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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8930
H. F. AHMANSON & COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-0479700
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4900 Rivergrade Road
Irwindale, California 91706
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: 818/960-6311
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Series A Junior Participating Pacific Stock Exchange
Cumulative Preferred Stock
Depositary Shares Each Representing a One-Tenth New York Stock Exchange
Interest in a Share of 8.40% Preferred Stock,
Series C
Depositary Shares Each Representing a One-Tenth New York Stock Exchange
Interest in a Share of 6% Cumulative
Convertible Preferred Stock, Series D
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing sale price of its Common Stock on the New
York Stock Exchange on March 17, 1997, a date within 60 days prior to the date
of filing, was $3,990,480,359.
Common Stock, $.01 par value of registrant outstanding at March 17, 1997--
100,594,581 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held
April 21, 1997 are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS.......................................................... 1
General................................................................. 1
Personal Financial Services............................................. 2
Residential Real Estate Lending......................................... 3
General............................................................... 3
Interest Rates, Terms and Fees........................................ 3
Sales of Loans and MBS and Servicing Activities....................... 5
Consumer Lending and Small Business Banking............................. 5
Treasury Activities..................................................... 5
Interest Margin......................................................... 6
Asset/Liability Management.............................................. 6
Competition............................................................. 7
Regulation.............................................................. 7
General............................................................... 7
Savings and Loan Holding Company Regulations.......................... 8
Affiliate and Insider Transactions.................................... 8
Limitations on Acquisitions........................................... 8
Payment of Dividends.................................................. 8
Deposit Insurance..................................................... 8
FICO Debt............................................................. 9
Conversion of Deposit Insurance; Acquisitions of Savings
Institutions......................................................... 9
Classification of Assets.............................................. 10
Capital Requirements.................................................. 10
Prompt Corrective Action.............................................. 11
Enforcement and Penalties............................................. 11
Loans and Investments................................................. 12
FHLB System........................................................... 12
Federal Reserve System................................................ 12
Liquidity............................................................. 12
Community Reinvestment Act............................................ 12
Qualified Thrift Lender............................................... 13
Service Corporations.................................................. 13
Proposed Legislation.................................................. 13
Taxation................................................................ 13
Federal............................................................... 13
State................................................................. 13
REI Operations.......................................................... 14
Other Activities........................................................ 14
Employees............................................................... 14
ITEM 2. PROPERTIES........................................................ 14
ITEM 3. LEGAL PROCEEDINGS................................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS........................................................... 15
Market Prices of Stock.................................................. 15
Per Share Cash Dividends Data........................................... 15
Stockholders............................................................ 16
ITEM 6. SELECTED FINANCIAL DATA........................................... 17
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 20
Overview................................................................ 20
Results of Operations................................................... 24
Net Interest Income................................................... 24
Credit Costs.......................................................... 26
Provision for Loan Losses........................................... 26
Operations of REO................................................... 26
Other Income.......................................................... 27
Gain (Loss) on Sales of MBS......................................... 27
Gain (Loss) on Sales of Loans....................................... 28
Loan Servicing Income............................................... 29
Banking and Other Retail Service Fees............................... 29
Other Fee Income.................................................... 29
Gains on Sales of Retail Deposit Branch Systems..................... 29
Other Operating Income.............................................. 29
Other Expenses........................................................ 30
General and Administrative Expenses................................. 30
Operations of REI................................................... 30
Amortization of Goodwill and Other Intangible Assets and Cumulative
Effect of Change in Accounting for Goodwill........................ 30
Provision for Income Taxes.......................................... 31
Quarterly Results of Operations....................................... 32
Financial Condition..................................................... 34
Asset/Liability Management............................................ 36
Asset Quality......................................................... 40
NPAs and Potential Problem Loans.................................... 40
Allowance for Loan Losses........................................... 43
REI................................................................. 46
Liquidity and Capital Resources....................................... 47
Loans Receivable.................................................... 47
MBS................................................................. 47
Deposits............................................................ 48
Borrowings.......................................................... 48
Capital Securities, Series A........................................ 48
Capital............................................................. 48
Accounting Developments............................................... 49
Tax Contingency....................................................... 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................... 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 51
ITEM 11. EXECUTIVE COMPENSATION........................................... 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 54
SIGNATURES
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PART I
ITEM 1. BUSINESS
GENERAL
H. F. Ahmanson & Company, a Delaware corporation, is one of the largest
residential real estate and consumer finance-oriented financial services
companies in the United States, owning subsidiaries principally engaged in
consumer and small business banking and related financial services activities.
Ahmanson was originally organized in 1928 in California and changed its state
of incorporation from California to Delaware in 1985. As used herein, the
"Company" means Ahmanson collectively with its subsidiaries, and "Ahmanson"
means H. F. Ahmanson & Company, a Delaware corporation incorporated in 1984
and its predecessor California corporation. Ahmanson's executive offices are
located at 4900 Rivergrade Road, Irwindale, California 91706, and its
telephone number is (818) 960-6311.
Approximately 97% of the Company's consolidated revenues in 1996 were
derived from the operations of Home Savings of America, FSB, a federally
chartered savings bank ("Home Savings"), which is wholly-owned by Ahmanson.
Home Savings represented over 99% of the Company's consolidated assets at
December 31, 1996. Home Savings is currently the largest savings institution
in the United States. Home Savings is regulated by the Director of the Office
of Thrift Supervision ("OTS Director") and the Federal Deposit Insurance
Corporation ("FDIC") which, through the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF"), insures the deposit accounts of
Home Savings. Home Savings is a member of the Federal Home Loan Bank ("FHLB")
of San Francisco, which is one of the twelve regional banks for federally
insured depository institutions comprising the FHLB System. Home Savings is
further subject to regulations of the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") with respect to reserves required to
be maintained against certain deposits and certain other matters.
Home Savings conducts the majority of its business in California. Home
Savings currently conducts certain of its savings and lending operations
outside California under the name "Savings of America, a division of Home
Savings of America, FSB." Home Savings also conducts certain of its consumer
lending operations under the name "Home Consumer Finance of America" and
certain of its real estate lending operations outside California through
Ahmanson Mortgage Company, a wholly-owned subsidiary.
The Company's principal business is attracting funds from the general public
and institutions and originating and investing in residential real estate
mortgage loans, consumer and small business loans, mortgage-backed securities
("MBS") and investment securities. MBS include securities issued or guaranteed
by government-sponsored enterprises ("GSE MBS") such as the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and the Government National Mortgage Association ("GNMA"), mortgage
pass-through securities issued by other entities, including Home Savings, and
collateralized mortgage obligations ("CMOs"). The Company's primary sources of
revenues are interest earned on loans and MBS, income from investment
securities, gains on sales of loans and MBS, fees earned in connection with
loans and deposits, and income earned on its portfolio of loans and MBS
serviced for investors. Its principal expense is interest incurred on
interest-costing liabilities, including deposits and borrowings. The Company's
primary sources of funds are deposits, principal and interest payments on
loans and MBS, proceeds from sales of loans and MBS and borrowings. Scheduled
payments on loans and MBS are a relatively stable source of funds, while
prepayments of loans and MBS and flows in deposits vary widely.
The Company, through certain subsidiaries, engages in real estate
development and investment ("REI") activities. The operations of the REI
subsidiaries are described below under "REI Operations." The effect on
regulatory capital of REI activities by Home Savings' subsidiaries is
discussed below under "Regulation-- Capital Requirements." For information
with respect to industry segments see Note 16 of Notes to Consolidated
Financial Statements.
The Company's operations are significantly influenced by general economic
conditions, the monetary and fiscal policies of the federal government and the
regulatory policies of governmental authorities. Deposit flows and the cost of
interest-costing liabilities ("cost of funds") to the Company are influenced
by interest rates on
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competing investments and general market interest rates. Similarly, the
Company's loan volume and yields on loans and MBS, and the level of
prepayments on such loans and MBS, are affected by market interest rates, as
well as additional factors affecting the supply of and demand for housing and
the availability of funds.
Home Savings is in the process of changing its focus from being a
traditional savings institution to being a consumer bank. One significant
aspect of this change in focus is an increase in the types of products and
services offered to Home Savings' customers. This has been implemented in part
through the creation of a consumer lending division which offers products such
as home equity loans, automobile loans and unsecured personal lines of credit,
the development of a business banking group which offers products such as
small business loans and cash management services, the expansion of the
securities and insurance products and services offered by Griffin Financial
Services, which is a wholly-owned subsidiary of Ahmanson and an affiliate of
Home Savings, and the introduction of electronic banking. The acquisition of
61 former First Interstate Bank of California branches, completed on September
20, 1996, accelerated Home Savings' progress toward its objective of becoming
a full-service provider of consumer and small business banking products.
The change in focus is reflected at Ahmanson by increased scrutiny of the
use of capital. Ahmanson's goal is to hold an asset or engage in an activity
only if the income generated by such asset or activity adequately compensates
the Company and its stockholders for the use of the capital necessary to hold
the asset or engage in the activity. Between October 1995, when Ahmanson
initiated its first stock purchase program, and December 1996, Ahmanson
returned capital to its stockholders by repurchasing 17 million shares of its
common stock. During the third quarter of 1996 Ahmanson also redeemed at par
the $175 million of its 9.60% Preferred Stock, Series B.
On February 17, 1997, the Company proposed a merger transaction with Great
Western Financial Corporation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" for additional
information.
PERSONAL FINANCIAL SERVICES
At December 31, 1996 Home Savings' deposits totaled $34.8 billion,
substantially all of which were retail deposits. The Company believes that
retail deposits are a stable and cost effective source of funds to support its
lending.
At December 31, 1996 the Company had 391 personal financial service centers
located in four states and 125 loan offices in nine states. The Company is
focusing on enlarging its presence and enhancing its market share in key
markets and recognizing that there are markets where the Company can not
economically achieve sufficient market share to be an effective competitor.
With this focus, the Company periodically reviews the desirability of
maintaining, expanding or contracting its personal financial service center
network and loan office network. Prior to closing any office, the Company
reviews and considers the potential impact of the office closing on the credit
needs of the surrounding community. During 1996 the Company introduced a new
products and services delivery vehicle by opening two grocery store based
personal financial service centers, purchased 61 personal financial service
centers in California with deposits totaling $1.9 billion, in connection with
which 22 personal financial service centers were consolidated with other
personal financial service centers, and sold three personal financial service
centers in Texas with deposits totaling $197 million.
Home Savings attracts deposits by offering a wide variety of transaction and
term accounts and quality customer service. Examples of Home Savings'
transaction accounts include checking, statement savings and money market
savings accounts. Home Savings' term accounts generally include an interest
forfeiture provision designed to discourage withdrawals prior to maturity.
Griffin Financial Services, a subsidiary of Ahmanson and an affiliate of
Home Savings, provides alternative investment and insurance products and
services, including mutual funds, annuities, life insurance, property and
casualty insurance, and discount brokerage. Griffin Financial Services also
serves as investment adviser and distributor for The Griffin Funds, a family
of mutual funds.
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RESIDENTIAL REAL ESTATE LENDING
General. The Company originates loans on existing residential property
through loan consultants who are employees of the Company. The value of the
property as security for a mortgage loan is determined by an appraiser, who is
generally an employee of the Company. All appraisers used by the Company meet
the requirements of applicable regulations. Salaried loan underwriters
consider the value of the property as determined by the appraiser and the
potential borrower's ability to make principal and interest payments in
determining whether to approve applications for such loans. The Company's loan
consultants, employee appraisers and loan underwriters work exclusively for
the Company.
The Company has not originated for its own portfolio new residential loans
secured by multi-family structures located in states other than California
since 1990 and has not originated new commercial and industrial real estate
loans since 1988.
Home Savings' loans on single family homes must be approved by one or more
of the Director of Consumer Loans, the Sales Center Directors and the loan
underwriters. The specific approval required for a loan depends upon such
factors as the size of the loan, the loan-to-value ratio and the applicant's
debt-to-income ratio. Loans on multi-family real estate properties are subject
to various approval requirements depending on the size of the loan. Because
loan applications declined by Home Savings may be acceptable to other lenders,
Home Savings has a program to refer loan applications which have been declined
to another lender. This program assists applicants to meet their credit needs
and generates fees for Home Savings.
The Company requires title insurance coverage on all loans secured by liens
on real property and also requires that fire and extended coverage special
form casualty insurance be maintained on the security properties in an amount
at least equal to the total of the Company's loans or the replacement cost of
the structure, whichever is less. In designated special flood hazard areas,
the Company also requires flood insurance. For higher balance loans secured by
multi-family structures which are determined by a seismic study to be subject
to potential earthquake damage, the borrower is given the option of obtaining
earthquake insurance or accepting a reduced maximum loan-to-value ratio.
For additional information on the composition of the Company's loan and MBS
portfolio, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition."
The Company has established an allowance for loan losses relating to
specifically identified impaired loans and all other loans. For more
information on the amount of the allowance and the process for evaluating its
adequacy, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Financial Condition--Asset Quality--Allowance for Loan
Losses."
For information on nonperforming assets and potential problem loans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Asset Quality--NPAs and Potential Problem
Loans."
Interest Rates, Terms and Fees. Most of the Company's portfolio of
adjustable rate mortgage loans ("ARMs") provide for interest rates that adjust
monthly based on changes in the monthly weighted average cost of funds of
savings institutions headquartered in the Federal Home Loan Bank System's
Eleventh District, which comprises California, Arizona and Nevada, as computed
by the FHLB of San Francisco ("COFI"). The cost of funds of Home Savings, as
computed for purposes of its Thrift Financial Reports to the OTS, represents a
significant component of COFI. COFI is currently announced on the last
business day of the month following the month in which such cost of funds was
incurred. The Company's ARMs which adjust based upon changes in COFI ("COFI
ARMs") generally commence accruing interest at the newly announced rate plus
the contractual loan factor at the payment due date next following such
announcement. As part of the Company's asset/liability management strategy,
since June 1996, the Company has been originating fewer COFI ARMs and
emphasizing the origination of ARMs which adjust based on changes in other
indices such as the yields of U. S. Treasury securities, including the 12
Month Annual Treasury ("12 MAT") Index (ARMs which adjust based on changes
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in the 12 MAT Index are referred to as "12 MAT ARMs"; ARMs which adjust based
on changes in other U. S. Treasury securities indices are referred to as
"Treasury ARMs"), and the London Interbank Offered Rate ("LIBOR"), including
the LIBOR Annual Monthly Average ("LAMA") Index. The 12 MAT Index is
determined by taking the average of the 12 most recently available monthly
yields on U. S. Treasury securities adjusted to a constant maturity of one
year, as published in Federal Reserve Release H.15. The LAMA Index is
published monthly by FNMA and is determined by taking the average of the 12
most recently available One Month LIBOR as published each month by FNMA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Asset/Liability Management."
Federal laws and regulations restrict the nature, amount, terms and security
for real estate loans that savings institutions may originate or purchase. For
information on the original loan-to-value ratios of loans originated by Home
Savings, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition."
Certain of the Company's ARMs originated prior to May 1996 permit homeowners
to borrow additional funds at the existing loan's current interest rate for
any purpose, but only if a specified loan-to-value ratio, based on the
appraised value of the security property at the time of the additional
borrowing, or the Company's maximum loan amount for similar type property is
not exceeded.
Substantially all ARMs originated since 1981 have lifetime maximum interest
rates. In addition, substantially all the Company's ARMs provide that the
minimum monthly payments to be made by the borrower may be adjusted only
annually and generally by not more than 7.5% of such minimum payments in any
year. However, at the end of each five-year interval during the life of the
loan, the payments may be adjusted by more than 7.5% if necessary to cause the
loan to amortize over the remaining term. The Company's Treasury ARMs secured
by single family properties generally provide that the interest rate will not
be adjusted by more than two percentage points in any year but do not
otherwise limit the adjustment of the minimum monthly payments. The Company's
Treasury ARMs secured by single family properties have a repayment schedule of
30 years. The Company permits the borrower to select, at the time of
origination of other ARMs, a repayment schedule of 15 or 30 years.
Adjustable interest rates could result in increased minimum monthly payments
that some borrowers find difficult to make. However, the limits discussed
above on changes in interest rates and monthly payments provide some
protection to borrowers from unlimited interest rate and payment increases.
The limits on changes in payments on ARMs can result in minimum monthly
payments that are greater or less than the amount necessary to amortize the
ARM by its maturity date at the interest rate in effect in any particular
month. If a monthly payment is not sufficient to pay the interest accruing on
an ARM, the shortage is added to the principal balance of the ARM to be repaid
through future monthly payments. The aggregate amounts of interest capitalized
(or negative amortization) on the Company's ARMs during 1996 and 1995 were
$103.8 million and $156.4 million, respectively. At December 31, 1996 the
amount of interest capitalized on the Company's $44.1 billion ARM portfolio
totaled $115.9 million. Of such amount, $7.9 million represents capitalized
interest on loans with current principal balances that are less than the
original loan amounts. The remaining $108.0 million represents capitalized
interest on loans with an aggregate principal balance at December 31, 1996 of
$5.4 billion compared to an aggregate original loan balance of $5.3 billion.
At December 31, 1996 the average principal balance of such loans was 2% higher
than the average original loan amount. If a loan bears a high loan-to-value
ratio at origination, the default risk associated with the loan could increase
due to negative amortization. However, the Company's management does not
believe that the default risk associated with negative amortization is
material. If a scheduled monthly payment exceeds the interest and principal
payment that would have been necessary to amortize or pay the outstanding
principal balance over the remaining term of the loan, the excess (or
accelerated amortization) reduces the principal balance of the ARM and
therefore the amount to be repaid through future monthly payments. The terms
of the Company's Treasury ARMs secured by single family properties do not
result in negative or accelerated amortization.
The Company currently also offers a 30-year fixed rate mortgage loan and a
15-year fixed rate mortgage loan. The Company believes that offering fixed
rate mortgage loans strengthens its marketing position with real
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estate brokers and provides access to a greatly expanded potential customer
base, factors that the Company believes also result in higher ARM
originations.
Home Savings has established underwriting criteria for its fixed rate
mortgage loans such that these loans are normally readily saleable in the
secondary market. Periodically, based on existing market conditions, Home
Savings packages and sells these loans. If insufficient demand exists in the
secondary market for such transfers or the pricing is not attractive, Home
Savings will reduce its originations of fixed rate mortgage loans until market
conditions become more favorable.
In addition to the interest on its loans, the Company charges fees for loan
originations, loan prepayments and modifications, late payments, changes of
property ownership and other services. Fees realized vary with the volume of
loans made and prepaid, economic conditions and other competitive conditions
in the mortgage market.
Sales of Loans and MBS and Servicing Activities. The Company has sold loans,
GSE MBS and other MBS and participations therein, which have generated gains
on sale, a stream of loan servicing revenue and cash for lending or liquidity.
The Company designates certain loans and MBS that may be sold as available for
sale. For information on the amount of loans and MBS sold, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Other Income--Gain (Loss) on Sales of MBS" and "--Gain
(Loss) on Sales of Loans."
When loans and MBS representing interests in loans originated by the Company
are sold to investors, the Company generally continues to collect the payments
on the loans as they become due and otherwise to service the loans. For more
information on the amount and components of loan servicing income, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Other Income--Loan Servicing Income" and
Note 3 of Notes to Consolidated Financial Statements.
The Company has sold certain loans and MBS with different types of credit
enhancement features. Such features may include direct recourse to the Company
in the event of credit losses on the loans or MBS sold and subordination of
the Company's retained interest in a pool of loans or MBS to the interest of
the investor. For additional information regarding the Company's credit
enhancement obligations, see Note 3 of Notes to Consolidated Financial
Statements.
The Company has periodically securitized mortgage loans into GSE MBS, which
can be used as collateral for borrowings and can also be more readily sold in
the secondary market. The Company also has securitized mortgage loans into
other MBS which can be used as collateral for borrowings or sold in the
secondary market.
CONSUMER LENDING AND SMALL BUSINESS BANKING
In April 1996 the Company completed the introduction of a broad range of
consumer loan and credit-related insurance products, distributed primarily
through the personal financial service center network. The consumer loan
products offered include home equity loans and lines of credit, new and used
automobile loans, debt consolidation loans, home improvement loans and
unsecured loans and personal lines of credit. The credit-related insurance
products offered include credit life, accident and health insurance. During
1996 the Company originated $270.3 million of consumer loans.
In early 1996 the Company made a strategic decision to pursue the small
business market, which the Company generally defines as including businesses
with annual revenues of $10 million or less. The business banking group became
operational in October 1996 and offers a range of deposit, loan and cash
management products and services designed to meet the specific needs of the
small business customer.
TREASURY ACTIVITIES
Home Savings is required by federal regulations to maintain a minimum amount
of assets which qualify as liquidity for regulatory purposes, including
specified short-term securities, and is also permitted to make certain
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other securities investments. See "Regulation--Liquidity." For information
concerning interest and dividends on investments, see Note 2 of Notes to
Consolidated Financial Statements.
The Company purchases securities from broker-dealers with a concurrent
commitment to resell the securities to the broker-dealer at a specified price
on a specified future date, typically one to 90 days after the date of the
initial purchase. The amounts advanced under these agreements are subject to
regulatory limits on loans to one borrower and are reflected as cash
equivalents in the Consolidated Statements of Financial Condition. Repurchase
agreements are subject to certain risks, including the risks that the broker-
dealer will fail to perform its obligations, the value of the securities may
fall below the amount of funds disbursed to the broker-dealer and the
Company's interest in the securities may be inadequately protected if the
broker-dealer fails to perform its obligations. The Company attempts to reduce
such risks by, among other things, entering into such agreements only with
well-capitalized broker-dealers who are primary dealers in government
securities, reviewing on a regular basis the financial status of such broker-
dealers, limiting the maximum amount of agreements permitted to be outstanding
at any time with any single broker-dealer, limiting the types of securities
which are considered acceptable for purchase, requiring the purchased
securities to be held by a third party custodian and requiring additional
securities if the market value of the purchased securities decreases below
levels specified in such agreements. See Note 2 of Notes to Consolidated
Financial Statements.
Home Savings borrows funds from the FHLB of San Francisco on the security of
the FHLB capital stock owned by it and certain mortgage loans and MBS pledged
as collateral. The Company also from time to time has issued senior notes,
subordinated notes, medium-term notes, mortgage-backed bonds and commercial
paper and expects in the future to issue other debt instruments. In addition,
the Company obtains funds through both short-term and long-term agreements to
repurchase securities sold with broker-dealers, which are deemed to be secured
borrowings and typically have terms ranging from one day to two years. See
Notes 8 and 9 of Notes to Consolidated Financial Statements.
In December 1996, the Ahmanson Capital Trust I, a wholly-owned subsidiary of
the Company, issued $150 million of 8.36% Capital Securities, Series A. In
connection with the issuance of these securities, Ahmanson issued to Ahmanson
Capital Trust I $154.6 million of its 8.36% subordinated notes, due 2026. Such
subordinated notes are the sole assets of Ahmanson Capital Trust I.
INTEREST MARGIN
The Company's earnings primarily depend upon (i) the margin between the
yield on its interest-earning assets and the rates on its interest-costing
liabilities and (ii) the relative amounts of interest-earning assets and
interest-costing liabilities. When interest-earning assets equal or exceed
interest-costing liabilities, any positive margin will generate net interest
income. When the amount of interest-earning assets is less than the amount of
interest-costing liabilities, net interest expense can result even when the
margin is positive. The Company's net interest margin reflects the difference
between the average dollar amount of and yield on interest-earning assets
compared with the average dollar amount and cost of funds.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Net
Interest Income."
ASSET/LIABILITY MANAGEMENT
Home Savings has an Asset/Liability Management Committee ("ALCO"), which is
responsible for balance sheet management, including implementation of the
interest rate risk management policy statement adopted by Home Savings
pursuant to OTS Thrift Bulletin No. 13. Among other things, Home Savings'
policy statement sets forth the limits established by the board of directors
on acceptable changes in net interest income and the net present value of the
institution's assets, liabilities and off-balance sheet instruments (referred
to as the "economic value of equity") resulting from specific changes in
interest rates. ALCO regularly reviews, among other things, economic
conditions, the interest rate outlook, the demand for loans, the availability
of deposits and Home Savings' liquidity, capital and interest rate risk
exposure. Based on such reviews, ALCO prepares an implementation plan intended
to achieve the objectives set forth in Home Savings' business plan without
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exceeding the maximum acceptable declines in net interest income and economic
value of equity set forth in the interest rate risk management policy
statement. On a quarterly basis, Home Savings' board of directors reviews
ALCO's implementation plan and the effects thereof. On at least an annual
basis, Home Savings' board of directors reviews the interest rate risk
management policy statement.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--
Asset/Liability Management."
COMPETITION
Financial institutions experience intense competition in making loans and
attracting deposits from the general public. The competition for funds is
principally among savings institutions, commercial banks, credit unions and
thrift and loan associations, corporate and government securities and money
market mutual funds. The principal basis of competition for funds is the
interest rate paid. In addition to offering competitive rates of interest,
other methods used by the Company to attract deposits include advertising,
readily accessible office locations, the quality of its service to its
customers and an electronic banking program which enables the Company's
customers to electronically access their accounts by using personal computers
and personal financial management programs. However, competition for deposits
in certain states, including California, is particularly strong from large
commercial banks because they provide a broader range of consumer services and
because of their large branch networks.
Competition in making real estate loans is principally among savings
institutions, commercial banks, credit unions, mortgage companies, insurance
companies, GSEs and real estate investment trusts. Competition in making
consumer loans is principally among savings institutions, commercial banks,
credit unions and finance companies. These institutions compete for loans
primarily through the interest rates and loan fees they charge and the
efficiency, convenience and quality of services they provide to borrowers and,
in the case of real estate loans, their real estate brokers.
An OTS regulation, which states that it preempts any state law purporting to
address the subject of branching by a federal savings institution, generally
allows federal savings institutions, including Home Savings, to branch freely
throughout the United States to the extent allowed by federal statutes.
Legislation adopted by Congress during 1994, which becomes effective on June
1, 1997, will generally expand the ability of banks to effect interstate
mergers, except with banks in states which have adopted legislation expressly
prohibiting such mergers. California has not adopted such legislation. Bank
competitors of the Company may then be able to conduct extensive interstate
banking operations, thereby gaining competitive advantages.
Pursuant to the Deposit Insurance Funds Act of 1996 ("DIFA"), as of January
1, 1997 the deposit insurance assessment rates for SAIF deposits and BIF
deposits are determined according to identical schedules. However, until
December 31, 1999 or, if earlier, the date on which the last savings
institution ceases to exist, SAIF deposits are assessed to pay interest on
debt incurred to provide funds to the former Federal Savings and Loan
Insurance Corporation ("FICO Debt") at five times the rate at which BIF
deposits are assessed to pay such interest. Institutions whose deposits are
exclusively or primarily BIF-insured (such as almost all commercial banks)
therefore have certain competitive advantages over institutions whose deposits
are primarily SAIF-insured (such as Home Savings) although the extent of the
advantage is less than the deposit insurance premium advantage which existed
prior to the enactment of DIFA. See "Regulation--Deposit Insurance" and "--
FICO Debt."
REGULATION
General. Ahmanson is a savings and loan holding company and, as such, is
subject to the OTS Director's regulations, examination, supervision and
reporting requirements. Home Savings is a federally chartered savings bank and
a member of the FHLB System, and its deposits are insured by the FDIC. It is
subject to examination and supervision by the OTS Director and the FDIC and to
regulations governing such matters as capital standards, mergers,
establishment and closing of branch offices, subsidiary investments and
activities, and general investment authority.
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The descriptions of the statutes and regulations that are applicable to the
Company and the effects thereof that are set forth below and elsewhere in this
document do not purport to be a complete description of such statutes and
regulations and their effects on the Company or to identify every statute and
regulation that may apply to the Company.
Savings and Loan Holding Company Regulations. Subject to certain limited
exceptions, control of a savings institution or a savings and loan holding
company may only be obtained with the approval (or in the case of an
acquisition of control by an individual, the absence of disapproval) of the
OTS, after a public comment and application review process. Any company
acquiring control of a savings institution becomes a savings and loan holding
company, must register and file periodic reports with the OTS, and is subject
to OTS examination.
Affiliate and Insider Transactions. Savings institutions are subject to the
affiliate and insider transaction rules applicable to member banks of the
Federal Reserve System set forth in Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act, as well as additional limitations as may be adopted by
the OTS Director. These provisions, among other things, prohibit or limit a
savings institution from extending credit to, or entering into certain
transactions with, its affiliates (which generally include holding companies
such as Ahmanson and any company under common control with the savings
institution) and principal stockholders, directors and executive officers of
the savings institution and its affiliates.
Limitations on Acquisitions. Ahmanson is generally prohibited, either
directly or indirectly, from acquiring control of any savings institution or
savings and loan holding company absent prior approval by the OTS Director and
from acquiring more than 5% of any class of voting stock of any savings
institution or savings and loan holding company that is not a subsidiary of
Ahmanson.
Payment of Dividends. Ahmanson's principal sources of funds are cash
dividends paid to it by Home Savings and other subsidiaries, investment income
and borrowings. There are restrictions on the ability of Home Savings to pay
dividends to Ahmanson. Savings institution subsidiaries of savings and loan
holding companies, such as Home Savings, must notify the OTS Director of their
intent to declare dividends at least 30 days before declaration. The OTS
Director has the authority to preclude those institutions from declaring a
dividend.
OTS regulations impose limitations upon certain "capital distributions" by
savings institutions, including dividends. The regulations establish a three-
tiered system of regulation, with the greatest flexibility being afforded to
institutions that meet or exceed the capital requirements.
An institution that has capital immediately prior to, and on a pro forma
basis after giving effect to, a proposed capital distribution that is at least
equal to its capital requirements is considered a Tier 1 institution ("Tier 1
Institution"). At December 31, 1996 Home Savings was a Tier 1 Institution. A
Tier 1 Institution may, without the approval of but with prior notice to the
OTS, make capital distributions during a calendar year up to the greater of
(1) 100% of its net income to date during the calendar year plus the amount
that would reduce the institution's "surplus capital ratio" (the excess over
its risk-based capital requirement) to one-half of its surplus capital ratio
at the beginning of the calendar year or (2) 75% of the institution's net
income over the most recent four quarter period. Any additional capital
distributions would require prior regulatory approval. The OTS retains
discretion to subject Tier 1 Institutions to the more stringent capital
distribution rules applicable to institutions with less capital if the OTS
determines that the institution is in need of more than normal supervision and
has provided the institution with notice to that effect. The OTS also retains
the authority to prohibit any capital distribution otherwise authorized under
the regulations if the OTS determines that the capital distribution would
constitute an unsafe or unsound practice.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds: the BIF, which insures the deposits of institutions the deposits of
which were insured by the FDIC prior to the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and the
SAIF, which insures the deposits of institutions the deposits of which were
insured by the Federal Savings and Loan Insurance Corporation prior to the
enactment of FIRREA. Home Savings is a member of the BIF and is obligated to
pay deposit insurance assessments ratably to the SAIF and the BIF based on 85%
and 15% of total deposits, respectively. These percentages are subject to
change in the future. The OTS Director is also authorized to impose
assessments on savings institutions to fund certain of the costs of
administration of the OTS.
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The FDIC has established a risk-based system for setting deposit insurance
assessments. Under the risk-based assessment system, an institution's
insurance assessments vary depending upon the level of capital the institution
holds and the degree to which it is the subject of supervisory concern to the
FDIC. During the first three quarters of 1996, the assessment rate for SAIF
deposits varied from 0.23% of covered deposits for well-capitalized
institutions that were deemed to have no more than a few minor weaknesses, to
0.31% of covered deposits for less than adequately capitalized institutions
that posed substantial supervisory concern. The lowest assessment rate for BIF
deposits was $2,000 per institution per year. Due to the recapitalization of
the SAIF, the Company received a refund of the $18 million deposit insurance
assessment related to the fourth quarter of 1996. As of January 1, 1997, the
assessment rate for both SAIF and BIF deposits varies from zero to 0.27% of
covered deposits. The Company paid $55.1 million in deposit insurance premiums
to the SAIF in 1996 compared to $79.9 million and $4.1 million to the SAIF and
the BIF, respectively, in 1995. Assuming Home Savings remains "well-
capitalized" and that Home Savings' deposits remain unchanged from their
December 31, 1996 balances, based on the current deposit insurance assessment
rate schedule, the Company would pay no deposit insurance premiums in 1997 if
Home Savings is in the highest supervisory subgroup, approximately $10 million
in deposit insurance premiums if Home Savings is in the middle supervisory
subgroup and approximately $59 million in deposit insurance premiums if Home
Savings is in the lowest supervisory subgroup.
Prior to enactment of DIFA, the SAIF's three major obligations were to fund
losses associated with the failure of institutions with SAIF-insured deposits,
to increase its reserves to 1.25% of insured deposits over a reasonable period
of time, and to make interest payments on the FICO Debt. The reserves of the
SAIF were lower than the reserves of the BIF and the BIF did not have an
obligation to pay interest on the FICO Debt. Therefore, premiums assessed on
deposits insured by the SAIF were higher than premiums assessed on deposits
insured by the BIF. Such a premium structure provided institutions whose
deposits were exclusively or primarily BIF-insured (such as almost all
commercial banks) certain competitive advantages over institutions whose
deposits were primarily SAIF-insured (such as Home Savings).
