<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 September 30, 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
------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code. (818) 960-6311
-------------
Exhibit Index appears on page: 32
Total number of sequentially numbered pages: 33
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1996: $.01 par value - 105,496,154
shares.
<PAGE>
PART I. CONSOLIDATED 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.
It is suggested that these condensed consolidated financial statements 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.
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Assets September 30, 1996 December 31, 1995
- ------ ------------------- -----------------
<S> <C> <C>
Cash and amounts due from banks $ 758,312 $ 752,878
Securities purchased under agreements to resell 623,000 381,000
Other short-term investments 14,517 13,278
----------- -----------
Total cash and cash equivalents 1,395,829 1,147,156
Other investment securities held to
maturity [market value
$2,417 (September 30, 1996) and
$2,484 (December 31, 1995)] 2,440 2,448
Other investment securities available for
sale [amortized cost
$8,581 (September 30, 1996) and
$9,327 (December 31, 1995)] 9,074 9,908
Investment in stock of Federal Home
Loan Bank (FHLB), at cost 414,901 485,938
Mortgage-backed securities (MBS)
held to maturity [market value
$5,273,207 (September 30, 1996) and
$5,965,045 (December 31, 1995)] 5,253,208 5,825,276
MBS available for sale [amortized cost
$9,761,091 (September 30, 1996) and
$10,293,537 (December 31, 1995)] 9,610,020 10,326,866
Loans receivable less allowance for losses of
$398,290 (September 30, 1996) and
$380,886 (December 31, 1995) 31,728,580 30,273,514
Loans held for sale [market value
$127,178 (September 30, 1996) and
$992,550 (December 31, 1995)] 125,524 981,865
Accrued interest receivable 215,238 228,111
Real estate held for development and
investment (REI) less allowance for losses of
$164,298 (September 30, 1996)and
$283,748 (December 31, 1995) 192,846 234,855
Real estate owned held for sale (REO)
less allowance for losses of
$36,126 (September 30, 1996) and
$38,080 (December 31, 1995) 277,594 225,566
Premises and equipment 437,886 410,947
Goodwill and other intangible assets 321,088 147,974
Other assets 591,292 229,162
Income taxes 12,704 -
----------- -----------
$50,588,224 $50,529,586
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $35,399,443 $34,244,481
Securities sold under agreements to repurchase 1,705,000 3,519,311
Other short-term borrowings 50,000 -
FHLB and other borrowings 9,500,882 8,717,117
Other liabilities 1,460,265 873,313
Income taxes - 118,442
----------- -----------
Total liabilities 48,115,590 47,472,664
Stockholders' equity 2,472,634 3,056,922
----------- -----------
$50,588,224 $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 For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 567,001 $ 576,205 $ 1,700,934 $ 1,822,277
Interest on MBS 283,568 333,978 888,849 848,448
Interest and dividends on investments 17,406 38,983 40,298 121,989
----------- ----------- ----------- -----------
Total interest income 867,975 949,166 2,630,081 2,792,714
----------- ----------- ----------- -----------
Interest expense:
Deposits 377,011 504,241 1,137,181 1,428,477
Short-term borrowings 32,035 37,669 108,599 132,330
FHLB and other borrowings 152,693 92,812 449,509 312,044
----------- ----------- ----------- -----------
Total interest expense 561,739 634,722 1,695,289 1,872,851
----------- ----------- ----------- -----------
Net interest income 306,236 314,444 934,792 919,863
Provision for loan losses 35,783 29,175 115,626 81,184
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 270,453 285,269 819,166 838,679
----------- ----------- ----------- -----------
Other income:
Gain (loss) on sales of MBS - 2,586 (29) 11,866
Gain (loss) on sales of loans 3,307 (1,021) 24,501 989
Servicing income 18,114 16,688 49,916 44,550
Other fee income 34,386 26,542 92,496 76,896
Gain on sale of New York retail deposit branch system - 514,671 - 514,671
Gain on sales of investment securities 313 142 313 254
Other operating income 1,140 1,179 6,593 963
----------- ----------- ----------- -----------
57,260 560,787 173,790 650,189
----------- ----------- ----------- -----------
Other expenses:
SAIF recapitalization 243,862 - 243,862 -
Other general and administrative expenses 204,400 235,305 587,100 619,362
----------- ----------- ----------- -----------
General and administrative expenses (G&A) 448,262 235,305 830,962 619,362
Operations of REI 19,295 42,148 33,573 45,856
Operations of REO 25,225 21,007 78,216 61,665
Amortization of goodwill and other intangible assets 3,955 8,103 11,907 21,948
----------- ----------- ----------- -----------
496,737 306,563 954,658 748,831
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (benefit)
and cumulative effect of accounting change (169,024) 539,493 38,298 740,037
Provision for income taxes (benefit) (89,546) 266,495 (15,713) 349,800
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of accounting
change (79,478) 272,998 54,011 390,237
Cumulative effect of change in accounting for goodwill - - - (234,742)
----------- ----------- ----------- -----------
Net income (loss) $ (79,478) $ 272,998 $ 54,011 $ 155,495
=========== =========== =========== ===========
Income (loss) attributable to common shares $ (90,776) $ 264,703 $ 17,497 $ 130,610
============ =========== =========== ===========
Income (loss) per common share - primary:
Income (loss) before cumulative effect of accounting
change $ (0.85) $ 2.20 $ 0.16 $ 2.99
Cumulative effect of change in accounting for
goodwill - - - (1.99)
----------- ----------- ----------- -----------
Net income (loss) $ (0.85) $ 2.20 $ 0.16 $ 1.00
=========== =========== =========== ===========
Income (loss) per common share - fully diluted:
Income (loss) before cumulative effect of accounting
change $ (0.85) $ 2.03 $ 0.16 $ 2.80
Cumulative effect of change in accounting for
goodwill - - - (1.80)
----------- ----------- ----------- -----------
Net income (loss) $ (0.85) $ 2.03 $ 0.16 $ 1.00
=========== =========== =========== ===========
Common shares outstanding, weighted average:
Primary 106,282,651 118,507,477 110,750,825 118,059,572
Fully diluted 106,282,651 130,541,379 110,750,825 130,427,469
</TABLE>
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued (Unaudited)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Return on average assets (1) (0.65)% 2.04% 0.15% 0.38%
Return on average equity (1) (11.77)% 37.72% 2.53% 7.28%
Return on average tangible equity (1),(2) (11.79)% 55.59% 2.95% 25.09%
Efficiency ratio (1) 124.96% 65.79% 77.14% 59.48%
<FN>
(1) Excluding the effect of the SAIF recapitalization of $243.9 million and FIB branch acquisition costs of $14.0
million, the returns on average assets, average equity and average tangible equity and the efficiency ratio would
have been as follows:
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, 1996 September 30, 1996
-------------------------- -------------------------
<S> <C> <C>
Return on average assets 0.60% 0.56%
Return on average equity 10.86% 9.70%
Return on average tangible equity (2) 11.56% 10.34%
Efficiency ratio 53.08% 53.20%
<FN>
(2) Net income excluding amortization of goodwill and other intangible assets (net of applicable tax), and cumulative
effect of change in accounting for goodwill (net of applicable tax), as a percentage of average equity excluding
goodwill and other intangible assets (net of applicable tax). Prior periods have been restated to conform to
current presentation.
