ---------- ---------- ----------- ------
$35,987,796 76.84 $9,319,789 19.90 $1,528,441 3.26 $46,836,026 100.00%
=========== ========== ========== =========== ======
</TABLE>
The loan and MBS portfolio includes approximately $6.8 billion in
mortgage loans that were originated with loan to value ("LTV") ratios
exceeding 80%, or 15% of the portfolio at March 31, 1996. Approximately 10%
of loans originated during the first quarter of 1996 had LTV ratios in excess
of 80%, all of which were loans on single family properties, including 3% with
LTV ratios in excess of 90%. The Company takes the additional risk of
originating mortgage loans with LTV ratios in excess of 80% into consideration
in its loan underwriting and pricing policies.
The Company also funded $16.6 million in consumer loans during the first
quarter of 1996. At March 31, 1996, the Company's loan portfolio included
$41.3 million in consumer loans.
<PAGE>
ASSET/LIABILITY MANAGEMENT
One of the Company's primary business strategies continues to be the
reduction of volatility in net interest income resulting from changes in
interest rates. This is accomplished by managing the repricing
characteristics of its interest-earning assets and interest-costing
liabilities. (Interest rate reset provisions of both assets and liabilities,
whether through contractual maturity or through contractual interest rate
adjustment provisions, are commonly referred to as "repricing terms.")
In order to manage the interest rate risk inherent in its portfolios of
interest-earning assets and interest-costing liabilities, the Company has
historically emphasized the origination of ARMs for retention in the loan and
MBS portfolio with the majority of originated ARMs indexed to COFI. At March
31, 1996, 96.4% of the Company's $46.5 billion loan and MBS portfolio
consisted of ARMs indexed primarily to COFI, compared to 96.8% of the $47.4
billion loan and MBS portfolio at December 31, 1995. The average factor above
COFI on the Company's COFI ARM portfolio was 249 basis points at March 31,
1996, up two basis points from 247 basis points at December 31, 1995.
During late 1994 the Company began offering ARMs which provide for
interest rates that adjust based upon changes in the yields of U.S. Treasury
securities. The Company originated $99.8 million of these Treasury ARMs
during the first quarter of 1996. At March 31, 1996 there was $493.2
million of Treasury ARMs in the Company's loan portfolio.
Although residential lending is and will continue to be the Company's
primary business, the Company is repositioning itself to become more of a
consumer bank by offering a range of loan products, such as home equity lines,
which carry interest rates higher than the Company's traditional mortgage
loans.
The Company intends to originate and sell fixed rate mortgages and lower
margin ARMs to the secondary market while retaining only the more profitable
ARMs in its portfolio. As a result, the Company's portfolio size may be
reduced through opportunistic loan sales from its held for sale portfolio and
through loan payoffs. During the first quarter of 1996, the Company sold a
total of $939.4 million in loans from its held for sale portfolio, including
$586.0 million in fixed rate loans and $353.4 million of COFI ARMs.
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 cost of all FHLB Eleventh District Savings
institutions' interest-costing liabilities, some of which do not reprice
immediately and (2) the Company's COFI ARMs reprice monthly based on changes
in the cost of such liabilities approximately two months earlier.
The Company's basic interest rate risk management strategy includes a goal of
having the combined repricing terms of its interest-costing liabilities not
differ materially from those of the FHLB Eleventh District savings
institutions, in aggregate. The Company's approach to managing interest rate
risk includes the changing of repricing terms and spreading of maturities on
term deposits and other interest-costing liabilities and acquiring assets more
responsive to interest rate changes, including plans to diversify away from
COFI on certain interest-earning assets. The Company manages the maturities
of its borrowings to balance changes in depositor maturity demand. The
Company has adopted a pro-active strategy to increase the percentage of
customer checking accounts in its deposit portfolio which the Company believes
is a steady funding source having less sensitivity to changes in market
interest rates than other funding sources.