DIFA required institutions with SAIF-insured deposits to pay a special
assessment designed to increase the SAIF's reserves to the required 1.25% of
insured deposits. The amount of the special assessment imposed on Home Savings
was $243.9 million. DIFA also altered the obligation to make interest payments
on the FICO Debt so that assessments to collect the necessary funds are
imposed separately from the deposit insurance premium and are now assessed on
BIF-insured deposits, although at a lower rate, as well as on SAIF-insured
deposits. Because the reserves of both the SAIF and the BIF equal or exceed
the required minimum amount and FICO Debt assessments are collected separately
from deposit insurance assessments, deposit insurance premiums are currently
assessed on SAIF-insured and BIF-insured deposits according to the same
schedule.
The FDIC may initiate a proceeding to terminate an institution's deposit
insurance after a 30-day notice period if, among other things, the institution
is in an unsafe and unsound condition to continue operations. It is the policy
of the FDIC to deem an insured institution to be in an unsafe and unsound
condition if its ratio of Tier 1 capital to total assets is less than 2%. Tier
1 capital is similar to core capital but includes certain investments in and
extensions of credit to subsidiaries engaged in activities not permitted for
national banks. In addition, the FDIC has the power to suspend temporarily a
savings institution's insurance on deposits received after the issuance of a
suspension order if the savings institution has no tangible capital.
FICO Debt. SAIF deposits are currently assessed at 6.48 basis points to pay
FICO Debt interest payments while BIF deposits are currently assessed at 1.30
basis points to pay such interest. If Home Savings' deposits during 1997
remain unchanged from the balances used to compute the FICO Debt assessments
for the first quarter of 1997, at the current FICO Debt assessment rates, Home
Savings would pay $19.5 million with respect to SAIF-insured deposits and $0.7
million with respect to BIF-insured deposits.
Conversion of Deposit Insurance; Acquisitions of Savings Institutions. Since
the SAIF has reached its designated reserve ratio of 1.25%, the moratorium on
conversion of SAIF-insured deposits to BIF insurance has expired. However, any
conversion of deposits between SAIF insurance and BIF insurance requires the
payment of an entrance fee equal to the amount of the converted deposits
multiplied by the reserve ratio of the fund into which the deposits are
transferred and an exit fee equal to the amount of the converted deposits
multiplied by 90 basis points, in the case of deposits transferred from SAIF
to BIF, or 1 basis point, in the case of deposits transferred from BIF to
SAIF. Subject to certain limitations, however, a savings institution may
convert to a bank
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charter if the fund insuring the deposits of the resulting bank remains
unchanged. An insured depository institution, regardless of whether it is
chartered as a bank or thrift, may also participate in a merger or acquisition
transaction without payment of entrance and exit fees if the resulting
institution subsequently pays assessments to the BIF and the SAIF based on the
relative amounts of the deposits that were insured by the BIF and the SAIF
prior to the transaction.
FIRREA facilitated the acquisition of savings institutions by bank holding
companies. Bank holding companies were previously authorized to acquire
savings institutions only in connection with supervisory transactions. FIRREA
amended the Bank Holding Company Act to authorize the Federal Reserve Board to
approve such acquisitions generally.
Classification of Assets. Federal regulations require savings institutions
to review their assets on a regular basis and to classify them as
"substandard," "doubtful" or "loss" if warranted. Adequate valuation
allowances for loan losses are required for assets classified as substandard
or doubtful. If an asset is classified as loss, the institution must charge
off such amount. The institution's OTS District Director has the authority to
approve, disapprove or modify any asset classification and any amounts
established as allowances for loan losses.
At present, certain general allowances may be included within regulatory
capital, while specific allowances may not. If an OTS examiner concludes that
additional assets should be classified or that the valuation allowances
established by the savings institution are inadequate, the examiner may
determine, subject to internal review by the OTS, the need for and extent of
additional classification or any increase necessary in the savings
institution's general or specific valuation allowances. An insured savings
institution is also required to set aside adequate valuation allowances to the
extent that an affiliate possesses assets posing a risk to the institution and
to establish liabilities for off-balance sheet items, such as letters of
credit, when loss becomes probable and estimable.
Capital Requirements. The OTS has adopted capital regulations ("Capital
Regulations") which establish three capital requirements--a core capital
requirement, a tangible capital requirement and a risk-based capital
requirement. The capital standards contained in the Capital Regulations
generally must be no less stringent than the capital standards applicable to
national banks. The Capital Regulations require 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 total capital of at
least 8% of risk-weighted assets. In addition, institutions whose exposure to
interest-rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case by case basis, individual minimum capital requirements
for a savings institution that vary from the requirements that would otherwise
apply under the Capital Regulations. The OTS has not established such
individual minimum capital requirements for Home Savings. Home Savings was in
compliance with the Capital Regulations at December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources."
Core capital generally includes common stockholders' equity (including
retained earnings but excluding the net unrealized gain or loss on securities
available for sale), noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of fully consolidated
subsidiaries. Intangible assets (other than a limited amount of mortgage
servicing rights and purchased credit card relationships) must be deducted
from core capital. Certain deferred tax assets also must be deducted.
Tangible capital generally means core capital less any intangible assets
(other than a limited amount of mortgage servicing rights).
Total capital for purposes of the Capital Regulations consists of core
capital and supplementary capital. Supplementary capital includes, among other
things, certain types of preferred stock and subordinated debt and, subject to
certain limits, general valuation loan and lease loss allowances. A savings
institution's supplementary capital may be used to satisfy the risk-based
capital requirement in an amount not exceeding that institution's core
capital. Risk-weighted assets are determined by multiplying each category of
an institution's assets, including off balance sheet equivalents, by a risk
weight assigned by the OTS based on the credit risk associated
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with those assets, and adding the resulting amounts. The risk weight
categories range from zero percent for cash and government securities to 100%
for assets that do not qualify for preferential risk weighting as determined
by the OTS.
The Capital Regulations treat asset sales with recourse as if they did not
occur, and generally require a savings institution to maintain capital against
the entire amount of assets sold with recourse, even if recourse is for less
than the full amount. However, when assets are sold with recourse and the
amount of recourse is less than the risk-based capital requirement for such
assets, the assets are not included in risk-weighted assets and capital is
required to be maintained in an amount equal to such recourse amount. A
savings institution's retention of the subordinated portion of a
senior/subordinated loan participation or package of loans is treated in the
same manner as an asset sale with recourse.
The Capital Regulations contain special capital rules affecting savings
institutions with certain kinds of subsidiaries. For purposes of determining
compliance with each of the capital standards, a savings institution's
investments in and extensions of credit to subsidiaries engaged in activities
not permissible for a national bank are deducted from the savings
institution's capital, net of reserves against such investment. Home Savings'
REI subsidiary is its only significant subsidiary engaged in activities not
permissible for a national bank. At December 31, 1996 Home Savings' investment
in its REI subsidiary aggregated $40.5 million, of which $39.7 million was
required to be deducted from Home Savings' capital.
Each bank regulatory agency and the OTS is required to review its capital
standards every two years to determine whether those standards require
sufficient capital to facilitate prompt corrective action to prevent or
minimize loss to the deposit insurance funds.
Prompt Corrective Action. Under OTS regulations which implement the "prompt
corrective action" system mandated by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), 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 December 31, 1996 Home Savings met these standards. An institution which is
not well capitalized is adequately capitalized if its ratio of total capital
to risk-weighted assets is at least 8%, its ratio of core capital to risk-
adjusted assets is at least 4% and its ratio of core capital to total assets
is at least 4% (3% if the institution receives the highest rating on the OTS's
CAMEL rating system). Any institution which is not adequately capitalized is
undercapitalized, significantly undercapitalized or critically
undercapitalized, depending upon its capital ratios.
An institution which is undercapitalized must submit a capital restoration
plan to the OTS. The plan may be approved only if the OTS determines it is
likely to succeed in restoring the institution's capital and will not
appreciably increase the risks to which the institution is exposed. The
institution's performance under the plan must be guaranteed by any company
which controls the institution, up to a maximum of 5% of the institution's
assets. The OTS may also require the institution to take various actions
deemed appropriate to minimize potential losses to the deposit insurance fund.
A significantly undercapitalized institution is subject to additional
sanctions and a critically undercapitalized institution generally must be
placed in receivership or conservatorship.
Enforcement and Penalties. All depository institutions, including savings
institutions, and "institution-affiliated parties" such as directors,
officers, employees, agents and controlling stockholders of depository
institutions, including holding companies such as Ahmanson, are subject to
regulatory agency enforcement authority. An institution or institution-
affiliated party may be subject to a three tier penalty regime that ranges
from a maximum penalty of $5,000 per day for a simple violation to a maximum
penalty of $1 million per day for certain knowing violations including the
failure to submit or submission of incomplete, false or misleading reports. An
institution-affiliated party may also be subject to loss of voting rights with
respect to the stock of depository institutions.
Whenever the OTS has reasonable cause to believe that the continuation by a
savings and loan holding company of any activity or of ownership or control of
any subsidiary not insured by the FDIC constitutes a serious risk to the
financial safety, soundness or stability of a subsidiary savings institution
and is inconsistent with the sound operation of the savings institution, the
OTS may order the holding company to terminate such
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activities or divest such non-insured subsidiary. The OTS, without notice or
opportunity for hearing, may also (i) limit the payment of dividends by the
savings institution, (ii) limit transactions between the savings institution
and its holding company or other affiliates and (iii) limit any activity of
the savings institution which creates a serious risk that the liabilities of
the holding company and its affiliates may be imposed upon the savings
institution.
FDICIA, as amended, required the OTS to prescribe minimum operational and
managerial standards and standards for asset quality, earnings and stock
valuation for savings institutions. Any savings institution which fails to
meet the standards may be required to submit a plan for corrective action. If
a savings institution fails to submit or implement an acceptable plan, the OTS
may require the institution to take any action the OTS determines will best
carry out the purpose of prompt corrective action. The OTS and the bank
regulatory agencies have jointly published a regulation prescribing the
required safety and soundness standards. Home Savings believes that it is in
compliance with the regulation.
Loans and Investments. Aggregate loans to a single borrower are limited to
specified percentages of a savings institution's capital, depending upon the
existence and type of any collateral. Aggregate loans secured by non-
residential real property are limited to a specified percentage of capital.
Savings institutions generally may not invest directly in equity securities,
non-investment grade securities or real estate. Indirect investments in real
estate are permitted through subsidiaries subject to limitations based,
generally, on the institution's capital ratios. Investments in subsidiaries,
and the activities conducted through subsidiaries, are subject to regulatory
restrictions.
FHLB System. The FHLBs provide a central credit facility for member
institutions. As a federal savings institution, Home Savings is required to be
a member of the FHLB System. Members of the FHLB System are required to own
capital stock in an FHLB at least equal to the greater of 1% of the member's
outstanding home mortgage loans and 5% of the member's advances from the FHLB.
At December 31, 1996 Home Savings' investment in FHLB stock was $421.0
million, substantially all of which can not be withdrawn as long as Home
Savings' real estate loan portfolio remains at its current size.
Federal Reserve System. Home Savings is subject to various regulations
promulgated by the Federal Reserve Board, including, among others, Regulation
B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E
(Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC
(Availability of Funds) and Regulation DD (Truth in Savings). As holders of
loans secured by real property, and as owners of real property, financial
institutions, including Home Savings, may also be subject to potential
liability under various statutes and regulations applicable to property owners
generally, including statutes and regulations relating to the environmental
condition of the property.
Liquidity. OTS regulations require a 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. The OTS Director
may vary the required percentage within a range of 4% to 10% and may also vary
the definition of liquid assets. OTS regulations also require a savings
institution to maintain, for each calendar month, an average daily balance of
short-term liquid assets equal to at least 1% of the average daily balance of
its net withdrawable accounts plus short-term borrowings during the preceding
calendar month. Monetary penalties may be imposed for failure to meet
liquidity ratio requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--Liquidity
and Capital Resources."
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each savings institution, as well as other depository institutions, to
identify the communities served by the institution's offices and to identify
the types of credit the institution is prepared to extend within such
communities. The CRA also requires the OTS to assess the performance of the
institution in meeting the credit needs of its community and to take such
assessments into consideration in reviewing applications for mergers,
acquisitions and other transactions. In connection with its assessment of a
savings institution's CRA performance, the OTS will assign a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Based on an examination conducted as of September 5, 1995,
Home Savings was rated "outstanding."
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Qualified Thrift Lender. A savings institution must invest at least 65% of
its portfolio assets in "qualified thrift investments" on a monthly average
basis in nine out of every 12 months on a rolling 12-month "look back" basis.
Home Savings was in compliance with this regulation at December 31, 1996.
Service Corporations. Federal savings institutions may invest in the capital
stock, obligations or other securities of certain types of subsidiaries
(referred to as "service corporations") and may make loans to these
subsidiaries (and to projects in which they participate) in an aggregate
amount not exceeding 2% of the institution's assets, plus an additional 1% of
assets for investments used for community development or inner-city purposes.
An institution which has regulatory capital in an amount at least equal to
minimum regulatory requirements may make additional loans to such subsidiaries
in an aggregate amount up to 50% or 100% of regulatory capital, depending upon
the extent of the institution's ownership or control of the subsidiary.
Proposed Legislation. Proposals which could alter the current banking
regulatory structure and thrift charter are included in bills introduced
during the current session of Congress. The Company can not predict whether or
when any of these proposals may be enacted or what provisions any enacted
legislation may contain.
TAXATION
Federal. The Small Business Job Protection Act of 1996 ("1996 Act")
significantly altered the tax bad debt deduction available to savings
institutions. Prior to enactment of the 1996 Act, a savings institution which
met certain definitional tests relating to the composition of its assets and
the sources of its income was permitted to determine its tax bad debt
deduction based upon a reserve method, with annual additions to the reserve
determined under the experience method, which generally permits an annual
deduction based upon the institution's historical loan loss experience, or
under the percentage of taxable income method. The 1996 Act disallows the
reserve method for determining tax bad debt deductions for large savings
institutions and only allows bad debt deductions determined under the charge-
off method.
While disallowing the reserve method for determining tax bad debt
deductions, the 1996 Act maintained existing pre-1988 bad debt reserves and
required that these reserves be recaptured into taxable income only in limited
circumstances. Dividends may be paid out of retained earnings without the
imposition of any tax on the savings institution to the extent that the
amounts paid as dividends do not exceed both the savings institution's current
and accumulated earnings and profits as calculated for federal income tax
purposes. Dividends in excess of the savings institution's current and
accumulated earnings and profits as calculated for federal income tax
purposes, and any redemption or liquidation distributions, are, however,
deemed under Section 593(e) of the Internal Revenue Code of 1986, as amended,
to be made from the savings institution's pre-1988 tax bad debt reserves. The
amount of Home Savings' pre-1988 tax bad debt reserves subject to recapture
under this provision approximated $691 million at December 31, 1996. The
amount of tax that would be payable upon any distribution that is treated as
having been made from the savings institution's pre-1988 tax bad debt reserves
is also deemed to have been paid from these reserves. As a result, any
distributions that are treated as having been made from Home Savings' pre-1988
tax bad debt reserves could result in a federal recapture tax of up to
approximately 54% of the amount of such distributions.
As of December 31, 1996, the Company's tax returns had been audited by the
Internal Revenue Service for all years through 1989.
State. The California franchise tax applicable to savings institutions is a
variable rate tax applicable to that portion of an institution's income
allocable to California. The rate of tax is computed under a formula that
results in a rate higher than the rate applicable to non-financial
corporations because it includes an amount "in lieu" of local personal
property and business license taxes paid by such corporations (but not
generally paid by banks or financial institutions such as Home Savings). For
calendar year taxpayers such as Home Savings the maximum rate for the 1996
taxable year was approximately 11.3%. Under California regulations, bad debt
deductions are available in computing California franchise taxes by use of the
reserve method. An addition to the reserve may be claimed under the experience
method, which generally permits an annual deduction based upon the
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institution's historical loan loss experience. The deduction for losses may be
limited by the determination of the maximum ending reserve balance using
current and prior years' loss experience of Home Savings. In addition, if it
can be established that the amount allowed under the experience method is
insufficient to absorb anticipated losses, an addition to the reserve may be
claimed up to the amount which causes the reserve to equal the lesser of the
reserves included in the institution's financial statements, or one percent of
the amount of loans outstanding at the end of the year.
The Company also pays franchise or state income taxes in a number of other
jurisdictions in which it or its subsidiaries conduct business. All such taxes
are deductible for federal income tax purposes.
For additional information regarding taxation, see Note 11 of Notes to
Consolidated Financial Statements.
REI OPERATIONS
Through its REI subsidiaries, Home Savings previously acquired, developed
and sold real property in the ordinary course of business. In response to
provisions in FIRREA which require savings institutions to maintain 100%
capital against loans to and investments in their REI subsidiaries, certain
REI operations previously conducted by Home Savings' subsidiaries have been
sold to Ahmanson.
The Company intends to continue its withdrawal from REI activities. Neither
Ahmanson's REI subsidiaries nor Home Savings' REI subsidiary intend to acquire
any new properties and will develop, hold and/or sell their currently owned
properties depending upon economic conditions. The Company has retained Lowe
Enterprises Realty Services, Inc., a real estate asset management firm, to
assist in the management and disposition of these properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Asset Quality--REI."
OTHER ACTIVITIES
The Company has other subsidiaries which are primarily engaged in financial
services activities related to the savings bank business, including loan
servicing, insurance agencies and a securities brokerage firm. These
activities did not make material contributions to the Company's results of
operations in 1996 and are not expected to make a material contribution to its
results of operations in 1997.
EMPLOYEES
At December 31, 1996 the Company employed approximately 7,221 full-time and
2,281 part-time employees. Full-time and certain part-time employees are
eligible for retirement and other benefits, including life, health and
accident and dental insurance. The management of the Company regards its
employee relations as satisfactory.
ITEM 2. PROPERTIES
The Company maintains executive offices in leased premises at 4900
Rivergrade Road, Irwindale, California 91706 and its telephone number is (818)
960-6311. The Company owns approximately 26% of the 4.1 million square feet in
which its offices are located and leases the remainder. The Company has 541
offices and other office facilities of which 179 are owned and the remainder
are leased. Annual lease payments total approximately $70.1 million. The net
investment in premises, equipment and leaseholds totaled $424.6 million at
December 31, 1996 compared to $410.9 million at December 31, 1995.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICES OF STOCK
The principal market for Ahmanson's Common Stock is the New York Stock
Exchange. Ahmanson's Common Stock is also listed on the Pacific Stock
Exchange. The following table sets forth the high and low sale prices of the
Common Stock of Ahmanson for the periods indicated as reported on the New York
Stock Exchange Composite Tape:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1995--
First Quarter............................................ $18 5/8 $16
Second Quarter........................................... 23 3/4 18 1/8
Third Quarter............................................ 25 3/4 20 5/8
Fourth Quarter........................................... 28 3/8 24 1/8
1996--
First Quarter............................................ 26 3/4 21 1/4
Second Quarter........................................... 27 5/8 22 1/4
Third Quarter............................................ 28 3/8 23 3/8
Fourth Quarter........................................... 34 1/2 27 7/8
1997--
First Quarter (through March 17)......................... 45 1/4 32
</TABLE>
PER SHARE CASH DIVIDENDS DATA
The following table sets forth per share cash dividends of Ahmanson as
derived from the Company's Consolidated Financial Statements included
elsewhere herein and should be read in conjunction with such Consolidated
Financial Statements and accompanying Notes.
Cash Dividends Declared and Paid
<TABLE>
<S> <C>
1995--
First Quarter...................................................... $.22
Second Quarter..................................................... .22
Third Quarter...................................................... .22
Fourth Quarter..................................................... .22
1996--
First Quarter...................................................... $.22
Second Quarter..................................................... .22
Third Quarter...................................................... .22
Fourth Quarter..................................................... .22
1997--
First Quarter...................................................... $.22
</TABLE>
The principal sources of funds for the payment by Ahmanson of cash dividends
are cash dividends paid to it by Home Savings and, to a lesser extent, cash
dividends paid to it by other subsidiaries, investment income and borrowings.
There are limitations on the ability of Home Savings to pay dividends to
Ahmanson.
Home Savings may pay dividends to Ahmanson in any year without incurring tax
liability only if such dividends do not exceed both current year earnings and
profits and accumulated earnings and profits as of the beginning of the year,
as determined for federal income tax purposes. See "Business--Taxation."
OTS regulations impose restrictions on the payment of dividends by savings
institutions. In addition, savings institution subsidiaries of savings and
loan holding companies, such as Home Savings, must notify the
15
<PAGE>
OTS Director of their intent to declare dividends at least 30 days before
declaration. The OTS Director has the authority to preclude those institutions
from declaring a dividend. See "Business--Regulation--Payment of Dividends."
At January 1, 1997 Home Savings could have paid dividends of approximately
$440.3 million under the most restrictive of the foregoing limits without OTS
approval. Home Savings may also become subject to a prohibition on the payment
of dividends if it is not in compliance with its capital requirements.
STOCKHOLDERS
At the close of business on March 17, 1997, 100,594,581 shares of Ahmanson
Common Stock were outstanding and were held by 6,218 stockholders of record.
The transfer agent and registrar for the Ahmanson Common Stock is First
Chicago Trust Company of New York. First Chicago Trust Company of New York is
also the transfer agent and registrar for the Depositary Shares, each
representing a one-tenth interest in a share of Ahmanson's 8.40% Preferred
Stock, Series C, and the Depositary Shares, each representing a one-tenth
interest in a share of Ahmanson's 6% Cumulative Convertible Preferred Stock,
Series D.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Five-Year
Consolidated Summary of Financial Condition" and "Five-Year Consolidated
Summary of Operations" for, and as of the end of, each of the years in the
five-year period ended December 31, 1996 are derived from the consolidated
financial statements of H. F. Ahmanson & Company and Subsidiaries, which
consolidated financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial
statements as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996, and the report thereon of KPMG Peat
Marwick LLP, are included elsewhere herein.
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
FIVE-YEAR CONSOLIDATED SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated assets:
Cash and investment
securities........... $ 1,876,435 $ 1,645,450 $ 2,773,573 $ 3,906,044 $ 2,362,563
Mortgage-backed
securities (MBS)..... 14,296,512 16,152,142 12,789,420 6,919,997 3,915,508
Loans receivable...... 31,789,158 31,255,379 36,001,745 37,704,368 38,962,875
Real estate........... 395,428 460,421 475,264 623,519 1,127,271
Premises and
equipment............ 424,567 410,947 614,817 673,879 686,693
Goodwill and other
intangible assets.... 308,083 147,974 468,542 428,444 478,017
All other assets...... 811,861 457,273 603,432 614,994 607,580
----------- ----------- ----------- ----------- -----------
Total assets........ $49,902,044 $50,529,586 $53,726,793 $50,871,245 $48,140,507
=========== =========== =========== =========== ===========
Consolidated
liabilities, Company-
obligated mandatorily
redeemable capital
securities, Series A,
of subsidiary trust
holding solely Junior
Subordinated Deferrable
Interest Debentures of
the Company and
stockholders' equity:
Deposits.............. $34,773,945 $34,244,481 $40,655,016 $38,018,653 $39,273,192
Borrowings............ 11,580,521 12,236,428 9,176,085 8,879,345 4,978,583
All other liabilities. 966,116 991,755 931,091 1,024,216 1,143,088
----------- ----------- ----------- ----------- -----------
Total liabilities... 47,320,582 47,472,664 50,762,192 47,922,214 45,394,863
Company-obligated
mandatorily
redeemable capital
securities, Series A,
of subsidiary trust
holding solely Junior
Subordinated
Deferrable Interest
Debentures of the
Company.............. 148,413 -- -- -- --
Stockholders' equity.. 2,433,049 3,056,922 2,964,601 2,949,031 2,745,644
----------- ----------- ----------- ----------- -----------
Total liabilities,
Company-obligated
mandatorily
redeemable capital
securities, Series
A, of subsidiary
trust holding
solely Junior
Subordinated
Deferrable Interest
Debentures of the
Company and
stockholders'
equity............. $49,902,044 $50,529,586 $53,726,793 $50,871,245 $48,140,507
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
FIVE-YEAR CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income......... $ 3,514,795 $ 3,699,091 $ 3,095,375 $ 3,003,422 $ 3,428,979
Interest expense........ 2,262,281 2,472,336 1,798,454 1,666,350 2,070,413
----------- ----------- ----------- ----------- -----------
Net interest income.... 1,252,514 1,226,755 1,296,921 1,337,072 1,358,566
Provision for loan
losses................. 144,924 119,111 176,557 574,970 367,366
----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses........... 1,107,590 1,107,644 1,120,364 762,102 991,200
----------- ----------- ----------- ----------- -----------
Other income:
Gain (loss) on sales
of loans and MBS...... 31,420 17,283 (16,168) 101,044 76,925
Loan servicing and
other fee income...... 205,104 164,116 184,809 174,061 184,549
Gain on sales of
retail deposit branch
systems............... 6,861 514,671 77,901 -- --
Other operating
income................ 8,413 2,339 13,814 42,723 5,383
----------- ----------- ----------- ----------- -----------
Total other income... 251,798 698,409 260,356 317,828 266,857
----------- ----------- ----------- ----------- -----------
Other expenses:
SAIF recapitalization.. 243,862 -- -- -- --
Other general and
administrative
expenses.............. 775,285 818,579 758,560 819,403 753,257
----------- ----------- ----------- ----------- -----------
General and
administrative (G&A)
expenses............ 1,019,147 818,579 758,560 819,403 753,257
Operations of real
estate held for
development and
investment (REI)...... 34,961 49,481 97,644 229,300 58,359
Operations of real
estate owned held for
sale (REO)............ 105,880 86,788 86,011 212,130 129,153
Amortization of
goodwill and other
intangible assets..... 18,842 26,559 27,835 39,163 27,674
----------- ----------- ----------- ----------- -----------
Total other expenses. 1,178,830 981,407 970,050 1,299,996 968,443
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes (benefit),
extraordinary loss and
cumulative effect of
accounting changes..... 180,558 824,646 410,670 (220,066) 289,614
Provision for income
taxes (benefit)........ 35,300 373,700 173,312 (82,034) 133,222
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary loss and
cumulative effect of
accounting changes..... 145,258 450,946 237,358 (138,032) 156,392
Extraordinary loss on
early extinguishment of
debt (net of tax
benefit)............... -- -- -- (21,607) --
Cumulative effect of
changes in accounting
for goodwill (1995) and
income taxes (1992).... -- (234,742) -- -- 47,677
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 145,258 $ 216,204 $ 237,358 $ (159,639) $ 204,069
=========== =========== =========== =========== ===========
Per share information--
common shares:
Primary--
Income (loss) before
extraordinary loss
and cumulative
effect of accounting
changes............. $ 0.91 $ 3.39 $ 1.59 $ (1.51) $ 1.19
Net income (loss).... 0.91 1.40 1.59 (1.69) 1.60
Fully diluted--
Income (loss) before
extraordinary loss
and cumulative
effect of accounting
changes............. 0.91 3.20 1.58 (1.51) 1.19
Net income (loss).... 0.91 1.40 1.58 (1.69) 1.60
Book value at December
31.................... 19.09 20.75 19.70 19.61 22.04
Tangible book value at
December 31........... 17.31 19.47 15.70 15.94 17.94
Dividends.............. 0.88 0.88 0.88 0.88 0.88
Weighted average number
of common shares
outstanding:
Primary................ 109,748,923 118,074,091 117,369,431 116,786,369 116,915,342
Fully diluted.......... 109,748,923 130,378,061 128,946,242 116,786,369 117,199,811
</TABLE>
18
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
FIVE-YEAR SELECTED OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Regulatory capital:
Tangible capital....................... 5.55% 5.90% 5.12% 4.97% 4.85%
Core capital........................... 5.56 5.91 5.50 5.72 5.77
Risk-based capital..................... 10.78 12.43 12.17 12.59 12.99
Ratio of nonperforming assets to total
assets.................................. 1.70 1.88 1.57 1.89 4.61
Return on average assets................. 0.29(1) 0.41 0.46 (0.32) 0.42
Return on average equity................. 5.26(1) 7.47 8.00 (5.58) 7.49
Return on average tangible equity(2)..... 5.91(1) 17.00 9.69 (4.94) 9.43
Efficiency ratio(3)...................... 69.92(1) 58.85 51.19 54.22 48.81
Ratio of dividends paid to net income
(loss).................................. 97.48 71.04 64.62 (86.53) 58.37
Total number of financial service centers
and loan offices........................ 516 464 439 455 467
</TABLE>
- --------
(1) Excluding the after tax effects of the SAIF recapitalization of $144.4
million and the First Interstate Bank branch acquisition costs of $8.3
million, the returns on average assets, average equity and average
tangible equity and the efficiency ratio for the year ended December 31,
1996 would have been as follows:
Return on average assets........................................... 0.60%
Return on average equity........................................... 10.80
Return on average tangible equity(2)............................... 11.68
Efficiency ratio................................................... 52.23
(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).
(3) Represents G&A expenses as a percentage of net interest income plus loan
servicing and other fee income.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Nineteen ninety-six was a pivotal year for H. F. Ahmanson & Company. The
Company's principal operating unit, Home Savings of America, holds an enviable
customer franchise: high name recognition in its primary markets, a reputation
for integrity and service and a strong capital position. The Company also has
several important challenges, including:
. To achieve consistently strong profitability with a return on
stockholders' equity in excess of 18%.
. To become a full-service consumer and small business bank. The Company
now offers customers a broad range of loan, deposit, investment and
financial information services for their personal and business needs.
. To move beyond the California real estate recession-related problems and
create new opportunities through its consumer and small business
initiatives.
. To focus on increasing stockholder value rather than just size and
geographic presence.
The purchase of 61 former branches of First Interstate Bank in the third
quarter of 1996 was a significant advance in transforming the Company into a
full-service consumer and small business bank. It added critical mass to the
Company's consumer lending business and served as a foundation for penetration
into the California small business banking marketplace.
In addition, the Company has undertaken five major business activities which
should also contribute to building stockholder value:
. Personal Financial Services--Provides a variety of services and products
in its financial service centers, as well as electronic banking and
telebanking services.
. Consumer Lending--Provides a broad selection of consumer loan and
credit-related insurance products including home equity loans and lines
of credit, loans for new and used automobiles, debt consolidation loans,
home improvement loans, unsecured loans and personal lines of credit and
credit-related life, accident and health insurance.
. Investment and Insurance Brokerage Services--Provides a wide variety of
investment and insurance brokerage services and products and discount
brokerage services.
. Small Business Banking--Provides a range of deposit, loan and cash
management products and services designed to meet the specific needs of
the small business customer.
. Project HOME Run--Is designed to use technology to lower mortgage loan
origination and processing costs while providing customers with fast and
efficient service.
The Company also continued its stock purchase programs which provided an
efficient use of excess capital resulting in immediate accretion to income per
share and a higher return on stockholders' equity.
On February 17, 1997, the Company proposed a merger transaction with Great
Western Financial Corporation ("Great Western"). The merged company would be
one of the nation's leading financial institutions with combined assets of
approximately $93 billion. As originally proposed, Great Western's
stockholders would have received in a tax-free exchange 1.05 shares of
Ahmanson Common Stock for each share of common stock of Great Western. Based
on the closing price of Ahmanson Common Stock on February 14, 1997 (the last
trading day before announcement of the original proposal), the exchange ratio
would have produced a value of $42.53 for each share of the common stock of
Great Western, or a premium of 24.2% over the closing market price of Great
Western's common stock on February 14, 1997.
On March 6, 1997, Great Western announced that it had entered into an
agreement to merge with Washington Mutual, Inc. ("WAMU"), subject to approval
by the stockholders of Great Western and WAMU and by applicable regulatory
agencies.
20
<PAGE>
On March 17, 1997, the Company announced that it had enhanced its proposal
by establishing a floating exchange ratio for Great Western common shares
linked to the market price for Ahmanson common shares. Under the terms of the
proposal, each share of common stock of Great Western would be converted into
that number of shares of Ahmanson Common Stock equal to (a) $50 divided by (b)
the average closing price of Ahmanson Common Stock on the New York Stock
Exchange on the 20 trading days preceding approval of the proposed merger by
the Office of Thrift Supervision ("OTS"), provided that each share of common
stock of Great Western would be converted into not less than 1.10 nor more
than 1.20 shares of Ahmanson Common Stock. Based on the closing price of
Ahmanson Common Stock on March 14, 1997 (the last trading day before
announcement of the enhanced proposal), each share of common stock of Great
Western would have been converted into 1.20 shares of Ahmanson Common Stock,
producing a value of $48.30 per share of Great Western common stock, or a
premium of approximately $3 per share over the value implied by the WAMU
proposal. The Company currently estimates that a maximum of 174,108,000 shares
of Ahmanson Common Stock would be issued in connection with the proposed
merger, as a result of which Ahmanson Common Stock issued in the proposed
merger would represent approximately 63% of the shares outstanding after the
proposed merger. The aggregate value of the proposed transaction, based on the
currently estimated maximum number of shares of Ahmanson Common Stock to be
issued and the closing price of Ahmanson Common Stock on March 14, 1997, is
approximately $7 billion.
The Company believes its proposed merger with Great Western is financially
superior for the stockholders of Great Western and in the best interests of
Great Western's employees and customers, the communities which Great Western
serves, and the greater Los Angeles region. The Company remains committed to
effecting its proposed merger with Great Western. However, no assurance can be
given that the merger will be consummated as proposed.
For further information on the proposed merger, stockholders are encouraged
to obtain the Registration Statement on Form S-4 (Registration No. 333-21919)
filed with the Securities and Exchange Commission ("SEC") on February 18,
1997, Amendment No. 1 thereto filed with the SEC on March 18, 1997, any
subsequent amendments thereto, the documents incorporated therein by reference
and the exhibits thereto.