</TABLE>
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For The Nine
Months Ended September 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,011 $ 155,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of New York retail deposit branch system - (514,671)
Provision for losses on loans and real estate 171,483 151,170
Depreciation and amortization 69,905 69,075
Cumulative effect of change in accounting for goodwill - 234,742
Decrease in accrued interest receivable 12,873 54,808
Proceeds from sales of loans originated for sale 2,141,612 742,259
Loans originated for sale (1,310,546) (766,248)
Loans repurchased from investors (197,288) (52,276)
SAIF recapitalization accrual 243,862 -
Increase (decrease) in other liabilities (19,095) 209,412
Other, net (90,358) (123,364)
----------- -----------
Net cash provided by operating activities 1,076,459 160,402
----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available for sale 10,219 2,432,215
Proceeds from sales of MBS held to maturity - 491,100
Principal payments on loans 1,761,015 1,207,344
Principal payments on MBS 1,225,383 864,523
Loans originated for investment (net of refinances) (2,457,156) (3,811,345)
Loans purchased (1,142,696) (43,667)
MBS purchased (10,173) (535)
Net redemption (purchase) of FHLB stock 89,386 (22,209)
Other investment securities purchased (13,333) (6,008)
Proceeds from sales of other investment securities available for sale 12,731 537
Proceeds from maturities of other investment securities 1,348 253,756
Proceeds from sales of REO 322,820 245,794
Proceeds from sales of premises and equipment 3,023 78,212
Additions to premises and equipment (81,350) (73,512)
Goodwill from FIB branch acquisition (185,021) -
Other, net 3,744 7,146
----------- -----------
Net cash provided by (used in) investing activities (460,060) 1,623,351
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits (733,887) 786,921
Deposits purchased 1,888,849 1,299,322
Proceeds from deposits sold - (7,462,847)
Increase (decrease) in borrowings maturing in 90 days or less (959,311) 3,133,877
Proceeds from other borrowings 3,237,427 1,174,248
Repayment of other borrowings (3,260,421) (1,729,438)
Common stock purchased for treasury (255,308) -
Preferred stock redeemed (175,000) -
Dividends to stockholders (110,075) (115,247)
----------- -----------
Net cash used in financing activities (367,726) (2,913,164)
----------- -----------
Net increase (decrease) in cash and cash equivalents 248,673 (1,129,411)
Cash and cash equivalents at beginning of period 1,147,156 2,046,620
----------- -----------
Cash and cash equivalents at end of period $ 1,395,829 $ 917,209
=========== ===========
</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 would have reported net income for the third quarter of 1996
of $73.2 million, or $0.56 per fully diluted common share, excluding after tax
charges of $8.3 million, or $0.07 per share, related to the acquisition of 61
former First Interstate Bank branches from Wells Fargo & Company (the "FIB
branch acquisition"), and $144.4 million, or $1.34 per share, for the special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF").
Including these charges, the Company recorded a net loss of $79.5 million, or
$0.85 per share, for the third quarter of 1996.
For the third quarter of 1995, the Company reported net income of $273.0
million, or $2.03 per fully diluted common share, which included an after tax
gain of $252.7 million from the sale of the Company's New York retail deposit
branch system (the "New York sale"). Excluding the gain and certain charges,
the Company earned $65.6 million, or $0.44 per fully diluted common share, for
the third quarter of 1995.
For the first nine months of 1996, the Company would have reported net
income, excluding the third quarter charges, of $206.7 million, or $1.49 per
fully diluted common share. Including these charges, net income was $54.0
million, or $0.16 per share. This compares with $155.5 million, or $1.00 per
share, for the first nine months of 1995, which included the gain on the New
York sale and the adoption of an accounting change that resulted in the write-
off of $234.7 million of goodwill related to acquisitions prior to 1982.
FIB BRANCH ACQUISITION
The acquisition of the 61 former First Interstate branches by Home
Savings was completed at the close of business on September 20, 1996. In the
transaction, the Company acquired approximately $1.9 billion in deposits and
$1.1 billion in loans. The Company recorded approximately $185 million in
goodwill related to the acquisition. The Company's results of operations for
the third quarter and nine months of 1996 include operating results of the
acquired branches only after September 20, 1996.
<PAGE>
SAIF RECAPITALIZATION
On September 30, 1996, President Clinton signed a bill that included a
special assessment to recapitalize SAIF. The special assessment will be
payable in the fourth quarter of 1996, but has been reflected in the Company's
third quarter results. The Company's share will be approximately $243.9
million on a pre-tax basis or $144.4 million after tax. Although savings
institutions will still pay more than banks to the Federal Deposit Insurance
Corporation (approximately $0.06 per $100 in deposits versus $0.01 to be paid
by banks) for the next several years, the recapitalization of SAIF is a step
towards allowing the Company to compete on a more equal footing with banks.
RESULTS OF OPERATIONS
Net interest income totaled $306.2 million for the third quarter of 1996,
compared to $314.4 million in the third quarter of 1995 and $311.6 million in
the second quarter of 1996. The decrease of $8.2 million in net interest
income from the third quarter of 1995 is due mainly to a decrease of $4.3
billion in average interest-earning assets principally as a result of the New
York sale. The decrease of $5.4 million, or 2%, in net interest income from
the second quarter of 1996 is primarily due to an increase in the Company's
cost of funds. For the third quarter of 1996, the net interest margin was
2.61%, compared to 2.47% in the third quarter of 1995 and 2.66% in the second
quarter of 1996. At September 30, 1996, the net interest margin was 2.67%.
Other income totaled $57.3 million for the third quarter of 1996,
compared to $46.1 million, excluding the gain from the New York sale, in the
third quarter of 1995. The increase was primarily due to improvements in
other fee income from personal financial services, commissions on sales of
investment and insurance products and services and trustee fees.
General and administrative ("G&A") expenses totaled $448.3 million in the
third quarter of 1996, including $243.9 million for the SAIF special
assessment and $14.0 million associated with the FIB branch acquisition. This
compares to $235.3 million in the third quarter of 1995, which included
certain charges of $36.7 million. Excluding the SAIF recapitalization and
these other charges, G&A expenses in the third quarter of 1996 would have been
$190.4 million compared to $198.6 million in the third quarter of 1995.
During the third quarter of 1996, the Company provided $35.8 million for
loan losses, compared to $29.2 million in the third quarter of 1995. During
the first nine months of 1996, the Company provided $115.6 million for loan
losses compared to $81.2 million in the first nine months of 1995. Expenses
for the operations of foreclosed real estate ("REO") amounted to $25.2 million
in the third quarter of 1996, compared to $21.0 million in the third quarter
of 1995. During the first nine months of 1996, these expenses amounted to
$78.2 million, compared to $61.7 million in the first nine months of 1995.
In the third quarter of 1996, the Company added $20.1 million to its
allowance for real estate investments ("REI"), $19.0 million of which was
principally due to a revision in business plans for the disposition of one
commercial project. In the third quarter of 1995, the Company recorded a $40
million provision to the allowance for REI due to a deterioration in the value
of a major commercial real estate investment project. REI, net of allowances,
totaled $192.8 million at September 30, 1996 compared to $321.5 million at
September 30, 1995.
<PAGE>
The Company's operations for the third quarter of 1996 and the nine
months ended September 30, 1996 included tax benefits of $19.0 million
resulting from a reduction in the Company's valuation allowance for deferred
taxes. This reduction is attributable to the Company's development of tax
planning strategies that would be implemented, if necessary, to realize the
excess tax bases in certain investments.
ASSET QUALITY
During the third quarter of 1996, nonperforming assets ("NPAs") decreased
by $56.1 million. This is the largest quarterly decline in NPAs since the
fourth quarter of 1993. At September 30, 1996, NPAs reached their lowest
level since August 1995 and totaled $897.6 million, or 1.77% of total assets,
compared to $916.5 million, or 1.81% of total assets, at September 30, 1995.
Troubled debt restructurings ("TDRs") totaled $187.3 million at
September 30, 1996.
Net loan charge-offs for the third quarter of 1996 totaled $34.7 million,
compared to $33.8 million in the third quarter of 1995. For the first nine
months of 1996, net charge-offs totaled $112.9 million compared to $96.1
million in the first nine months of 1995.