<PAGE>
The following table presents the components of the Company's interest
rate sensitive asset and liability portfolios by repricing periods
(contractual maturity as adjusted for frequency of repricing) as of March 31,
1996:
<TABLE>
<CAPTION>
Repricing Periods
Percent -------------------------------------------------------------------
of Within
Balance Total 6 Months Months 7-12 1-5 Years 5-10 Years Years Over 10
----------- ------- ----------- ----------- ----------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $ 707,045 1% $ 704,606 $ - $ 2,439 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (93,463) - 93,463 - -
----------- --- ----------- ---------- ----------- ---------- -----------
Total investment securities 707,045 1 611,143 - 95,902 - -
----------- --- ----------- ---------- ----------- ---------- -----------
Loans and MBS
MBS
ARMs 15,685,164 33 15,685,164 - - - -
Other 374,307 1 - - 3,604 159 370,544
Loans
ARMs 29,185,670 62 25,553,665 1,286,048 1,905,111 56,568 384,278
Other 1,285,469 3 235,362 3,240 - - 1,046,867
Impact of hedging (interest
rate swaps) - - 668,260 (370,460) (297,800) - -
----------- --- ----------- ----------- ----------- --------- ----------
Total loans and MBS 46,530,610 99 42,142,451 918,828 1,610,915 56,727 1,801,689
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-earning assets $47,237,655 100% $42,753,594 $ 918,828 $ 1,706,817 $ 56,727 $1,801,689
=========== === =========== =========== =========== ========= ==========
Interest-costing liabilities:
Deposits
Transaction accounts $ 9,981,101 22% $ 9,981,101 $ - $ - $ - $ -
Term accounts 23,966,827 53 13,785,698 7,401,144 2,768,101 11,794 90
----------- --- ----------- ----------- ----------- --------- ----------
Total deposits 33,947,928 75 23,766,799 7,401,144 2,768,101 11,794 90
----------- --- ----------- ----------- ----------- --------- ----------
Borrowings
Short-term 2,048,431 4 2,048,431 - - - -
FHLB and other 9,553,436 21 3,459,926 2,140,320 3,539,154 397,454 16,582
----------- --- ----------- ----------- ----------- --------- ----------
Total borrowings 11,601,867 25 5,508,357 2,140,320 3,539,154 397,454 16,582
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-costing
liabilities $45,549,795 100% $29,275,156 $ 9,541,464 $ 6,307,255 $ 409,248 $ 16,672
=========== === =========== =========== =========== ========= ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,687,860 $13,478,438 $(8,622,636) $(4,600,438) $(352,521) $1,785,017
=========== =========== =========== =========== ========= ==========
Cumulative interest sensitivity gap $13,478,438 $ 4,855,802 $ 255,364 $ (97,157) $1,687,860
=========== =========== =========== ========= ==========
Percentage of hedge-adjusted
interest-earning assets to
interest-costing liabilities 103.71%
Percentage of cumulative interest
sensitivity gap to total assets 3.39%
</TABLE>
<PAGE>
The following table presents the interest rates, spread and margin at the
end of the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Average yield on:
Loans 7.49% 7.52%
MBS 7.51 7.59
Total loans and MBS 7.50 7.54
Investment securities 5.30 5.56
Interest-earning assets 7.47 7.50
Average rate on:
Deposits 4.52 4.65
Borrowings:
Short-term 5.83 5.97
FHLB and other 6.10 6.38
Total borrowings 6.05 6.26
Interest-costing liabilities 4.91 5.07
Interest rate spread 2.56 2.43
Net interest margin 2.74 2.62
</TABLE>
ASSET QUALITY
NPAS AND POTENTIAL PROBLEM LOANS. A loan is generally placed on
nonaccrual status when the Company becomes aware that the borrower has entered
bankruptcy proceedings and the loan is delinquent, or when the loan is past
due 90 days as to either principal or interest. The Company considers a loan
to be impaired when, based upon current information and events, it believes it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Loans are reviewed for impairment either on an individual loan-by-loan
basis or collectively on an aggregate basis with similar loans depending upon
the characteristics of the loans. For the Company, loans collectively
reviewed for impairment include all single family loans and performing multi-
family and commercial and industrial real estate loans ("major loans") under
$2 million, excluding loans which are individually reviewed based on specific
criteria, such as delinquency, debt coverage, LTV ratio and condition of
collateral property. The Company's impaired loans within the scope of such
individual review include nonaccrual major loans (excluding those collectively
reviewed for impairment), TDRs, and performing major loans and major loans
less than 90 days delinquent ("other impaired major loans") which the Company
believes will be collected in full, but which the Company believes it is
probable will not be collected in accordance with the contractual terms of the
loans.