1996 FINANCIAL RESULTS
Net income for 1996 was $145.3 million, or $0.91 per fully diluted common
share, compared to $216.2 million, or $1.40 per fully diluted common share, in
1995. The 1996 results included after tax charges of $144.4 million for the
special assessment to recapitalize the Savings Association Insurance Fund
("SAIF") and $8.3 million related to the First Interstate Bank branch
acquisition in September 1996. The 1995 results included an after tax charge
of $234.7 million related to an accounting change, which eliminated goodwill
in connection with acquisitions prior to 1982, and an after tax gain of $252.7
million in connection with the sale of the Company's retail deposit branch
system in New York (the "New York sale"). Excluding the items in 1996, the
Company's return on average equity would have been 10.8% compared to 7.5% in
1995.
RESULTS OF OPERATIONS
Net interest income for 1996 totaled $1.25 billion, compared to $1.23
billion earned in 1995. The net interest margin was 2.63% for 1996, compared
to 2.39% for 1995.
For 1996, other income was $251.8 million, compared to $698.4 million in
1995. Included in other income for 1996 was a pre-tax gain of $6.9 million
from the sale of the Company's San Antonio, Texas branches and other branch
consolidation activities. Other income for 1995 included a pre-tax gain of
$514.7 million on the New York sale in the third quarter. Excluding the gains
on the sales of the Company's retail branches in 1996 and 1995, other income
would have been $244.9 million and $183.7 million in 1996 and 1995,
respectively. The increase was primarily due to the Company's emphasis on
building fee-based services in the Personal Financial Services Division
("PFS") and in the Griffin Financial Services unit ("Griffin"). PFS generates
fees in connection with deposit accounts, ATMs, debit cards, safe deposit
boxes and other related products and services
and Griffin generates fees in connection with securities and insurance
brokerage services. Fee income from PFS grew 40% to $83.4 million in 1996 from
$59.7 million in 1995, while Griffin increased its fee income by 39% to $16.8
million in 1996 from $12.1 million in 1995.
21
<PAGE>
General and administrative ("G&A") expenses totaled $1.0 billion in 1996
compared to $818.6 million in 1995. Included in 1996 was $243.9 million for
the SAIF special assessment and $14.0 million in expenses related to the First
Interstate Bank branch acquisition. Excluding these charges, G&A expenses
would have been $761.3 million in 1996, compared to $818.6 million in 1995 and
the Company's efficiency ratio would have been 52.2% in 1996 compared to 58.9%
in 1995.
For 1996, the Company incurred $250.8 million in credit costs, which include
the provision for loan losses and expenses for the operations of foreclosed
real estate ("REO"), compared to credit costs of $205.9 million in 1995.
The Company's operations for 1996 included tax benefits of $35.4 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.
REAL ESTATE HELD FOR INVESTMENT
The Company is continuing its strategy of exiting the real estate investment
business. At December 31, 1996, the Company's net investment in real estate
held for investment ("REI") was $147.9 million, a decline of 37% from $234.9
million at December 31, 1995. The reduction in net REI assets was due
primarily to the continued development and sale of ongoing residential
projects and the sale of two commercial development projects. Allowances for
REI assets totaled $132.4 million, or 47.2% of gross REI assets, at December
31, 1996 compared to $283.7 million, or 54.7% of gross REI assets, at December
31, 1995. Plans are under way for the sale of several other properties. No new
projects have been initiated since 1990.
ASSET QUALITY
At December 31, 1996, nonperforming assets ("NPAs"), which consist of
nonaccrual loans and REO, were $846.2 million, or 1.70% of total assets,
compared to $949.4 million, or 1.88% of total assets, at December 31, 1995.
NPAs decreased $103.2 million, or 11%, from December 31, 1995 and declined
$178.9 million, or 17%, from their recent peak in February 1996. Troubled debt
restructurings ("TDRs") totaled $185.6 million at December 31, 1996. NPAs
declined throughout most of 1996, reflecting the Company's more aggressive
efforts in dealing with problem assets and a more broadly-based strengthening
in the California economy.
Net loan charge-offs for 1996 were $151.4 million compared to $138.5 million
in 1995. Included in net loan charge-offs were recoveries of $39.2 million in
1996 compared to $24.2 million in 1995.
LOAN ORIGINATIONS
In 1996, Home Savings funded $5.2 billion in residential mortgages compared
to $6.4 billion in 1995. Approximately 30% of the real estate mortgage loans
funded were adjustable rate loans that were not tied to the Eleventh District
Cost of Funds. The Company provides customers with a broad array of loan
products to diversify the interest sensitivity profile of the Company's
interest-earning asset portfolio.
Consumer loan production totaled $270.3 million in 1996 compared to $35.5
million in 1995. The Company originated $51.8 million in consumer loans in
December 1996 and $131.0 million in the fourth quarter of 1996, achieving its
goal of finishing 1996 at an annualized origination rate of over $500 million
in new consumer loans. The consumer loan portfolio totaled $707.8 million at
December 31, 1996, including loans obtained in connection with the First
Interstate Bank branch acquisition.
DEPOSITS
Deposit balances at December 31, 1996 totaled $34.8 billion compared to
$34.2 billion at December 31, 1995. Checking and savings deposit balances
("transaction accounts") increased $1.5 billion, or 16%, during 1996, while
term deposits decreased $1.0 billion, or 4%, during the same period.
Transaction accounts comprised
22
<PAGE>
32% of the deposit base at December 31, 1996 compared to 28% at December 31,
1995. The change in deposit mix is primarily due to the First Interstate Bank
branch acquisition that resulted in a greater percentage of lower-cost
transaction accounts.
CAPITAL
At December 31, 1996, Home Savings' capital ratios exceeded the regulatory
requirements for a bank to be rated "well-capitalized," the highest regulatory
capital standard.
In the fourth quarter of 1995, Ahmanson announced its first stock purchase
program during which Ahmanson purchased $250 million of its common stock. In
the second quarter of 1996, the first program was completed and Ahmanson began
its second stock purchase program for $150 million. The completion of the
second program and the commencement of the third stock purchase program for
$250 million occurred in the fourth quarter of 1996. During the fourth quarter
of 1996 Ahmanson purchased a total of 4 million shares at an average price per
share of $31.86. Of the $250 million authorized for Ahmanson's third stock
purchase program, $205 million remained at December 31, 1996. At December 31,
1996, Ahmanson had $219 million in cash.
As of December 31, 1996, Ahmanson had purchased 17 million common shares, or
14% of the shares outstanding as of September 30, 1995, at an average price of
$26.11 under the three programs. In addition, in September of 1996 Ahmanson
redeemed at par the entire $175 million of its 9.60% Preferred Stock, Series
B, and in December of 1996 issued $150 million of 8.36% Capital Securities,
Series A, which are designated as "Company-obligated mandatorily redeemable
capital securities, Series A, of subsidiary trust holding solely Junior
Subordinated Deferrable Interest Debentures of the Company" in the
accompanying Consolidated Financial Statements.
23
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $1.25 billion in 1996, an increase of $25.8 million,
or 2%, from $1.23 billion in 1995, which was a decrease of $70.2 million, or
5%, from $1.30 billion in 1994. The following table presents the Company's
Consolidated Summary of Average Financial Condition and net interest income
for the years indicated. Average balances on interest-earning assets and
interest-costing liabilities are computed on a daily basis and other average
balances are computed on a monthly basis. Interest income and expense and the
related average balances include the effect of discounts or premiums.
Nonaccrual loans are included in the average balances, and delinquent interest
on such loans has been deducted from interest income. The average loan balance
for 1996 is presented before the deduction of the allowance for loan losses
and the average MBS balance for 1996 excludes the effect of the unrealized
gain or loss on MBS available for sale. The average loan and MBS balances for
1995 and 1994 have been restated to be consistent with the presentation for
1996. As a result of these changes the average rates on loans, MBS, total
loans and MBS, total interest-earning assets, interest rate spread, and the
net interest margin also have been restated for 1995 and 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $31,338,823 $2,296,786 7.33% $33,180,074 $2,405,820 7.25% $35,723,993 $2,265,050 6.34%
MBS.................... 15,415,898 1,161,487 7.48 15,911,554 1,158,077 7.27 10,844,465 686,390 6.32
----------- ---------- ----------- ---------- ----------- ----------
Total loans and MBS... 46,754,721 3,458,273 7.38 49,091,628 3,563,897 7.26 46,568,458 2,951,440 6.33
----------- ---------- ----------- ---------- ----------- ----------
Investment securities:
Securities purchased
under agreements to
resell................ 376,527 21,244 5.64 1,441,934 88,943 6.17 2,275,291 102,824 4.52
Other investments...... 446,522 35,278 7.90 777,409 46,251 5.95 677,546 41,111 6.07
----------- ---------- ----------- ---------- ----------- ----------
Total investment
securities........... 823,049 56,522 6.87 2,219,343 135,194 6.09 2,952,837 143,935 4.87
----------- ---------- ----------- ---------- ----------- ----------
Interest-earning
assets................ 47,577,770 3,514,795 7.37 51,310,971 3,699,091 7.21 49,521,295 3,095,375 6.25
---------- ---------- ----------
Other assets............ 2,080,725 2,041,485 2,553,436
----------- ----------- -----------
Total assets......... $49,658,495 $53,352,456 $52,074,731
=========== =========== ===========
Interest-costing
liabilities:
Deposits:
Checking accounts...... $ 2,614,110 21,449 0.82 $ 2,508,768 24,833 0.99 $ 2,677,130 27,577 1.03
Savings accounts....... 7,700,613 244,315 3.17 9,053,043 279,345 3.09 11,318,552 281,511 2.49
Term accounts.......... 23,733,533 1,258,109 5.30 28,418,471 1,531,412 5.39 24,536,784 982,805 4.01
----------- ---------- ----------- ---------- ----------- ----------
Total deposits........ 34,048,256 1,523,873 4.48 39,980,282 1,835,590 4.59 38,532,466 1,291,893 3.35
----------- ---------- ----------- ---------- ----------- ----------
Borrowings:
Short-term............. 2,289,974 138,182 6.03 3,129,503 197,437 6.31 4,324,762 182,721 4.22
FHLB................... 4,291,810 266,014 6.20 2,937,512 185,966 6.33 2,354,051 136,048 5.78
Other.................. 5,108,607 333,223 6.52 3,527,068 253,343 7.18 2,799,189 187,792 6.71
Capital securities of
subsidiary trust...... 11,771 989 8.52 -- -- -- -- -- --
----------- ---------- ----------- ---------- ----------- ----------
Total borrowings...... 11,702,162 738,408 6.31 9,594,083 636,746 6.64 9,478,002 506,561 5.34
----------- ---------- ----------- ---------- ----------- ----------
Interest-costing
liabilities........... 45,750,418 2,262,281 4.94 49,574,365 2,472,336 4.99 48,010,468 1,798,454 3.75
---------- ---------- ----------
Other liabilities....... 1,148,943 882,189 1,098,128
Stockholders' equity.... 2,759,134 2,895,902 2,966,135
----------- ----------- -----------
Total liabilities and
stockholders'
equity.............. $49,658,495 $53,352,456 $52,074,731
=========== =========== ===========
Excess interest-earning
assets/ Interest rate
spread................. $ 1,827,352 2.43 $ 1,736,606 2.22 $ 1,510,827 2.50
=========== =========== ===========
Net interest income/ Net
interest margin........ $1,252,514 2.63 $1,226,755 2.39 $1,296,921 2.62
========== ========== ==========
</TABLE>
24
<PAGE>
Included in net interest income were provisions for losses of delinquent
interest of $45.9 million, $46.5 million and $43.2 million in 1996, 1995 and
1994, respectively, related to nonaccrual loans. The provisions had the effect
of reducing the net interest margin by ten basis points in 1996 and nine basis
points in both 1995 and 1994.
The following table presents the changes for 1996 and 1995 from the
respective preceding year 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 year to
year, it is not practical to allocate precisely the effects thereof. For
purposes of this table, the change due to volume is initially calculated as
the change in average balance multiplied by the average rate during the
preceding year and the change due to rate is calculated as the change in
average rate multiplied by the average balance during the preceding year. Any
change that remains unallocated after such calculations is allocated
proportionately to changes in volume and changes in rates.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 VERSUS 1995 1995 VERSUS 1994
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................. $(136,096) $ 27,062 $(109,034) $(138,604) $ 279,374 $140,770
MBS................... (20,448) 23,858 3,410 356,634 115,053 471,687
Federal funds sold and
securities purchased
under agreements to
resell............... (94,859) 35,581 (59,278) (51,437) 37,556 (13,881)
Other investments..... (19,864) 470 (19,394) 6,271 (1,131) 5,140
--------- -------- --------- --------- --------- --------
Total interest
income............. (271,267) 86,971 (184,296) 172,864 430,852 603,716
--------- -------- --------- --------- --------- --------
Interest expense on:
Deposits.............. (268,370) (43,347) (311,717) 66,387 477,310 543,697
Short-term borrowings. (50,844) (8,411) (59,255) (74,156) 88,872 14,716
FHLB borrowings....... 83,780 (3,732) 80,048 36,961 12,957 49,918
Other borrowings...... 100,478 (20,598) 79,880 51,826 13,725 65,551
Capital securities of
subsidiary trust..... 989 -- 989 -- -- --
--------- -------- --------- --------- --------- --------
Total interest
expense............ (133,967) (76,088) (210,055) 81,018 592,864 673,882
--------- -------- --------- --------- --------- --------
Net interest income. $(137,300) $163,059 $ 25,759 $ 91,846 $(162,012) $(70,166)
========= ======== ========= ========= ========= ========
</TABLE>
The preceding two tables identify the components of the changes in net
interest income between the years ended December 31, 1996, 1995 and 1994. Net
interest income increased $25.8 million, or 2%, in 1996 from 1995 as the
result of an increase of 24 basis points in the net interest margin to 2.63%
in 1996 from 2.39% in 1995. The increase in the net interest margin for 1996
compared to 1995 was primarily due to the higher yields earned on the
Company's loan and MBS portfolio and a decrease in the average rates paid on
the Company's interest-costing liabilities during 1996.
During 1996, the average rates earned on the Company's growing consumer and
small business loan portfolios were 8.61% and 9.34%, respectively. Both these
rates were in excess of the average rate earned on the Company's mortgage loan
portfolio which contributed to the higher yield on the loan portfolio in 1996
compared to 1995.
The excess of interest-earning assets over interest-costing liabilities,
which represents assets funded with noninterest-costing sources of funds,
increased by $90.7 million in 1996 compared to 1995, which also had a positive
effect on the margin in 1996.
Net interest income decreased $70.2 million, or 5%, to $1.2 billion in 1995
resulting from the decrease of 23 basis points in the net interest margin, to
2.39% for 1995 from 2.62% for 1994, partially offset by an increase of $225.8
million in excess interest-earning assets.
25
<PAGE>
The yield on a majority of the Company's interest-earning assets adjust
monthly based on changes in the monthly weighted average cost of funds of
savings institutions headquartered in the Federal Home Loan Bank System
Eleventh District, which comprises California, Arizona and Nevada, as computed
by the Federal Home Loan Bank ("FHLB") of San Francisco ("COFI"). COFI is
currently announced on the last business day of the month following the month
in which such cost of funds was incurred. The Company's adjustable rate
mortgages ("ARMs") which adjust based upon changes in COFI ("COFI ARMs")
generally commence accruing interest at the newly announced rate plus the
contractual loan factor at the next payment due date following such
announcement.
The Company believes that its net interest income is somewhat insulated from
interest rate fluctuations primarily due to the adjustable rate nature of its
loan and MBS portfolio. In June 1996, the Company introduced two new loan
products tied to indices other than COFI, the 12 MAT ARM, which is tied to the
12-month moving average of the monthly average one-year constant maturity
treasury, and the LAMA loan, which is tied to the London Interbank Offered
Rate ("LIBOR") 12-month moving average of one-month LIBOR. The addition of
these new loan products is intended to diversify the interest sensitivity
profile of the Company's interest-earning assets.
Substantially all ARMs originated since 1981 are contractually limited as to
the lifetime maximum interest rate ("rate caps") that may be charged. In the
event of sustained significant increases in rates, such rate caps could
prevent the Company from further increasing rates on certain loans thus
contributing to a decrease in the net interest margin. As of December 31,
1996, the interest rate on approximately 93% of outstanding principal amount
of the Company's ARMs could have increased, as a result of a corresponding
increase in their indices, by at least 350 basis points without exceeding the
applicable maximum interest rate. For information regarding the Company's
strategies for managing its interest rate risk, see "Financial Condition--
Asset/Liability Management."
CREDIT COSTS
Provision for Loan Losses. The provision for loan losses was $144.9 million
in 1996, an increase of $25.8 million, or 22%, from $119.1 million in 1995,
which was a decrease of $57.5 million, or 33%, from $176.6 million in 1994.
The increase in the provision for 1996 was due to a higher level of NPAs
during 1996, which peaked in February 1996, as compared to 1995 levels mainly
due to weakness in the Southern California real estate market and the residual
effects of the conversion to a new loan servicing system in September 1995,
which caused a temporary disruption in the collection process. During the
latter months of 1996 credit quality indicators such as NPAs, charge-offs and
delinquencies began to improve and the Company's provision for loan losses in
the fourth quarter of 1996 declined by $8.6 million from the fourth quarter of
1995 and $6.5 million from the third quarter of 1996. The decrease in the
provision for 1995 compared to the provision for 1994 was principally due to a
$30 million charge in 1994 representing the Company's estimated losses from
real property damage sustained by its borrowers in the Northridge, California
earthquake in January 1994. For additional information regarding the
allowances for loan losses and NPAs, see "Financial Condition--Asset Quality."
Operations of REO. Losses from operations of REO were $105.9 million in
1996, an increase of $19.1 million, or 22%, from $86.8 million in 1995, which
was an increase of $0.8 million, or less than 1%, from $86.0 million in 1994.
The higher losses from operations in 1996 included increases of $12.5 million
in net operating expenses and $7.3 million in losses on sales of REO. The
higher REO operating expenses and losses on sales reflect the increase in the
number of REO properties handled during 1996 as a result of an increase
earlier in the year in the number of problem loans on which the Company
foreclosed. As a lagging indicator of credit quality, results of REO
operations have not improved as quickly as loan charge-offs and the provision
for loan losses, but during the fourth quarter of 1996 the Company experienced
a decrease in the rate of foreclosures and during the second half of 1996 the
Company experienced a continuing improvement in the speed and price at which
REO properties were sold. The increase in losses from REO operations in 1995
compared to 1994 was due to increases in net operating expenses of $2.8
million and provision for losses of $2.1 million, substantially offset by a
decrease in net losses on sales of $4.1 million. For additional information
regarding REO, see "Financial Condition--Asset Quality--NPAs and Potential
Problem Loans."
26
<PAGE>
OTHER INCOME
Gain (Loss) on Sales of MBS. During 1996, 1995 and 1994, the Company
recognized gains (losses) on sales of MBS with weighted average servicing fees
on such sales as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Book value of MBS sold:
ARM MBS..................................... $ 187,603 $2,183,628 $400,201
Fixed rate MBS.............................. 10,248 29,077 --
---------- ---------- --------
197,851 2,212,705 400,201
---------- ---------- --------
Relating to the New York sale:
ARM MBS................................... -- 38,722 --
Fixed rate MBS............................ -- 677,006 --
---------- ---------- --------
-- 715,728 --
---------- ---------- --------
$197,851 $2,928,433 $400,201
========== ========== ========
Pre-tax gains (losses) on sales of MBS:
Reported in "Gain on sale of MBS":
ARM MBS................................... $ 3,103 $ 11,733 $ 4,868
Fixed rate MBS............................ (29) 186 --
---------- ---------- --------
3,074 11,919 4,868
Relating to the New York sale:
ARM MBS................................... -- 113 --
Fixed rate MBS............................ -- (14,143) --
---------- ---------- --------
-- (14,030) --
---------- ---------- --------
$ 3,074 $ (2,111) $ 4,868
========== ========== ========
Weighted average servicing fees............... 0.60% 0.64% 0.73%
========== ========== ========
</TABLE>
The loss on sale of MBS related to the New York sale was netted against 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. Except for these $503.3 million in
MBS sold in 1995, the majority of the MBS sold were originated by the Company
and designated as available for sale upon securitization in 1996, 1995 and
1994. For additional information see "Financial Condition--Liquidity and
Capital Resources--MBS."
27
<PAGE>
Gain (Loss) on Sales of Loans. During 1996, 1995 and 1994, the Company
recognized gains (losses) on sales of loans, excluding the sales of nonaccrual
and other impaired loans in 1994, with weighted average servicing fees as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Book value of loans sold:
Fixed rate............................... $ 1,738,474 $1,339,319 $511,654
COFI ARMs................................ 618,312 40,409 53,543
Treasury ARMs............................ 270,227 1,944 --
Prime rate............................... 38,708 -- --
------------ ---------- --------
$2,665,721 $1,381,672 $565,197
============ ========== ========
Pre-tax gain (loss) on sales of loans:
Fixed rate............................... $ 17,237 $ 8,275 $ (3,585)
COFI ARMs................................ 2,140 (2,903) (17,451)
Treasury ARMs............................ 8,969 (8) --
------------ ---------- --------
$ 28,346 $ 5,364 $(21,036)
============ ========== ========
Weighted average servicing fees............ 0.46% 0.23% 0.26%
============ ========== ========
</TABLE>
The volume of fixed rate mortgage loans sold during 1996, 1995 and 1994 was
influenced principally by borrower demand for such loans. The Company intends
to originate and sell fixed rate mortgage loans and certain ARMs in the
secondary market. In addition, the Company's asset size may be reduced through
loan sales as opportunities arise.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
122, "Accounting for Mortgage Servicing Rights, an Amendment to FASB No. 65,"
effective April 1, 1995. Results from periods prior to April 1, 1995 have not
been restated. In accordance with SFAS No. 122, the Company capitalizes
mortgage servicing rights ("MSR") related to mortgage loans designated for
sale. The total cost of the mortgage loans designated for sale is allocated to
the MSR and the mortgage loans without the MSR based on their relative fair
values. The MSR related to loans and MBS sold are amortized in proportion to
and over the projected servicing period as a component of loan servicing
income. MSR related to MBS available for sale are amortized to interest income
on MBS. The MSR are periodically reviewed for impairment based on their fair
value. The fair value of the MSR, for purposes of impairment, is measured
using a discounted cash flow analysis based on the Company's estimated
servicing costs, market prepayment rates, ancillary income and market-adjusted
discount rates. Impairment losses, if any, are recognized through a valuation
allowance and are charged to loan servicing income. Impairment is measured on
a disaggregated basis based on predominant risk characteristics of the
underlying mortgage loans. The risk characteristics used by the Company for
the purposes of capitalization and impairment evaluation include loan amount,
loan type, loan origination date, loan term, the state where the collateral is
located and collateral type.
Included in "Other assets" in the Consolidated Statement of Financial
Condition were MSR as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................. $ 63,696 $ 57,812 $ 75,180
Originated MSR.................................. 40,256 16,829 --
Amortization to:
Interest on MBS............................... (934) -- --
Servicing fee income.......................... (14,318) (10,436) (17,368)
Addition to the valuation allowance............. (626) (509) --
-------- -------- --------
Ending balance.................................... $ 88,074 $ 63,696 $ 57,812
======== ======== ========
</TABLE>
28
<PAGE>
At December 31, 1996 and 1995, MSR attributable to loans held for sale
totaled $7.0 million and $2.6 million, respectively. The changes to the
valuation allowance included a provision of $0.6 million and $0.5 million for
1996 and 1995, respectively. There were no charge-offs against this valuation
allowance during 1996 and 1995. The valuation allowance was $1.1 million and
$0.5 million at December 31, 1996 and 1995, respectively.
Loan Servicing Income. Loan servicing income was $68.4 million in 1996, an
increase of $7.9 million, or 13%, from $60.5 million in 1995, which was a
decrease of $13.9 million, or 19%, from $74.4 million in 1994. The increase in
loan servicing income in 1996 was primarily due to a $1.5 billion increase in
the average portfolio of loans serviced for investors. This was partially
offset by a decrease of three basis points in the average servicing rate to
0.70%, as seasoned loans with higher servicing rates paid down and were
replaced by loans with lower servicing rates. An increase of $3.9 million in
the amortization of MSR due primarily to an increase in the related servicing
asset also offset some of the increase in loan servicing income associated
with the growth of the servicing portfolio. For 1994, loan servicing income
included a gain of $16.8 million on the sale of servicing rights related to $2
billion of fixed-rate single family loans serviced for investors. These loans
were lower principal balance loans which were less efficient for the Company
to service. Excluding the gain on sale of servicing rights, loan servicing
income was higher in 1995 than in 1994 primarily due to a decrease of
$6.9 million in amortization of the MSR and an increase of six basis points in
the average servicing rate to 0.73%, partially offset by the decline of
$2.1 billion, or 15%, in the average portfolio of loans serviced for
investors. The decrease in amortization of MSR in 1995 compared to 1994 is due
to both a decline in the related asset and slower prepayment rates. At
December 31, 1996 and 1995, the portfolio of loans serviced for investors was
$13.8 billion and $13.1 billion, respectively.
Banking and Other Retail Service Fees. Banking and other retail service fees
were $78.1 million in 1996, an increase of $22.3 million, or 40%, from $55.8
million in 1995, which was a decrease of $3.8 million, or 6%, from $59.6
million in 1994. The increase in 1996 was primarily due to the Company's
success in building fee-based services which resulted in increases of $14.3
million in service charges on deposit accounts and $7.5 million in ATM fees.
The decrease in 1995 was primarily due to declines of $2.5 million in service
charges on deposit accounts and $1.2 million in fees earned on safe deposit
boxes.
Other Fee Income. Other fee income was $58.7 million in 1996, an increase of
$10.8 million, or 23%, from $47.9 million in 1995, which was a decrease of
$2.9 million, or 6%, from $50.8 million in 1994. The increase in 1996 was
primarily due to increases of $4.8 million in commissions on the sales of
investment and insurance products and services and $2.0 million in foreclosure
fees. The decrease in 1995 compared to 1994 was primarily due to a decline of
$4.5 million in commissions on sales of investment and insurance products and
services.
Gains on Sales of Retail Deposit Branch Systems. In November 1996, the
Company sold deposits of $197.4 million and branch premises in San Antonio,
Texas, resulting in a pre-tax gain of $6.9 million. The gain is net of
expenses associated with the sale and other branch consolidation activities.
In September 1995, the Company sold deposits of $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.
In November 1994, the Company sold deposits of $1.6 billion and branch
premises in Illinois resulting in a pre-tax gain of $77.9 million. The gain is
net of the write-off of goodwill of $25.6 million and other expenses
associated with the sale.
Other Operating Income. Other operating income was $8.1 million in 1996, an
increase of $5.9 million from $2.2 million in 1995, which was a decrease of
$11.4 million from $13.6 million in 1994. The increase in 1996 was primarily
due to non-recurring refunds totaling $2.3 million recorded in the first
quarter of 1996 and a loss of $1.6 million on the sale of the remaining Ohio
branch in the first quarter of 1995. The decline in 1995 was also due to
proceeds of $8.9 million received in the fourth quarter of 1994 in connection
with a settlement related to an assistance agreement with the FDIC.
29
<PAGE>
OTHER EXPENSES
General and Administrative Expenses. G&A expenses were $1.0 billion in 1996,
an increase of $200.6 million, or 25%, from $818.6 million in 1995, which was
an increase of $60.0 million, or 8%, from $758.6 million in 1994. Excluding
the special SAIF recapitalization charge of $243.9 million, G&A expenses for
1996 would have declined by $43.3 million, or 5%, from 1995, due in part to a
refund from the FDIC of approximately $18 million of previously assessed
fourth quarter 1996 deposit insurance premiums. In the first quarter of 1997,
the FDIC assessment will be approximately $5 million, a $13 million decrease
from the quarterly assessment rate prior to the SAIF recapitalization. The
Company also recognized approximately $14.0 million in expenses in 1996
related to the First Interstate Bank branch acquisition. This compares to
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, of which one was sold in the fourth quarter of
1995, and $11.0 million associated with Project HOME Run. The increase in G&A
expenses during 1995 also included costs associated with establishing a
consumer lending division, investing in a more proactive sales capability and
culture and developing an electronic banking program as well as lower
deferrals of loan origination costs resulting from the lower volume of loan
originations in 1995. The increase in G&A expenses for 1995 compared to G&A
expenses for 1994 was partially offset by $9.0 million of FDIC premium refunds
and reductions in the premium assessment rates. Management is committed to
reviewing the Company's cost structure in order to reduce G&A expenses as the
Company completes its transition to a full-service consumer and small business
bank.
The efficiency ratio is defined by the Company as G&A expenses as a
percentage of net interest income plus loan servicing and banking and other
fee income. Excluding the SAIF recapitalization and First Interstate Bank
branch acquisition costs in 1996, the efficiency ratio would have been 52.2%
for 1996 compared with 58.9% and 51.2% for 1995 and 1994, respectively.
Operations of REI. Losses from operations of REI were $35.0 million in 1996,
a decrease of $14.5 million, or 29%, from $49.5 million in 1995, which was a
decrease of $48.1 million, or 49%, from $97.6 million in 1994. The decrease in
1996 was primarily due to a decline of $23.4 million in the provision for
losses, partially offset by $2.5 million in losses on sale of REI in 1996
compared to gains of $8.9 million in 1995. Operations of REI for 1996 include
a $19.0 million addition to the allowance for losses principally due to a
revision in the business plan for the final disposition of one commercial
project in California.
The decrease in 1995 was primarily due to a decline of $36.4 million in the
provision for losses and an $8.9 million gain on sales of REI in 1995 compared
to losses of $5.3 million on REI sales in 1994. Operations of REI in 1995
included a $40.0 million addition to the allowance for losses primarily due to
a deterioration in the value of the commercial REI project in California
referred to above. A review in September 1995 of the project's plans led to a
change in the Company's assessment of the continued viability of such plans.
For additional information regarding REI and the related allowance for losses,
see "Financial Condition--Asset Quality--REI."
Amortization of Goodwill and Other Intangible Assets and Cumulative Effect
of Change in Accounting for Goodwill. The Company adopted SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions,"
effective January 1, 1995 for goodwill related to acquisitions made prior to
September 30, 1982. As a result, in 1995 the Company wrote off goodwill
totaling $234.7 million as a cumulative effect of the change in accounting for
goodwill. Results from periods prior to 1995 have not been restated. SFAS No.
72 requires, among other things, that goodwill resulting from the acquisition
of banking or thrift institutions initiated after September 30, 1982 be
amortized over a period no longer than the estimated remaining life of the
acquired long-term interest-earning assets. The adoption of SFAS No. 72 for
goodwill related to acquisitions of banking or thrift institutions prior to
September 30, 1982 is permitted but not required. 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 $18.8 million in
1996, a decrease of $7.8 million, or 29%, from $26.6 million in 1995, which
was a decrease of $1.2 million, or 4%, from $27.8 million in 1994. The
declines reflect the reductions in the goodwill balance resulting from the
adoption of SFAS No. 72 and the
30
<PAGE>
sales of the New York and Illinois retail deposit branch systems, partially
offset by an increase in the core deposit premium related to deposits acquired
in 1994 and 1995 and $185 million of goodwill, which will be amortized over 15
years, recorded as part of the First Interstate Bank branch acquisition.
Provision for Income Taxes. The change in the provision for income taxes
between 1996 and 1995 primarily reflected the change in pre-tax income for
each year and included tax benefits of $35.4 million in 1996 resulting from
reductions in the Company's valuation allowance for deferred taxes as a result
of the Company's development of tax planning strategies that would be
implemented, if necessary, to realize the excess tax bases in certain
investments. The increase in 1995 from 1994 primarily reflected the change in
pre-tax income during each year and the 1995 write-off of $101.8 million in
non-deductible goodwill related to the New York sale. The effective tax rates
were 19.6% for 1996, 45.3% for 1995 and 42.2% for 1994. For additional
information regarding income taxes and related provision, see Note 11 of Notes
to Consolidated Financial Statements.