The amount of NPAs peaked in February 1996, and since then the Company
has experienced a trend of declines in NPAs along with improvements in other
indicators of asset quality. Single family recoveries were $7.4 million in
the third quarter of 1996, compared with $2.9 million in the third quarter of
1995.
LOAN ORIGINATIONS
The Company funded $1.3 billion of residential mortgages in the third
quarter of 1996, compared to $1.5 billion in the third quarter of 1995.
Consumer loan production totaled $71.1 million during the quarter compared to
$15.7 million in the third quarter of 1995. During the first nine months of
1996, the Company originated $4.0 billion in residential mortgage loans and
$139.3 million in consumer loans.
CAPITAL
At September 30, 1996, Home Savings' capital ratios exceeded all
regulatory requirements for well-capitalized institutions, the highest
regulatory standard.
In the third quarter of 1996, the Company purchased 1.9 million shares of
its outstanding common stock at an average price per share of $25.48. Of the
$150 million authorized for the Company's second stock purchase program, $82.4
million remains at September 30, 1996. As of September 30, 1996, the Company
had purchased 13 million shares since initiating the first stock purchase
program in October 1995, or 11% of the then outstanding common shares, at an
average price of $24.36.
In addition, in the third quarter of 1996, the Company redeemed at par
its Preferred Stock, Series B, which totaled $175 million. This redemption
should contribute approximately $0.09 to annualized income per common share.
<PAGE>
TAX CONTINGENCY
The Company's financial statements do not contain any benefit related to
the Company's recent 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 September 30, 1996, the Company
had sold its deposit branching businesses and abandoned such branching rights
in four of these states, the first of which was Missouri in 1993. The
potential tax benefit related to these abandonments as of September 30, 1996
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
1993 federal income tax return, including the Company's recently proposed
adjustment related to the abandonment of its Missouri branching rights. The
Company, after consultation with its tax advisors, believes that its position
with respect to the tax treatment of these rights is the correct
interpretation under the tax and regulatory law. However, the Company also
believes that its position has never been directly addressed by any judicial
or administrative authority. It is therefore impossible to predict either the
IRS response to the Company's position, or if the IRS contests the Company's
position, the ultimate outcome of litigation that the Company is prepared to
pursue. Because of these uncertainties, the Company cannot presently
determine if any of the above described tax benefits will ever be realized and
there is no assurance to that effect. Therefore, in accordance with generally
accepted accounting principles, the Company does not believe it is appropriate
at this time to reflect these tax benefits in its financial statements. This
position will be reviewed by the Company from time to time as these
uncertainties are resolved.
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $306.2 million in the third quarter of 1996, a
decrease of $8.2 million, or 3%, compared to the third quarter of 1995, and
was $934.8 million in the first nine months of 1996, an increase of $14.9
million, or 2%, compared to the first nine months of 1995. The following
tables present 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 September 30,
-----------------------------------------------------------------
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 $30,679,849 $567,001 7.39% $30,740,453 $576,205 7.50%
MBS 15,167,847 283,568 7.39* 17,819,246 333,978 7.50*
----------- -------- ----------- --------
Total loans and MBS 45,847,696 850,569 7.39* 48,559,699 910,183 7.50*
Investment securities 843,973 17,406 8.25 2,463,031 38,983 6.33
----------- -------- ----------- --------
Interest-earning assets 46,691,669 867,975 7.41* 51,022,730 949,166 7.44*
-------- --------
Other assets 2,377,437 2,591,933
----------- -----------
Total assets $49,069,106 $53,614,663
=========== ===========
Interest-costing liabilities:
Deposits $33,661,816 377,011 4.48 $42,386,182 504,241 4.76
----------- -------- ----------- --------
Borrowings:
Short-term 2,087,544 32,035 6.14 2,316,567 37,669 6.50
FHLB and other 9,470,132 152,693 6.45 5,229,260 92,812 7.10
----------- -------- ----------- --------
Total borrowings 11,557,676 184,728 6.39 7,545,827 130,481 6.92
----------- -------- ----------- --------
Interest-costing liabilities 45,219,492 561,739 4.97 49,932,009 634,722 5.08
-------- --------
Other liabilities 1,148,890 787,361
Stockholders' equity 2,700,724 2,895,293
----------- -----------
Total liabilities and
stockholders' equity $49,069,106 $53,614,663
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,472,177 2.44* $ 1,090,721 2.36*
=========== ===========
Net interest income/
Net interest margin $306,236 2.61* $314,444 2.47*
======== ========
<FN>
* Excludes the effect of the unrealized gain or loss on MBS available for sale.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------
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 $30,649,111 $1,700,934 7.40% $33,355,052 $1,822,277 7.28%
MBS 15,687,308 888,849 7.50* 15,771,929 848,448 7.16*
----------- ---------- ----------- ----------
Total loans and MBS 46,336,419 2,589,783 7.43* 49,126,981 2,670,725 7.25*
Investment securities 795,372 40,298 6.76 2,636,494 121,989 6.17
----------- ---------- ----------- ----------
Interest-earning assets 47,131,791 2,630,081 7.42* 51,763,475 2,792,714 7.19*
--------- ----------
Other assets 2,415,208 2,556,745
----------- -----------
Total assets $49,546,999 $54,320,220
=========== ===========
Interest-costing liabilities:
Deposits $33,700,428 1,137,181 4.50 $41,856,532 1,428,477 4.55
----------- --------- ----------- ----------
Borrowings:
Short-term 2,402,656 108,599 6.03 2,755,283 132,330 6.40
FHLB and other 9,425,960 449,509 6.36 6,033,155 312,044 6.90
----------- --------- ----------- ----------
Total borrowings 11,828,616 558,108 6.29 8,788,438 444,374 6.74
----------- --------- ----------- ----------
Interest-costing liabilities 45,529,044 1,695,289 4.96 50,644,970 1,872,851 4.93
--------- ----------
Other liabilities 1,176,257 829,047
Stockholders' equity 2,841,698 2,846,203
----------- -----------
Total liabilities and
stockholders' equity $49,546,999 $54,320,220
=========== ===========
Excess interest-earning assets/
Interest rate spread $ 1,602,747 2.46* $ 1,118,505 2.26*
=========== ===========
Net interest income/
Net interest margin $ 934,792 2.64* $ 919,863 2.37*
========== ==========
<FN>
* Excludes the effect of the unrealized gain or loss on MBS available for sale.
</TABLE>
Included in net interest income were provisions for losses on delinquent
interest of $9.9 million and $9.3 million in the third quarter of 1996 and
1995, respectively, related to nonaccrual loans which had the effect of
reducing the net interest margin by eight basis points and seven basis points,
respectively. Such provisions came to $37.8 million in the first nine months
of 1996 and $35.3 million the first nine months of 1995, reducing the net
interest margin by 10 basis points and nine basis points, respectively.
<PAGE>
The following table presents the changes for the third quarter and first
nine months of 1996 from the respective periods of 1995 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.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ----------------------------------
1996 Versus 1995 1996 Versus 1995
Increase/(Decrease) Due to Increase/(Decrease) Due to
--------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $ (1,090) $ (8,114) $ (9,204) $(152,286) $ 30,943 $(121,343)
MBS (a) (45,574) (4,836) (50,410) 468 39,933 40,401
Investment securities (40,064) 18,487 (21,577) (94,651) 12,960 (81,691)
-------- -------- --------- --------- -------- ---------
Total interest income (86,728) 5,537 (81,191) (246,469) 83,836 (162,633)
-------- -------- --------- --------- -------- ---------
Interest expense on:
Deposits (98,951) (28,279) (127,230) (275,746) (15,550) (291,296)
Short-term borrowings (3,611) (2,023) (5,634) (16,347) (7,384) (23,731)
FHLB and other borrowings 67,501 (7,620) 59,881 159,688 (22,223) 137,465
-------- -------- --------- --------- -------- ---------
Total interest expense (35,061) (37,922) (72,983) (132,405) (45,157) (177,562)
-------- -------- --------- --------- -------- ---------
Net interest income $(51,667) $ 43,459 $ (8,208) $(114,064) $128,993 $ 14,929
======== ======== ========= ========= ======== =========
<FN>
(a) Excludes the effect of the unrealized gain or loss on MBS available for sale.