<PAGE>
The following table presents NPAs (nonaccrual loans and REO), TDRs and
other impaired major loans, net of related specific loss allowances, by type
as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, Increase
1996 1995 (Decrease)
----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Single family $666,479 $630,395 $ 36,084
Multi-family 72,001 81,366 (9,365)
Commercial and industrial
real estate 13,009 12,030 979
-------- -------- --------
751,489 723,791 27,698
-------- -------- --------
REO:
Single family 196,853 193,729 3,124
Multi-family 16,189 14,139 2,050
Commercial and industrial
real estate 12,828 17,698 (4,870)
-------- -------- --------
225,870 225,566 304
-------- -------- --------
Total NPAs:
Single family 863,332 824,124 39,208
Multi-family 88,190 95,505 (7,315)
Commercial and industrial
real estate 25,837 29,728 (3,891)
-------- -------- --------
Total $977,359 $949,357 $ 28,002
======== ======== ========
TDRs:
Singlefamily $ 51,881 $ 45,592 $ 6,289
Multi-family 63,023 75,482 (12,459)
Commercial and industrial
real estate 53,469 42,770 10,699
-------- -------- --------
Total $168,373 $163,844 $ 4,529
======== ======== ========
Other impaired major loans:
Multi-family $ 67,633 $ 32,273 $ 35,360
Commercial and industrial
real estate 13,363 18,745 (5,382)
-------- -------- --------
$ 80,996 $ 51,018 $ 29,978
======== ======== ========
Ratio of NPAs to total assets 1.96% 1.88%
======== ========
Ratio of NPAs and TDRs to total assets 2.30% 2.20%
======== ========
Ratio of allowances for losses
on loans and REO to NPAs 41.65% 42.43%
======== ========
</TABLE>
<PAGE>
The amount of the net recorded investment in impaired loans for which
there is a related specific allowance for losses was $214.4 million, net of an
allowance of $62.9 million, at March 31, 1996 and $129.2 million, net of an
allowance of $44.6 million, at December 31, 1995. The Company's total net
recorded investment in impaired loans (excluding those loans collectively
reviewed for impairment) was $292.3 million and $272.5 million at March 31,
1996 and December 31, 1995, respectively.
The following table presents NPAs, TDRs and other impaired major loans by
state at March 31, 1996:
<TABLE>
<CAPTION>
NPAs
---------------------------------------------------
Commercial Other
and Impaired
Single Family Multi-Family Industrial Major
Residential Residential Real Estate Total TDRs Loans
------------- ------------ ----------- -------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
California $700,660 $77,769 $20,685 $799,114 $ 97,759 $72,535
New York 53,102 5,508 2,072 60,682 52,631 1,498
Florida 37,761 - 188 37,949 453 -
Illinois 19,880 - 1,474 21,354 585 2,047
Texas 10,291 557 56 10,904 6,147 2,419
Other 41,638 4,356 1,362 47,356 10,798 2,497
-------- ------- ------- -------- -------- -------
$863,332 $88,190 $25,837 $977,359 $168,373 $80,996
======== ======= ======= ======== ======== =======
</TABLE>
Total NPAs were $977.4 million at March 31, 1996, or a ratio of NPAs to
total assets of 1.96%, an increase of $28.0 million or 3% during the first
quarter of 1996 from $949.4 million, or 1.88% of total assets at December 31,
1995. NPAs increased $44.7 million in January 1996 and $31.1 million in
February, then decreased by $47.8 million in March. Single family NPAs were
$863.3 million at March 31, 1996, an increase of $39.2 million or 5% during
the first quarter of 1996 primarily due to increases in nonaccrual loans
secured by properties in the states of California ($21.9 million), Illinois
($3.1 million), Florida ($2.6 million) and New York ($2.5 million). The
increase in single family NPAs during the first quarter of 1996 reflected the
continuing weakness in the California real estate market, particularly in
Southern California. The increase also reflected the residual effects of the
conversion to a new loan servicing system in September 1995, which caused a
temporary disruption in the collection process.