31
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents results of operations by quarter for 1996 and
1995:
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total interest income........... $ 894,870 $867,236 $867,975 $884,714
Total interest expense.......... 577,888 555,662 561,739 566,992
--------- -------- -------- --------
Net interest income....... 316,982 311,574 306,236 317,722
Provision for loan losses....... 45,942 33,901 35,783 29,298
--------- -------- -------- --------
Net interest income after
provision for loan losses...... 271,040 277,673 270,453 288,424
Gain on sales of investment
securities..................... -- -- 313 --
Other income.................... 60,530 56,000 56,947 78,008
Other expenses.................. 266,815 264,939 407,191 275,185
--------- -------- -------- --------
Net income (loss)......... $ 64,755 $ 68,734 $(79,478) $ 91,247
========= ======== ======== ========
Net income (loss) per common
share:
Primary....................... $ 0.45 $ 0.51 $ (0.85) $ 0.78
========= ======== ======== ========
Fully diluted................. $ 0.45 $ 0.50 $ (0.85) $ 0.74
========= ======== ======== ========
1995
Total interest income........... $ 893,983 $949,565 $949,166 $906,377
Total interest expense.......... 598,739 639,390 634,722 599,485
--------- -------- -------- --------
Net interest income....... 295,244 310,175 314,444 306,892
Provision for loan losses....... 26,544 25,465 29,175 37,927
--------- -------- -------- --------
Net interest income after
provision for loan losses...... 268,700 284,710 285,269 268,965
Gain (loss) on sales of
investment securities.......... 10 102 142 (67)
Other income.................... 35,972 53,318 560,645 48,287
Other expenses.................. 251,832 273,741 573,058 256,476
--------- -------- -------- --------
Income before cumulative effect
of accounting change........... 52,850 64,389 272,998 60,709
Cumulative effect of change in
accounting for goodwill........ (234,742) -- -- --
--------- -------- -------- --------
Net income (loss)......... $(181,892) $ 64,389 $272,998 $ 60,709
========= ======== ======== ========
Net income (loss) per common
share:
Primary
Income before cumulative
effect of accounting
change..................... $ 0.34 $ 0.44 $ 2.20 $ 0.41
Cumulative effect of change
in accounting for goodwill. (2.00) -- -- --
--------- -------- -------- --------
Net income (loss)......... $ (1.66) $ 0.44 $ 2.20 $ 0.41
========= ======== ======== ========
Fully diluted
Income before cumulative
effect of accounting
change..................... $ 0.34 $ 0.43 $ 2.03 $ 0.40
Cumulative effect of change
in accounting for goodwill. (2.00) -- -- --
--------- -------- -------- --------
Net income (loss)......... $ (1.66) $ 0.43 $ 2.03 $ 0.40
========= ======== ======== ========
</TABLE>
32
<PAGE>
Net interest income increased in the fourth quarter of 1996 compared to the
third quarter of 1996 and to the fourth quarter of 1995 primarily due to the
increase in net interest margin to 2.65% for the fourth quarter of 1996 from
2.59% in the third quarter of 1996 and 2.52% in the fourth quarter of 1995.
The provision for loan losses decreased in the fourth quarter of 1996 from the
third quarter of 1996 and fourth quarter of 1995 as the Company realized
improvements in credit quality during the fourth quarter of 1996. Other income
increased in the fourth quarter of 1996 compared to the third quarter of 1996
and fourth quarter of 1995 due to a $9.9 million and $17.5 million increase,
respectively, in banking and other fee income and the $6.9 million gain on
sale of the San Antonio branches recognized in the fourth quarter of 1996.
Other expenses decreased in the fourth quarter of 1996 compared to the third
quarter of 1996 due to the special SAIF recapitalization charge of
$243.9 million recorded in the third quarter of 1996 and a refund of
approximately $18 million of FDIC deposit insurance premiums previously
assessed for the fourth quarter of 1996. Other expenses increased in the
fourth quarter of 1996 compared to the fourth quarter of 1995 due primarily to
an increase in provision for income taxes in the fourth quarter of 1996 of
$27.1 million (due to an increase in pre-tax income) partially offset by the
$18 million FDIC refund received in the fourth quarter of 1996.
33
<PAGE>
FINANCIAL CONDITION
The Company's consolidated assets were $49.9 billion at December 31, 1996, a
decrease of $627.6 million, or 1%, from $50.5 billion at December 31, 1995.
The decrease is primarily due to sales of and payments on loans and MBS,
substantially offset by the effects of the First Interstate Bank 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. Of the
loans purchased, approximately $593.4 million are business and consumer loans
with the remainder being residential mortgage loans. The First Interstate Bank
branch acquisition significantly accelerates the Company's strategic objective
of becoming a full-service provider of consumer and small business banking
products.
The following table presents the composition of the Company's loan and MBS
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential loans:
Single family......... $20,407,622 $20,684,133 $26,084,783 $28,764,402 $30,486,130
Multi-family.......... 9,582,129 9,284,131 8,518,510 7,219,708 6,543,238
Commercial and
industrial real estate
loans.................. 1,343,348 1,566,470 1,734,793 2,012,307 2,225,226
Consumer loans.......... 683,433 31,685 -- -- --
Small business loans.... 53,717 -- -- -- --
Other loans............. 108,788 104,645 124,922 259,354 282,786
----------- ----------- ----------- ----------- -----------
32,179,037 31,671,064 36,463,008 38,255,771 39,537,380
Deferred loan fees and
interest............... (13,176) (31,439) (55,184) (90,959) (97,662)
Unearned premiums
(discounts)............ 12,432 (3,360) (5,847) (21,658) (42,729)
Allowance for loan
losses................. (389,135) (380,886) (400,232) (438,786) (434,114)
----------- ----------- ----------- ----------- -----------
Loans receivable........ 31,789,158 31,255,379 36,001,745 37,704,368 38,962,875
MBS..................... 14,296,512 16,152,142 12,789,420 6,919,997 3,915,508
----------- ----------- ----------- ----------- -----------
$46,085,670 $47,407,521 $48,791,165 $44,624,365 $42,878,383
=========== =========== =========== =========== ===========
</TABLE>
During late 1994 the Company began offering ARMs which provide for interest
rates that adjust based upon changes in the yields of U.S. Treasury
securities. The 12 MAT ARM, which is also tied to U.S. Treasury securities,
was introduced in June 1996. The Company originated $1.1 billion of 12 MAT
ARMs and $343.7 million of other loans tied to U.S. Treasury securities
("Treasury ARMs") during 1996. At December 31, 1996, there were $1.1 billion
of 12 MAT ARMs in the Company's loan portfolio. Since the second quarter of
1996, the Company has increasingly emphasized the origination of these
products over its COFI ARM products in an effort to restructure the interest
sensitivity profile of its loan portfolio. Due to the long-time emphasis on
originating COFI ARMs 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 percentage of dollar volume of the
Company's residential mortgage loans originated by type is summarized below
for the years shown:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Single family (one to four units)............. 78% 81% 79% 86% 90%
Multi-family (five units and over)............ 22 19 21 14 10
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
34
<PAGE>
The Company's loan originations are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Residential mortgage loans:
Fixed rate.......................................... $1,842,738 $1,474,077
COFI ARMs........................................... 1,875,588 4,347,779
12 MAT ARMs......................................... 1,105,793 --
Treasury ARMs....................................... 343,639 581,149
LAMA................................................ 58,668 --
---------- ----------
5,226,426 6,403,005
Consumer loans........................................ 270,303 35,474
Small business loans.................................. 44,301 --
---------- ----------
$5,541,030 $6,438,479
========== ==========
</TABLE>
At December 31, 1996, the Company was committed to fund residential mortgage
loans totaling $330.3 million, of which $188.4 million, or 57%, were 12 MAT
ARMs, $92.8 million, or 28%, were fixed rate loans and $38.9 million, or 12%,
were COFI ARMs. Consumer and small business loan commitments, some of which
are expected to expire without being drawn upon, were $478.1 million and $60.0
million, respectively, at December 31, 1996. The Company expects to fund such
loans from its liquidity sources.
Approximately 68% of mortgage loan originations in 1996 were on properties
located in California compared to 66% in 1995. At December 31, 1996,
approximately 97% of the mortgage loan and MBS portfolio was secured by
residential properties, including 76% secured by single family properties, and
approximately 76% of the mortgage loan and MBS portfolio was secured by
properties located in California.
The following table presents the ranges of original loan-to-value ("LTV")
ratios as percentages of single family loans and multi-family loans originated
during the years indicated:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Single family loans:
Less than 75.0%.............................. 52% 42% 35% 54% 58%
75.0% to less than 80.0%..................... 9 10 9 15 14
80.0%........................................ 21 22 26 21 19
Greater than 80.0% to 90.0%.................. 12 17 22 10 9
Greater than 90.0%........................... 6 9 8 -- --
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
Multi-family loans:
70.0% or less................................ 41% 44% 54% 69% 73%
Greater than 70.0% to 75.0%.................. 52 49 41 25 20
Greater than 75.0%........................... 7 7 5 6 7
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
The mortgage loan and MBS portfolio includes approximately $6.7 billion in
mortgage loans that were originated with LTV ratios exceeding 80%, or 15% of
the portfolio at December 31, 1996. Approximately 14% of loans originated
during 1996 had LTV ratios in excess of 80%, including 4% with LTV ratios in
excess of 90%. The majority of the higher LTV loans in the portfolio at
December 31, 1996 were secured by single family properties. The additional
volume of higher LTV single family loans in 1995 was due, in part, to changes
in the marketplace, which was primarily a purchase market in 1994 through 1995
as compared to the predominant refinance market in 1992 and 1993. The Company
takes the additional risk of originating loans with LTV ratios in excess of
80% into consideration in its loan underwriting and pricing policies.
35
<PAGE>
At December 31, 1996 the Company had $707.8 million of consumer loans and
$54.5 million of business loans, the majority of which were acquired in the
First Interstate Bank branch acquisition, compared to $31.7 million of
consumer loans at December 31, 1995. During 1996 the Company funded $270.3
million of consumer loans. The Company is continuing to originate consumer
loans through its entire distribution network and began originating business
loans through some of its California branches in the fourth quarter of 1996
and expects to expand the origination of business loans to other markets in
1997. Both activities will help achieve the Company's objective of positioning
itself as a full-service consumer and small business bank.
In December 1996, the Company sold $38.7 million in agricultural production
loans (which were obtained in the First Interstate Bank branch acquisition)
for book value. The Company has decided to exit this line of business for the
foreseeable future.
ASSET/LIABILITY MANAGEMENT
The Company's principal objective of asset/liability management is to
maximize net interest income subject to net interest margin volatility and
liquidity constraints. Net interest margin volatility results when the rate
reset (or repricing) characteristics of the Company's assets are materially
different from those of the Company's liabilities. Liquidity risk results from
the mismatching of asset and liability cash flows.
In order to manage the interest rate risk inherent in its portfolios of
interest-earning assets and interest-costing liabilities, the Company 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.
The interest rates on COFI ARMs do not immediately reflect current market rate
movements (referred to as the "COFI lag"). The COFI lag arises because (1)
COFI is determined based on the average cost of all FHLB Eleventh District
member savings institutions' interest-costing liabilities, some of which do
not reprice immediately and (2) the Company's COFI ARMs reprice monthly based
on changes in the cost of such liabilities approximately two months earlier.
COFI is subject to influences in addition to changes in market interest rates,
such as changes in the roster of FHLB Eleventh District member savings
institutions, the aggregate liabilities and the mix of liabilities at such
institutions, and legislative and regulatory developments which affect the
business of such institutions. Due to the unique characteristics of COFI, the
secondary market for COFI loans and MBS is not as consistently liquid as it is
for various other loans and MBS.
During late 1994 the Company began offering ARMs which provide for interest
rates that adjust based upon changes in the yields of U.S. Treasury
securities. The ARM products offered were further expanded in June 1996 with
the introduction of 12 MAT ARMs and LAMA loans. Since June 1996 the Company
has increasingly emphasized the origination of these products over its COFI
ARMs in an effort to diversify the interest rate sensitivity of its loan
portfolio. In 1996 the Company originated $1.4 billion of Treasury ARMs,
including $1.1 billion of 12 MAT ARMs. Additionally, during 1996 the Company
sold $618.3 million of COFI ARMs, had commitments to sell approximately $300
million of COFI ARMs in the first quarter of 1997 and intends to securitize in
the first quarter of 1997 approximately $500 million in COFI ARMs for sale.
The introduction of these new loan products and the sale of certain COFI ARMs
is intended to diversify the interest sensitivity profile of the Company's
interest-earning assets and over time reduce interest income volatility.
However, due to the long-time emphasis on originating COFI ARMs and their
predominant balance in the current portfolio, any benefits from loans tied to
other indices will be realized slowly over time. At December 31, 1996,
approximately 90% of the Company's $46.1 billion loan and MBS portfolio
consisted of COFI ARMs, compared to approximately 94% of the $47.4 billion
loan and MBS portfolio at December 31, 1995.
Residential lending is and will continue to be a key component of the
Company's business as the Company is transforming into a full-service consumer
and small business bank. The First Interstate Bank branch acquisition
accelerated the Company's progress towards originating consumer and small
business loans which generally earn higher rates of interest and have
maturities shorter than residential loans.
The Company's approach to managing interest rate risk includes the changing
of repricing terms and spreading of maturities on term deposits and other
interest-costing liabilities. The Company manages the maturities of its
borrowings to balance changes in the demand for deposit maturities. Deposit
funds obtained in
36
<PAGE>
the First Interstate Bank branch acquisition that exceeded the amount required
to support the liabilities assumed and regulatory reserves 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. At December 31, 1996, the Company had increased the number of
checking accounts to approximately 900,000 accounts, an increase of
approximately 250,000 accounts, or 38%, from 650,000 accounts at December 31,
1995. For additional information regarding these and other transactions, see
"Results of Operations--Net Interest Income" and "Financial Condition--
Liquidity and Capital Resources."
37
<PAGE>
The following table presents the components of the Company's interest rate
sensitive asset and liability portfolios by repricing periods (contractual
maturity as adjusted for frequency of repricing) as of December 31, 1996:
<TABLE>
<CAPTION>
REPRICING PERIODS
PERCENT --------------------------------------------------------------
OF WITHIN MONTHS 1-5 5-10 YEARS
BALANCE TOTAL 6 MONTHS 7-12 YEARS YEARS OVER 10
----------- ------- ----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities--
Cash equivalents....... $ 752,282 2% $ 752,282 $ -- $ -- $ -- $ --
Other investment
securities............ 11,597 -- 9,159 6 2,432 -- --
FHLB stock............. 420,978 1 420,978 -- -- -- --
Impact of hedging
(LIBOR-indexed
amortizing swaps)..... -- -- (71,876) -- 71,876 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Total investment
securities............. 1,184,857 3 1,110,543 6 74,308 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Loans and MBS--
MBS--
ARMs................. 13,951,241 29 13,951,241 -- -- -- --
Other................ 345,271 1 -- -- 2,794 40 342,437
Loans--
ARMs................. 30,118,857 64 28,047,987 506,962 1,206,088 49,174 308,646
Other................ 1,670,301 3 134,952 -- -- -- 1,535,349
Impact of hedging
(interest rate
swaps)................ -- -- 192,400 (103,950) (88,450) -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Total loans and MBS..... 46,085,670 97 42,326,580 403,012 1,120,432 49,214 2,186,432
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-earning
assets................ $47,270,527 100% $43,437,123 $ 403,018 $ 1,194,740 $ 49,214 $2,186,432
=========== === =========== =========== =========== =========== ==========
INTEREST-COSTING
LIABILITIES:
Deposits--
Checking............... $ 3,271,549 7% $ 3,271,549 $ -- $ -- $ -- $ --
Statement savings...... 1,585,345 3 1,585,345 -- -- -- --
Money market savings... 6,328,235 14 6,328,235 -- -- -- --
Term accounts--
Under $100,000....... 23,187,593 50 13,759,533 4,961,323 4,456,305 10,333 99
Over $100,000........ 401,223 1 293,628 81,809 25,786 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Total deposits.......... 34,773,945 75 25,238,290 5,043,132 4,482,091 10,333 99
----------- --- ----------- ----------- ----------- ----------- ----------
Borrowings--
Repurchase agreements.. 1,820,000 4 1,820,000 -- -- -- --
FHLB................... 4,441,372 10 3,723,814 262,200 415,103 3,569 36,686
Other.................. 5,319,149 11 2,425,635 1,335,714 1,170,806 386,994 --
Capital securities of
subsidiary trust...... 148,413 -- -- -- -- 148,413 --
----------- --- ----------- ----------- ----------- ----------- ----------
Total borrowings........ 11,728,934 25 7,969,449 1,597,914 1,585,909 538,976 36,686
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-costing
liabilities........... $46,502,879 100% $33,207,739 $ 6,641,046 $ 6,068,000 $ 549,309 $ 36,785
=========== === =========== =========== =========== =========== ==========
Hedge-adjusted interest-
earning assets
more/(less) than
interest-costing
liabilities............ $ 767,648 $10,229,384 $(6,238,028) $(4,873,260) $ (500,095) $2,149,647
=========== =========== =========== =========== =========== ==========
Cumulative interest
sensitivity gap........ $10,229,384 $ 3,991,356 $ (881,904) $(1,381,999) $ 767,648
=========== =========== =========== =========== ==========
Percentage of hedge-
adjusted interest-
earning assets to
interest-costing
liabilities............ 101.65%
Percentage of cumulative
interest sensitivity
gap to total assets.... 1.54%
</TABLE>
38
<PAGE>
The following table presents the interest rates, spread and margin at the
end of the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average yield on:
Loans.............................................. 7.31% 7.41% 6.67%
MBS................................................ 7.45 7.69 6.63
Total loans and MBS............................ 7.35 7.50 6.66
Investment securities:
Federal funds sold and securities purchased under
agreements to resell............................ 6.59 6.25 6.66
Other investments................................ 6.03 5.05 5.11
Total investment securities.................... 6.38 5.56 5.85
Interest-earning assets...................... 7.33 7.46 6.63
Average rate on:
Deposits:
Checking accounts................................ 0.70 0.95 1.00
Savings accounts................................. 3.16 3.14 2.75
Term accounts.................................... 5.34 5.47 4.80
Total deposits................................. 4.40 4.65 4.05
Borrowings:
Short-term....................................... 6.03 5.97 6.38
FHLB............................................. 6.10 6.03 5.98
Other............................................ 6.36 6.72 7.10
Capital securities of subsidiary trust........... 8.52 -- --
Total borrowings............................... 6.23 6.26 6.58
Interest-costing liabilities................. 4.86 5.07 4.52
Interest rate spread................................. 2.47 2.39 2.11
Net interest margin.................................. 2.60 2.62 2.24
</TABLE>
The calculation of these rates includes an estimate for the effect of
delinquent interest and is based on balances gross of the allowance for loan
losses and the unrealized gain or loss on MBS available for sale.
The following table presents the schedule of contractual maturities for
loans and MBS as of December 31, 1996:
<TABLE>
<CAPTION>
WITHIN 1-2 2-3 3-5 5-10 10-15 YEARS
1 YEAR YEARS YEARS YEARS YEARS YEARS OVER 15
------ ----- ----- ----- ----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
MBS:
ARMs.................. $ -- $ -- $ -- $1,289,197 $ 559,568 $ -- $12,102,476
Other................. -- 4 -- 2,790 40 298,343 44,094
Residential loans:
ARMs.................. 62,654 28,520 50,831 195,603 1,613,554 1,445,661 25,390,968
Other................. 45,306 13,468 12,534 29,184 63,699 364,648 322,351
Commercial and
industrial real estate
loans:
ARMs.................. 7,144 33,160 19,948 197,688 649,673 17,121 163,009
Other................. 29,232 4,772 14,360 20,543 86,886 44,862 4,758
Consumer loans.......... 2,027 7,266 25,764 65,620 95,103 283,123 219,649
Small business loans.... 36,166 5,526 2,592 3,632 1,439 170 156
Other loans............. 108,788 -- -- -- -- -- --
-------- ------- -------- ---------- ---------- ---------- -----------
$291,317 $92,716 $126,029 $1,804,257 $3,069,962 $2,453,928 $38,247,461
======== ======= ======== ========== ========== ========== ===========
</TABLE>
39
<PAGE>
ASSET QUALITY
NPAs and Potential Problem Loans. When a borrower fails to make a required
payment on a loan and does not cure the delinquency promptly, the loan is
characterized as delinquent. The procedural steps necessary for foreclosure
vary from state to state, but generally if the loan is not reinstated within
certain periods specified by statute and no other workout arrangements
satisfactory to the lender are entered into, the property securing the loan
can be acquired by the lender. Although the Company generally relies on the
underlying property to satisfy foreclosed loans, in certain circumstances and
when permitted by law, the Company may seek to obtain deficiency judgments
against the borrowers. The Company reviews loans for impairment in accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures." Impaired loans, as defined by the
Company, include nonaccrual major loans (i.e., multi-family and commercial and
industrial loans) which are not collectively reviewed for impairment, TDRs and
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. See Note 1 of Notes to Consolidated Financial Statements for
information regarding the Company's policy for nonaccrual and impaired loans.
The following table presents the amounts of the Company's nonaccrual loans,
REO, past due loans, TDRs and other impaired major loans as of the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................ $598,661 $723,791 $681,026 $780,400 $1,768,362
REO............................. 247,577 225,566 161,948 179,862 452,971
Accruing loans contractually
past due 90 days or more (all
single family)................. -- -- -- -- 155,864
TDRs............................ 185,635 163,844 121,365 100,751 61,400
Other impaired major loans...... 114,332 51,018 12,158 391,044 --
</TABLE>
40
<PAGE>
The following table presents NPAs, TDRs and other impaired major loans, net
of related specific loss allowances, by type as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ INCREASE
1996 1995 (DECREASE)
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Single family.............................. $537,243 $630,395 $ (93,152)
Multi-family............................... 44,972 81,366 (36,394)
Commercial and industrial real estate...... 14,837 12,030 2,807
Consumer................................... 1,410 -- 1,410
Small business............................. 199 -- 199
-------- -------- ---------
Total.................................... $598,661 $723,791 $(125,130)
======== ======== =========
REO:
Single family.............................. $214,720 $193,729 $ 20,991
Multi-family............................... 19,239 14,139 5,100
Commercial and industrial real estate...... 13,618 17,698 (4,080)
-------- -------- ---------
Total.................................... $247,577 $225,566 $ 22,011
======== ======== =========
Total NPAs:
Single family.............................. $751,963 $824,124 $ (72,161)
Multi-family............................... 64,211 95,505 (31,294)
Commercial and industrial real estate...... 28,455 29,728 (1,273)
Consumer................................... 1,410 -- 1,410
Small business............................. 199 -- 199
-------- -------- ---------
Total.................................... $846,238 $949,357 $(103,119)
======== ======== =========
TDRs:
Single family.............................. $ 91,422 $ 45,592 $ 45,830
Multi-family............................... 58,027 75,482 (17,455)
Commercial and industrial real estate...... 36,186 42,770 (6,584)
-------- -------- ---------
Total.................................... $185,635 $163,844 $ 21,791
======== ======== =========
Other impaired major loans:
Multi-family............................... $ 96,383 $ 32,273 $ 64,110
Commercial and industrial real estate...... 17,949 18,745 (796)
-------- -------- ---------
Total.................................... $114,332 $ 51,018 $ 63,314
======== ======== =========
Ratio of NPAs to total assets................ 1.70% 1.88%
======== ========
Ratio of NPAs and TDRs to total assets....... 2.07% 2.20%
======== ========
Ratio of allowances for losses on loans and
REO to NPAs................................. 47.96% 42.43%
======== ========
</TABLE>
41
<PAGE>
The following table presents NPAs, TDRs and other impaired major loans by
state at December 31, 1996:
<TABLE>
<CAPTION>
NPAS
--------------------------------------------------------------
COMMERCIAL OTHER
SINGLE MULTI AND IMPAIRED
FAMILY FAMILY INDUSTRIAL MAJOR
RESIDENTIAL RESIDENTIAL REAL ESTATE CONSUMER BUSINESS TOTAL TDRS LOANS
----------- ----------- ----------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $592,694 $58,685 $19,214 $1,410 $199 $672,202 $132,069 $100,958
New York................ 47,740 2,428 36 -- -- 50,204 30,231 5,891
Florida................. 39,165 -- 192 -- -- 39,357 1,127 --
Illinois................ 24,953 -- 1,034 -- -- 25,987 356 --
Texas................... 10,854 353 3 -- -- 11,210 6,870 1,222
Other................... 36,557 2,745 7,976 -- -- 47,278 14,982 6,261
-------- ------- ------- ------ ---- -------- -------- --------
$751,963 $64,211 $28,455 $1,410 $199 $846,238 $185,635 $114,332
======== ======= ======= ====== ==== ======== ======== ========
</TABLE>
Total NPAs were $846.2 million at December 31, 1996, or a ratio of NPAs to
total assets of 1.70%, a decrease of $103.2 million, or 11%, during 1996 from
$949.4 million, or 1.88% of total assets, at December 31, 1995. The major
reasons for the decrease in NPAs during 1996 were Company initiatives to
improve collection efforts and an improvement in the California real estate
market, reflected by an increase in the number of units sold and slight
improvements in sales prices in 1996 compared with 1995. The higher level of
NPAs at December 31, 1995 also reflected the conversion to a new loan
servicing system in September 1995 which caused a temporary disruption in the
collection process.
Single family NPAs were $752.0 million at December 31, 1996, a decrease of
$72.1 million, or 9%, from $824.1 million at December 31, 1995 primarily due
to declines in NPAs secured by properties in California ($85.3 million),
partially offset by increases in the states of Illinois ($7.9 million) and
Florida ($4.8 million).
Multi-family NPAs totaled $64.2 million at December 31, 1996, a decrease of
$31.3 million, or 33%, from $95.5 million at December 31, 1995 primarily due
to declines in NPAs secured by properties in California ($25.5 million) and
New York ($3.1 million).
Commercial and industrial NPAs totaled $28.5 million at December 31, 1996, a
decrease of $1.2 million, or 4%, from $29.7 million at December 31, 1995
primarily due to a decline in New York ($2.8 million).
TDRs totaled $185.6 million at December 31, 1996, an increase of $21.8
million, or 13%, during 1996 from $163.8 million at December 31, 1995
primarily due to an increase in single family TDRs, primarily in California
($41.6 million), partially offset by a decrease in multi-family TDRs,
primarily in California ($14.8 million). The increase in single family TDRs
reflects, in part, the Company's efforts to improve collections on loans by
working with borrowers to modify payment plans as a preferable alternative to
nonpayment and eventual foreclosure and also due to the Company increasing the
length of time a TDR must perform in accordance with the terms of the
modification agreement before the Company reclassifies the loan from a TDR to
a performing loan.
Other impaired major loans totaled $114.3 million at December 31, 1996, an
increase of $63.3 million from $51.0 million at December 31, 1995 primarily
due to a change during 1996 in the Company's definition of these loans based
on discussions with its regulators.
The amount of the net recorded investment in impaired loans for which there
is a related specific allowance for loan losses was $246.4 million, net of a
specific allowance of $58.9 million, and $129.2 million, net of a specific
allowance of $44.6 million, at December 31, 1996 and 1995, respectively. The
Company's total net recorded investment in impaired loans was $335.9 million
and $272.5 million at December 31, 1996 and 1995, respectively.
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
42
<PAGE>
the REO. The Company sold $429.8 million of single family REO and $91.0
million of multi-family and commercial and industrial REO in 1996. The Company
sold $288.5 million of single family REO and $91.7 million of multi-family and
commercial and industrial REO in 1995. In addition, the Company may, from time
to time, offer packages of NPAs for competitive bid.
The following table presents the amounts of loans which were 60-89 days
delinquent by loan type as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOAN AND LOAN AND LOAN AND
MBS MBS MBS
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family........... $120,808 0.35% $143,932 0.39% $141,937 0.37%
Multi-family............ 6,968 0.07 34,614 0.37 10,395 0.12
Commercial and
industrial real estate. 1,934 0.14 2,648 0.17 9,540 0.55
Consumer................ 1,883 0.27 -- -- -- --
Business................ 102 0.19 -- -- -- --
-------- -------- --------
$131,695 0.28 $181,194 0.38 $161,872 0.33
======== ======== ========
</TABLE>
The decrease in loans delinquent 60-89 days at December 31, 1996 compared to
December 31, 1995 and the increase in loans delinquent 60-89 days at December
31, 1995 compared to December 31, 1994 was primarily influenced by the
Southern California economy and real estate market, both of which have shown
improvement in 1996 after continuing to exhibit weakness in 1995. Single
family loans 60-89 days delinquent decreased in 1996 by $23.1 million
primarily in the states of California ($16.9 million) and New York ($4.4
million) and increased by $2.0 million in 1995 primarily in the states of
California ($5.7 million) and Florida ($2.1 million), partially offset by a
decline in the state of New York ($8.7 million). Multi-family loans 60-89 days
delinquent decreased $27.6 million in 1996 primarily in the states of
California ($19.9 million) and New York ($7.7 million) and increased by $24.2
million in 1995 primarily in the states of California ($17.4 million) and New
York ($7.7 million). In addition, commercial and industrial real estate loans
60-89 days delinquent declined in 1996 and 1995 by $0.7 million and $6.9
million, respectively.
Allowance for Loan Losses. Management believes the Company's allowance for
loan losses as determined through periodic analysis of the loan portfolio was
adequate at December 31, 1996. The Company's process for evaluating the
adequacy of the allowance for loan losses includes the identification and
detailed review of impaired loans; an assessment of the overall quality and
inherent risk in the loan portfolio, and consideration of loan loss experience
and trends in problem loans, as well as current economic conditions and
trends. Based upon this process, management determines what it considers to be
an appropriate allowance for loan losses.
The identification of impaired loans is achieved mainly through individual
review of all real estate loans over $2 million and certain other loans under
$2 million. Loan loss allowances are established for specifically identified
impaired loans based on the fair value of the underlying collateral property.
Immediately upon or prior to the foreclosure of a mortgage loan, the Company
obtains an appraisal of the collateral property. In the case of a single
family or California multi-family loan, such appraisal generally is conducted
by an appraiser employed by the Company; in the case of a commercial and
industrial real estate or non-California multi-family loan, such appraisal is
conducted by an independent fee appraiser and reviewed by the Company's
appraisal review department. Based upon such appraisal, foreclosed loans are
recorded at fair value less estimated selling costs.
43
<PAGE>
The following tables set forth the allocation of the Company's allowance for
loan losses by loan and MBS category, the percent of loans and MBS in each
category to total loans and MBS and the allocated allowance as a percent of
the loan and MBS category at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
ALLOWANCE ALLOWANCE
PERCENT OF AS PERCENT PERCENT OF AS PERCENT
LOAN AND MBS OF LOAN LOAN AND MBS OF LOAN
CATEGORY AND MBS CATEGORY AND MBS
ALLOWANCE TO TOTAL CATEGORY ALLOWANCE TO TOTAL CATEGORY
--------- ------------ ---------- --------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family........... $176,120 74.8% 0.51% $174,242 77.3% 0.47%
Multi-family............ 153,933 20.7 1.60 147,708 19.4 1.59
Commercial and
industrial real estate. 45,065 2.9 3.37 58,936 3.3 3.78
Consumer................ 9,217 1.5 1.30 -- -- --
Business................ 4,800 0.1 8.81 -- -- --
-------- ----- -------- -----
$389,135 100.0% 0.84 $380,886 100.0% 0.80
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
ALLOWANCE ALLOWANCE
PERCENT OF AS PERCENT PERCENT OF AS PERCENT
LOAN AND MBS OF LOAN LOAN AND MBS OF LOAN
CATEGORY AND MBS CATEGORY AND MBS
ALLOWANCE TO TOTAL CATEGORY ALLOWANCE TO TOTAL CATEGORY
--------- ------------ ---------- --------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family........... $165,000 79.1% 0.42% $155,516 79.5% 0.43%
Multi-family............ 160,232 17.4 1.88 145,097 16.1 2.00
Commercial and
industrial real estate. 75,000 3.5 4.34 138,173 4.4 6.90
-------- ----- -------- -----
$400,232 100.0% 0.81 $438,786 100.0% 0.97
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1992
---------------------------------
ALLOWANCE
PERCENT OF AS PERCENT
LOAN AND MBS OF LOAN
CATEGORY AND MBS
ALLOWANCE TO TOTAL CATEGORY
--------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single family............ $185,343 79.5% 0.54%
Multi-family............. 120,946 15.0 1.86
Commercial and industrial
real estate............. 120,962 5.1 5.47
Credit cards............. 6,863 0.4 4.25
-------- -----
$434,114 100.0% 1.00
======== =====
</TABLE>
The allocation of the allowance for loan losses by type at December 31, 1996
reflects continued reduction in the commercial and industrial real estate loan
portfolio and the increase in the consumer and business loan portfolios. The
commercial and industrial real estate portfolio has diminished in size due to
loan principal payments and the Company's decision in 1988 to discontinue
originating new commercial and industrial real estate loans. Although the
single family portfolio declined by $2.2 billion, or 6%, in 1996 due to
principal payments and sales, there was an increase in the allocation of the
allowance primarily due to the continued concentration of the portfolio in the
single family category. Although the single family portfolio decreased
$2.0 billion, or 5%, in 1995 due to principal payments and sales, the
allocation of the allowance to the single family portfolio increased from that
in effect at December 31, 1994 in response to the increase in single family
nonperforming loans and other factors. As a result of the changes in the
composition of the Company's NPAs,
44
<PAGE>
the ratio of allowances for losses on loans and REO to NPAs increased from
42.43% in 1995 to 47.96% in 1996. For additional information regarding the
allowance for loan losses, see "Financial Condition--Asset Quality--NPAs and
Potential Problem Loans."