</TABLE>
The preceding three tables identify the components of the changes in net
interest income between the third quarters and nine month periods of 1996 and
1995. Net interest income decreased $8.2 million, or 3%, in the third quarter
of 1996 as compared to the third quarter of 1995. Net interest income
increased $14.9 million, or 2%, for the first nine months of 1996 as compared
to the same period of 1995. The decrease in net interest income between third
quarter periods resulted primarily from the decrease in the average balance of
interest-earning assets.
The yield on a majority of the Company's interest-earning assets is tied
to the monthly weighted average cost of funds for FHLB Eleventh District
member savings institutions as computed by the FHLB of San Francisco ("COFI").
The FHLB of San Francisco currently reports COFI at the end of the month
following the month to which it relates. The Company's COFI ARMs generally
commence accruing interest based on the most recently reported COFI during the
month after it is reported. As a result, changes in the Company's COFI ARMs
generally reflect changes in the cost of funds of FHLB Eleventh District
member savings institutions two to three months earlier. During the first
nine months of 1996, this lag delayed the effect on the Company's net interest
income of a decline in COFI and yields on COFI-indexed assets were higher than
during the first nine months of 1995. The increase in the yield on these
COFI-indexed assets was more than enough to offset the decline in the average
balance of total interest-earning assets and the increase in the Company's
cost of funds supporting those assets. In addition, excess interest-earning
assets increased by $351.8 million in the first nine months of 1996 compared
to the same period of 1995. The declines in average interest-earning assets
for the 1996 periods compared to the 1995 periods were principally due to the
New York sale.
<PAGE>
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. In June 1996, the
Company introduced two new loan products tied to indices other than COFI, the
12-MAT loan, which is tied to the 12-Month Average Treasury Index, and LAMA
loan, which is tied to the LIBOR Annual Monthly Average. The addition of
these new loan products is intended to diversify the interest profile of the
Company's earning assets.
Net interest income decreased to $306.2 million for the third quarter of
1996, compared with $311.6 million in the second quarter of 1996. The
decrease in net interest income from the second quarter of 1996 is due to a
narrowing of the net interest margin due principally to an increase in the
Company's cost of funds. For the third quarter of 1996, the net interest
margin was 2.61% compared to 2.66% for the second quarter of 1996. At
September 30, 1996, the net interest margin was 2.67% compared to 2.61% at
June 30, 1996. The higher margin at September 30, 1996 includes the effect of
the higher yielding loans and lower costing deposits obtained in the FIB
branch acquisition. Because those assets and deposits were owned by the
Company for only the last ten days of the third quarter, they had a minimal
effect on the margin for the quarter. 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 $35.8 million in the third quarter of
1996, an increase of $6.6 million, or 23%, from the $29.2 million provision
for the third quarter of 1995. The provision for losses was $115.6 million in
the first nine months of 1996, an increase of $34.4 million, or 42%, from the
$81.2 million provision for the first nine months of 1995. The increases in
the provision during the third quarter and the first nine months of 1996 were
due to weakness in the Southern California real estate market and other
factors. The allowance for loan losses included $14.7 million relating to
loans from the FIB branch acquisition. 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 MBS. There were no sales of MBS in the third
quarter of 1996 compared to sales of MBS totaling $641.9 million for a pre-tax
gain of $2.6 million in the third quarter of 1995. In the first nine months
of 1996, MBS totaling $10.2 million were sold for a slight pre-tax loss
compared to a pre-tax gain of $11.9 million on sales of MBS totaling $2.2
billion in the first nine months of 1995.
During the third quarter of 1995, MBS totaling $715.7 million were sold
to partially fund the New York sale, resulting in a pre-tax loss of $14.0
million which was included in the gain on the New York sale as a related
expense. Included in these sales were MBS originally designated as held to
maturity of $503.3 million, which were sold at a pre-tax loss of $12.2
million.
<PAGE>
GAIN (LOSS) ON SALES OF LOANS. During the third quarter of 1996, loans
classified as held for sale totaling $477.5 million were sold for a pre-tax
gain of $3.3 million compared to loans totaling $508.6 million sold for a pre-
tax loss of $1.0 million in the third quarter of 1995. The loans sold in the
third quarter of 1996 consisted of $278.9 million in fixed rate loans, $158.6
million in COFI ARMs and $40.1 million in ARMs tied to U.S. Treasury
securities ("Treasury ARMs"). In the first nine months of 1996, loans
originated for sale totaling $2.1 billion were sold for a pre-tax gain of
$24.5 million compared to such loans totaling $745.4 million sold for a pre-
tax gain of $1.0 million in the first nine months of 1995. The loans sold for
the first nine months of 1996 consisted of $1.5 billion in fixed rate loans,
$419.1 million in COFI ARMs and $219.4 million in Treasury ARMs. 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.
The Company adopted 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. 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, the state where the collateral is
located and collateral type. MSR totaling $29.7 million were capitalized in
the first nine months of 1996, including MSR of $1.3 million on loans held for
sale at September 30, 1996. During the first nine months of 1995, MSR of $9.2
million were capitalized. The valuation allowance for MSR impairment was $1.1
million as of September 30, 1996.
SERVICING INCOME. Servicing income was $18.1 million in the third
quarter of 1996, an increase of $1.4 million or 8% from $16.7 million for the
third quarter of 1995, and was $49.9 million in the first nine months of 1996,
an increase of $5.3 million or 12% from $44.6 million in the first nine months
of 1995. The increase for the first nine months was primarily due to a $1.8
billion increase in the average portfolio of loans serviced for investors,
partially offset by a decrease of three basis points in the average servicing
fee rate to 0.70%. During the first nine months of 1996, $0.6 million was
added to the valuation allowance. There were no other changes in the
valuation allowance during the first nine months of 1996. At September 30,
1996 and 1995, the portfolio of loans serviced for investors was $13.5 billion
and $12.9 billion, respectively.
OTHER FEE INCOME. Other fee income was $34.4 million in the third
quarter of 1996, an increase of $7.9 million or 30% from $26.5 million for the
third quarter of 1995. The increase was primarily due to increases of $5.4
million in fees generated by personal financial services and $1.3 million in
commissions on the sales of investment and insurance services and products.
Other fee income was $92.5 million for the first nine months of 1996, an
increase of $15.6 million or 20% from $76.9 million for the same period of
1995. The increase was primarily due to increases of $8.0 million in fees
generated by personal financial services, $4.2 million in commissions on the
sales of investment and insurance services and products and $2.1 million in
trustee fees.
<PAGE>
GAIN ON SALE OF NEW YORK RETAIL DEPOSIT BRANCH SYSTEM. In September
1995, the Company sold its deposits totaling $8.1 billion and branch premises
in New York, resulting in a pre-tax gain of $514.7 million. The gain is net
of the write-off of goodwill and other intangibles of $106.9 million and other
expenses associated with the sale. The gain on the New York sale, after
taxes, was $252.7 million.