Multi-family NPAs totaled $88.2 million at March 31, 1996, a decrease of
$7.3 million or 8% during the first quarter of 1996 primarily due to a
decrease in California of $6.5 million. Commercial and industrial real estate
NPAs totaled $25.8 million at March 31, 1996, a decrease of $3.9 million or
13% during the first quarter of 1996 primarily due to a decrease in Illinois
of $1.6 million.
<PAGE>
TDRs were $168.4 million at March 31, 1996, an increase of $4.6 million
or 3% during the first quarter of 1996 from $163.8 million at December 31,
1995 primarily due to an increase in TDRs secured by properties in New York of
$12.2 million, partially offset by a decrease in California of $3.4 million.
Other impaired major loans totaled $81.0 million at March 31, 1996, an
increase of $30.0 million or 59% from $51.0 million at December 31, 1995
primarily due to a $36.8 million increase in such loans secured by properties
in California.
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 $95.6 million of single family REO and $25.4 million of multi-
family and commercial and industrial REO in the first quarter of 1996. In
addition, the Company may, from time to time, offer packages of NPAs for
competitive bids.
ALLOWANCE FOR LOAN LOSSES. Management believes the Company's allowance
for loan losses was adequate at March 31, 1996. The Company's process for
evaluating the adequacy of the allowance for loan losses has three basic
elements: first, the identification of impaired loans; second, the
establishment of appropriate loan loss allowances once individual specific
impaired loans are identified; and third, a methodology for estimating loan
losses based on the inherent risk in the remainder of the loan portfolio.
Based upon this process, consideration of the current economic environment and
other factors, management determines what it considers to be an appropriate
allowance for loan losses.
The changes in and a summary by type of the allowance for loan losses
are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
(dollars in thousands)
<S> <C> <C>
Beginning balance $380,886 $400,232
Provision for loan losses 45,942 26,544
-------- --------
426,828 426,776
-------- --------
Charge-offs:
Single family (29,576) (24,722)
Multi-family (17,971) (10,129)
Commercial and industrial real estate (576) (7,259)
Consumer (14) -
-------- --------
(48,137) (42,110)
-------- --------
Recoveries:
Single family 4,576 4,085
Multi-family 1,483 1,786
Commercial and industrial real estate 617 568
-------- --------
6,676 6,439
-------- --------
Net charge-offs (41,461) (35,671)
-------- --------
Ending balance $385,367 $391,105
======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.35% 0.29%
==== ====
</TABLE>
<PAGE>
The following table sets forth the allocation of the Company's allowance
for loan losses by the percent of loans and MBS in each category at the dates
indicated:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------------- ---------------------
% of Loan % of Loan
and MBS and MBS
Allowance Portfolio Allowance Portfolio
--------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Single family $174,242 0.48% $174,242 0.47%
Multi-family 149,871 1.61 147,708 1.59
Commercial and industrial real estate 60,886 4.00 58,936 3.78
Consumer 368 0.88 - -
-------- --------
$385,367 0.82 $380,886 0.80
======== ========
</TABLE>
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 future events, including
the economies of the areas in which the Company lends. Management believes
that the principal risk factor which could potentially require an increase in
the allowance for loan losses is the potential further deterioration in the
residential purchase market in California, particularly in Southern
California.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity as defined by the Office of Thrift Supervision ("OTS") consists
of cash, cash equivalents and certain marketable securities which are not
committed, pledged or required to liquidate specific liabilities. Sources of
liquidity consist primarily of positive cash flows generated from operations,
the collection of principal payments and prepayments on loans and MBS and
increases in deposits. Positive cash flows are also generated through the sale
of MBS, loans and other assets for cash. Sources of liquidity may also
include borrowings from the FHLB, commercial paper and public debt issuances,
borrowings under reverse repurchase agreements, commercial bank lines of
credit and, under certain conditions, direct borrowings from the Federal
Reserve System. The principal sources of cash inflows during the first
quarter of 1996 were FHLB and other borrowings, principal payments and
prepayments on loans and MBS and proceeds from sales of loans. The liquidity
portfolio, totaling approximately $2.2 billion at March 31, 1996, decreased
$202.9 million or 8% from December 31, 1995. The decrease is primarily due to
the use of funds to reduce borrowings and deposits, which had net declines of
$634.6 million and $296.6 million, respectively, from December 31, 1995. In
addition, the Company repurchased its own common stock totaling $77.5 million.