The following table presents the changes in the Company's allowance for loan
losses and the loss experience for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
the year............... $ 380,886 $ 400,232 $ 438,786 $ 434,114 $ 303,804
Provision for loan
losses................. 144,924 119,111 176,557 574,970 367,366
Allowance for loan
losses on loans
purchased.............. 14,710 -- -- 20,365 --
--------- --------- --------- ---------- ---------
540,520 519,343 615,343 1,029,449 671,170
--------- --------- --------- ---------- ---------
Charge-offs:
Single family......... (111,212) (87,240) (97,865) (469,204) (114,086)
Multi-family.......... (59,262) (53,263) (114,323) (76,189) (60,956)
Commercial and
industrial real
estate............... (19,599) (22,115) (40,546) (68,135) (73,069)
Consumer.............. (398) -- -- -- --
Business.............. (69) -- -- -- --
Credit cards.......... -- -- -- (10,207) (7,382)
--------- --------- --------- ---------- ---------
(190,540) (162,618) (252,734) (623,735) (255,493)
--------- --------- --------- ---------- ---------
Recoveries:
Single family......... 28,835 14,967 14,759 18,392 9,601
Multi-family.......... 8,199 7,405 15,314 7,365 5,286
Commercial and
industrial real
estate............... 2,121 1,789 7,550 7,315 3,550
--------- --------- --------- ---------- ---------
39,155 24,161 37,623 33,072 18,437
--------- --------- --------- ---------- ---------
Net charge-offs..... (151,385) (138,457) (215,111) (590,663) (237,056)
--------- --------- --------- ---------- ---------
Balance at end of the
year................... $ 389,135 $ 380,886 $ 400,232 $ 438,786 $ 434,114
========= ========= ========= ========== =========
Ratio of net charge-offs
to average loans and
MBS outstanding during
the year............... 0.32% 0.28% 0.46% 1.34% 0.56%
========= ========= ========= ========== =========
</TABLE>
The increase in the provision for loan losses and gross charge-offs for 1996
compared to 1995 is due mainly to a higher level of NPAs in 1996, which peaked
in February 1996, compared to 1995 due mainly to weakness in the Southern
California real estate market. The increase in recoveries in 1996, especially
in single family properties, is mainly due to recoveries upon the sales of REO
properties as sale prices of properties improved slightly during the second
half of 1996. The change in the allowance for loan losses during 1996 also
includes $14.7 million relating to loans from the First Interstate Bank branch
acquisition. The decrease in the provision for loan losses and gross charge-
offs for 1995 compared to 1994 is due to the 1994 sales of nonaccrual and
impaired loans of $163.6 million, resulting in gross charge-offs of
$79.2 million, and a $30.0 million provision in 1994 related to estimated
losses due to the Northridge earthquake. The decrease in provision for loan
losses and gross charge-offs for 1994 compared to 1993 and the increase for
1993 compared to 1992 are due to the 1993 sales of nonaccrual and impaired
loans of $959.0 million, resulting in gross charge-offs of $378.1 million, and
the 1993 sale of the Company's credit card portfolio, totaling $131.3 million.
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 deterioration in the
residential purchase market in California, particularly in Southern
California.
45
<PAGE>
REI. 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. In accordance with SFAS No. 121, the Company reviews REI properties
with long-term holding and development periods ("long-term REI") for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the long-term REI may not be recoverable. Also, in
accordance with SFAS No. 121, the Company carries REI held for sale at the
lower of the carrying value or fair value less costs to sell. For additional
information regarding the Company's accounting policy for REI see Note 1 of
Notes to Consolidated Financial Statements.
The Company's REI decreased $87.0 million or 37% to $147.9 million at
December 31, 1996 from $234.9 million at December 31, 1995. The allowance for
losses on REI was $132.4 million or 47.2% of gross REI at December 31, 1996,
compared to $283.7 million or 54.7% of gross REI at December 31, 1995. The
decline in net REI was primarily due to the continued development and sale of
ongoing residential projects and the sale of two commercial development
projects. Operations of REI for 1996 reflect provisions for losses of $26.3
million, including a $19.0 million addition to the allowance for losses
recognized in the third quarter of 1996 principally due to a revision in the
business plan for the final disposition of one commercial project in
California. The provision for losses for 1995 totaled $49.7 million, which
included a $40.0 million charge during the third quarter of 1995 due largely
to a deterioration in the value of the commercial REI project in California
referred to above.
The following table presents the Company's REI by type at December 31, 1996:
<TABLE>
<CAPTION>
GROSS ALLOWANCE NET
BOOK VALUE FOR LOSSES BOOK VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REI held for sale:
Residential REI.......................... $ 52,128 $ 32,071 $ 20,057
Commercial and industrial REI and
undeveloped land........................ 101,271 36,247 65,024
-------- -------- --------
153,399 68,318 85,081
Long-term REI:
Residential REI.......................... 37,143 24,249 12,894
Commercial and industrial REI and
undeveloped land........................ 89,741 39,865 49,876
-------- -------- --------
126,884 64,114 62,770
-------- -------- --------
Total REI.................................. $280,283 $132,432 $147,851
======== ======== ========
</TABLE>
At December 31, 1996, REI totaling $62.8 million were classified as long-
term consisting of four projects located in California. At December 31, 1996,
REI totaling $85.1 million were classified as held for sale consisting of ten
projects located in California which the Company expects to sell in the near
term. There were no specific impairment allowances recognized on these REI
assets at December 31, 1996 as management believes that the general valuation
allowances established were adequate to cover impairment.
The Company is continuing its strategy of exiting the real estate investment
business. Although the Company does not intend to acquire new properties, it
intends to develop, hold and/or sell its current properties depending on
economic conditions. Plans are under way for the sale of several properties in
1997. No new projects have been initiated since 1990.
The Company may establish general valuation allowances based on management's
assessment of the risk of further reductions in carrying values. The Company's
basis for such estimates include project business plans monitored and approved
by management, market studies and other information. Although management
believes the carrying values of the REI and the related allowance for losses
are fairly stated, declines in carrying values and additions to the allowance
for losses could result from continued weakness in the specific project
markets, changes in economic conditions and revisions to project business
plans, which may reflect decisions by the Company to accelerate the
disposition of the properties.
For additional information regarding REI, see Note 5 of Notes to
Consolidated Financial Statements. For additional information regarding SFAS
No. 121, see Note 1 of Notes to Consolidated Financial Statements.
46
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability or financial flexibility to adjust
its future cash flows to meet the demands of depositors and borrowers and to
fund operations on a timely and cost-effective basis. Sources of liquidity
consist primarily of positive cash flows generated from operations, the
collection of principal payments and prepayments on loans and MBS and
increases in deposits. Positive cash flows are also generated through the sale
of MBS, loans and other assets for cash. Sources of liquidity may also include
borrowings from the FHLB, commercial paper and public debt issuances,
borrowings under reverse repurchase agreements, commercial bank lines of
credit and, under certain conditions, direct borrowings from the Federal
Reserve System. The Company actively manages its liquidity needs by selecting
asset and liability maturity mixes that best meet its projected needs and by
maintaining the ability to raise additional funds as needed in the money
markets.
Liquidity as defined by the OTS for Home Savings consists of cash, cash
equivalents and certain marketable securities which are not committed, pledged
or required to liquidate specific liabilities. Regulations of the OTS 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 December 1996 the average liquidity and average short-term
liquidity ratios of Home Savings were 5.38% and 2.16%, 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 1996 cash of $5.1 billion was used to originate
loans. Gross loan originations, which include refinanced loans but exclude the
loans purchased in the First Interstate Bank branch acquisition, were $5.5
billion in 1996. Fixed rate loans originated and designated for sale
represented approximately 36% of single family loan originations in 1996.
Principal payments on loans were $2.6 billion in 1996, an increase of $810.5
million, or 45%, from $1.8 billion in 1995.
During the third quarter of 1996 the Company acquired $1.1 billion in loans
in the First Interstate Bank branch acquisition. Approximately $593.4 million
of these were consumer and small business loans with the remainder being
residential mortgage loans.
During 1996 the Company sold loans totaling $2.7 billion. At December 31,
1996, the Company had $1.1 billion of loans held for sale. The loans
designated for sale included $817.2 million in COFI ARMs, $190.4 million of
fixed rate loans and $58.5 million of Treasury ARMs. Of these loans, the
Company is committed to sell approximately $300 million of COFI ARMs in the
first quarter of 1997 and intends to securitize in the first quarter of 1997
approximately $500 million in COFI ARMs for sale.
MBS. During 1996, the Company sold $197.9 million of fixed rate MBS
available for sale. The Company designates certain MBS as available for sale.
At December 31, 1996 the Company had $9.2 billion of MBS available for sale,
comprised of $8.9 billion of ARM MBS and $298.3 million of fixed rate MBS.
These MBS had an unrealized loss of $129.2 million at December 31, 1996. The
unrealized loss is due mainly to temporary market-related conditions and the
Company expects no significant effect on its future interest income.
47
<PAGE>
Deposits. Savings deposits were $34.8 billion at December 31, 1996, an
increase of $529.5 million, or 2%, from $34.2 billion at December 31, 1995.
The net deposit inflow was primarily due to the $1.9 billion in deposits from
the First Interstate Bank branch acquisition, partially offset by a sale of
$197.0 million in deposits in three branches located in San Antonio, Texas,
which closed in November 1996. Excluding these transactions, there was a net
deposit outflow of $1.2 billion primarily due to maturities of term accounts,
which have more sensitivity to market interest rates. The Company manages its
borrowings to balance changes in deposits.
Transaction accounts increased $1.5 billion, or 16%, during 1996, while term
deposits decreased $1.0 billion, or 4%, during the same period. Transaction
accounts comprised 32% of the deposit base at December 31, 1996 compared to
28% at December 31, 1995. The change in deposit mix is primarily due to the
First Interstate Bank branch acquisition which facilitated the replacement of
higher-cost term deposits with lower-cost transaction accounts. In addition,
the Company is reducing the number of single-service term deposit customers
through management of interest rates.
At December 31, 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 sale of its four Arizona branches with deposits of
approximately $270 million which is expected to close in March 1997.
In February 1997, the Company announced the sale of all twelve of its West
Coast Florida branches with deposits of approximately $970 million. The sale
is expected to close in the second quarter of 1997, and is 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 $11.6 billion at December 31, 1996, a
decrease of $655.9 million, or 5%, from $12.2 billion at December 31, 1995,
reflecting declines in short-term borrowings of $1.4 billion, partially offset
by increases in FHLB and other borrowings of $832.9 million. The First
Interstate Bank 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 in April 1997 and have a fixed interest rate of 6.00%. In
1996, the Company issued term notes totaling $2.3 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 Securities, Series A. In December 1996, Ahmanson Capital Trust I
(the "capital trust"), a wholly-owned subsidiary of the Company, issued $150
million of 8.36% Capital Securities, Series A ("Capital Securities"). In
connection with the capital trust's issuance of the Capital Securities, the
Company issued to the capital trust $154.6 million principal amount of its
8.36% subordinated notes, due 2026 (the "subordinated notes"). The sole assets
of the capital trust are the subordinated notes.
Capital. The Company reviews its use of capital with a goal of maximizing
stockholder value and makes decisions regarding the total amount and alternate
forms of capital to maintain. Between October 1995, when Ahmanson initiated
its first stock purchase program, and December 1996, Ahmanson returned capital
to its stockholders by purchasing 17 million shares of its common stock.
During the third quarter of 1996, Ahmanson also redeemed at par its 9.60%
Preferred Stock, Series B.
Stockholders' equity totaled $2.4 billion at December 31, 1996, a decrease
of $623.9 million, or 20%, from $3.1 billion at December 31, 1995. The
decrease is primarily due to payments of $381.9 million to purchase 14.6
million shares of the Company's common stock, $175.0 million to redeem its
9.60% Preferred Stock, Series B, dividends paid to common and preferred
stockholders of $141.6 million and a net change of $94.2 million to a net
unrealized loss on securities available for sale. The net unrealized loss on
securities available for sale at December 31, 1996 was $74.1 million.
48
<PAGE>
The OTS has adopted regulations that contain a three-part capital standard
requiring savings institutions to maintain "core" capital of at least 3% of
adjusted total assets, tangible capital of at least 1.5% of adjusted total
assets and risk-based capital of at least 8% of risk-weighted assets. Special
rules govern the ability of savings institutions to include in their capital
computations investments in subsidiaries engaged in activities not permissible
for national banks, such as real estate development. In addition, institutions
whose exposure to interest-rate risk as determined by the OTS is deemed to be
above normal may be required to hold additional risk-based capital. Home
Savings believes it does not have above-normal exposure to interest-rate risk.
Under OTS regulations which implement the "prompt corrective action" system
mandated by the Federal Deposit Insurance Corporation Improvement Act, an
institution is well capitalized if its ratio of total capital to risk-weighted
assets is 10% or more, its ratio of core capital to risk-based 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 December 31, 1996 Home Savings exceeded these standards. The
following table shows the capital amounts and ratios of Home Savings at
December 31, 1996:
<TABLE>
<CAPTION>
BALANCE RATIO
---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital (to adjusted total assets)............ $2,741,733 5.55%
Core capital (to adjusted total assets)................ 2,745,817 5.56
Core capital (to risk-weighted assets)................. 2,745,817 8.67
Total risk-based capital (to risk-weighted assets)..... 3,414,861 10.78
</TABLE>
ACCOUNTING DEVELOPMENTS
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.
In June 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. The
Company adopted SFAS No. 125 as of January 1, 1997. For more information
regarding SFAS Nos. 123 and 125 see Note 1 of Notes to Consolidated Financial
Statements.
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 December 31, 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 December 31, 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
federal income tax returns for the years 1990 through 1993, 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
49
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included on page 59 and the Financial Statements which begin
on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
AGE AS OF DIRECTOR
NAME POSITION MARCH 31, 1997 SINCE
---- -------- -------------- --------
<S> <C> <C> <C>
Byron Allumbaugh Director 65 1987
Anne-Drue M. Anderson* Executive Vice President and 36 --
Treasurer
Harold A. Black Director 51 1995
Richard M. Bressler Director 66 1987
David R. Carpenter Director 58 1995
Madeleine A. Kleiner* Senior Executive Vice 45 --
President, Chief
Administrative Officer,
General Counsel and
Secretary
E. Nancy Markle* Executive Vice President 55 --
Phillip D. Matthews Director 58 1995
George Miranda* First Vice President and 49 --
Principal Accounting Officer
Richard L. Nolan Director 56 1995
Delia M. Reyes Director 55 1992
Charles R. Rinehart* Chairman of the Board and 50 1990
Chief Executive Officer
Frank M. Sanchez Director 53 1995
Elizabeth A. Sanders Director 51 1990
Arthur W. Schmutz Director 75 1993
William D. Schulte Director 64 1991
Kevin M. Twomey* Senior Executive Vice 50 --
President and Chief
Financial Officer
Bruce G. Willison* Director, President and Chief 48 1996
Operating Officer
</TABLE>
- --------
* Executive Officers. Messrs. Miranda and Rinehart have been employed as
officers of Ahmanson and/or one of its affiliate companies for more than
five years.
MR. ALLUMBAUGH is a retired Chairman of the Board of Ralphs Grocery Company,
a Los Angeles-based supermarket company. Mr. Allumbaugh also serves as a
director of El Paso Energy Company, Ultramar Diamond Shamrock, Inc. and CKE
Restaurants, Inc.
MS. ANDERSON joined Ahmanson as First Vice President and Treasurer in
September 1993 and became Executive Vice President in March 1995. From April
1993 until joining Ahmanson, Ms. Anderson was Bank and Thrift Strategist at
First Boston Corporation. From September 1989 to February 1993 she was Senior
Vice President and Treasurer at First Gibraltar Bank.
DR. BLACK is the James F. Smith Professor of Financial Institutions at the
College of Business Administration at the University of Tennessee, Knoxville.
MR. BRESSLER is a retired Chairman of the Board of Plum Creek Management
Company, a manufacturer of lumber and wood products, and a retired Chairman of
the Board of El Paso Natural Gas Company (now known as El Paso Energy
Company), a natural resources company. Mr. Bressler also serves as a director
of General Mills, Inc. and Rockwell International Corporation.
MR. CARPENTER is Chairman and Chief Executive Officer of Paradigm Partners
International and Chairman of UniHealth. He retired as Chairman and Chief
Executive Officer of Transamerica Occidental Life Insurance Company and
Executive Vice President of its parent company, Transamerica Corporation, in
1995. Mr. Carpenter also serves as a director of PacifiCare Health Systems.
MS. KLEINER joined Ahmanson as Executive Vice President, General Counsel and
Secretary in May 1995 and became Senior Executive Vice President and Chief
Administrative Officer in February 1997. From 1977 until joining Ahmanson,
Ms. Kleiner was with the law firm of Gibson, Dunn & Crutcher where she was a
partner since 1983.
MS. MARKLE joined Home Savings of America, FSB as First Vice President in
July 1994 and became Executive Vice President of Ahmanson in July 1995. Prior
to joining Home Savings, Ms. Markle served as President of Information
Technology Consultants since 1988.
51
<PAGE>
MR. MATTHEWS is Chairman of the Executive Committee of the Board of
Wolverine World Wide, Inc., a NYSE footwear company. Mr. Matthews also serves
as a director of Bell Sports, Inc.
DR. NOLAN is the M.B.A. Class of 1942 Professor of Business Administration
at the Graduate School of Business Administration at Harvard University. Dr.
Nolan also serves as a director of Xcellenet Inc.
MS. REYES is President and Chief Executive Officer of Reyes Consulting
Group, a market research and consulting firm.
MR. RINEHART also serves as a director of Kaufman and Broad Home
Corporation.
DR. SANCHEZ is an owner and operator of eight McDonald's franchises.
MS. SANDERS is a business consultant. Ms. Sanders also serves as a director
of Flagstar Companies Inc., Wal-Mart Stores, Inc., Wellpoint Health Networks,
Inc. and Wolverine World Wide, Inc.
MR. SCHMUTZ is a retired partner of Gibson, Dunn & Crutcher, a law firm. Mr.
Schmutz also serves as a director of Ducommum Incorporated.
MR. SCHULTE is a retired Vice Chairman of KPMG Peat Marwick LLP, a firm of
independent certified public accountants. Mr. Schulte also serves as a
director of Santa Anita Operating Company, Santa Anita Realty Enterprises,
Inc. and Vastar Resources, Inc.
MR. TWOMEY joined Ahmanson in June 1993, became Executive Vice President and
Chief Financial Officer in July 1993 and became Senior Executive Vice
President in March 1995. From February 1993 until joining Ahmanson, he worked
in corporate finance at MacAndrews and Forbes. From July 1989 to February
1993, he was Executive Vice President, Finance, Administration and Chief
Financial Officer of First Gibraltar Bank.
MR. WILLISON joined Ahmanson in May 1996. From 1979 until joining Ahmanson,
Mr. Willison was with First Interstate Bancorp and/or one or more of its
subsidiaries. For more than five years prior to joining Ahmanson, he was
Chairman, President and Chief Executive Officer of First Interstate Bank of
California and, since January 1995, he was also Vice Chairman of First
Interstate Bancorp. Mr. Willison also serves as a director of Portland General
Corporation.
No directors or executive officers of Ahmanson are related.
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
certain officers of Ahmanson and persons who own more than ten percent of a
registered class of Ahmanson's equity securities to file with the Securities
and Exchange Commission and any national securities exchange on which
Ahmanson's equity securities are registered initial reports of ownership and
reports of changes in ownership of Ahmanson Common Stock and other equity
securities of Ahmanson. Officers, directors and beneficial owners of more than
ten percent of Ahmanson's equity securities are required by regulations of the
Securities and Exchange Commission to furnish Ahmanson with copies of all
Section 16(a) forms they file.
To Ahmanson's knowledge, based solely upon a review of the copies of such
forms furnished to Ahmanson and written representations that no other reports
were required, during the fiscal year ended December 31, 1996 all Section
16(a) filing requirements applicable to its officers, directors and beneficial
owners of more than ten percent of Ahmanson's equity securities were complied
with by such persons.
ITEM 11. EXECUTIVE COMPENSATION
That portion of Ahmanson's definitive Proxy Statement appearing under the
caption "Executive Compensation," to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1996 and to be used in
connection with Ahmanson's Annual Meeting of Stockholders to be held on April
21, 1997 is hereby incorporated by reference.
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That portion of Ahmanson's definitive Proxy Statement appearing under the
captions "Principal Holders of Ahmanson Common Stock" and "Security Ownership
of Management," to be filed with the Commission pursuant to Regulation 14A
within 120 days after December 31, 1996 and to be used in connection with
Ahmanson's Annual Meeting of Stockholders to be held on April 21, 1997 is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of Ahmanson's definitive Proxy Statement appearing under the
caption "Executive Compensation--Certain Transactions," to be filed with the
Commission pursuant to Regulation 14A within 120 days after December 31, 1996
and to be used in connection with Ahmanson's Annual Meeting of Stockholders to
be held on April 21, 1997 is hereby incorporated by reference.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS*
EXHIBIT
NUMBERS
-------
3.1 Certificate of Incorporation of H. F. Ahmanson & Company, as
amended (Exhibit 3.1 to Form 10-K for year ended December 31,
1991).
3.2 By-Laws of H. F. Ahmanson & Company, as amended (Exhibit 3.2 to
Form 10-Q for quarter ended June 30, 1994).
3.3 Certificate of Designations dated August 12, 1988 (Exhibit 3.1.2
to Form 10-Q for quarter ended September 30, 1988).
3.5 Certificate of Designations dated February 9, 1993 (Exhibit 3.5
to Form 10-K for year ended December 31, 1992).
3.6 Certificate of Designations dated July 30, 1993 (Exhibit 4.1 to
Form 8-K for the event on July 29, 1993).
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Copies of instruments defining the rights of holders of long-term
debt of H. F. Ahmanson & Company or any of its subsidiaries are,
under Item 601(b)(4)(iii)(A) of Regulation S-K, not required to
be filed, but will be filed upon request of the Commission.
4.3 Rights Agreement, dated July 26, 1988, between H. F. Ahmanson &
Company and Union Bank (Exhibit 4.3 to Form 8-K dated July 26,
1988).
Management Contracts and Compensatory Plans and Arrangements (Exhibits
10.1-10.23)
10.1 H. F. Ahmanson & Company 1984 Stock Incentive Plan (Exhibit
10.2.3 to Form 10-K for year ended December 31, 1984).
10.1.1 Amendment to H. F. Ahmanson & Company 1984 Stock Incentive Plan
(Exhibit 10.2.3.1 to Form 10-K for year ended December 31, 1989).
10.2 H. F. Ahmanson & Company 1993 Stock Incentive Plan as amended.
10.3 H. F. Ahmanson & Company Executive Stock Option Award Guidelines.
10.4 H. F. Ahmanson & Company 1988 Directors' Stock Incentive Plan, as
amended (Exhibit 10.9.25 to Form 10-K for year ended December 31,
1989).
10.5 H. F. Ahmanson & Company 1996 Nonemployee Directors' Stock
Incentive Plan (Exhibit 10.19 to Form 10-K for year ended
December 31, 1995).
10.6 H. F. Ahmanson & Company Executive Long-Term Incentive Plan as
amended.
10.7 H. F. Ahmanson & Company Executive Short-Term Incentive Plan, as
amended (Exhibit 10.9.26 to Form 10-K for year ended December 31,
1994).
10.8 1989 Contingent Deferred Compensation Plan of H. F. Ahmanson &
Company (Exhibit 19.4 to Form 10-Q for quarter ended June 30,
1991).
10.8.1 First Amendment to 1989 Contingent Deferred Compensation Plan of
H. F. Ahmanson & Company (Exhibit 10.9.27.1 to Form 10-K for year
ended December 31, 1995).
10.8.2 Second Amendment to 1989 Contingent Deferred Compensation Plan of
H. F. Ahmanson & Company. (To be filed by amendment.)
54
<PAGE>
EXHIBIT
NUMBERS
-------
10.9 Elective Deferred Compensation Plan of H. F. Ahmanson & Company
(Exhibit 19.6 to Form 10-Q for quarter ended June 30, 1991).
10.9.1 First Amendment to Elective Deferred Compensation Plan of H. F.
Ahmanson & Company (Exhibit 10.9.29.1 to Form 10-K for year ended
December 31, 1995).
10.9.2 Second Amendment to Elective Deferred Compensation Plan of H. F.
Ahmanson & Company. (To be filed by amendment.)
10.10 Capital Accumulation Plan of H. F. Ahmanson & Company. (To be
filed by amendment.)
10.10.1 First Amendment to Capital Accumulation Plan of H. F. Ahmanson &
Company. (To be filed by amendment.)
10.11 Supplemental Executive Retirement Plan of H. F. Ahmanson &
Company, as amended and restated (Exhibit 10.9.7.1 to Form 10-K
for year ended December 31, 1995).
10.11.1 First Amendment to Supplemental Executive Retirement Plan of H.
F. Ahmanson & Company. (To be filed by amendment.)
10.12 Senior Supplemental Executive Retirement Plan of H. F. Ahmanson
and Company, as amended and restated (Exhibit 10.17.1 to Form 10-
K for year ended December 31, 1995).
10.13 Executive Life Insurance Plan of H. F. Ahmanson & Company
(Exhibit 10.9.30 to Form 10-K for year ended December 31, 1989).
10.13.1 First Amendment to Executive Life Insurance Plan of H. F.
Ahmanson & Company (Exhibit 10.9.30.1 to Form 10-K for year ended
December 31, 1995).
10.13.2 Second Amendment to Executive Life Insurance Plan of H. F.
Ahmanson & Company. (To be filed by amendment.)
10.14 Senior Executive Life Insurance Plan of H. F. Ahmanson & Company,
as amended and restated (Exhibit 10.18.1 to Form 10-K for year
ended December 31, 1995).
10.15 H. F. Ahmanson & Company Supplemental Long Term Disability Plan
(Exhibit 10.9.31 to Form 10-K for year ended December 31, 1989).
10.16 Executive Medical Reimbursement Plan (Exhibit 10.9.8 to Form 10-K
for year ended December 31, 1984).
10.16.1 Amendment to Executive Medical Reimbursement Plan adopted March
24, 1987 (Exhibit 10.9.8.1 to Form 10-K for year ended December
31, 1986).
10.17 Financial Counseling Plan for Executives, as amended (Exhibit
19.6 to Form 10-Q for quarter ended September 30, 1985).
10.17.1 Amendment to Financial Counseling Plan for Executives adopted
March 24, 1987 (reference is made to Exhibit 10.9.8.1 to Form 10-
K for year ended December 31, 1986).
10.18 Outside Directors' Elective Deferred Compensation Plan of H. F.
Ahmanson & Company (Exhibit 19.5 to Form 10-Q for quarter ended
June 30, 1991).
10.18.1 First Amendment to Outside Directors' Elective Deferred
Compensation Plan of H. F. Ahmanson & Company (Exhibit 10.9.28.1
to Form 10-K for year ended December 31, 1995).
10.18.2 Second Amendment to Outside Directors' Elective Deferred
Compensation Plan of H. F. Ahmanson & Company. (To be filed by
amendment.)
10.19 Outside Directors' Capital Accumulation Plan of H. F. Ahmanson &
Company. (To be filed by amendment.)
10.19.1 First Amendment to Outside Directors' Capital Accumulation Plan
of H. F. Ahmanson & Company. (To be filed by amendment.)
55
<PAGE>
EXHIBIT
NUMBERS
-------
10.20 Outside Director Retirement Plan of H. F. Ahmanson & Company, as
amended and restated (Exhibit 19.2 to Form 10-Q for quarter ended
June 30, 1991).
10.20.1 First Amendment to Outside Director Retirement Plan of H. F.
Ahmanson & Company (Exhibit 10.9.11.1 to Form 10-K for year ended
December 31, 1995).
10.21 H. F. Ahmanson & Company Griffin Investment Account (Exhibit
10.9.21 to Form 10-K for year ended December 31, 1989).
10.21.1 First Amendment to H. F. Ahmanson & Company Griffin Investment
Account (Exhibit 19.2 to Form 10-Q for quarter ended September
30, 1990).
10.22 Amended Form of Employment Agreement between H. F. Ahmanson &
Company and executive officers.
10.23 Amended Form of Indemnity Agreement between H. F. Ahmanson &
Company and directors and executive officers (Exhibit 10.13 to
Form 10-K for year ended December 31, 1989).
21 Subsidiaries of H. F. Ahmanson & Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
- --------
* Exhibits followed by a parenthetical reference are incorporated by reference
herein from the documents described therein. Documents filed prior to May
1985 were filed by H. F. Ahmanson & Company, a California corporation,
Commission File No. 1-7108.
FINANCIAL STATEMENTS
See the Index included on page 59 and the Financial Statements which begin on
page F-2.
REPORTS ON FORM 8-K
The Registrant filed with the Commission a Current Report on Form 8-K dated
October 16, 1996 with respect to its third quarter earnings.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Irwindale, State of California, on the 18th day of March 1997.
H. F. AHMANSON & COMPANY
By /s/ Kevin M. Twomey
___________________________________
Kevin M. Twomey
Senior Executive Vice President
and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated below and on the 18th day of March 1997.
/s/ Byron Allumbaugh
___________________________________
Byron Allumbaugh
Director
/s/ Harold A. Black
___________________________________
Harold A. Black
Director
/s/ Richard M. Bressler
___________________________________
Richard M. Bressler
Director
/s/ David R. Carpenter
___________________________________
David R. Carpenter
Director
/s/ Phillip D. Matthews
___________________________________
Phillip D. Matthews
Director
/s/ Richard L. Nolan
___________________________________
Richard L. Nolan
Director
/s/ Delia M. Reyes
___________________________________
Delia M. Reyes
Director
57
<PAGE>
/s/ Charles R. Rinehart
___________________________________
Charles R. Rinehart
Director
Principal Executive Officer
___________________________________
Frank M. Sanchez
Director
/s/ Elizabeth A. Sanders
___________________________________
Elizabeth A. Sanders
Director
/s/ Arthur W. Schmutz
___________________________________
Arthur W. Schmutz
Director
/s/ William D. Schulte
___________________________________
William D. Schulte
Director
/s/ Bruce G. Willison
___________________________________
Bruce G. Willison
Director
/s/ Kevin M. Twomey
___________________________________
Kevin M. Twomey
Principal Financial Officer
/s/ George Miranda
___________________________________
George Miranda
Principal Accounting Officer
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ............................................. F-1
H. F. Ahmanson & Company and Subsidiaries (Consolidated):
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995 .............................................................. F-2
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994 ................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995
and 1994 .............................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994 ................................................... F-5
Notes to Consolidated Financial Statements ............................. F-6
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes thereto.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
H. F. Ahmanson & Company:
We have audited the accompanying consolidated statements of financial
condition of H. F. Ahmanson & Company and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of H. F.