OTHER OPERATING INCOME. Other operating income was $6.6 million for the
first nine months of 1996, an increase of $5.6 million from $1.0 million for
the same period 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 $448.3 million in the third quarter of
1996, an increase of $213.0 million or 91% from $235.3 million in the third
quarter of 1995, and were $831.0 million for the first nine months of 1996, an
increase of $211.6 million or 34% from $619.4 million for the same period of
1995. The increases in G&A expenses for the third quarter and first nine
months of 1996 are primarily due to the special SAIF recapitalization charge
of $243.9 million. The Company also recognized approximately $14.0 million in
expenses in the third quarter of 1996 related to the FIB branch acquisition,
and approximately $15.8 million of costs associated with major business
initiatives such as Project HOME Run, consumer lending, and electronic banking
during the first nine months of 1996. This compares to certain charges
recognized in the third quarter of 1995 of $25.7 million to bring certain
premises to fair value, reflecting the Company's change in business plans to
sell these premises, and $11.0 million associated with the Company's major
business initiatives. The efficiency ratio is defined by the Company as G&A
expenses as a percentage of net interest income plus loan servicing and other
fee income. The efficiency ratio, excluding the effect of the SAIF
recapitalization and FIB branch acquisition costs in 1996 and the premises
charges in 1995, would have been 53.1% for the third quarter of 1996 compared
to 65.8% for the third quarter of 1995, and would have been 53.2% for the
first nine months of 1996 compared to 59.5% for the first nine months of 1995.
OPERATIONS OF REI. Losses from operations of REI were $19.3 million in
the third quarter of 1996, a decrease of $22.8 million from losses of $42.1
million in the third quarter of 1995. Losses from operations of REI were
$33.6 million for the first nine months of 1996, a decrease of $12.3 million
from $45.9 million compared to the same period of 1995. Operations of REI for
the first nine months of 1996 include a $19.0 million addition to the
allowance for losses recognized in the third quarter of 1996 principally due
to a revision in business plans for the disposition of one commercial project.
Operations of REI for the first nine months of 1995 reflect a $40.0 million
provision for losses recognized during the third quarter of 1995 due largely
to a deterioration in the value of a major commercial REI project in
California.
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
certain properties. No new projects have been initiated since 1990.
<PAGE>
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 $25.2 million in
the third quarter of 1996, an increase of $4.2 million or 20% from losses of
$21.0 million for the third quarter of 1995. The increase was primarily due
to increases of $3.3 million in net operating expenses. For the first nine
months of 1996, losses from operations of REO were $78.2 million, an increase
of $16.5 million or 27% from $61.7 million for the same period of 1995,
reflecting increases of $5.4 million in losses on sales of REO, $9.0 million
in net operating expenses and $2.2 million in the provision for losses. 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 acquisitions of
banking or thrift institutions initiated after September 30, 1982, continues
to be amortized in accordance with SFAS No. 72.
Amortization of goodwill and other intangible assets was $4.0 million for
the third quarter of 1996, a decrease of $4.1 million or 51% from $8.1 million
for the third quarter of 1995. For the first nine months of 1996,
amortization of goodwill and other intangible assets was $11.9 million, a
decrease of $10.0 million or 46% from $21.9 million for the same period of
1995. The declines in amortization reflect the reduction in the goodwill
balance resulting from the New York sale.
Upon completion of the FIB branch acquisition, the Company recorded
$185.0 million in goodwill which will be amortized over 15 years.
PROVISION FOR INCOME TAXES (BENEFIT). The effective tax (benefit) rates
for the third quarter of 1996 and 1995 were (53.0)% and 49.4%, respectively.
For the comparable nine month periods, the effective tax (benefit) rates were
(41.0)% in 1996 and 47.3% in 1995. The tax benefits recorded in the third
quarter and the first nine months of 1996 include a $19.0 million reduction in
the Company's valuation allowance for deferred taxes related to the Company's
development of tax planning strategies that would be implemented, if
necessary, to realize the excess tax bases in certain investments. The
effective tax rates for the comparable 1995 periods include the tax effect of
nondeductible goodwill amortization and write-offs
<PAGE>
FINANCIAL CONDITION
The Company's consolidated assets were $50.6 billion at September 30,
1996, an increase of $58.6 million or less than 1% from $50.5 billion at
December 31, 1995. The increase includes the effects of the FIB branch
acquisition, in which the Company purchased approximately $1.1 billion of
loans and $1.9 billion of deposits, and recorded $185.0 million in goodwill
related to the acquisition. The FIB branch acquisition accelerates the
Company's transition into a full-service consumer bank. Of the loans
purchased, approximately $593.4 million are business banking and consumer
loans with the remainder being residential mortgage loans. The increase in
assets resulting from the FIB branch acquisition was substantially offset by
sales of and payments on loans and MBS.
During late 1994 the Company began offering ARMs which provide for
interest rates that adjust based upon changes in the yields of U.S. Treasury
securities, including the 12-MAT loan which was introduced in June 1996. The
Company originated $772.5 million of these Treasury ARMs, including $506.7
million of 12-MAT loans, during the first nine months of 1996. At September
30, 1996, there were $493.9 million of 12-MAT loans in the Company's loan
portfolio. Since the second quarter of 1996, the Company has increasingly
emphasized the marketing of these products over its COFI products in an effort
to restructure its loan portfolio. However, due to the longtime emphasis on
originating COFI loans and their predominant balance in the current portfolio
any benefits from loans tied to other indices will be realized slowly over
time.
The Company's primary business continues to be the origination of loans
on residential real estate properties. The Company originated $4.0 billion in
residential mortgage loans and $139.3 million in consumer loans during the
first nine months of 1996 compared to $4.8 billion in residential mortgage
loans and $16.8 million in consumer loans during the first nine months of
1995. Loans on single family homes (one-to-four units) accounted for 76% of
the total loan origination volume in the first nine months of 1996, and 62% of
total originations were ARMs. In the first nine months of 1996, these
originations included $1.7 billion of COFI ARMs, $1.5 billion of fixed rate
loans, $772.5 million of Treasury ARMs (of which $506.7 million were 12-MAT
loans), $58.7 million in LAMA loans and $144.1 million of consumer and
business loans.
In the first nine months of 1996, approximately 68% of mortgage loan
originations were on properties located in California. At September 30, 1996,
approximately 97% of the loan and MBS mortgage portfolio was secured by
residential properties, including 76% secured by single family properties.
The following table summarizes the Company's gross mortgage portfolio by
state and property type at September 30, 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 $25,050,557 70.60% $8,891,337 93.75% $1,108,528 76.02% $35,050,422 75.50%
Florida 2,536,783 7.15 31,337 0.33 3,544 0.24 2,571,664 5.54
New York 1,977,937 5.58 197,129 2.08 171,175 11.74 2,346,241 5.05
Illinois 1,792,477 5.05 87,319 0.92 9,621 0.66 1,889,417 4.07
Texas 1,147,054 3.23 72,898 0.77 25,939 1.78 1,245,891 2.68
Other 2,977,681 8.39 204,331 2.15 139,354 9.56 3,321,366 7.16
----------- ---------- ---------- ----------- ------
$35,482,489 76.43 $9,484,351 20.43 $1,458,161 3.14 $46,425,001 100.00%
=========== ========== ========== =========== ======
</TABLE>
<PAGE>
The mortgage 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 September 30, 1996. Approximately
15% of loans originated during the first nine months of 1996 had LTV ratios in
excess of 80%, all of which were loans on single family properties, including
5% 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.
At September 30, 1996 the Company had $633.1 million of consumer loans
and $102.4 million of business loans, the majority of which were acquired in
the FIB branch acquisition. At September 30, 1995 the Company had only $16.8
million of consumer loans in its portfolio. During the first nine months of
1996 the Company funded $139.3 million of consumer loans. The Company is
continuing to market consumer loans through its entire distribution network
and intends to begin rolling out the origination of business loans to its
entire California branch network in the fourth quarter of 1996. Both
activities are considered central to the Company's objective of positioning
itself as a full service consumer bank.
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.")