These fund outflows were partially offset by a net decrease in the loan and
MBS portfolio of $876.9 million due to sales and payments during the first
quarter of 1996.
Regulations of the OTS require each savings institution to maintain, for
each calendar month, an average daily balance of liquid assets equal to at
least 5% of the average daily balance of its net withdrawable accounts plus
short-term borrowings during the preceding calendar month. OTS regulations
also require each savings institution to maintain, for each calendar month, an
average daily balance of short-term liquid assets (generally those having
maturities of 12 months or less) equal to at least 1% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during the
preceding calendar month. For March 1996 the average liquidity and average
short-term liquidity ratios of Home Savings were 5.23% and 1.59%,
respectively.
<PAGE>
Each of the Company's sources of liquidity is influenced by various
uncertainties beyond the control of the Company. Scheduled loan payments are
a relatively stable source of funds, while loan prepayments and deposit flows
vary widely in reaction to market conditions, primarily market interest rates.
Asset sales are influenced by general market interest rates and other
unforeseeable market conditions. The Company's ability to borrow at
attractive rates is affected by its size, credit rating, the availability of
acceptable collateral and other market-driven conditions.
In order to manage the uncertainty inherent in its sources of funds, the
Company continually evaluates alternate sources of funds and maintains and
develops diversity and flexibility in the number and character of such
sources. The effect of a decline in any one source of funds generally can be
offset by use of an alternate source, although potentially at a different cost
to the Company.
LOANS RECEIVABLE. During the first quarter of 1996 cash of $1.2 billion
was used to originate loans. Gross loan originations in the first quarter of
1996 of $1.3 billion included $460.2 million of COFI ARMs with an average
factor of 264 basis points above COFI, $99.8 million of Treasury ARMs, $744.3
million of fixed rate loans and $16.6 million of consumer loans. Fixed rate
loans originated and designated for sale represented approximately 52% of
single family loan originations in the first quarter of 1996. Principal
payments on loans were $466.3 million in the first quarter of 1996, an
increase of $73.6 million or 19% from $392.7 million in the first quarter of
1995.
During the first quarter of 1996 the Company sold loans totaling $939.4
million. The Company designates certain loans as held for sale, including
most of its fixed rate originations. At March 31, 1996, the Company had
$259.2 million of loans held for sale. The loans designated for sale included
$249.1 million of fixed rate loans, $7.6 million of Treasury ARMs and $2.5
million in COFI ARMs.
At March 31, 1996 the Company was committed to fund mortgage loans
totaling $686.4 million, of which $383.6 million or 56% were COFI ARMs, $47.8
million or 7% were Treasury ARMs and $255.0 million or 37% were fixed rate
loans. The Company expects to fund such loans from its liquidity sources.
MBS. The Company designates certain MBS as available for sale. At March
31, 1996 the Company had $10.4 billion of MBS available for sale.
At March 31, 1996, the Company had $347.4 million of COFI ARMs and $79.7
million of Treasury ARMs securitized as Federal National Mortgage Association
mortgage pass-through securities. The Company classified these MBS as
available for sale.
DEPOSITS. Savings deposits were $33.9 billion at March 31, 1996, a
decrease of $296.6 million or less than 1% during the first quarter of 1996,
reflecting a minor net deposit outflow.
The purchase of deposits from Wells Fargo & Company will significantly
advance the Company's presence in the California market. At March 31, 1996,
78% of the Company's deposits were in California, compared to 77% at December
31, 1995.The Company intends to continue consideration of branch purchases and
sales as opportunities to consolidate the Company's presence in its key
strategic markets.