Ahmanson & Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for goodwill in 1995.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 15, 1997, except as to
Note 18 of Notes to the Consolidated
Financial Statements, which is as of
March 17, 1997
F-1
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and amounts due from banks..................... $ 691,578 $ 752,878
Securities purchased under agreements to resell..... 737,500 381,000
Other short-term investments........................ 14,782 13,278
----------- -----------
Total cash and cash equivalents................... 1,443,860 1,147,156
Other investment securities held to maturity [market
value $2,456 (1996) and $2,484 (1995)]............. 2,438 2,448
Other investment securities available for sale
[amortized cost $8,541 (1996) and $9,327 (1995)]... 9,159 9,908
Investment in stock of Federal Home Loan Bank
(FHLB), at cost.................................... 420,978 485,938
Mortgage-backed securities (MBS) held to maturity
[market value $5,111,367 (1996) and $5,965,045
(1995)]............................................ 5,066,670 5,825,276
MBS available for sale [amortized cost $9,359,058
(1996) and $10,293,537 (1995)]..................... 9,229,842 10,326,866
Loans receivable less allowance for losses of
$389,135 (1996) and $380,886 (1995)................ 30,723,398 30,273,514
Loans held for sale [market value $1,080,046 (1996)
and $992,550 (1995)]............................... 1,065,760 981,865
Accrued interest receivable......................... 209,839 228,111
Real estate held for development and investment
(REI) less allowance for losses of $132,432 (1996)
and $283,748 (1995)................................ 147,851 234,855
Real estate owned held for sale (REO) less allowance
for losses of $32,137 (1996) and $38,080 (1995).... 247,577 225,566
Premises and equipment.............................. 424,567 410,947
Goodwill and other intangible assets................ 308,083 147,974
Other assets........................................ 602,022 229,162
----------- -----------
$49,902,044 $50,529,586
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing.............................. $ 985,594 $ 432,834
Interest bearing.................................. 33,788,351 33,811,647
----------- -----------
34,773,945 34,244,481
Securities sold under agreements to repurchase...... 1,820,000 3,519,311
Other short-term borrowings......................... 210,529 --
FHLB and other borrowings........................... 9,549,992 8,717,117
Other liabilities................................... 917,198 873,313
Income taxes........................................ 48,918 118,442
----------- -----------
Total liabilities................................ 47,320,582 47,472,664
----------- -----------
CAPITAL SECURITIES OF SUBSIDIARY TRUST
Company-obligated mandatorily redeemable capital
securities, Series A, of subsidiary trust holding
solely Junior Subordinated Deferrable Interest
Debentures of the Company.......................... 148,413 --
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized
10,000,000 shares:
9.60% Series B, outstanding 3,500,000 shares
(1995)........................................... -- 35
8.40% Series C, outstanding 780,000 shares;
liquidation preference $195,000.................. 8 8
6.00% Cumulative Convertible Series D, outstanding
575,000 shares; liquidation preference $287,500.. 6 6
Common stock, $0.01 par value; authorized
220,000,000 shares:
Issued 119,543,614 shares (1996) and 118,395,291
shares (1995).................................... 1,195 1,184
Additional paid-in capital.......................... 1,112,045 1,260,650
Net unrealized gain (loss) on securities available
for sale, net of taxes............................. (74,124) 20,090
Retained earnings................................... 1,847,367 1,843,704
Common stock in treasury, at cost:
17,390,562 shares (1996) and 2,785,214 shares
(1995)........................................... (450,922) (68,581)
----------- -----------
2,435,575 3,057,096
Unearned compensation............................... (2,526) (174)
----------- -----------
Total stockholders' equity........................ 2,433,049 3,056,922
----------- -----------
$49,902,044 $50,529,586
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans...................................... $2,296,786 $2,405,820 $2,265,050
MBS........................................ 1,161,487 1,158,077 686,390
Investments................................ 56,522 135,194 143,935
---------- ---------- ----------
Total interest income.................... 3,514,795 3,699,091 3,095,375
---------- ---------- ----------
Interest expense:
Deposits................................... 1,523,873 1,835,590 1,291,893
Short-term borrowings...................... 138,182 197,437 182,721
FHLB and other borrowings.................. 600,226 439,309 323,840
---------- ---------- ----------
Total interest expense................... 2,262,281 2,472,336 1,798,454
---------- ---------- ----------
Net interest income...................... 1,252,514 1,226,755 1,296,921
Provision for loan losses................... 144,924 119,111 176,557
---------- ---------- ----------
Net interest income after provision for
loan losses............................. 1,107,590 1,107,644 1,120,364
---------- ---------- ----------
Other income:
Gain on sales of MBS....................... 3,074 11,919 4,868
Gain (loss) on sales of loans.............. 28,346 5,364 (21,036)
Loan servicing income...................... 68,365 60,490 74,441
Banking and other retail service fees...... 78,061 55,766 59,555
Other fee income........................... 58,678 47,860 50,813
Gain on sales of retail deposit branch
systems................................... 6,861 514,671 77,901
Gain on sales of investment securities..... 313 187 202
Other operating income..................... 8,100 2,152 13,612
---------- ---------- ----------
251,798 698,409 260,356
---------- ---------- ----------
Other expenses:
Compensation and other employee expenses... 369,264 378,851 340,645
Occupancy expenses......................... 122,740 148,250 132,282
Federal deposit insurance premiums and
assessments............................... 60,641 86,909 105,238
SAIF recapitalization...................... 243,862 -- --
Other general and administrative expenses.. 222,640 204,569 180,395
---------- ---------- ----------
Total general and administrative
expenses................................ 1,019,147 818,579 758,560
Operations of REI.......................... 34,961 49,481 97,644
Operations of REO.......................... 105,880 86,788 86,011
Amortization of goodwill and other
intangible assets......................... 18,842 26,559 27,835
---------- ---------- ----------
1,178,830 981,407 970,050
---------- ---------- ----------
Income before provision for income taxes and
cumulative effect of accounting change..... 180,558 824,646 410,670
Provision for income taxes.................. 35,300 373,700 173,312
---------- ---------- ----------
Income before cumulative effect of
accounting change.......................... 145,258 450,946 237,358
Cumulative effect of change in accounting
for goodwill............................... -- (234,742) --
---------- ---------- ----------
Net income.................................. $ 145,258 $ 216,204 $ 237,358
========== ========== ==========
Net income attributable to common shares.... $ 100,337 $ 165,774 $ 186,928
========== ========== ==========
Income per common share--primary:
Income before cumulative effect of
accounting change......................... $ 0.91 $ 3.39 $ 1.59
Cumulative effect of change in accounting
for goodwill.............................. -- (1.99) --
---------- ---------- ----------
Net income................................. $ 0.91 $ 1.40 $ 1.59
========== ========== ==========
Income per common share--fully diluted:
Income before cumulative effect of
accounting change......................... $ 0.91 $ 3.20 $ 1.58
Cumulative effect of change in accounting
for goodwill.............................. -- (1.80) --
---------- ---------- ----------
Net income................................. $ 0.91 $ 1.40 $ 1.58
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED COMMON
ADDITIONAL GAIN (LOSS) STOCK
PREFERRED COMMON PAID-IN ON RETAINED IN UNEARNED
TOTAL STOCK STOCK CAPITAL SECURITIES EARNINGS TREASURY COMPENSATION
---------- --------- ------ ---------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... $2,949,031 $ 49 $1,172 $1,236,671 $ 21,549 $1,697,113 $ (4,843) $(2,680)
Net income.............. 237,358 -- -- -- -- 237,358 -- --
Dividends on Common
Stock ($0.88 per
share)................. (102,948) -- -- -- -- (102,948) -- --
Dividends on Preferred
Stock.................. (50,430) -- -- -- -- (50,430) -- --
Unrealized loss on
securities available
for sale, net of tax
effect of $55,799...... (73,989) -- -- -- (73,989) -- -- --
Restricted stock awards
granted, net of
cancellations.......... (332) -- -- 1 -- -- (505) 172
Unearned compensation
amortized to expense... 1,448 -- -- -- -- -- -- 1,448
Stock options exercised. 3,554 -- 2 3,552 -- -- -- --
Tax benefits from
restricted stock awards
and stock options...... 909 -- -- 909 -- -- -- --
---------- ---- ------ ---------- -------- ---------- --------- -------
BALANCE, DECEMBER 31,
1994................... 2,964,601 49 1,174 1,241,133 (52,440) 1,781,093 (5,348) (1,060)
Net income.............. 216,204 -- -- -- -- 216,204 -- --
Dividends on Common
Stock ($0.88 per
share)................. (103,163) -- -- -- -- (103,163) -- --
Dividends on Preferred
Stock.................. (50,430) -- -- -- -- (50,430) -- --
Unrealized gain on
securities available
for sale, net of tax
effect of $53,360...... 72,530 -- -- -- 72,530 -- -- --
Restricted stock awards
granted, net of
cancellations.......... (477) -- 1 191 -- -- (638) (31)
Unearned compensation
amortized to expense... 917 -- -- -- -- -- -- 917
Stock options exercised. 16,631 -- 9 16,622 -- -- -- --
Repurchase of 2,439,000
shares................. (62,595) -- -- -- -- -- (62,595) --
Tax benefits from
restricted stock awards
and stock options...... 2,704 -- -- 2,704 -- -- -- --
---------- ---- ------ ---------- -------- ---------- --------- -------
BALANCE, DECEMBER 31,
1995................... 3,056,922 49 1,184 1,260,650 20,090 1,843,704 (68,581) (174)
Net income.............. 145,258 -- -- -- -- 145,258 -- --
Dividends on Common
Stock ($0.88 per
share)................. (95,274) -- -- -- -- (95,274) -- --
Dividends on Preferred
Stock.................. (46,321) -- -- -- -- (46,321) -- --
Unrealized loss on
securities available
for sale, net of tax
effect of $68,294...... (94,214) -- -- -- (94,214) -- -- --
Restricted stock awards
granted, net of
cancellations.......... (408) -- -- 2,792 -- -- (408) (2,792)
Unearned compensation
amortized to expense... 440 -- -- -- -- -- -- 440
Stock options exercised. 18,840 -- 11 18,829 -- -- -- --
Repurchase of 14,588,250
shares................. (381,933) -- -- -- -- -- (381,933) --
Redemption of Preferred
Stock, Series B........ (175,000) (35) -- (174,965) -- -- -- --
Tax benefits from
restricted stock awards
and stock options...... 4,739 -- -- 4,739 -- -- -- --
---------- ---- ------ ---------- -------- ---------- --------- -------
BALANCE, DECEMBER 31,
1996................... $2,433,049 $ 14 $1,195 $1,112,045 $(74,124) $1,847,367 $(450,922) $(2,526)
========== ==== ====== ========== ======== ========== ========= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 145,258 $ 216,204 $ 237,358
Adjustments to reconcile net income to
net cash provided by operating
activities:
Interest capitalized on loans and MBS
(negative amortization).............. (103,716) (156,367) (39,031)
Amortization of deferred loan fees and
interest............................. (9,324) (31,768) (43,103)
Provision for losses on loans and real
estate............................... 211,792 209,969 301,761
Depreciation and amortization......... 97,705 98,539 86,833
Cumulative effect of change in
accounting for goodwill.............. -- 234,742 --
Gain on sales of retail deposit branch
systems.............................. (6,861) (514,671) (77,901)
(Increase) decrease in accrued
interest receivable.................. 18,272 (15,164) (46,099)
FHLB stock dividends.................. (25,176) (23,838) (20,609)
Cash (gain) loss on sales of loans.... (37,346) (9,037) 2,687
Increase in credit enhancement
liability............................ 9,000 3,673 18,350
Cash gain on sales of MBS............. (3,074) (11,919) (4,868)
Cash gain on sales of servicing
rights............................... -- -- (16,798)
Proceeds from sales of loans
originated for sale.................. 2,703,067 1,390,709 562,510
Loans originated for sale............. (1,695,988) (1,330,034) (350,729)
Loans repurchased from investors...... (259,045) (72,842) (74,110)
Proceeds from loan origination fees
(costs).............................. (9,101) 5,276 20,660
Gain on sales of real estate.......... (14,355) (19,321) (9,663)
Provision for deferred income taxes
(benefits)........................... 74,621 54,192 (25,339)
Increase (decrease) in other
liabilities.......................... (340,700) 11,949 119,263
Other, net............................ 28,156 89,080 (27,777)
----------- ----------- -----------
Net cash provided by operating
activities.............................. 783,185 129,372 613,395
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available
for sale............................. 200,925 2,433,462 405,069
Proceeds from sales of MBS held to
maturity............................. -- 491,100 --
Proceeds from sales of impaired loans
and credit card portfolio............ -- -- 163,557
Proceeds from sales of servicing
rights............................... -- -- 16,798
Principal payments on loans........... 2,594,956 1,784,440 2,883,373
Principal payments on MBS............. 1,629,103 1,282,114 1,180,403
Loans originated for investment, net
of refinances........................ (3,411,391) (4,801,436) (9,228,503)
Loans purchased....................... (1,142,696) (44,590) (4,748)
MBS purchased......................... (10,173) (535) (585,955)
Proceeds from maturities of other
investment securities................ -- 258,756 56,259
Proceeds from sales of other
investment securities................ 14,532 26,519 5,202
Other investment securities
purchased............................ (13,433) (8,546) (337,571)
Purchases of FHLB stock............... -- (22,209) (56,140)
Redemption of FHLB stock.............. 90,136 -- 1,250
Proceeds from sales of REI............ 72,418 128,416 82,973
Proceeds from sales of REO............ 451,268 332,359 361,452
Net (additions to) sales of premises
and equipment........................ (81,298) 62,318 1,140
Additions to REI...................... (21,153) (51,152) (47,955)
Goodwill from First Interstate Bank
branch acquisition................... (185,021) -- --
Other, net............................ (2,784) 9,058 115,214
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 185,389 1,880,074 (4,988,182)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits... (1,162,378) 413,597 1,418,848
Proceeds from deposits purchased...... 1,888,849 1,299,322 2,796,522
Deposits sold......................... (190,146) (7,462,847) (1,456,947)
Net increase (decrease) in borrowings
maturing in 90 days or less.......... (848,782) 1,565,506 (2,626,779)
Proceeds from other borrowings........ 3,952,817 4,289,070 4,533,716
Repayment of other borrowings......... (3,762,102) (2,797,370) (1,620,703)
Common stock purchased for treasury... (381,933) (62,595) --
Preferred stock, Series B redeemed.... (175,000) -- --
Net proceeds from capital securities
of subsidiary trust.................. 148,400 -- --
Dividends to stockholders............. (141,595) (153,593) (153,378)
----------- ----------- -----------
Net cash provided by (used in)
financing activities................ (671,870) (2,908,910) 2,891,279
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents....................... 296,704 (899,464) (1,483,508)
Cash and cash equivalents at beginning
of year................................ 1,147,156 2,046,620 3,530,128
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 1,443,860 $ 1,147,156 $ 2,046,620
=========== =========== ===========
Supplemental cash flow information:
Interest paid on deposits............. $ 1,525,164 $ 1,828,836 $ 1,284,749
Interest paid on borrowings........... 772,072 556,907 442,815
Income tax payments................... 73,243 208,731 107,327
Non-cash investing activities:
Loans securitized into MBS............ 205,089 7,441,138 7,123,693
Loans transferred from held to
maturity to held for sale............ 1,258,728 1,024,324 211,909
Additions to REO...................... 453,281 385,770 449,738
Loans originated to sell REO.......... 86,394 58,263 103,071
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
H. F. Ahmanson & Company ("Ahmanson") is a holding company whose principal
subsidiary, Home Savings of America, FSB ("Home Savings"), is engaged in
consumer banking operations. In addition, Ahmanson has other subsidiaries
which are engaged primarily in related financial services activities,
including loan servicing, securities and insurance brokerage, real estate
mortgage origination and residential and commercial real estate development.
The accompanying Consolidated Financial Statements include the accounts of
Ahmanson and its subsidiaries (the "Company"). All of Ahmanson's subsidiaries
are wholly-owned. All material intercompany balances and transactions have
been eliminated in consolidation. Certain amounts in prior years' financial
statements have been reclassified to conform to the current presentation.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing deposits
and highly liquid debt instruments purchased with a maturity of three months
or less. Cash and cash equivalents are carried at cost.
Home Savings is required by the Federal Reserve System to maintain non-
interest earning cash reserves against certain of its transaction accounts. At
December 31, 1996 the required reserves totaled $179.8 million.
Securities
The Company classifies debt and equity securities, including MBS, into one
of three categories: held to maturity, available for sale or trading
securities. Securities which the Company has the intent and ability to hold to
maturity are recorded at amortized cost. Securities which the Company intends
to hold for indefinite periods of time are classified as available for sale
and are recorded at fair value, with any unrealized holding gains and losses,
net of the tax effect, reported as a separate component of stockholders'
equity. Should an other than temporary decline in the credit quality of a
security classified as held to maturity or available for sale occur, the
carrying value of such security would be written down to fair value by a
charge to operations. Trading securities, which are purchased principally to
sell in the near term, are recorded at fair value, with any unrealized gains
and losses recorded as an adjustment to operations. The Company owned no
trading securities during 1996 or 1995.
During the fourth quarter of 1995, the Financial Accounting Standards Board
("FASB") permitted a one-time opportunity for institutions to reclassify
securities from the "held to maturity" designation to "available for sale."
The Company reclassified MBS with an amortized cost of $10.3 billion during
this time period. At December 31, 1995, the unrealized gain on these
securities was approximately $32.0 million.
The Company's portfolio of MBS includes conventional single family mortgage
loans originated by the Company and subsequently securitized into private
placement mortgage pass-through securities ("MPTs") and through government
sponsored enterprises ("GSE") including Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Government
National Mortgage Association ("GNMA"). The Company also purchases
collateralized mortgage obligations ("CMOs") and other MBS.
F-6
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest income on MBS, including the amortization of discounts or premiums,
is recognized using the interest method over the estimated lives of the MBS
with adjustments based on prepayment experience either faster or slower than
originally anticipated.
Loans Receivable
The Company is an originator of monthly adjustable rate mortgage loans
("ARMs") and consumer and business loans for investment in its own loan
portfolio. The Company also designates certain loans it originates as held for
sale, including most fixed rate loans. Loans held for sale are carried at the
lower of aggregate cost or market value. The Company has the intent and
ability to hold all other loans until maturity. Accordingly, these other loans
are carried at cost, adjusted for unamortized discounts and loan fees.
The Company reviews loans for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures." Impaired loans
include troubled, collateral-dependent loans. Troubled, collateral-dependent
loans are expected to perform in accordance with the loan agreements but based
on current information it is probable that repayment can be expected to be
funded by the operation and sale of the collateral property. SFAS No. 114 does
not apply to large groups of smaller balance homogeneous loans which are
collectively evaluated for impairment. For the Company, loans collectively
evaluated for impairment generally include all single family loans; multi-
family and commercial and industrial real estate loans ("major loans") under
$2 million; and consumer and small business loans. Certain major loans under
$2 million may be individually reviewed based on specific criteria, such as
delinquency, debt coverage, loan-to-value ratio and condition of collateral
property.
The Company continues to accrue interest on troubled debt restructurings
("TDRs") and impaired loans when full payment of principal and interest is
expected and such loans are performing or less than 90 days delinquent and
therefore do not meet the criteria for nonaccrual status. The Company's
impaired loans include nonaccrual major loans (excluding those collectively
reviewed for impairment), TDRs and major loans (excluding those collectively
reviewed for impairment) that are less than 90 days delinquent which the
Company believes will be collected in full, but which the Company believes it
is probable will not be collected in accordance with the contractual terms of
the loans and repayment may be dependent upon operation and/or sale of the
collateral property ("other impaired major loans"). Once a loan is determined
to be impaired, the Company bases the fair value of the loan's collateral
properties in accordance with SFAS No. 114. Impairment losses are included in
the allowance for loan losses through a charge to provision for loan losses.
Adjustments to impairment losses due to changes in the fair value of impaired
loans' collateral properties are included in the provision for loan losses.
Upon disposition of an impaired loan, any related valuation allowance is
charged off from the allowance for loan losses.
Interest income on loans, including the recognition of discounts and loan
fees, is accrued based on the outstanding principal amount of loans using the
interest method. 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. When a loan is placed on nonaccrual status, interest
accrued but not received is reversed against interest income. Cash receipts on
nonaccrual loans are used to reduce principal balances rather than being
included in interest income. A nonaccrual loan may be restored to accrual
basis when delinquent loan payments are collected and the loan is expected to
perform according to its contractual terms.
Loan Fees
Loan fees charged to borrowers together with certain direct costs of loan
origination are deferred and amortized as an adjustment to the yield (interest
income) on loans over their lives using the interest method.
F-7
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Allowance for Loan Losses
The allowance for loan losses is maintained by additions charged to
operations as provision for loan losses and by loan recoveries, with actual
losses charged as reductions to the allowance for loan losses. The Company's
process for evaluating the adequacy of the allowance for loan losses includes
the identification and detailed review of impaired loans, an assessment of the
overall quality and inherent risk in the loan portfolio, and consideration of
loan loss experience and trends in problem loans, as well as current economic
conditions and trends.
Loss allowances are established for specifically identified impaired loans
based on the fair value of the underlying collateral property or discounted
cash flows. The allowance for loan losses also includes estimates based upon
consideration of actual loss experience for loans during the past several
years by loan type, year of origination, delinquency statistics, condition of
collateral property and projected economic conditions and other trends. 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. Although the Company believes it has a sound basis
for this estimation, actual charge-offs incurred in the future are highly
dependent upon future events, including the economies of the areas in which
the Company lends.
Loan and MBS Sales and Servicing Activities
When loans or MBS are sold, a gain or loss is recognized to the extent that
the sales proceeds differ from the net carrying value of the loans or MBS. In
transactions that involve sales of loans or MBS that are backed by loans
originated by the Company, the Company generally continues to collect payments
on the loans as they become due and otherwise to service the loans.
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 1, 1995 have not been restated. In accordance with SFAS No.
122, the Company capitalizes mortgage servicing rights ("MSR") related to
mortgage loans designated for sale. The total cost of the mortgage loans
designated for sale is allocated to the MSR and the mortgage loans without the
MSR based on their relative fair values. The amount of MSR capitalized is
included in "Other assets" in the Consolidated Statements of Financial
Condition. MSR related to loans and MBS sold are amortized in proportion to
and over the projected servicing period as a component of loan servicing
income. MSR related to MBS available for sale are amortized to interest income
on MBS. MSR 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, ancillary income 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. The amount of
impairment recognized, if any, is included in "Loan servicing income" in the
Consolidated Statements of Operations.
Statement of Financial Accounting Standards No. 125
In June 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. In December
1996, the FASB issued SFAS No. 127, "Deferral of the
F-8
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective Date of Certain Provisions of FASB No. 125, an Amendment of FASB No.
125." The impact on the Company of adopting SFAS No. 125 and SFAS No. 127 is
not expected to be material as the Company's existing policies are generally
in compliance with the provisions of SFAS No. 125 and SFAS No. 127.
Derivative Financial Instruments
The Company utilizes certain off-balance sheet financial instruments,
including forward sales of and options to sell loans and MBS to help manage
its interest rate exposure with respect to fixed rate loans (or loans with
certain periods at a fixed rate) in its portfolio and in its loan origination
pipeline. Interest rate swaps and other derivative instruments may be used to
manage interest rates, duration and other credit and market risks. The Company
does not hold or issue derivative financial instruments for trading purposes.
The fair value of forward sales of and options to sell loans and MBS
utilized to manage interest rate risk are adjusted monthly, with the related
gains and losses recognized as gain (loss) on sale of loans. The fair values
of the Company's forward sales and options at December 31, 1996 and 1995 were
not material. Interest income or expense resulting from interest rate swaps
utilized for hedging is recorded as an adjustment to the interest income of
the hedged asset. Gains or losses on the early termination of a swap
agreement, or the assignment of the Company's rights and obligations under the
swap agreement to a third party, are amortized over the remaining term of the
original swap agreement when the underlying assets still exist. Otherwise,
such gains and losses are immediately expensed or recorded as income based on
the fair value of the open swap positions.
Long-Lived Assets
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 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 for 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 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 a long-lived asset held for sale
exceeds its fair value less costs to sell. Restoration of previously
recognized impairment losses is only allowed for long-lived assets held for
sale.
Real Estate
REI is real estate held for development and investment. The period of
development and sale of these properties depends on economic and other
conditions and may extend over several years. The Company has designated
certain projects with long-term holding and development periods as long-term
REI and others as REI held for sale. An allowance for losses on REI is
established or adjusted through a charge to REI operations to reflect
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.
REI is also reviewed for impairment in accordance with SFAS No. 121. Any
impairment losses are recognized through a charge to REI operations.
Improvements are capitalized during construction.
REO is real estate acquired through foreclosure or in settlement of loans.
All REO is held for prompt and orderly sale and is not held for development or
investment. REO is initially recorded at fair value. Fair value is the amount
of cash that the property would yield in a current sale between a willing
buyer and a willing seller. Initial write-downs are charged to the allowance
for loan losses. In addition, an allowance for losses on REO is established
for estimated disposition costs at the time of acquisition. An additional
allowance for losses on REO
F-9
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is recorded if there is a further deterioration in fair value or an increase
in estimated disposition costs after acquisition. Operating costs are expensed
as incurred.
The recognition of gains from the sale of real estate is dependent on a
number of factors relating to the nature of the property sold, the terms of
the sale and the future involvement of the Company in the property sold. If a
real estate transaction does not meet established financial criteria, income
recognition is deferred and recognized under the installment or cost recovery
method or is deferred until such time as the criteria are met.
Premises and Equipment
Assets are depreciated by use of various methods (primarily the straight-
line method) over the estimated useful lives of the respective classes of
assets. Leasehold improvements are amortized over the lesser of the terms of
the leases or the useful lives of the improvements. Premises and equipment are
also reviewed for impairment in accordance with SFAS No. 121. Any impairment
losses are included in accumulated depreciation through a charge to
operations. Maintenance and repairs are charged to expense in the year
incurred. Material improvements are capitalized. The cost and accumulated
depreciation relating to assets retired or otherwise disposed of are
eliminated from the accounts, and any resulting gains or losses are credited
or charged to operations.
Goodwill and Other Intangible Assets
The Company has acquired various savings deposits in California. The
acquisitions were accounted for as purchases and, accordingly, all assets and
liabilities acquired were adjusted to and recorded at their estimated fair
values as of the acquisition dates. The excess of the fair value of the
liabilities assumed and the cash consideration paid over the fair value of the
assets acquired in connection with these acquisitions has been included in
"Goodwill and other intangible assets" in the accompanying Consolidated
Statements of Financial Condition.
Effective January 1, 1995, the Company adopted SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions" for goodwill related
to acquisitions made prior to September 30, 1982. As a result, the Company
wrote off goodwill totaling $234.7 million as a cumulative effect of the
change in accounting for goodwill. SFAS No. 72 requires, among other things,
that goodwill resulting from the acquisition of banking or thrift institutions
initiated after September 30, 1982 be amortized over a period no longer than
the estimated remaining life of the acquired long-term interest-earning
assets. The adoption of SFAS No. 72 for goodwill relating to acquisitions of
banking or thrift institutions prior to September 30, 1982 is permitted but
not required. The Company has been accounting for acquisitions initiated
subsequent to September 30, 1982 in accordance with SFAS No. 72.
The amount of goodwill increased by $185.0 million due to the September 1996
acquisition of the 61 former First Interstate Bank branches from Wells Fargo &
Company (the "First Interstate Bank branch acquisition") and declined by
$101.8 million due to the sale of the Company's New York retail deposit branch
system (the "New York sale") in September 1995.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The unamortized goodwill at December 31, 1996 aggregated $247.6
million and is being amortized over a period of 15 years.
From 1991 through 1995, the Company purchased certain deposits from other
financial institutions, and recorded amounts which represent the portion of
the purchase price attributable to the fair value of the depositor
relationships acquired. This "core" deposit premium is being amortized over
periods up to 10 years. The Company reduced its core deposit premium in
September 1995 by $5.1 million due to the New York sale. At December 31, 1996,
the unamortized core deposit premium was $60.5 million.
F-10
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
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 has elected to continue accounting for stock-based
employee compensation plans in accordance with APB No. 25 and has disclosed
certain fair value information as prescribed by SFAS No. 123 in these Notes to
Consolidated Financial Statements.
(2) INVESTMENTS
The Company purchases securities under agreements to resell ("repurchase
agreements"). At December 31, 1996 these repurchase agreements matured within
24 days. At December 31, 1996, there were no repurchase agreements outstanding
with individual brokers which exceeded ten percent of stockholders' equity.
Repurchase agreements averaged $376.5 million, $1.4 billion and $2.3 billion
during 1996, 1995 and 1994, respectively, and the maximum amounts outstanding
at any month-end during 1996, 1995 and 1994 were $737.5 million, $2.1 billion
and $2.6 billion, respectively.
Repurchase agreements are subject to certain risks. The Company attempts to
reduce such risks by, among other things, entering into such agreements only
with well-capitalized broker-dealers who are primary dealers in government
securities, reviewing on a regular basis the financial status of such broker-
dealers, limiting the maximum amount of agreements permitted to be outstanding
at any time with any single broker-dealer, limiting the types of securities
which are considered acceptable for purchase, requiring the purchased
securities to be held by a third party, and requiring additional securities if
the market value of the purchased securities decreases below levels specified
for such agreements.
In the first quarter of 1994 the Company entered into two amortizing
interest rate swap agreements to manage the market risks associated with
certain repurchase agreements secured by whole loans. The Company pays
interest based on the one-month London Interbank Offered Rate ("LIBOR") and
receives interest at a weighted average fixed coupon rate of 5.74%. Monthly
changes in LIBOR are used to calculate the amortization of the notional
amounts. Under these agreements, no collateral was required at December 31,
1996. The original notional amounts totaled $210.0 million, of which $72.0
million was outstanding at December 31, 1996. The swaps are scheduled to
mature in June 1998 and February 1999. The Company addresses any credit risk
associated with the payments from the counterparties by evaluating their
creditworthiness and monitoring limits and positions.
F-11
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other investment securities held to maturity at December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------- --------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------ --------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and GSE
obligations............ $2,432 $18 $-- $2,450 $2,442 $36 $-- $2,478
Industrial and other.... 6 -- -- 6 6 -- -- 6
------ --- --- ------ ------ --- --- ------
$2,438 $18 $-- $2,456 $2,448 $36 $-- $2,484
====== === === ====== ====== === === ======
</TABLE>
Other investment securities available for sale at December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------- --------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------ --------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and GSE
obligations............ $ -- $ 3 $-- $ 3 $ -- $-- $-- $ --
Marketable equity
securities............. 8,541 615 -- 9,156 9,327 581 -- 9,908
------ ---- --- ------ ------ ---- --- ------
$8,541 $618 $-- $9,159 $9,327 $581 $-- $9,908
====== ==== === ====== ====== ==== === ======
</TABLE>
At December 31, 1996, the Company did not hold investment securities with
any single issuer which exceeded ten percent of stockholders' equity.
The contractual maturities of all debt securities owned at December 31, 1996
were as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
-------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
One year or less................................... $ 6 $ 6
After one year through five years.................. 2,432 2,450
------ ------
$2,438 $2,456
====== ======
</TABLE>
The following table presents proceeds from sales of debt securities,
classified as available for sale, and gross realized gains and losses on such
sales for years ended December 31, 1996, 1995 and 1994. There were no sales of
investment securities classified as held to maturity in 1996, 1995 or 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.................................. $12,731 $25,994 $5,147
======= ======= ======
Gross realized gains................................. $ -- $ 9 $ 147
Gross realized losses................................ -- (67) --
------- ------- ------
Net gains (losses)................................. $ -- $ (58) $ 147
======= ======= ======
</TABLE>
F-12
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest and dividends on investments are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on repurchase agreements................. $21,244 $ 88,943 $102,824
Interest on other short-term and other investment
securities....................................... 9,658 21,971 20,080
Dividends on FHLB stock........................... 25,216 23,896 20,677
Dividends on other investment securities.......... 404 384 354
------- -------- --------
$56,522 $135,194 $143,935
======= ======== ========
</TABLE>
(3) LOANS, MBS, SALES AND SERVICING ACTIVITIES
Portfolio Composition
The loan and MBS portfolio is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Real estate mortgage loans:
Single family (1-4 units)........................ $19,354,683 $19,701,734
Multi-family (5 units and over).................. 9,582,129 9,284,131
Commercial and industrial........................ 1,343,348 1,566,470
----------- -----------
30,280,160 30,552,335
Consumer loans..................................... 671,270 31,488
Small business loans............................... 53,717 --
Other loans........................................ 108,788 104,645
Deferred loan fees and interest.................... (13,834) (30,708)
Unearned premiums (discounts) on loans............. 12,432 (3,360)
Allowance for loan losses.......................... (389,135) (380,886)
----------- -----------
Loans receivable............................... 30,723,398 30,273,514
Loans held for sale................................ 1,065,760 981,865
MBS held to maturity............................... 5,066,670 5,825,276
MBS available for sale............................. 9,229,842 10,326,866
----------- -----------
Total loans receivable and MBS................. $46,085,670 $47,407,521
=========== ===========
</TABLE>
As a result of the First Interstate Bank branch acquisition, the Company
obtained $1.1 billion in loans, consisting of $548.6 million in real estate
mortgage loans and $593.4 million in consumer and small business loans.
At December 31, 1996 the Company was committed to fund residential mortgage
loans totaling $330.3 million. The Company also had approved consumer and
business loan commitments totaling $478.l million at December 31, 1996.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company would not expect
to incur any losses if the commitments are not drawn upon. The Company
evaluates each customer's creditworthiness and the value of any underlying
collateral property on a case-by-case basis. The amount of collateral required
by the Company upon extension of credit is based on management's credit
evaluation of the customer.
F-13
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average yield on the Company's loan and MBS portfolio at
December 31, 1996 and 1995, computed after giving effect to amortization of
deferred loan fees and interest, discounts and premiums and effect of hedging,
and after adding back to the portfolio balance both the unrealized gain or
loss on MBS and the allowance for loan losses, was 7.35% and 7.50%,
respectively.
During 1996 and 1995 the Company securitized various conventional single
family mortgages into GSE securities of equal value. The unpaid principal
amount of loans securitized into FNMA and FHLMC securities was $205.1 million
and $7.4 billion in 1996 and 1995, respectively. Such MBS increase the
Company's ability to access collateralized borrowings. The credit risk on all
MBS securitized by the Company is provided for in the allowance for loan
losses.
The MBS owned by the Company and classified as held to maturity at December
31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------- -------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MPTs:
GSE.................... $ 2,834 $ 43 $ (2) $ 2,875 $ 4,124 $ 59 $ -- $ 4,183
Other.................. 5,063,836 142,020 (97,364) 5,108,492 5,821,152 226,997 (87,287) 5,960,862
---------- -------- -------- ---------- ---------- -------- -------- ----------
$5,066,670 $142,063 $(97,366) $5,111,367 $5,825,276 $227,056 $(87,287) $5,965,045
========== ======== ======== ========== ========== ======== ======== ==========
</TABLE>
The MBS available for sale by the Company at December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------- ---------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MPTs:
GSE.................... $3,760,004 $ -- $ (28,803) $3,731,201 $ 4,132,844 $42,860 $ (7,665) $ 4,168,039
Other.................. 28,069 1,106 -- 29,175 31,858 1,285 -- 33,143
CMOs:
GSE.................... 5,570,985 33,468 (134,987) 5,469,466 6,128,835 39,656 (42,807) 6,125,684
---------- ------- --------- ---------- ----------- ------- -------- -----------
$9,359,058 $34,574 $(163,790) $9,229,842 $10,293,537 $83,801 $(50,472) $10,326,866
========== ======= ========= ========== =========== ======= ======== ===========
</TABLE>
The Company believes that the gross unrealized gains and losses on MBS at
December 31, 1996 and 1995 were due to temporary market-related conditions.
The contractual maturities of all MBS at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
MBS AVAILABLE FOR
MBS HELD TO MATURITY SALE
--------------------- ---------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
After one year through five
years.......................... $ 2,794 $ 2,833 $1,265,353 $1,289,197
After five years through ten
years.......................... 40 42 549,944 559,568
After ten years................. 5,063,836 5,108,492 7,543,761 7,381,077
---------- ---------- ---------- ----------
$5,066,670 $5,111,367 $9,359,058 $9,229,842
========== ========== ========== ==========
</TABLE>
F-14
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
From 1991 through late 1993, the Company originated loans with a fixed
interest rate for five years after which the loans adjust monthly based on the
monthly cost of funds index of the Eleventh District of the FHLB ("COFI"). In
conjunction with the origination of these loans and as part of the Company's
asset and liability management, Home Savings entered into a series of interest
rate swap agreements that effectively caused the interest rate on these loans
to change monthly during the fixed interest rate period based on COFI. The
swap agreements, which are with the FHLB of San Francisco and certain national
banking firms, provide mutual payment of interest on the outstanding notional
amount of the swaps. The notional amounts are used to calculate the mutual
interest payments and do not represent exposure to credit loss. In accordance
with the swap contracts, the Company pays a fixed rate of interest, which may
be different than the actual fixed rate paid by the borrower, and receives a
variable rate based on COFI. The Company addresses any credit risk associated
with the variable rate payments from the counterparties by evaluating their
creditworthiness and by monitoring limits and positions. In 1996, 1995 and
1994 interest income was reduced by $15.2 million, $25.4 million and
$43.8 million, respectively, as a result of these swap agreements.