COFI ARMs do not immediately reflect current market interest rate
movements (referred to as the "COFI lag"). The COFI lag arises because (1)
COFI is determined based on the cost of FHLB Eleventh District member savings
institutions' interest-costing liabilities, some of which do not reprice
immediately and (2) the Company's COFI ARMs reprice monthly based on changes
in the cost of such liabilities approximately two months earlier. COFI is
subject to influences which may not generally affect 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.
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 mortgage
loan and MBS portfolio, with the majority of originated ARMs indexed to COFI.
At September 30, 1996, 95.9% of the Company's $46.7 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
September 30, 1996, up two basis points from 247 basis points at December 31,
1995.
The Company intends to originate and sell fixed rate mortgages and
certain ARMs in the secondary market. As a result, the Company's portfolio
size may be reduced through asset sales from its held for sale portfolio as
opportunities arise and through loan payoffs. During the first nine months of
1996, the Company sold a total of $2.1 billion in loans from its held for sale
portfolio, including $1.5 billion in fixed rate loans, $419.1 million of COFI
ARMs and $219.4 million of Treasury ARMs.
<PAGE>
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
diversification away from COFI on certain interest-earning assets. Between
their introduction in June 1996 and September 1996, originations of 12-MAT and
LAMA loans were $506.7 million and $58.7 million, respectively. The Company
manages the maturities of its borrowings to balance changes in the demand for
deposit maturities. Deposit funds acquired in the FIB branch acquisition that
exceeded the amount required to support the assets acquired were used by the
Company to repay certain borrowings. 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.
The following table presents the components of the Company's interest
rate sensitive asset and liability portfolios by repricing periods
(contractual maturity as adjusted for frequency of repricing) as of September
30, 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 $ 1,063,932 2% $ 1,061,492 $ 6 $ 2,434 $ - $ -
Impact of hedging (LIBOR-indexed
amortizing swaps) - - (79,772) - 79,772 - -
----------- --- ----------- ---------- ----------- ---------- -----------
Total investment securities 1,063,932 2 981,720 6 82,206 - -
----------- --- ----------- ---------- ----------- ---------- -----------
Loans and MBS
MBS
ARMs 14,511,431 30 14,511,431 - - - -
Other 351,797 1 - - 3,049 83 348,665
Loans
ARMs 30,286,179 64 27,419,821 970,581 1,493,372 54,327 348,078
Other 1,567,925 3 160,369 - - - 1,407,556
Impact of hedging (interest
rate swaps) - - 297,800 (148,600) (149,200) - -
----------- --- ----------- ----------- ----------- --------- ----------
Total loans and MBS 46,717,332 98 42,389,421 821,981 1,347,221 54,410 2,104,299
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-earning assets $47,781,264 100% $43,371,141 $ 821,987 $ 1,429,427 $ 54,410 $2,104,299
=========== === =========== =========== =========== ========= ==========
Interest-costing liabilities:
Deposits
Transaction accounts $11,261,537 24% $11,261,537 $ - $ - $ - $ -
Term accounts 24,137,906 52 12,202,398 7,871,053 4,052,427 11,938 90
----------- --- ----------- ----------- ----------- --------- ----------
Total deposits 35,399,443 76 23,463,935 7,871,053 4,052,427 11,938 90
----------- --- ----------- ----------- ----------- --------- ----------
Borrowings
Short-term 1,755,000 4 1,755,000 - - - -
FHLB and other 9,500,882 20 4,972,795 2,158,923 1,942,294 390,342 36,528
----------- --- ----------- ----------- ----------- --------- ----------
Total borrowings 11,255,882 24 6,727,795 2,158,923 1,942,294 390,342 36,528
----------- --- ----------- ----------- ----------- --------- ----------
Total interest-costing
liabilities $46,655,325 100% $30,191,730 $10,029,976 $ 5,994,721 $ 402,280 $ 36,618
=========== === =========== =========== =========== ========= ==========
Hedge-adjusted interest-earning
assets more/(less) than
interest-costing liabilities $ 1,125,939 $13,179,411 $(9,207,989) $(4,565,294) $(347,870) $2,067,681
=========== =========== =========== =========== ========= ==========
Cumulative interest sensitivity gap $13,179,411 $ 3,971,422 $ (593,872) $(941,742) $1,125,939
=========== =========== =========== ========= ==========
Percentage of hedge-adjusted
interest-earning assets to
interest-costing liabilities 102.41%
Percentage of cumulative interest
sensitivity gap to total assets 2.23%
</TABLE>
<PAGE>
The following table presents the interest rates, spread and margin at the
end of the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Average yield on:
Loans 7.36% 7.52%
MBS 7.44 7.69
Total loans and MBS 7.39 7.58
Investment securities 6.09 5.56
Interest-earning assets 7.36 7.54
Average rate on:
Deposits 4.38 4.65
Borrowings:
Short-term 5.91 5.97
FHLB and other 6.25 6.38
Total borrowings 6.20 6.26
Interest-costing liabilities 4.82 5.07
Interest rate spread 2.54 2.47
Net interest margin 2.67 2.66
</TABLE>
These rates exclude the effect of the unrealized gain or loss on MBS
available for sale.
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>
September 30, December 31, Increase
1996 1995 (Decrease)
------------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Single family $558,746 $630,395 $(71,649)
Multi-family 46,250 81,366 (35,116)
Commercial and industrial real estate 14,813 12,030 2,783
Consumer 197 - 197
-------- -------- --------
620,006 723,791 (103,785)
-------- -------- --------
REO:
Single family 241,104 193,729 47,375
Multi-family 20,179 14,139 6,040
Commercial and industrial real estate 16,311 17,698 (1,387)
-------- -------- --------
277,594 225,566 52,028
-------- -------- --------
Total NPAs:
Single family 799,850 824,124 (24,274)
Multi-family 66,429 95,505 (29,076)
Commercial and industrial real estate 31,124 29,728 1,396
Consumer 197 - 197
-------- -------- --------
Total $897,600 $949,357 $(51,757)
======== ======== ========
TDRs:
Single family $ 73,110 $ 45,592 $ 27,518
Multi-family 60,722 75,482 (14,760)
Commercial and industrial real estate 53,424 42,770 10,654
-------- -------- --------
Total $187,256 $163,844 $ 23,412
======== ======== ========
Other impaired major loans:
Multi-family $122,153 $ 32,273 $ 89,880
Commercial and industrial real estate 38,956 18,745 20,211
-------- -------- --------
$161,109 $ 51,018 $110,091
======== ======== ========
Ratio of NPAs to total assets 1.77% 1.88%
======== ========
Ratio of NPAs and TDRs to total assets 2.14% 2.20%
======== ========
Ratio of allowances for losses on loans
and REO to NPAs 46.52% 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 $240.6 million, net of an
allowance of $59.4 million, at September 30, 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 $375.1 million and $272.5 million at September
30, 1996 and December 31, 1995, respectively.
The following table presents NPAs, TDRs and other impaired major loans by
state at September 30, 1996:
<TABLE>
<CAPTION>
NPAs
---------------------------------------------------------
Commercial Other
Single Multi- and Impaired
Family Family Industrial Major
Residential Residential Real Estate Consumer Total TDRs Loans
----------- ----------- ----------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
California $635,944 $59,264 $24,796 $197 $720,201 $111,837 $125,228
New York 49,992 2,449 938 - 53,379 49,858 5,868
Florida 40,077 - 191 - 40,268 1,095 -
Illinois 23,479 - 1,034 - 24,513 426 -
Texas 9,898 1,450 1,644 - 12,992 7,563 9,397
Other 40,460 3,266 2,521 - 46,247 16,477 20,616
-------- ------- ------- ---- -------- -------- --------
$799,850 $66,429 $31,124 $197 $897,600 $187,256 $161,109
======== ======= ======= ==== ======== ======== ========
</TABLE>
Total NPAs were $897.6 million at September 30, 1996, or a ratio of NPAs
to total assets of 1.77%, a decrease of $51.8 million or 5% during the first
nine months of 1996 from $949.4 million, or 1.88% of total assets, at December
31, 1995. Single family NPAs were $799.9 million at September 30, 1996, a
decrease of $24.3 million or 3% during the first nine months of 1996 primarily
due to a decrease in NPAs secured by properties in California ($42.0 million),
partially offset by increases in the states of Illinois ($6.5 million),
Florida ($5.7 million), Texas ($1.8 million) and New York ($1.2 million).