<PAGE>
BORROWINGS. Borrowings totaled $11.6 billion at March 31, 1996, a
decrease of $634.6 million or 5% during the first quarter of 1996 reflecting a
net reduction in short-term borrowings of $1.5 billion, partially offset by an
increase in FHLB and other borrowings of $836.3 million.
In the first quarter of 1996, the Company issued term notes totaling $1.6
billion to various brokerage firms. The notes will mature in one to two years
and have a weighted average interest rate of 4.85%. Such borrowings will be
used for general corporate purposes.
In February 1996, $200 million of the Company's medium term notes with a
coupon interest rate of 5.98% matured .
In March 1996, the Company paid maturing term notes, which totaled $300
million at an effective interest rate of 4.46%, and redeemed at par its 10.5%
subordinated notes totaling $250 million.
CAPITAL. Stockholders' equity was $3.0 billion at March 31, 1996, a
decrease of $104.2 million or 3% from December 31, 1995. The decrease is
primarily due to payments of $77.5 million to purchase 3.2 million shares of
the Company's common stock, a net change of $55.5 million to a net unrealized
loss on securities available for sale, and dividends paid to common and
preferred stockholders of $37.7 million, partially offset by net earnings of
$64.8 million. The net unrealized loss on securities available for sale at
March 31, 1996 was $35.4 million.
The OTS has adopted regulations that contain a three-part capital
standard requiring savings institutions to maintain "core" capital of at least
3% of adjusted total assets, tangible capital of at least 1.5% of adjusted
total assets and risk-based capital of at least 8% of risk-weighted assets.
Special rules govern the ability of savings institutions to include in their
capital computations investments in subsidiaries engaged in activities not
permissible for national banks, such as real estate development. In addition,
institutions whose exposure to interest-rate risk as determined by the OTS is
deemed to be above normal may be required to hold additional risk-based
capital. Home Savings believes it does not have above-normal exposure to
interest-rate risk.
Under OTS regulations which implement the "prompt corrective action"
system mandated by the Federal Deposit Insurance Corporation Improvement Act,
an institution is well capitalized if its ratio of total capital to risk-
weighted assets is 10% or more, its ratio of core capital to risk-weighted
assets is 6% or more, its ratio of core capital to total assets is 5% or more
and it is not subject to any written agreement, order or directive to meet a
specified capital level. At March 31, 1996 Home Savings met these standards.
Home Savings is in compliance with the OTS capital regulations. The
following table shows the capital amounts and ratios of Home Savings at March
31, 1996:
<TABLE>
<CAPTION>
Balance Ratio
---------- -------
(dollars in thousands)
<S> <C> <C>
Tangible capital (to adjusted total assets) $3,022,360 6.12%
Core capital (to adjusted total assets) 3,027,356 6.13
Core capital (to risk-weighted assets) 3,027,356 9.87
Total risk-based capital 3,683,140 12.01
</TABLE>
<PAGE>
The regulatory capital requirements applicable to Home Savings will
become more stringent as the amount of Home Savings' investment in real estate
development subsidiaries includable in capital is phased out on July 1, 1996.
Home Savings currently meets the requirements of the OTS regulations assuming
the present application of the full phase-out provisions. At March 31, 1996
the capital ratios computed on this more stringent, "fully phased-in" basis
were 6.10% for tangible capital, 6.11% for core capital, and 11.98% for risk-
based capital.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" as of January 1,
1996. The Company's long-lived assets affected by the adoption of SFAS No. 121
include premises and equipment and REI. In accordance with SFAS No. 121, the
Company reviews a long-lived asset for impairment whenever events or changes
in circumstances indicate that the carrying amount of the long-lived asset may
not be recoverable. Impairment exists for a long-lived asset when the
estimated undiscounted cash flows from the property are less than its carrying
value. An impairment loss, if any, is recognized as the amount by which the
carrying value of a long-lived asset exceeds its fair value. The Company
carries a long-lived asset held for sale at the lower of the carrying value or
fair value less costs to sell. An impairment loss, if any, is recognized as
the amount by which the carrying value of the long-lived asset held for sale
exceeds its fair value less costs to sell. The adoption of SFAS No. 121 did
not have a material effect on the Company's financial condition or results of
operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" as of January 1, 1996. SFAS No. 123 permits a choice of
accounting methods and requires additional disclosures for stock-based
employee compensation plans. SFAS No. 123 defines a fair value based method
of accounting for an employee stock option or similar equity instrument.