The total unpaid principal amount of the hedged loans related to these
interest rate swaps was $516.0 million at December 31, 1996. A summary of the
activity for the notional amounts of these interest rate swaps for the years
1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance....................... $1,243,860 $1,444,820 $1,982,350
Rights and obligations assigned to a
third party.......................... -- -- (283,450)
Expired agreements.................... (727,860) (200,960) (254,080)
---------- ---------- ----------
Ending balance.......................... $ 516,000 $1,243,860 $1,444,820
========== ========== ==========
</TABLE>
The interest rate swap agreements outstanding at December 31, 1996 have the
following maturities:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATE
------------------------
NOTIONAL FIXED RATE VARIABLE RATE
AMOUNT PAID RECEIVED(1)
-------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997................................. $427,550 6.78% 4.84%
1998................................. 88,450 5.51 4.84
--------
Total............................ $516,000 6.56 4.84
========
</TABLE>
- --------
(1) COFI for October 1996.
F-15
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Credit Risk and Concentration
The Company's primary lending business has been to originate residential
single family loans in specific states throughout the United States, primarily
in California. In addition, the Company originates loans on multi-family
structures and in the past has originated loans on commercial and industrial
real estate properties. The Company has not originated for its own portfolio
residential loans secured by multi-family structures located in states other
than California since July 1990, and in December 1988 discontinued originating
new commercial and industrial real estate loans. The Company's major loans
entail different risks as compared to residential loans secured by existing
single family structures. Set forth below is a table which summarizes the
Company's gross mortgage portfolio and nonaccrual loans as a percentage of the
gross mortgage portfolio by state and property type at December 31, 1996:
<TABLE>
<CAPTION>
SINGLE FAMILY MULTI-FAMILY COMMERCIAL AND
PROPERTIES PROPERTIES INDUSTRIAL PROPERTIES TOTAL
---------------------- --------------------- --------------------- ----------------------
GROSS GROSS GROSS GROSS
MORTGAGE NONACCRUAL MORTGAGE NONACCRUAL MORTGAGE NONACCRUAL MORTGAGE NONACCRUAL
STATE PORTFOLIO LOAN RATIO PORTFOLIO LOAN RATIO PORTFOLIO LOAN RATIO PORTFOLIO LOAN RATIO
----- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $24,568,361 1.66% $9,050,369 0.44% $1,043,257 0.75% $34,661,987 1.31%
Florida................. 2,489,508 1.32 39,188 -- 3,501 5.48 2,532,197 1.30
New York................ 1,924,830 2.02 188,627 1.29 138,566 0.03 2,252,023 1.83
Illinois................ 1,767,267 1.27 80,987 -- 9,516 -- 1,857,770 1.21
Texas................... 1,141,788 0.68 65,570 -- 23,769 0.01 1,231,127 0.63
Other................... 2,899,939 0.96 198,752 1.26 124,739 5.44 3,223,430 1.15
----------- ---------- ---------- -----------
$34,791,693 1.54 $9,623,493 0.47 $1,343,348 1.10 $45,758,534 1.30
=========== ========== ========== ===========
</TABLE>
At December 31, 1996, the Company had $707.8 million in gross consumer loans
and $54.5 million in gross business loans, with nonaccrual loan ratios of
0.20% and 0.37%, respectively. The majority of these loans were originated in
California.
Allowance for Loan Losses
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.......................... $ 380,886 $ 400,232 $ 438,786
Provision for loan losses................ 144,924 119,111 176,557
Allowance for loan losses on the First
Interstate Bank loans purchased......... 14,710 -- --
Charge-offs.............................. (190,540) (162,618) (252,734)
Recoveries............................... 39,155 24,161 37,623
--------- --------- ---------
Ending balance............................. $ 389,135 $ 380,886 $ 400,232
========= ========= =========
</TABLE>
Nonaccrual Loans, TDRs and Other Impaired Major Loans
The following is a summary of nonaccrual loans, TDRs and other impaired
major loans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans.................................. $598,661 $723,791 $681,026
TDRs.............................................. 185,635 163,844 121,365
Other impaired major loans........................ 114,332 51,018 12,158
-------- -------- --------
Total......................................... $898,628 $938,653 $814,549
======== ======== ========
</TABLE>
F-16
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1995 impaired loans recognized in accordance with
SFAS No. 114, and the related specific loan loss allowances, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR NET RECORDED FOR NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
With specific
allowances........... $ 25,132 $ 6,850 $ 18,282 $ 40,563 $10,318 $ 30,245
Without specific
allowances........... 17,687 -- 17,687 27,428 -- 27,428
-------- ------- -------- -------- ------- --------
42,819 6,850 35,969 67,991 10,318 57,673
-------- ------- -------- -------- ------- --------
TDRs:
With specific
allowances........... 160,684 23,174 137,510 76,110 17,621 58,489
Without specific
allowances........... 48,125 -- 48,125 105,355 -- 105,355
-------- ------- -------- -------- ------- --------
208,809 23,174 185,635 181,465 17,621 163,844
-------- ------- -------- -------- ------- --------
Other impaired major
loans:
With specific
allowances........... 119,505 28,852 90,653 57,082 16,634 40,448
Without specific
allowances........... 23,679 -- 23,679 10,570 -- 10,570
-------- ------- -------- -------- ------- --------
143,184 28,852 114,332 67,652 16,634 51,018
-------- ------- -------- -------- ------- --------
Total impaired
loans.............. $394,812 $58,876 $335,936 $317,108 $44,573 $272,535
======== ======= ======== ======== ======= ========
</TABLE>
The average net recorded investment in impaired loans for the years ended
December 31, 1996, 1995 and 1994 was $333.6 million, $236.9 million and $414.7
million, respectively. Interest income of $20.2 million for 1996, $17.9
million for 1995 and $6.2 million for 1994 was recognized on impaired loans
during the period of impairment.
Loans in nonaccrual status as of December 31, 1996, 1995 and 1994 had
interest due but not recognized of approximately $34.0 million, $43.0 million
and $39.0 million, respectively. Net interest forgone related to TDRs totaled
$0.8 million, $0.5 million and $0.1 million in 1996, 1995 and 1994,
respectively. Interest income recorded on TDRs for 1996, 1995 and 1994 was
$13.5 million, $14.0 million and $4.7 million, respectively. The Company has
no commitments to lend additional funds to borrowers whose loans were
classified as TDRs.
F-17
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales and Servicing Activities
During 1996, 1995 and 1994, the Company recognized gains (losses) on sales of
MBS as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Book value of MBS sold:
ARM MBS.................................. $187,603 $2,183,628 $400,201
Fixed rate MBS........................... 10,248 29,077 --
-------- ---------- --------
197,851 2,212,705 400,201
-------- ---------- --------
Relating to the New York sale:
ARM MBS.................................. -- 677,006 --
Fixed rate MBS........................... -- 38,722 --
-------- ---------- --------
-- 715,728 --
-------- ---------- --------
$197,851 $2,928,433 $400,201
======== ========== ========
Pre-tax gains (losses) on sales of MBS:
Reported in "Gain on sale of MBS":
ARM MBS.................................. $ 3,103 $ 11,733 $ 4,868
Fixed rate MBS........................... (29) 186 --
-------- ---------- --------
3,074 11,919 4,868
Relating to the New York sale:
ARM MBS.................................. -- 113 --
Fixed rate MBS........................... -- (14,143) --
-------- ---------- --------
-- (14,030) --
-------- ---------- --------
$ 3,074 $ (2,111) $ 4,868
======== ========== ========
</TABLE>
The changes to MSR, which are included in "Other assets," were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................ $ 63,696 $ 57,812 $ 75,180
Originated MSR............................. 40,256 16,829 --
Amortization to:
Interest on MBS.......................... (934) -- --
Servicing fee income..................... (14,318) (10,436) (17,368)
Addition to the valuation allowance........ (626) (509) --
-------- ---------- --------
Ending balance............................. $ 88,074 $ 63,696 $ 57,812
======== ========== ========
</TABLE>
At December 31, 1996 and 1995, MSR attributable to loans held for sale
totaled $7.0 million and $2.6 million, respectively. The changes to the
valuation allowance included a provision of $0.6 million and $0.5 million for
1996 and 1995, respectively. There were no charge-offs against this valuation
allowance during 1996 and 1995. The valuation allowance at December 31, 1996
and 1995 was $1.1 million and $0.5 million, respectively.
F-18
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has sold certain loans and MBS with different types of credit
enhancement features. During 1995 and as part of the funding of the New York
sale, the Company sold $861.0 million in FNMA MBS with various credit
enhancement features. The unpaid principal balance of loans and MBS sold with
various credit enhancement features at December 31, 1996 and 1995 was $4.3
billion and $5.0 billion, respectively. The maximum exposure under the
Company's credit enhancement obligations at December 31, 1996 was
approximately $1.2 billion. Approximately $1.0 billion of this exposure is
associated with $1.0 billion of loans sold to FHLMC on which the Company is
obligated to absorb all losses associated with foreclosures. An additional
$213.8 million in exposure under credit enhancement obligations relates to
loans totaling $3.3 billion. Losses incurred by the Company on its credit
enhancement obligations totaled $12.8 million, $14.3 million and $9.5 million
in 1996, 1995 and 1994, respectively. At December 31, 1996 the total allowance
for credit enhancement obligations included in "Other liabilities" was $27.9
million. The Company does not believe that its credit enhancement obligations
subject it to material risk of loss in the future.
At December 31, 1996, 1995 and 1994 the Company was engaged in servicing for
investors $13.8 billion, $13.1 billion and $11.3 billion, respectively, in
unpaid principal amount of loan participations, whole loans and MPTs.
Set forth below is a summary by year of the components of loan servicing
income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross servicing income......................... $ 99,263 $ 87,791 $ 92,608
GSE guarantee and other fees................... (15,954) (16,356) (17,597)
Amortization of MSR............................ (14,318) (10,436) (17,368)
Valuation adjustment on MSR.................... (626) (509) --
Gain on sale of servicing rights............... -- -- 16,798
-------- -------- --------
Loan servicing income.................... $ 68,365 $ 60,490 $ 74,441
======== ======== ========
</TABLE>
In December 1994, the Company sold servicing rights related to $2.0 billion
of fixed-rate single family loans serviced for investors for a gain of $16.8
million.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest on:
Repurchase agreements.................................... $ 829 $ 193
Investment securities.................................... 288 288
MBS...................................................... 62,816 73,806
Loans receivable......................................... 145,906 153,824
-------- --------
$209,839 $228,111
======== ========
</TABLE>
F-19
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) OPERATIONS OF REAL ESTATE
REI
The Company's REI was $147.9 million, net of an allowance of $132.4 million,
and $234.9 million, net of an allowance of $283.7 million, at December 31,
1996 and 1995, respectively. The following table presents the Company's REI by
type at December 31, 1996:
<TABLE>
<CAPTION>
GROSS ALLOWANCE NET
BOOK VALUE FOR LOSSES BOOK VALUE
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REI held for sale:
Residential REI:
California............................. $ 11,768 $ 8,794 $ 2,974
Maryland............................... 40,360 23,277 17,083
-------- -------- --------
52,128 32,071 20,057
Commercial and industrial REI and
undeveloped land........................ 101,271 36,247 65,024
-------- -------- --------
153,399 68,318 85,081
-------- -------- --------
Long-term REI:
Residential REI:
California............................. 37,143 24,249 12,894
Commercial and industrial REI and
undeveloped land........................ 89,741 39,865 49,876
-------- -------- --------
126,884 64,114 62,770
-------- -------- --------
Total REI.................................. $280,283 $132,432 $147,851
======== ======== ========
</TABLE>
There was no additional impairment of these REI at December 31, 1996.
Included in other expenses are operations of REI, summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net gain (loss) on sales....................... $ (2,546) $ 8,872 $ (5,327)
Provision for losses........................... (26,296) (49,660) (86,080)
Net operating expense.......................... (6,119) (8,693) (6,237)
-------- -------- --------
Total loss............................... $(34,961) $(49,481) $(97,644)
======== ======== ========
</TABLE>
The changes in the allowance for losses on REI are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................. $ 283,748 $333,825 $341,705
Provision for losses........................ 26,296 49,660 86,080
Charge-offs................................. (177,612) (99,737) (93,960)
--------- -------- --------
Ending balance................................ $ 132,432 $283,748 $333,825
========= ======== ========
</TABLE>
F-20
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REO
Included in other expenses are operations of REO, summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss on sales............................. $ (20,893) $(13,643) $(17,706)
Provision for losses.......................... (40,572) (41,198) (39,124)
Net operating expense......................... (44,415) (31,947) (29,181)
--------- -------- --------
Total loss.............................. $(105,880) $(86,788) $(86,011)
========= ======== ========
</TABLE>
The changes in allowance for losses on REO are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................. $ 38,080 $ 44,726 $ 66,453
Provision for losses........................ 40,572 41,198 39,124
Charge-offs................................. (46,515) (47,844) (60,851)
--------- -------- --------
Ending balance................................ $ 32,137 $ 38,080 $ 44,726
========= ======== ========
</TABLE>
(6) PREMISES AND EQUIPMENT
Premises and equipment at cost are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 114,602 $ 105,825
Buildings.............................................. 192,944 185,701
Furniture, fixtures and equipment...................... 336,081 312,920
Leasehold improvements................................. 138,007 139,682
--------- ---------
781,634 744,128
Less accumulated depreciation and amortization......... (357,067) (333,181)
--------- ---------
$ 424,567 $ 410,947
========= =========
</TABLE>
There were no impairment losses recognized in the years ended December 31,
1996 and 1995.
Total rental expense, including common area maintenance and rent escalation
costs, in the Company's Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 was $73.4 million, $78.2 million and
$74.0 million, respectively.
The following is a schedule by years of minimum future rentals on
noncancelable operating leases, related principally to premises, as of
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997............................................ $ 72,875
1998............................................ 66,777
1999............................................ 61,444
2000............................................ 56,924
2001............................................ 53,703
Thereafter...................................... 445,680
--------
$757,403
========
</TABLE>
F-21
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED DECEMBER 31,
AVERAGE RATE AT ------------------------------------
DECEMBER 31, 1996 1996 1995
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Transaction accounts:
Checking:
Non-interest
bearing............ $ 985,594 2.8% $ 432,834 1.3%
Interest bearing.... 0.99% 2,285,955 6.6 2,061,232 6.0
Statement savings..... 1.95 1,585,345 4.6 1,379,927 4.0
Money market savings.. 3.46 6,328,235 18.2 5,788,958 16.9
----------- ----- ----------- -----
Total transaction
accounts........... 11,185,129 32.2 9,662,951 28.2
----------- ----- ----------- -----
Term accounts:
Certificates of
deposit under
$100,000............. 5.34 23,187,593 66.7 24,139,269 70.5
Jumbo certificates of
deposit.............. 5.10 401,223 1.1 442,261 1.3
----------- ----- ----------- -----
Total term accounts. 23,588,816 67.8 24,581,530 71.8
----------- ----- ----------- -----
$34,773,945 100.0% $34,244,481 100.0%
=========== ===== =========== =====
</TABLE>
On November 21, 1996, the Company sold deposits totaling $197.0 million and
branch premises of its four San Antonio, Texas branches for a pre-tax gain of
$6.9 million. The sale was funded with excess liquidity.
On September 20, 1996, the Company purchased approximately $1.9 billion of
deposits as a result of the First Interstate Bank branch acquisition. This
included $728.5 million in checking accounts, $284.2 million in statement
savings, $353.4 million in money market savings and $522.7 million in term
accounts.
On September 22, 1995 and as part of the New York sale, the Company sold
deposits totaling $8.1 billion and branch premises in New York for a pre-tax
gain of $514.7 million. The gain is net of the write-off of goodwill and other
tangibles of $106.9 million and other expenses associated with the sale. The
sale was funded with excess liquidity, including funds generated by the
acquisition of deposits in 1995, and a combination of new borrowings and sales
of securities.
The aggregate amounts of term account maturities at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
AMOUNT MATURING DURING THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
----------- ---------- -------- -------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Term accounts:
2.5% or less.......... $ 2,790 $ 429 $ 25 $ -- $ 2 $ -- $ 3,246
2.501%-3.5%........... 132,917 56 7 -- -- -- 132,980
3.501%-4.5%........... 605,350 3,241 1,583 -- -- -- 610,174
4.501%-5.5%........... 13,023,499 1,204,670 237,679 725 14,817 1,599 14,482,989
5.501%-6.5%........... 4,846,553 2,092,620 559,670 104,613 136,315 6,121 7,745,892
6.501%-7.5%........... 418,140 65,234 76,242 27,737 5,517 2,539 595,409
7.501%-8.5%........... 2,789 1,281 2,215 520 229 43 7,077
8.501%-15.5%.......... 3,142 1,286 5,617 872 2 130 11,049
----------- ---------- -------- -------- -------- ------- -----------
Total term accounts. $19,035,180 $3,368,817 $883,038 $134,467 $156,882 $10,432 $23,588,816
=========== ========== ======== ======== ======== ======= ===========
</TABLE>
F-22
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate amounts of certificates of deposit in amounts of $100,000 or
more at December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less.................................................... $167,443
Over 3 months through 6 months...................................... 126,185
Over 6 months through 12 months..................................... 81,809
Over 12 months...................................................... 25,786
--------
Total......................................................... $401,223
========
</TABLE>
At December 31, 1996 and 1995 the weighted average interest rate on the
deposits, computed without the effect of compounding interest, was 4.40% and
4.65%, respectively. All government agency deposits, totaling $93.1 million at
December 31, 1996, were secured by certain real estate loans of the Company
amounting to $174.2 million.
Interest expense on deposits by type of account is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Checking.................................... $ 21,449 $ 24,833 $ 27,577
Savings accounts............................ 244,315 279,345 281,511
Term accounts............................... 1,258,109 1,531,412 982,805
---------- ---------- ----------
$1,523,873 $1,835,590 $1,291,893
========== ========== ==========
</TABLE>
(8) SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities sold under agreements to
repurchase:
Balance at December 31................ $1,820,000 $3,519,311 $2,253,805
Average balance....................... 2,236,360 3,122,938 4,182,802
Maximum amount outstanding at any
month end............................ 3,124,303 5,487,682 5,311,468
Average interest rate:
During the year..................... 6.05% 6.31% 4.24%
At December 31...................... 6.10 5.97 6.40
Federal funds purchased:
Balance at December 31................ $ 200,000 $ -- $ 100,000
Average balance....................... 51,980 6,565 58,411
Maximum amount outstanding at any
month end............................ 200,000 6,096 250,000
Average interest rate:
During the year..................... 5.46% 5.95% 3.79%
At December 31...................... 5.45 -- 6.00
Other short-term borrowings:
Balance at December 31................ $ 10,529 $ -- $ --
Average balance....................... 1,634 -- 83,549
Maximum amount outstanding at any
month end............................ 13,921 -- 355,000
Average interest rate:
During the year..................... 5.36% -- % 3.54%
At December 31...................... 4.96 -- --
Accrued interest on short-term
borrowings included in
"Other liabilities".................... $ 14,060 $ 58,337 $ 13,582
</TABLE>
F-23
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreements to repurchase securities sold require that the Company repurchase
identical securities to those which were sold. At December 31, 1996 short-term
borrowings under agreements to repurchase securities sold are summarized as
follows:
<TABLE>
<CAPTION>
COLLATERAL
---------------------
WEIGHTED FEDERAL AGENCY MBS
AVERAGE ---------------------
REPURCHASE INTEREST BOOK
LIABILITY RATE VALUE* FAIR VALUE
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 30 days..................... $ 150,000 5.36% $ 156,349 $ 154,782
30-90 days......................... 575,000 5.40 651,716 623,309
90-180 days........................ 1,095,000 5.72 1,204,832 1,172,058
---------- ---------- ----------
$1,820,000 $2,012,897 $1,950,149
========== ========== ==========
</TABLE>
- --------
*Book value includes accrued interest.
Amounts outstanding with individual brokers at December 31, 1996 which
exceeded ten percent of the Company's stockholders' equity were:
<TABLE>
<CAPTION>
COLLATERAL
WEIGHTED --------------------
AVERAGE FAIR
PURCHASING PARTY MATURITY BOOK VALUE* BOOK VALUE* VALUE
---------------- -------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
C.S. First Boston Corp. ........... 128 days $433,036 $465,316 $451,814
Morgan Stanley & Co. Inc. ......... 106 days 361,963 405,986 388,290
Nomura Securities International ... 80 days 686,666 774,225 746,356
</TABLE>
- --------
* Book value includes accrued interest.
F-24
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) FHLB AND OTHER BORROWINGS
These borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
FHLB advances with a weighted average interest rate of
5.94% (1996) and 5.67% (1995)........................... $3,138,725 $1,801,914
Notes payable to FHLB with a weighted average interest
rate of 6.50% (1996) and 6.29% (1995)................... 1,302,647 2,548,247
Notes payable to various brokerage firms with a weighted
average interest rate of 5.92% (1996) and 5.95% (1995).. 3,915,499 2,784,499
Floating rate notes with a contract interest rate based
on three-month LIBOR plus ten basis points contract
interest rate of 5.98% and an effective interest rate of
6.00%, net of unamortized discount of $11............... -- 199,989
Medium term notes with an average contract interest rate
of 6.82% (1996) and an effective average interest rate
of 7.01% (1996) and an average contract interest rate of
7.12% (1995) and an effective average interest rate of
7.28% (1995), net of unamortized discount of $639 (1996)
and $819 (1995)......................................... 219,361 159,181
Subordinated notes payable to FDIC with a contract
interest rate based on the average equivalent coupon-
issue yield on the U.S. Treasury's 52-week bills
contract interest of 6.40% (1996) and 6.02% (1995)...... 100,000 100,000
Senior notes with a contract interest rate of 8.25% and
effective interest rate of 8.42%, due October 1, 2002,
net of unamortized discount of $2,003 (1996) and $2,352
(1995).................................................. 247,997 247,648
Subordinated notes with a weighted average contract
interest rate of 7.93% (1996) and an effective average
interest rate of 8.08% (1996), and a weighted average
contract interest rate of 8.66% (1995) and an effective
average interest rate of 8.83% (1995), net of
unamortized discount of $3,416 (1996) and $4,849 (1995). 621,584 870,151
Other, net of unamortized discount of $29 (1996) and $51
(1995).................................................. 4,179 5,488
---------- ----------
Total FHLB and other borrowings.................... $9,549,992 $8,717,117
========== ==========
</TABLE>
At December 31, 1996 the Company had outstanding and unused secured lines of
credit totaling $100 million with the Federal Reserve Bank to cover
overdrafts. The Company also had a letter of credit of $5 million with the
Eleventh District of the FHLB to guarantee certain obligations.
The FHLB advances and notes are secured by the stock of the FHLB totaling
$421.0 million and certain real estate loans and MBS of the Company totaling
$4.6 billion at December 31, 1996. All FHLB advances at December 31, 1996 had
prepayment penalty provisions. The notes payable to FHLB are due at various
dates through 1998.
During 1996 and 1995 the Company issued notes, all due within two years, to
various brokerage firms. The notes are secured by MBS owned by the Company
totaling $4.5 billion and $3.0 billion at December 31, 1996 and 1995,
respectively. In 1996 these notes include four two-year fixed rate notes for
$620 million, with an average interest rate of 5.15% and in 1995 these notes
include a two-year note for $200 million, with a fixed interest rate of 5.32%.
The notes contain a provision that allows the brokerage firm one year after
the settlement date to change the interest rate to be equal to LIBOR less 15
basis points. If this option is not exercised, the note's fixed interest rate
will be reduced by 15 basis points. In 1996, these notes also include twelve
two-year notes totaling $1.3 billion with an average interest rate of 5.38%
which are callable by the brokerage firm, on either a monthly, quarterly, or
yearly basis.
F-25
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1996, the Company issued Medium Term Notes totaling $60 million. The
notes will mature in April 1997 and have a fixed interest rate of 6.00%. 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.
In 1995, the Company had four issuances of Medium Term Notes totaling $160
million. These Medium Term Notes will mature in three to seven years and have
a weighted average interest rate of 7.11%. These Medium Term Notes are not
redeemable prior to maturity. The discounts on these borrowings are being
amortized to interest expense over their terms using the interest method.
The aggregate amounts of principal maturities for FHLB and other borrowings,
excluding unamortized discounts, at December 31, 1996 were (dollars in
thousands):
<TABLE>
<S> <C> <C>
1997...................... $5,466,882 57.2%
1998...................... 2,813,035 29.4
1999...................... 303,213 3.2
2000...................... 501,358 5.3
2001...................... 41,059 0.4
Thereafter................ 430,532 4.5
---------- -----
$9,556,079 100.0%
========== =====
</TABLE>
Mandatorily Redeemable Capital Securities of Subsidiary Trust
In December 1996, Ahmanson Trust I (the "capital trust"), a wholly-owned
subsidiary of the Company, issued $150 million of 8.36% Company-obligated
mandatorily redeemable capital securities, Series A, of subsidiary trust
holding solely Junior Subordinated Deferrable Interest Debentures of the
Company. In connection with the capital trust's issuance of these securities,
the Company issued to the capital trust $154.6 million principal amount of its
8.36% subordinated notes, due December 2026 (the "subordinated notes"). The
sole assets of the capital trust are and will be the subordinated notes.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are based on relevant market information and
information about the various financial instruments. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments, including derivative financial instruments, without
attempting to estimate the value of anticipated future business and the value
of certain assets and liabilities that are not considered financial
instruments. Other significant assets and liabilities that are not considered
financial assets or liabilities include tax assets and liabilities, premises
and equipment, REI, REO and intangible assets. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
F-26
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair value due
to the short-term nature of these items and because they do not present
significant credit concerns.
Amortizing Swap Agreements
The fair value of the Company's amortizing swap agreements reflect the
estimated amounts the Company would have paid to the counterparties if the
agreements had been terminated early as of the end of 1996 and 1995,
respectively.
Investment Securities and MBS
The fair value of investment securities with maturities greater than 90 days
and the fair value of MBS are based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
Loans Receivable
Fair values are estimated for portfolios of loans with similar individual
financial characteristics. Loans are segregated by type, such as single and
multi-family residential mortgages and commercial and industrial real estate
mortgages. Each loan category is further segmented based on whether the loans
bear fixed or adjustable rates of interest and the level of their coupon rates
compared to current market rates.
The fair value of residential mortgage loans is calculated by discounting
contractual cash flows adjusted for prepayment estimates using discount rates
based on secondary market sources adjusted to reflect differences in servicing
and credit costs.
The fair value of commercial and industrial real estate loans is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loans. The estimate of maturity is based on the Company's
historical experience with payments modified, as required, by an estimate of
the effect of current economic and lending conditions.
The fair values of consumer and business loans are calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loans.
MSR
The fair value of MSR on the Company's portfolio of loans serviced for
investors is determined based on the estimated discounted net cash flow to be
received, less the estimated cost of servicing and credit enhancements.
Deposits
The fair value of deposits with no stated maturity ("core deposits") is
equal to the amount payable on demand. The fair value of term accounts is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for alternative sources of funds
with comparable remaining maturities. These amounts do not include the fair
value of a core deposit intangible asset as it is not a financial instrument
as defined by the FASB. If this asset was considered at December 31, 1996 and
1995, the Company estimates the fair value of the core deposit intangible
would have been $1.636 billion and $1.238 billion, respectively, at those
dates, which is not reflected in the accompanying Consolidated Statements of
Financial Condition. The Company estimated the fair value ascribed to the core
deposit intangible by estimating the cost savings from the low cost of such
deposits over their estimated life and discounting the results using an
incremental cost of funds rate.
F-27
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings
The fair value of borrowings is estimated based on the discounted value of
contractual cash flows. The discount rates are estimated using rates currently
available to the Company for borrowings with similar terms and remaining
maturities.
Capital Securities of Subsidiary Trust
The fair value of the Capital Securities of Subsidiary Trust is based on bid
prices published in financial newspapers or bid quotations received from
securities dealers.
The estimated fair values of the Company's financial instruments at December
31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.. $ 1,443,860 $ 1,443,860 $ 1,147,156 $ 1,147,156
Amortizing swap agreements. -- (256) -- 2,600
Investment securities...... 11,597 11,615 12,356 12,392
MBS........................ 14,296,512 14,341,209 16,152,142 16,291,911
Loans receivable, net...... 31,789,158 31,604,189 31,255,379 31,511,907
MSR........................ 88,074 184,646 63,696 142,612
Deposits................... 34,773,945 33,137,856 34,244,481 33,689,750
Short-term borrowings...... 2,030,529 2,040,621 3,519,311 3,599,300
FHLB and other borrowings.. 9,549,992 9,597,455 8,717,117 8,915,347
Capital Securities of
Subsidiary Trust.......... 148,413 151,298 -- --
</TABLE>
(11) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is established if a deferred tax asset is not
more likely than not to be realized. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in statutory tax rates is
recognized in net income in the period that includes the enactment date.
The Company files a consolidated federal income tax return. The Company or
its subsidiaries file returns in various states. The federal and state income
tax allocation policy of the consolidated group generally provides that each
subsidiary's tax is allocated as though it were filing as a separate company.
Provisions of the Small Business Job Protection Act of 1996 (the "Act")
significantly altered the Company's tax bad debt deduction method and the
circumstances that would require a tax bad debt reserve recapture. Prior to
enactment of the Act, savings institutions were permitted to compute their tax
bad debt deduction through use of either the reserve method or the percentage-
of-taxable income method. The Act repealed both of these methods for large
savings institutions and allows for bad debt deductions using the charge-off
method. While repealing the reserve method for computing bad debt deductions,
the Act retained existing base year tax bad debt reserves and requires that
these reserves be recaptured into taxable income only in limited situations,
such as in the event of certain excess distributions or complete liquidation.
None of the limited circumstances requiring recapture are contemplated by the
Company. The amount of the Company's tax bad debt reserves subject to
recapture in these circumstances approximated $691 million at December 31,
1996. Due to
F-28
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the indefinite nature of the recapture provisions, no tax liability has been
established in the accompanying Consolidated Financial Statements.
During 1994 the Company entered into a final settlement with the Internal
Revenue Service (the "IRS") for taxable years 1983 through 1989 which resolved
disputes on various issues. The Company adjusted its tax liability based upon
this settlement. The IRS is currently examining the Company's tax returns for
the years 1990 through 1993.
The provision for income taxes from continuing operations consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $(60,283) $258,105 $147,907
State and local............................... 20,962 61,403 50,744
-------- -------- --------
(39,321) 319,508 198,651
-------- -------- --------
Deferred:
Federal....................................... 108,349 51,161 (16,070)
State and local............................... (33,728) 3,031 (9,269)
-------- -------- --------
74,621 54,192 (25,339)
-------- -------- --------
$ 35,300 $373,700 $173,312
======== ======== ========
</TABLE>
Total income taxes (benefits) were allocated as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations........................... $ 35,300 $373,700 $173,312
Goodwill........................................ -- -- (34,382)
Stockholders' equity............................ (73,033) 50,656 (56,708)
Other assets or liabilities..................... (25) 43 (773)
-------- -------- --------
Total income taxes (benefits)............. $(37,758) $424,399 $ 81,449
======== ======== ========
</TABLE>
F-29
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Provision for losses on loans and REO............... $ 179,218 $ 209,044
Basis differences on REI and partnerships........... 25,330 65,856
Delinquent accrued interest......................... 2,320 5,716
State and local taxes............................... -- 15,525
Purchase accounting differences..................... 27,857 24,327
Compensation differences............................ 10,688 9,500
Net operating losses................................ 4,876 18,813
Investment in subsidiaries.......................... 49,161 51,756
Unrealized loss on securities....................... 54,407 --
Other............................................... 3,260 898
--------- ---------
Total deferred tax assets......................... 357,117 401,435
Valuation allowance................................. (6,897) (51,756)
--------- ---------
Total deferred tax assets, net of valuation
allowance........................................ 350,220 349,679
--------- ---------
Deferred tax liabilities:
Loan fee income..................................... (191,657) (205,915)
FHLB stock dividends................................ (126,753) (120,220)
Gains on loan sales................................. (23,981) (15,477)
Accrued interest on tax settlements................. (16,909) (17,817)
Basis difference on premises and equipment.......... (35,358) (14,613)
State and local taxes............................... (6,074) --
Recurring liabilities............................... (5,788) (20,219)
Unrealized gains on securities...................... -- (4,871)
--------- ---------
Total deferred tax liabilities.................... (406,520) (399,132)
--------- ---------
Net deferred tax liability........................ $ (56,300) $ (49,453)
========= =========
</TABLE>
The Company establishes a valuation allowance if it does not determine that
a deferred tax asset is more likely than not to be realized. The valuation
allowance at December 31, 1996 and 1995 relates to the realizability of tax
basis differences on subsidiaries.