Multi-family NPAs totaled $66.4 million at September 30, 1996, a decrease
of $29.1 million or 30% during the first nine months of 1996 primarily due to
declines in NPAs secured by properties in California ($25.0 million) and New
York ($3.1 million). Commercial and industrial real estate NPAs totaled $31.1
million at September 30, 1996, an increase of $1.4 million or 5% during the
first nine months of 1996 primarily due to increases in California ($3.4
million) and Texas ($1.6 million), partially offset by declines in the states
of Illinois ($2.1 million) and New York ($1.9 million).
TDRs were $187.3 million at September 30, 1996, an increase of $23.5
million or 14% during the first nine months of 1996 from $163.8 million at
December 31, 1995 primarily due to increases in TDRs secured by properties in
California of $10.6 million and New York of $9.5 million. Other impaired
major loans totaled $161.1 million at September 30, 1996, an increase of
$110.1 million from $51.0 million at December 31, 1995 primarily due to a
change during 1996 in the Company's identification of these loans based on
discussions with its regulators. The majority of the $110.1 million increase
in other impaired major loans resulted from this change in identification.
<PAGE>
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 $301.9 million of single family REO and $71.2 million of multi-
family and commercial and industrial REO in the first nine months of 1996. In
the first nine months of 1995, the Company sold $212.6 million of single
family REO and $66.4 million of multi-family and commercial and industrial
REO. In addition, the Company may, from time to time, offer packages of NPAs
for competitive bids.
ALLOWANCE FOR LOAN LOSSES. Management believes the Company's allowance
for loan losses was adequate at September 30, 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $382,485 $389,927 $380,886 $400,232
Provision for loan losses 35,783 29,175 115,626 81,184
Loan loss allowance for loans acquired 14,710 - 14,710 -
-------- -------- -------- --------
432,978 419,102 511,222 481,416
-------- -------- -------- --------
Charge-offs:
Single family (26,683) (19,736) (85,195) (63,899)
Multi-family (17,107) (10,242) (50,536) (33,582)
Commercial and industrial real estate (2,154) (8,754) (7,437) (17,103)
Consumer (67) - (87) -
-------- -------- -------- --------
(46,011) (38,732) (143,255) (114,584)
-------- -------- -------- --------
Recoveries:
Single family 7,384 2,860 22,238 11,040
Multi family 2,820 1,905 6,322 5,764
Commercial and industrial real estate 1,119 154 1,763 1,653
-------- -------- -------- --------
11,323 4,919 30,323 18,457
-------- -------- -------- --------
Net charge-offs (34,688) (33,813) (112,932) (96,127)
-------- -------- -------- --------
Ending balance $398,290 $385,289 $398,290 $385,289
======== ======== ======== ========
Ratio of net charge-offs to average
loans and MBS outstanding during
the periods (annualized) 0.30% 0.28% 0.32% 0.26%
==== ==== ==== ====
</TABLE>
The increases in the provision for loan losses and gross charge-offs for
the third quarter and first nine months of 1996 compared to the respective
periods in 1995 are due mainly to the weakness in the Southern California real
estate market. The increase in recoveries, especially in single family
properties, for the third quarter and first nine months of 1996 compared to
the respective periods in 1995 is mainly due to recoveries upon the sales of
REO properties.
<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>
September 30, 1996 December 31, 1995
----------------------------------- -----------------------------------
% of Loan % of Loan
and MBS % of Loan and MBS % of Loan
Portfolio in and MBS Portfolio in and MBS
Allowance Each Category Portfolio Allowance Each Category Portfolio
--------- ------------- --------- --------- ------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family $176,120 75.3 0.50% $174,242 77.2% 0.47%
Multi-family 153,249 20.0 1.62 147,708 19.4 1.59
Commercial and industrial
real estate 55,471 3.1 3.82 58,936 3.3 3.78
Consumer 8,650 1.4 1.35 - 0.1 -
Business 4,800 0.2 4.48 - - -
-------- ----- -------- -----
$398,290 100.0% 0.85 $380,886 100.0% 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 liquidity portfolio, totaling approximately $2.5 billion at September
30, 1996, increased $107.5 million or 4% from December 31, 1995 primarily due
to the FIB branch acquisition. Additional sources of cash inflows during the
first nine months of 1996 were principal payments and prepayments on loans and
MBS and proceeds from sales of loans and MBS. Including the effects of the
FIB branch acquisition, the loan and MBS portfolio declined by $690.2 million,
mainly due to sales and payments, and deposits increased by $1.2 billion
during the first nine months of 1996. These sources of funds were partially
offset by a decrease of $980.5 million in total borrowings. During the first
nine months of 1996, the Company repurchased a total of $255.3 million of its
own common stock and redeemed its Preferred Stock, Series B, totaling $175.0
million.
<PAGE>
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 September 1996 the average liquidity and
average short-term liquidity ratios of Home Savings were 5.21% and 1.83%,
respectively.
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 nine months of 1996 cash of $3.8
billion was used to originate loans. Gross loan originations, which include
refinanced loans but exclude the loans purchased in the FIB branch
acquisition, were $4.1 billion in the first nine months of 1996. Fixed rate
loans originated and designated for sale represented approximately 37% of
single family loan originations in the first nine months of 1996. Principal
payments on loans were $1.8 billion in the first nine months of 1996, an
increase of $553.7 million or 46% from $1.2 billion in the first nine months
of 1995.
During the third quarter of 1996 the Company acquired $1.1 billion in
loans from the FIB branch acquisition. Approximately $593.4 million of these
were business banking and consumer loans with the remainder being residential
mortgage loans. Approximately 5% of the acquired loans were non-COFI ARMs.
During the first nine months of 1996 the Company sold loans totaling $2.1
billion. At September 30, 1996, the Company had $125.5 million of loans held
for sale. The loans designated for sale included $92.7 million of fixed rate
loans, $21.8 million of Treasury ARMs and $11.0 million in COFI ARMs.
At September 30, 1996 the Company was committed to fund mortgage loans
totaling $426.8 million, of which $219.5 million or 51% were Treasury ARMs
(including $190.8 million of 12-MAT loans), $132.0 million or 31% were COFI
ARMs and $75.3 million or 18% were fixed rate loans. The Company expects to
fund such loans from its liquidity sources.
MBS. During the first nine months of 1996, the Company sold $10.2
million of fixed rate MBS available for sale. The Company designates certain
MBS as available for sale. At September 30, 1996 the Company had $9.6 billion
of MBS available for sale, comprised of $9.3 billion of ARM MBS and $303.5
million of fixed rate MBS. These MBS have an unrealized loss of $151.1
million. The unrealized loss is due mainly to temporary market-related
conditions and the Company expects no significant effect on its future
interest income.
<PAGE>
DEPOSITS. Savings deposits were $35.4 billion at September 30, 1996, an
increase of $1.2 billion or 3% during the first nine months of 1996. The net
deposit inflow was primarily due to the $1.9 billion in deposits from the FIB
branch acquisition. Excluding the FIB branch acquisition, there was a net
deposit outflow of $733.9 million primarily due to maturities of term
accounts, which have more sensitivity to market interest rates. The Company
manages its borrowings to balance changes in deposits.