However, it also allows the continued use of the intrinsic value based method
of accounting as prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees." Regardless of the method used
to account for stock-based compensation, SFAS No. 123 requires that the fair
value of such compensation and certain other disclosures be included in the
Company's annual report. The Company plans to continue accounting for stock-
based employee compensation plans in accordance with APB No. 25 and will
disclose certain fair value information as prescribed by SFAS No. 123 in its
1996 annual report.
RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND
Home Savings is a BIF member institution. Home Savings' deposits are
treated in part as SAIF-insured and in part as BIF-insured. The BIF and the
SAIF are both administered by the FDIC. During 1995, Home Savings paid
deposit insurance premiums to the SAIF on its SAIF deposits and to the BIF on
its BIF deposits.
The reserves of the BIF have reached the statutorily designated reserve
ratio ("DRR"), defined as the ratio of the fund's net worth to the amount of
its total insured deposit liabilities, of 1.25%. The lowest deposit insurance
assessment rate for BIF deposits has therefore been reduced to $2,000 per
institution per year. The reserves of the SAIF have not reached its DRR of
1.25%. The lowest deposit insurance assessment rate for SAIF deposits
therefore remains 0.23% of covered deposits.
<PAGE>
The difference between BIF and SAIF assessment rates provides
institutions whose deposits are exclusively or primarily BIF-insured, such as
most commercial banks, a competitive advantage over institutions whose
deposits are primarily SAIF-insured, such as Home Savings. In order to
eliminate the difference between BIF and SAIF assessment rates, Congress
adopted a proposal in late 1995 to recapitalize SAIF to its DRR by means of a
special one-time assessment on SAIF-insured deposits. The proposal was
included as part of the Congressional balanced budget program which was then
vetoed by President Clinton and therefore has not been implemented. The
budget for fiscal 1996 which was ultimately adopted by Congress and signed by
President Clinton in early 1996 omitted the proposal. Congress continues to
consider the recapitalization of SAIF although the Company cannot predict
whether or when a recapitalization will be effected. If a recapitalization of
SAIF had been effected in 1995 as proposed by means of a special assessment
equal to 0.80% of SAIF deposits as of March 31, 1995, Home Savings would have
paid a special assessment of approximately $184 million, net of taxes. An
assessment of this amount would have had a material effect on the Company's
net earnings, but would not have had a material effect on the Company's total
assets or liquidity. Such an assessment would also not have materially
affected Home Savings' capital ratios and Home Savings would still have been
considered well-capitalized.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
11 Statement of Computation of Earnings per Share.
27 Financial Data Schedule. *
(b) Reports on Form 8-K.
The Registrant filed with the Commission a Current Report
on Form 8-K on March 28, 1996 with respect to the
Registrant's agreement to acquire 61 First Interstate
Bancorp branches from Wells Fargo & Company.
The Registrant filed with the Commission a Current Report
on Form 8-K on April 16, 1996 with the respect to its first
quarter earnings.
* Filed electronically with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: May 14, 1996 H. F. Ahmanson & Company
/s/ Kevin M. Twomey
-------------------------------
Kevin M. Twomey
Senior Executive Vice President
and Chief Financial Officer
(Authorized Signer)
/s/ George Miranda
-------------------------------
George Miranda
First Vice President and
Principal Accounting Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
<S> <C> <C>
11 Statement of Computation of Earnings
per Share. 29
27 Financial Data Schedule. *
<FN>
* Filed electronically with the Securities and Exchange Commission.
</FN>
</TABLE>
<PAGE>
H. F. Ahmanson & Company and Subsidiaries
Statement of Computation of Earnings Per Share
Exhibit 11
Common stock equivalents identified by the Company in determining its
primary earnings per common share are stock options and stock appreciation
rights. In addition, common stock equivalents used in the determination of
fully diluted earnings per common share include the effect, when such effect
is not anti-dilutive, of the 6% Cumulative Convertible Preferred Stock,
Series D which is convertible into 11.8 million shares of Common Stock at
$24.335 per share of Common Stock. The following is a summary of the
calculation of earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----------- -----------
(dollars in thousands,
except per share data)
<S> <C> <C>
Primary earnings (loss) per common share:
Earnings before cumulative effect of accounting change $ 64,755 $ 52,850
Less accumulated dividends on preferred stock (12,608) (12,608)
----------- -----------
Earnings attributable to common shares before cumulative
effect of accounting change $ 52,147 $ 40,242
Cumulative effect of change in accounting for goodwill - (234,742)
----------- -----------
Net earnings (loss) attributable to common shares $ 52,147 $ (194,500)
=========== ===========
Weighted average number of common shares outstanding 113,992,699 117,143,614
Dilutive effect of outstanding common stock equivalents 788,817 -
----------- -----------
Weighted average number of common shares as adjusted for
calculation of primary earnings (loss) per share 114,781,516 117,143,614
=========== ===========
Primary earnings per common share before cumulative effect
of accounting change $ 0.45 $ 0.34
Cumulative effect of change in accounting for goodwill - (2.00)
----------- -----------
Primary earnings (loss) per common share $ 0.45 $ (1.66)
=========== ===========
Fully diluted earnings (loss) per common share:
Earnings before cumulative effect of accounting change $ 64,755 $ 52,850
Less accumulated dividends on preferred stock (8,295) (12,608)
----------- -----------
Earnings attributable to common shares before cumulative
effect of accounting change $ 56,460 $ 40,242
Cumulative effect of change in accounting for goodwill - (234,742)
----------- -----------
Net earnings (loss) attributable to common shares $ 56,460 $ (194,500)
=========== ===========
Weighted average number of common shares outstanding 113,992,699 117,143,614
Dilutive effect of outstanding common stock equivalents 12,659,199 -
----------- -----------
Weighted average number of common shares as adjusted for
calculation of fully diluted earnings (loss) per share 126,651,898 117,143,614
=========== ===========
Fully diluted earnings per common share before cumulative
effect of accounting change $ 0.45 $ 0.34
Cumulative effect of change in accounting for goodwill - (2.00)
----------- -----------
Fully diluted earnings (loss) per common share $ 0.45 $ (1.66)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
of H. F. Ahmanson & Company for the three months ended March 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 683,480
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 278,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,419,862
<INVESTMENTS-CARRYING> 5,651,863
<INVESTMENTS-MARKET> 5,786,387
<LOANS> 30,471,139
<ALLOWANCE> 385,367
<TOTAL-ASSETS> 49,781,986
<DEPOSITS> 33,947,928
<SHORT-TERM> 2,048,431
<LIABILITIES-OTHER> 1,279,489
<LONG-TERM> 9,553,436
<COMMON> 0
0
0
<OTHER-SE> 2,952,702
<TOTAL-LIABILITIES-AND-EQUITY> 49,781,986
<INTEREST-LOAN> 574,855
<INTEREST-INVEST> 320,015
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 894,870
<INTEREST-DEPOSIT> 387,173
<INTEREST-EXPENSE> 577,888
<INTEREST-INCOME-NET> 316,982
<LOAN-LOSSES> 45,942
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 229,474
<INCOME-PRETAX> 102,096
<INCOME-PRE-EXTRAORDINARY> 102,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,755
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 2.64
<LOANS-NON> 751,489
<LOANS-PAST> 0
<LOANS-TROUBLED> 168,373
<LOANS-PROBLEM> 80,996
<ALLOWANCE-OPEN> 380,886
<CHARGE-OFFS> 48,137
<RECOVERIES> 6,676
<ALLOWANCE-CLOSE> 385,367
<ALLOWANCE-DOMESTIC> 385,367
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