At September 30, 1996, 79% of the Company's deposits were in California,
compared to 77% at December 31, 1995. During the third quarter of 1996, the
Company announced the sales of three branches located in San Antonio, Texas
with deposits of approximately $228 million and four Arizona branches with
deposits of approximately $270 million. The San Antonio and Arizona sales are
expected to close in the fourth quarter of 1996 and the first quarter of 1997,
respectively, and are subject to regulatory approval. The Company may engage
in additional branch purchases and sales to consolidate its presence in key
strategic markets.
BORROWINGS. Borrowings totaled $11.3 billion at September 30, 1996, a
decrease of $980.5 million or 8% during the first nine months of 1996. The
decrease reflects a net reduction in short-term borrowings of $1.8 billion,
partially offset by an increase in FHLB and other borrowings of $783.8
million. The FIB branch acquisition provided liquidity to pay down a portion
of more expensive short-term borrowings.
In July 1996, the Company issued medium term notes totaling $60 million.
The notes will mature on April 1997 and have a fixed interest rate of 6.00%.
In the first nine months of 1996, the Company issued term notes totaling $2.2
billion to various brokerage firms. The notes will mature in one to two years
and have a weighted average interest rate of 5.01%. Such borrowings are being
used for general corporate purposes.
In February 1996, $200 million of medium term notes with a coupon
interest rate of 5.98% matured. In March 1996, $300 million of term notes
with an effective interest rate of 4.46% matured, and the Company redeemed at
par its $250 million 10.5% subordinated notes.
CAPITAL. Stockholders' equity was $2.5 billion at September 30, 1996, a
decrease of $584.3 million or 19% from December 31, 1995. The decrease is
primarily due to payments of $255.3 million to purchase 10.6 million shares of
the Company's common stock, $175.0 million to redeem its 9.6% Preferred Stock,
Series B, a net change of $106.9 million to a net unrealized loss on
securities available for sale, and dividends paid to common and preferred
stockholders of $110.1 million. The net unrealized loss on securities
available for sale at September 30, 1996 was $86.8 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.
<PAGE>
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 September 30, 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
September 30, 1996:
<TABLE>
<CAPTION>
Balance Ratio
---------- -------
(dollars in thousands)
<S> <C> <C>
Tangible capital (to adjusted total assets) $2,694,467 5.38%
Core capital (to adjusted total assets) 2,698,852 5.39
Core capital (to risk-weighted assets) 2,698,852 8.51
Total risk-based capital (to risk-weighted assets) 3,377,781 10.65
</TABLE>
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 financial statements. 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 financial statements.
<PAGE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125
In September 1996 the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
control. Under this approach, after a transfer of financial assets, the
Company will recognize the financial and servicing assets it controls and the
liabilities incurred, and derecognize financial assets when control has been
surrendered and liabilities when extinguished. SFAS No. 125 provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 must be adopted for
financial statements for fiscal years beginning after December 31, 1996. The
impact on the Company of adopting SFAS No. 125 is not expected to be material
as the Company's existing procedures are generally in compliance with the
provisions of SFAS No. 125.
<PAGE>
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.
The Registrant filed with the Commission a Current Report
on Form 8-K, dated July 16, 1996, with respect to its
second 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: November 13, 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>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
<S> <C> <C>
11 Statement of Computation of Income
per Share. 33
27 Financial Data Schedule. *
<FN>
* Filed electronically with the Securities and Exchange Commission.
</TABLE>
<PAGE>
H. F. Ahmanson & Company and Subsidiaries
Statement of Computation of Income Per Share
Exhibit 11
Common stock equivalents identified by the Company in determining its
primary income (loss) per common share are stock options and stock
appreciation rights. In addition, common stock equivalents used in the
determination of fully diluted income 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 income (loss) per common share:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary income (loss) per common share:
Income (loss) before cumulative effect of
accounting change $ (79,478) $ 272,998 $ 54,011 $ 390,237
Less accumulated dividends on preferred stock (11,298) (12,607) (36,514) (37,823)
----------- ----------- ----------- -----------
Income (loss) attributable to common shares
before cumulative effect of accounting change (90,776) 260,391 17,497 352,414
Cumulative effect of change in accounting for
goodwill - - - (234,742)
----------- ----------- ----------- -----------
Net income (loss) attributable to common
shares $ (90,776) $ 260,391 $ 17,497 $ 117,672
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 106,282,651 117,609,880 109,855,064 117,456,961
Dilutive effect of outstanding common stock
equivalents - 897,597 895,761 602,611
----------- ----------- ----------- -----------
Weighted average number of common shares as
adjusted for calculation of primary
income (loss) per share 106,282,651 118,507,477 110,750,825 118,059,572
=========== =========== =========== ===========
Primary income (loss) per common share before
cumulative effect of accounting change $ (0.85) $ 2.20 $ 0.16 $ 2.99
Cumulative effect of change in accounting for
goodwill - - - (1.99)
----------- ----------- ----------- -----------
Primary income (loss) per common share $ (0.85) $ 2.20 $ 0.16 $ 1.00
=========== ============ ============ ============
Fully diluted income (loss) per common share:
Income (loss) before cumulative effect of
accounting change $ (79,478) $ 272,998 $ 54,011 $ 390,237
Less accumulated dividends on preferred
stock (11,298) (8,295) (36,514) (24,885)
----------- ----------- ----------- -----------
Income (loss) attributable to common shares
before cumulative effect of accounting change (90,776) 264,703 17,497 365,352
Cumulative effect of change in accounting for
goodwill - - - (234,742)
----------- ----------- ----------- -----------
Net income (loss) attributable to common
shares $ (90,776) $ 264,703 $ 17,497 $ 130,610
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 106,282,651 117,609,880 109,855,064 117,456,961
Dilutive effect of outstanding common stock
equivalents - 12,931,499 895,761 12,970,508
----------- ----------- ----------- -----------
Weighted average number of common shares as
adjusted for calculation of fully diluted
income (loss) per share 106,282,651 130,541,379 110,750,825 130,427,469
=========== =========== =========== ===========
Fully diluted income (loss) per common share
before cumulative effect of accounting change $ (0.85) $ 2.03 $ 0.16 $ 2.80
Cumulative effect of change in accounting for
goodwill - - - (1.80)
----------- ----------- ----------- -----------
Fully diluted income (loss) per common
share $ (0.85) $ 2.03 $ 0.16 $ 1.00
=========== =========== =========== ===========
</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 nine months ended
September 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CAPTION>
<S> <C>
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 758,312
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 623,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,619,094
<INVESTMENTS-CARRYING> 5,255,648
<INVESTMENTS-MARKET> 5,275,624
<LOANS> 31,854,104
<ALLOWANCE> 398,290
<TOTAL-ASSETS> 50,588,224
<DEPOSITS> 35,399,443
<SHORT-TERM> 1,755,000
<LIABILITIES-OTHER> 1,460,265
<LONG-TERM> 9,500,882
<COMMON> 0
0
0
<OTHER-SE> 2,472,634
<TOTAL-LIABILITIES-AND-EQUITY> 50,588,224
<INTEREST-LOAN> 1,700,934
<INTEREST-INVEST> 929,147
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,630,081
<INTEREST-DEPOSIT> 1,137,181
<INTEREST-EXPENSE> 1,695,289
<INTEREST-INCOME-NET> 934,792
<LOAN-LOSSES> 115,626
<SECURITIES-GAINS> 284
<EXPENSE-OTHER> 954,658
<INCOME-PRETAX> 38,298
<INCOME-PRE-EXTRAORDINARY> 38,298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,011
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 2.64
<LOANS-NON> 620,006
<LOANS-PAST> 0
<LOANS-TROUBLED> 187,256
<LOANS-PROBLEM> 161,109
<ALLOWANCE-OPEN> 380,886
<CHARGE-OFFS> 143,255
<RECOVERIES> 30,323
<ALLOWANCE-CLOSE> 398,290
<ALLOWANCE-DOMESTIC> 398,290
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