F-30
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes in the accompanying Consolidated Financial Statements have been
provided at effective tax rates of 19.6% (1996), 45.3% (1995) and 42.2%
(1994). These rates differ from statutory federal income tax rates. The
differences were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
--------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate........ $ 63,195 35.0% $288,626 35.0% $143,736 35.0%
Increases (reductions) in taxes
resulting from:
State income tax, net of
federal income tax benefit.. 8,602 4.7 41,882 5.1 34,690 8.5
Tax basis adjustments for
assets and liabilities of
companies acquired.......... -- -- 38,983 4.7 16,986 4.1
Valuation allowance
reduction, net of federal
income tax benefit.......... (35,400) (19.6) -- -- -- --
Reduction of liabilities from
prior periods............... (1,000) (0.5) -- -- (20,000) (4.9)
Tax rate changes............. -- -- -- -- (3,100) (0.8)
Other........................ (97) -- 4,209 0.5 1,000 0.3
-------- ----- -------- ---- -------- ----
Provision for income taxes..... $ 35,300 19.6% $373,700 45.3% $173,312 42.2%
======== ===== ======== ==== ======== ====
</TABLE>
The Company had total net operating losses of $13.9 million at December 31,
1996. Included in the total are $7.4 million of acquired net operating losses
which expire in 2001 and are subject to limitations under Internal Revenue
Code Section 382 which limit the Company's use of the losses to $16.8 million
each year. The remaining $6.5 million of net operating losses expire in 2009
and are attributable to a subsidiary that is not included in the federal
consolidated income tax return of the Company.
(12) CONTINGENT LIABILITIES
The Company is involved in litigation and may be subject to claims arising
in the normal course of business. In the opinion of management the amount of
ultimate liability with respect to these matters in the aggregate will not
have a material adverse effect on the Company.
F-31
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) INCOME PER COMMON SHARE AND STOCKHOLDER RIGHTS
The following is a summary of the calculation of income per common share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Primary income per common share:
Income before cumulative effect of
accounting change.................... $ 145,258 $ 450,946 $ 237,358
Less accumulated dividends on
preferred stock...................... (44,921) (50,430) (50,430)
----------- ----------- -----------
Income attributable to common shares
before cumulative effect of
accounting change.................... 100,337 400,516 186,928
Cumulative effect of change in
accounting for goodwill.............. -- (234,742) --
----------- ----------- -----------
Net income attributable to common
shares............................. $ 100,337 $ 165,774 $ 186,928
=========== =========== ===========
Weighted average number of common
shares outstanding................... 108,770,660 117,336,793 117,014,262
Dilutive effect of outstanding common
stock equivalents.................... 978,263 737,298 355,169
----------- ----------- -----------
Weighted average number of common
shares as adjusted for calculation of
primary income per share............. 109,748,923 118,074,091 117,369,431
=========== =========== ===========
Primary income per common share before
cumulative effect of accounting
change............................... $ 0.91 $ 3.39 $ 1.59
Cumulative effect of change in
accounting for goodwill.............. -- (1.99) --
----------- ----------- -----------
Primary income per common share..... $ 0.91 $ 1.40 $ 1.59
=========== =========== ===========
Fully diluted income per common share:
Income before cumulative effect of
accounting change.................... $ 145,258 $ 450,946 $ 237,358
Less accumulated dividends on
preferred stock...................... (44,921) (33,180) (33,180)
----------- ----------- -----------
Income attributable to common shares
before cumulative effect of
accounting change.................... 100,337 417,766 204,178
Cumulative effect of change in
accounting for goodwill.............. -- (234,742) --
----------- ----------- -----------
Net income attributable to common
shares............................. $ 100,337 $ 183,024 $ 204,178
=========== =========== ===========
Weighted average number of common
shares outstanding................... 108,770,660 117,336,793 117,014,262
Dilutive effect of outstanding common
stock equivalents.................... 978,263 13,041,268 11,931,980
----------- ----------- -----------
Weighted average number of common
shares as adjusted for calculation of
fully diluted income per share....... 109,748,923 130,378,061 128,946,242
=========== =========== ===========
Fully diluted income per common share
before cumulative effect of
accounting change.................... $ 0.91 $ 3.20 $ 1.58
Cumulative effect of change in
accounting for goodwill.............. -- (1.80) --
----------- ----------- -----------
Fully diluted income per common
share.............................. $ 0.91 $ 1.40 $ 1.58
=========== =========== ===========
</TABLE>
Common stock equivalents identified by the Company in determining its
primary earnings per common share are stock options and options with stock
appreciation rights. In addition, common stock equivalents used in the
determination of fully diluted earnings per common share include the effect 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 Company has a stockholder rights plan (the "Rights Plan") under which
the Company distributed one common stock purchase right (a "Primary Right")
and one preferred stock purchase right (a "Secondary
F-32
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Right") for each share of common stock outstanding. If any person becomes the
beneficial owner of 15% or more of the Company's outstanding common shares
without first complying with a specified procedure designed to provide fair
treatment to all the Company stockholders, then each Primary Right will
entitle the holder (other than the 15% stockholder) to purchase common shares
at 20% of the then-market price of such shares. The total number of common
shares that may be purchased upon the exercise of all Primary Rights is equal
to 50% of the number of common shares outstanding when the Primary Rights
become exercisable.
Upon the occurrence of certain events that could result in the ownership of
25% or more of the outstanding common shares by any person, each Secondary
Right will entitle the holder (other than the 25% stockholder) to purchase, at
the then-current Secondary Right exercise price, a hundredth of a share of a
newly-issued series of preferred stock, which one-hundredth share is designed
to have a value approximately equal to the value of one common share. If any
person becomes a 25% stockholder, each previously unexercised Secondary Right
will entitle the holder (other than the 25% stockholder) to purchase common
stock having a market value equal to two times the then-current Secondary
Right exercise price.
(14) REGULATORY CAPITAL AND DIVIDENDS
The Office of Thrift Supervision ("OTS") has adopted regulations ("OTS
Regulations") that contain a capital standard for savings institutions. Home
Savings is in compliance with the OTS Regulations at December 31, 1996. The
following table shows the capital amounts and ratios of Home Savings at
December 31, 1996:
<TABLE>
<CAPTION>
BALANCE RATIO
---------- -----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Tangible capital (to adjusted total assets)................ $2,741,733 5.55%
Core capital (to adjusted total assets).................... 2,745,817 5.56
Core capital (to risk-weighted assets)..................... 2,745,817 8.67
Total risk-based capital (to risk-weighted assets)......... 3,414,861 10.78
</TABLE>
The payment of dividends is subject to certain federal income tax
consequences. Specifically, Home Savings is capable of paying dividends to
Ahmanson in any year without incurring tax liability only if such dividends do
not exceed both the tax basis current year earnings and profits and
accumulated tax earnings and profits as of the beginning of the year.
Thirty days' prior notice to the OTS of the intent to declare dividends is
required for the declaration of such dividends by Home Savings. The OTS
Regulations generally allow a savings institution which meets its capital
requirements to distribute without OTS approval dividends up to 100% of the
institution's net income during a calendar year plus the amount that would
reduce the institution's "surplus capital ratio" (the excess over its capital
requirement) to one-half of its surplus capital ratio at the beginning of the
calendar year. At January 1, 1997 Home Savings could have paid dividends of
approximately $440.3 million without OTS approval. However, the OTS has the
authority to preclude the declaration of any dividends or adopt more stringent
amendments to the OTS Regulations.
(15) EMPLOYEE BENEFIT PLANS
Pension and Savings Plans
The Company has a trusteed, noncontributory pension plan (the "Plan")
covering eligible employees over 21 years of age who meet minimum service
requirements. The benefits are generally based on years of service and the
employee's average earnings in the last 10 years of employment. Benefits under
the Plan are reduced by a specified percentage of the employee's primary
Social Security benefits.
F-33
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the Plan's funded status and liabilities
accrued in the Company's Consolidated Statements of Financial Condition at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits........................... $231,480 $198,570
Nonvested accumulated benefits........................ 7,696 5,530
-------- --------
Total accumulated benefits.......................... $239,176 $204,100
======== ========
Projected benefit obligation for service rendered to
date................................................. $261,027 $224,888
Plan assets at fair value; primarily listed common
stocks, U.S. government obligations and corporate bonds
and debentures......................................... 306,200 253,602
-------- --------
Funded status--Plan assets in excess of projected
benefit................................................ 45,173 28,714
Items not yet recognized in income:
Unrecognized net loss................................. 10,588 13,004
Prior service cost not yet recognized in net periodic
pension cost......................................... 378 517
Unrecognized transition asset being recognized over
8.8 years............................................ (577) (1,595)
-------- --------
Prepaid pension cost................................ $ 55,562 $ 40,640
======== ========
</TABLE>
Net pension expense for the Plan for 1996, 1995 and 1994 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the
period...................................... $ 9,863 $ 9,006 $ 10,004
Interest cost on projected benefit
obligations................................. 16,963 16,056 13,741
Actual return on plan assets................. (49,920) (43,221) (3,874)
Net amortization and deferral................ 26,172 24,015 (13,754)
-------- -------- --------
Net pension expense.................... $ 3,078 $ 5,856 $ 6,117
======== ======== ========
</TABLE>
As prescribed by SFAS No. 87, the Company uses the projected unit credit
actuarial cost method for financial reporting purposes. The discount rate and
weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligations
for the qualified plan were 7.75% and 4.75%, respectively, as of December 31,
1996. The expected long-term weighted average rate of return on assets was
9.0%.
The Company has a Supplemental Executive Retirement Plan ("SERP") and an
Outside Director Retirement Plan ("ODRP") which are nonqualified,
noncontributory pension plans ("Nonqualified Plans"). The Company's SERP is a
defined benefit plan under which the Company pays benefits to certain officers
of the Company designated by the Compensation Committee of the Company's Board
of Directors in an amount equal to a specified percentage of the participant's
highest average annual earnings for three consecutive years during the
participant's final 10 years of employment and are based on years of service
subject to a maximum of 15 years. Such benefits are reduced to the extent a
participant receives benefits from primary Social Security and the Plan. The
Company's ODRP is a retirement plan for directors of the Company who are not
also officers or employees of the Company. Under the ODRP, a participating
director receives annual retirement benefits equal to the director's annual
fee during the twelve-month period immediately preceding the director's
retirement from the Board. Benefits under the ODRP generally are payable for a
period equal to the participant's period of service on the Board plus certain
governmental service, with a lifetime benefit payable to participants with 15
or more years of service.
F-34
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the Nonqualified Plans' funded status and
liabilities accrued in the Company's Consolidated Statements of Financial
Condition at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits........................... $ 25,347 $ 23,893
Nonvested accumulated benefits........................ 631 165
-------- --------
Total accumulated benefits.......................... $ 25,978 $ 24,058
======== ========
Projected benefit obligation for service rendered to
date................................................. $ 28,365 $ 26,176
Plan assets at fair value............................... -- --
-------- --------
Funded status--Projected benefit in excess of plan
assets................................................. (28,365) (26,176)
Items not yet recognized in income:
Unrecognized net loss................................. 5,065 4,085
Prior service cost not yet recognized in net periodic
pension cost......................................... 4,680 4,298
Unrecognized net obligation being recognized over 15
years................................................ 1,428 1,739
Adjustment required to reflect minimum liability...... (8,785) (7,917)
-------- --------
Accrued pension cost included in "Other liabilities".. $(25,977) $(23,971)
======== ========
</TABLE>
The net pension expense for the Nonqualified Plans for 1996, 1995 and 1994
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period......... $ 315 $ 208 $ 73
Interest cost on projected benefit obligations......... 1,956 2,001 1,825
Net amortization and deferral.......................... 891 751 959
------ ------ ------
Net pension expense.............................. $3,162 $2,960 $2,857
====== ====== ======
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for the Nonqualified Plans were 7.75% and 4.75%,
respectively, as of December 31, 1996.
The Company has a Savings Plan for employees which allows participants to
make contributions by salary deduction equal to 15% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. Employee
contributions are generally matched by the Company at the rate of one dollar
per dollar up to 3% of the employee's salary. Employees vest immediately in
their own contributions and they vest in the Company's contributions based on
years of service. Total Company contributions and administrative expenses of
the Savings Plan were $6.1 million, $7.2 million and $7.1 million in 1996,
1995 and 1994, respectively.
Other Postretirement Benefit Plans
The Company provides certain postretirement benefits, including health care,
life insurance and dental care, to qualifying retired employees. The level of
these postretirement benefits are at the discretion of the Company. The
weighted average discount rate used in determining the actuarial present value
of the projected benefit obligation was 7.75% as of December 31, 1996. The
Company accounts for other postretirement benefits using SFAS No. 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions." SFAS
No. 106 requires accrual, during the years employees render service to earn
the benefits, of the expected cost of providing the benefits to the employees,
their beneficiaries and covered dependents.
F-35
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the accumulated postretirement benefits
obligation at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 11,333 $ 13,779
Fully eligible active employees........................ 402 1,101
Other active employees................................. 656 1,465
-------- --------
Total accumulated postretirement benefit obligation.. 12,391 16,345
Plan assets at fair value................................ -- --
-------- --------
Funded status--Accumulated benefit obligation in excess
of plan assets.......................................... (12,391) (16,345)
Unrecognized transition obligation being recognized over
20 years................................................ 11,545 13,693
Unrecognized (gain) loss................................. (360) 1,604
-------- --------
Accrued postretirement benefit cost included in "Other
liabilities".......................................... $ (1,206) $ (1,048)
======== ========
</TABLE>
The total postretirement benefit expense for the Plan for 1996, 1995, and
1994 included the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................... $ 131 $ 207 $ 348
Amortization of transition obligation.................. 806 806 806
Interest cost.......................................... 1,174 1,400 1,205
------ ------ ------
Total postretirement benefit expense............... $2,111 $2,413 $2,359
====== ====== ======
</TABLE>
STOCK COMPENSATION PLANS
As of December 31, 1996 there were 4,616,478 shares of the Company's Common
Stock available for awards and grants to officers, key employees and directors
of the Company under the 1993 Stock Incentive Plan (the "1993 Plan"). The 1993
Plan, the 1984 Stock Incentive Plan ("the 1984 Plan") and the Long-Term
Management Performance Plan (the "1979 Plan") provide for the issuance of
Incentive and Nonqualified Stock Options and Restricted Stock Awards ("RSAs").
No further awards may be made under the 1984 and 1979 Plans. The 1993 and 1984
Plans also provide for the issuance of Stock Appreciation Rights ("SARs") in
tandem with Nonqualified and Incentive Stock Options. Nonqualified and
Incentive Stock Options permit participants to purchase shares of the
Company's Common Stock at a price per share not less than the fair market
value per share on the date of grant. RSAs provide for the issuance of shares
of the Company's Common Stock without payment or upon payment by the
participants of up to 10% of the fair market value of the shares. SARs provide
the recipient with the right to receive payment in cash or shares of the
Company's Common Stock equal to the appreciation in value of the optioned
shares from the date of grant in lieu of exercising the related stock option.
These SARs become exercisable at the same times as the related options.
Generally, awards vest over a period of six months to three years from the
date of grant and have exercise periods of ten years and one month from the
date of grant. Options expiring through 2003 are all currently exercisable.
The options expiring in 2005 are exercisable in annual increments of 33 1/3%
commencing in 1996, except options for 435,396 shares which were exercisable
in 1995; 197,927 shares which were exercisable in 1996; and 31,923 shares
which are exercisable in 1998. The options expiring in 2006 are exercisable in
annual increments of 33 1/3% commencing in 1997, except options for 661,645
shares which were exercisable in 1996; 230,202 shares which are exercisable in
1997; and 20,000 shares which are exercisable in 1999.
F-36
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company adopted SFAS No. 123 as of January 1, 1996. SFAS No. 123 is
effective for financial statements for the years ended December 31, 1996 and
1995, application to the year ended December 31, 1994 financial statements is
prohibited. At December 31, 1996, the Company had three stock compensation
plans which the Company continues to account for in accordance with APB No.
25. Total compensation expense related to these stock compensation plans was
$1.1 million, $4.7 million and $0.1 million for 1996, 1995 and 1994,
respectively. Had compensation cost for the Company's stock compensation plans
been determined consistent with the alternate method permitted by SFAS No.
123, the Company's net income and income per share would have been reduced to
the pro forma amounts indicated below (dollars in thousands except per share
data):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net income:
As reported............................................. $145,258 $216,204
Proforma................................................ 140,942 214,601
Primary income per share:
As reported............................................. $ 0.91 $ 1.40
Proforma................................................ 0.87 1.39
Fully diluted income per share:
As reported............................................. $ 0.91 $ 1.40
Proforma................................................ 0.87 1.39
</TABLE>
The fair value of each option granted in 1996 and 1995, estimated on
December 31, 1996 and 1995, using the Black-Scholes option-pricing model, was
computed based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
STOCK OPTIONS RSAS STOCK OPTIONS RSAS
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Dividend yield.................... 2.71% 2.71% 3.32% 3.32%
Expected volatility............... 31.49 24.15 31.96 23.72
Risk-free interest rate........... 6.29 6.01 5.50 5.24
Expected lives.................... 7 years 3 years 7 years 3 years
</TABLE>
The following is a summary of RSA transactions in 1996, 1995 and 1994. Final
restrictions lapse in the year 2000.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
ISSUANCE ISSUANCE ISSUANCE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance beginning of
year.................... 65,416 $15.61 172,514 $14.71 259,702 $14.53
Granted and issued.... 113,147 24.67 9,000 21.21 --
------- -------- -------
178,563 181,514 259,702
Canceled.............. -- (9,911) 16.20 (11,917) 14.48
Restrictions lapsed... (67,037) 15.74 (106,187) 14.56 (75,271) 14.12
------- -------- -------
Balance end of year..... 111,526 24.73 65,416 15.61 172,514 14.71
======= ======== =======
</TABLE>
Total compensation expense related to RSAs was $0.4 million, $0.9 million
and $1.4 million for 1996, 1995 and 1994, respectively.
F-37
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 options to purchase 3,686,237 shares of the Company's
Common Stock under the 1984 and 1993 Plans were outstanding as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE EXPIRATION EXERCISE EXERCISE SHARES
PRICES SHARES DATE PRICE SHARES PRICE WITH SARS
------------ --------- ---------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
$ 7.74-20.38 64,216 1997 $15.35 64,216 $15.35 36,326
16.94 67,515 1998 16.94 67,515 16.94 14,400
21.56-22.25 89,749 1999 21.83 89,749 21.83 20,202
13.13-19.25 80,349 2000 15.24 80,349 15.24 68,877
13.94-18.19 105,358 2001 16.00 105,358 16.00 --
14.94 101,583 2002 14.94 101,583 14.94 --
17.13-20.06 625,552 2003 18.28 625,552 18.28 --
16.00-25.94 1,151,211 2005 19.40 771,805 19.71 --
23.56-31.38 1,400,704 2006 25.29 661,645 23.93 --
--------- --------- -------
3,686,237 21.08 2,567,772 19.86 139,805
========= ========= =======
</TABLE>
There was no compensation expense recognized upon the issuance of options as
the exercise price of the options was equal to the market price of the stock
on the grant dates. Total compensation expense (credit) related to SARs was
$0.7 million, $3.8 million and $(1.3) million for 1996, 1995 and 1994,
respectively.
Option transactions under the 1979, 1984 and 1993 Plans during 1996, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,361,164 $18.35 3,412,598 $17.24 3,525,176 $16.96
Options granted
Without SARs........ 1,455,286 25.24 1,203,608 19.71 254,465 16.00
Options canceled
With SARs........... -- -- (510) 20.38
Upon exercise of
SARs............... (16,422) 18.74 (310,915) 16.73 (27,000) 7.42
Without SARs........ (106,615) 19.10 (106,153) 17.66 (77,154) 16.51
Options exercised
Without SARs........ (950,690) 18.13 (765,524) 16.48 (262,379) 13.52
With SARs canceled.. (56,486) 19.75 (72,450) 16.32 --
--------- --------- ---------
Outstanding at end of
year................... 3,686,237 21.08 3,361,164 18.35 3,412,598 17.24
========= ========= =========
Exercisable at end of
year................... 2,567,772 19.86 2,342,538 17.68 2,763,186 17.38
========= ========= =========
</TABLE>
The weighted average exercise price of options granted during the year was
equal to weighted average fair value.
As of December 31, 1996, the $77.7 million of stock options outstanding
under the 1984 and 1993 Plans have exercise prices between $7.74 and $31.38
and a weighted average remaining contractual life of 7 years.
F-38
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) FINANCIAL HIGHLIGHTS BY PRINCIPAL BUSINESS OPERATIONS
Financial highlights concerning the Company's principal business operations
(industry segments) at or for the years ended December 31, 1996, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Savings and lending................... $ 3,632,158 $ 4,307,271 $ 3,257,689
Mortgage banking...................... 127,420 85,419 88,873
REI................................... 958 2,101 1,997
Corporate and other................... 6,057 2,709 7,172
----------- ----------- -----------
Consolidated revenues............... $ 3,766,593 $ 4,397,500 $ 3,355,731
=========== =========== ===========
Operating income before taxes and
cumulative effect of accounting change:
Savings and lending................... $ 232,215 $ 933,734 $ 527,753
Mortgage banking...................... 35,613 18,299 42,747
REI................................... (56,180) (81,844) (127,068)
Corporate and other................... (31,090) (45,543) (32,762)
----------- ----------- -----------
Consolidated operating income before
income taxes and cumulative effect
of accounting change............... $ 180,558 $ 824,646 $ 410,670
=========== =========== ===========
Assets:
Savings and lending................... $48,473,974 $48,997,401 $53,360,067
Mortgage banking...................... 1,331,260 1,201,055 222,705
REI................................... 210,585 262,410 439,767
Corporate and other................... (113,775) 68,720 (295,746)
----------- ----------- -----------
Consolidated assets................. $49,902,044 $50,529,586 $53,726,793
=========== =========== ===========
</TABLE>
F-39
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) PARENT COMPANY FINANCIAL INFORMATION
See other Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash and amounts due from banks........................ $ 596 $ 345
Securities purchased under agreements to resell........ 27,700 12,000
Short-term investments due from Home Savings........... 182,064 296,009
Other short-term investments........................... 8,976 8,554
---------- ----------
Total cash and cash equivalents...................... 219,336 316,908
Accounts and notes receivable from subsidiaries........ 286,289 249,560
Investment in Home Savings............................. 2,885,151 3,147,445
Investment in other subsidiaries....................... 54,777 99,991
Other assets........................................... 136,694 101,931
---------- ----------
$3,582,247 $3,915,835
========== ==========
Liabilities and Stockholders' Equity:
Notes payable.......................................... $1,094,947 $ 804,688
Accrued expenses and other liabilities................. 40,973 37,403
Income taxes........................................... 13,278 16,822
---------- ----------
Total liabilities.................................... 1,149,198 858,913
Stockholders' equity................................... 2,433,049 3,056,922
---------- ----------
$3,582,247 $3,915,835
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Income:
Cash dividends from Home Savings............. $ 307,000 $ 410,000 $160,000
Cash dividends from other subsidiaries....... 35,200 32,000 89,950
Interest..................................... 35,188 30,549 11,626
Other income................................. 670 774 694
--------- --------- --------
378,058 473,323 262,270
--------- --------- --------
Expenses:
Interest..................................... 72,806 64,123 50,210
G&A expenses................................. 10,889 27,197 10,647
Other expenses............................... 5,975 -- --
Income tax benefit........................... (61,324) (30,439) (31,939)
--------- --------- --------
28,346 60,881 28,918
--------- --------- --------
Income before equity in undistributed net
income (loss) of subsidiaries................. 349,712 412,442 233,352
Equity in undistributed net income (loss) of
subsidiaries.................................. (204,454) (196,238) 4,006
--------- --------- --------
Net income..................................... $ 145,258 $ 216,204 $237,358
========= ========= ========
</TABLE>
F-40
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income.................................. $ 145,258 $ 216,204 $ 237,358
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income (loss) of
subsidiaries............................... 204,454 196,238 (4,006)
Other, net.................................. 11,086 39,888 5,130
--------- --------- ---------
Net cash provided by operating
activities............................. 360,798 452,330 238,482
--------- --------- ---------
Cash flows from investing activities:
Purchase of interest in partnership from a
subsidiary................................. (34,888) -- --
Purchase of real estate subsidiaries........ -- (29,144) --
Capital contributions to Home Savings....... -- (54,700) (140,000)
Capital contributions to subsidiaries....... (1,081) (16,878) --
Net increase in notes receivable from
subsidiaries............................... (40,008) (229,790) (13,700)
Purchase of other investment securities..... (12,731) (25,788) (25,000)
Proceeds from sale of other investment
securities................................. 12,731 25,981 --
Proceeds from sale of real estate
subsidiary................................. 12,988 -- --
Maturities of other investment securities... -- 12,189 12,811
Other, net.................................. (4,822) (19,281) (3,119)
--------- --------- ---------
Net cash used in investing activities... (67,811) (337,411) (169,008)
--------- --------- ---------
Cash flows from financing activities:
Dividends on Common Stock ($0.88 per share). (95,274) (103,163) (102,948)
Dividends on Preferred Stock................ (46,321) (50,430) (50,430)
Common stock purchased for Treasury......... (381,933) (62,595) --
Preferred stock redeemed.................... (175,000) -- --
Net proceeds from issuance of Subordinated
Debt....................................... -- -- 123,668
Net proceeds from issuance of Medium Term
Notes...................................... 59,835 159,052 --
Proceeds from issuance of notes payable to
subsidiaries............................... 229,307 -- 6,745
Other, net.................................. 18,827 15,114 5,296
--------- --------- ---------
Net cash used in financing activities... (390,559) (42,022) (17,669)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. (97,572) 72,897 51,805
Cash and cash equivalents at beginning of
year......................................... 316,908 244,011 192,206
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 219,336 $ 316,908 $ 244,011
========= ========= =========
</TABLE>
In 1996, Ahmanson purchased the interest in a real estate investment
partnership from a subsidiary of Home Savings for $34.9 million and issued
$154.6 million in subordinated notes to the Capital Trust. In 1995 Ahmanson
purchased the stock of two real estate subsidiaries of Home Savings, with over
$75 million of REI assets, for $29.1 million.
(18) SUBSEQUENT EVENT
On February 17, 1997, the Company proposed a merger transaction with Great
Western Financial Corporation ("Great Western"). As originally proposed, Great
Western's stockholders would have received in a tax-free exchange 1.05 shares
of Ahmanson Common Stock for each share of common stock of Great Western. On
March 17, 1997, the Company enhanced its merger proposal by increasing the
share exchange ratio and
F-41
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
establishing a floating exchange ratio (based on the market value of Ahmanson
Common Stock) that would result in the Great Western shareholders receiving
between 1.10 and 1.20 shares of Ahmanson Common Stock for each share of common
stock of Great Western. Based on the closing price of Ahmanson Common Stock on
March 14, 1997 (the last trading day before the announcement of the enhanced
proposal) each share of Great Western common stock would have been converted
into 1.20 shares of Ahmanson Common Stock. The transaction would be accounted
for as a purchase, and is subject to approval by both Ahmanson's and Great
Western's stockholders, and by the applicable regulatory agencies.
F-42
<PAGE>
EXHIBIT 10.2
H.F. AHMANSON & COMPANY
1993 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1993 Stock Incentive Plan ("Plan") of H.F.
Ahmanson & Company, a Delaware corporation (the "Company"), is to enable the
Company to attract, retain and motivate its employees by providing for or
increasing the proprietary interests of such employees in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an employee
of the Company or any of its subsidiaries (an "Employee") shall be eligible to
be considered for the grant of Awards (as hereinafter defined) hereunder.
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company,
is authorized under this Plan to enter into any of the following types of
arrangement with an Employee involving shares of common stock of the Company
("Common Shares") or a value derived from the value of the Common Shares: (i)
stock options; (ii) stock appreciation rights; (iii) sales or bonuses of stock
and (iv) restricted stock. The entering into of any such arrangement is
referred to herein as the "grant" of an "Award." Awards may be made alone or
two or more in tandem or in the alternative.
(b) Awards may be issued, and Common Shares may be issued pursuant to
an Award, for any lawful consideration as determined by the Committee,
including, without limitation, services rendered by the recipient of such Award.
(c) Subject to the provisions of this Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things:
(i) a provision permitting the recipient of such Award, including any
Employee recipient who is a director or officer of the Company, to pay the
purchase price of the Common Shares or other property issuable pursuant to such
Award, or such recipient's tax withholding obligation with respect to such
issuance, in whole or in part, by any one or more of the following:
<PAGE>
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock of
the Company (including "pyramiding") or other property;
(D) a reduction in the amount of Common Shares or other property
otherwise issuable pursuant to such Award; or
(E) the delivery of a promissory note, the terms and conditions
of which shall be determined by the Committee;
(ii) a provision conditioning or accelerating the receipt of benefits
pursuant to such Award, either automatically or in the discretion of the
Committee, upon the occurrence of specified events, including, without
limitation, a change of control of the Company, an acquisition of a
specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or an event of the type described in Section 6
hereof; or
(iii) provisions required in order for such Award to qualify as an
incentive stock option (an "Incentive Stock Option") under Section 422 of
the Internal Revenue Code (the "Code").
(d) Notwithstanding Section 3(b), in the event any Award is made while
this Plan is subject to Rule 16b-3 as in effect on April 30, 1991 and under
which Common Shares are or may in the future be issued for any type of
consideration other than as a bonus without the payment of any consideration,
the amount of such consideration shall be equal to (i) the amount (such as par
value) required to be received by the Company in order to assure compliance with
applicable state law, or (ii) an amount equal to or greater than 50% of the fair
market value of such shares on the date of grant of such Award.
2
<PAGE>
Section 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 6 hereof, the
aggregate number of Common Shares that may be issued as restricted stock shall
not exceed 3,500,000.
(b) Subject to adjustment as provided in Section 6 hereof, the
aggregate number of Common Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under this Plan shall not exceed
8,000,000, provided, however, that any adjustments pursuant to Section 6 hereof
with respect to Incentive Stock Options shall be limited to those that will not
adversely affect the status of such options as Incentive Stock Options under
Section 422 of the Code.
(c) Subject to adjustment as provided in Section 6 hereof, the
maximum number of shares of Common Stock issuable pursuant to all Awards granted
to any Employee during any calendar year shall be 300,000. This limitation is
intended to satisfy the requirements of Section 162(m) of the Code so that
compensation attributable to Awards hereunder qualify as performance-based
compensation under Section 162(m) of the Code. Adjustments to the maximum under
this Subsection (c) pursuant to Section 6 hereof shall be limited to the extent
permitted under Section 162(m) of the Code.
(d) The aggregate number of Common Shares issued and issuable pursuant
to Awards granted under this Plan shall at any time be deemed to be equal to the
sum of the following:
(i) the number of Common Shares that were issued prior to such time
pursuant to Awards granted under this Plan, other than Common Shares that
were subsequently reacquired by the Company pursuant to the terms and
conditions of such Awards and with respect to which the holder thereof
received no benefits of ownership such as dividends; plus
(ii) the number of Common Shares that were otherwise issuable prior to
such time pursuant to Awards granted under this Plan, but that were
withheld by the Company as payment of the purchase price of the Common
Shares issued pursuant to such Awards or as payment of the recipient's tax
withholding obligation with respect to such issuance; plus
(iii) the maximum number of Common Shares that are or may be issuable
at or after such time pursuant to Awards granted under this Plan prior to
such time.
3
<PAGE>
Section 5. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by a committee (the "Committee")
of the Board of Directors of the Company (the "Board") consisting of two or more
directors, each of whom: (i) is a "disinterested person" (as such term is
defined in Rule 16b-3 promulgated under the Exchange Act, as such Rule may be
amended from time to time), and (ii) is not (1) a current employee of the
Company, or any Parent or Subsidiary (as hereinafter defined) of the Company,
(2) a former employee of such entities who is receiving compensation therefrom
for prior services (other than qualified plan benefits), (3) a former officer of
such entities, or (4) a person receiving compensation from such entities for
personal services in any capacity other than as a director. For purposes of the
preceding sentence, "Parent" and "Subsidiary" refer to "parent corporation" and
"subsidiary corporation," respectively, as such terms are defined in Section
424(f) of the Code.
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan, including, without limitation, the
following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Employees and to which of such
Employees, if any, Awards shall be granted hereunder;
(iii) grant Awards to Employees and determine the terms and conditions
thereof, including the number of Common Shares issuable pursuant thereto;
(iv) determine whether, and the extent to which adjustments are
required pursuant to Section 6 hereof; and
(v) interpret and construe this Plan and the terms and conditions of
any Award granted hereunder.
Section 6. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into cash, property or a
different number or kind of
4
<PAGE>
securities, or if cash, property or securities are distributed in respect of
such outstanding securities, in either case as a result of a reorganization,
merger, consolidation, recapitalization, restructuring, reclassification,
dividend (other than a regular, quarterly cash dividend) or other distribution,
stock split, reverse stock split or the like, or if substantially all of the
property and assets of the Company are sold, then, unless the terms of such
transaction shall provide otherwise, the Committee shall make appropriate and
proportionate adjustments in (a) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Incentive
Stock Options and other Awards theretofore granted under this Plan, (b) the
maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards thereafter granted under
this Plan, and (c) the maximum number of Common Shares issuable pursuant to all
Awards granted to any Employee during any calendar year.
Section 7. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this Plan at any time and in any
manner; provided, however, that no such amendment or termination shall deprive
-------- -------
the recipient of any Award theretofore granted under this Plan, without the
consent of such recipient, of any of his or her rights thereunder or with
respect thereto; provided, further, that if an amendment to the Plan would
-------- -------
increase the number of Common Shares subject to the Plan or the maximum number
of Common Shares issuable pursuant to all Awards during any calendar year (as
adjusted under Section 6), change the class of persons eligible to receive
Awards under the Plan, or otherwise materially increase the benefits accruing to
participants in a manner not specifically contemplated herein or affect the
Plan's compliance with Rule 16b-3 under the Exchange Act or applicable
provisions of the Code, the amendment shall be approved by the Company's
stockholders to the extent required to comply with Rule 16b-3 under the Exchange
Act or applicable provisions of or rules under the Code.
Section 8. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of November 23, 1993, the date upon
which it was approved by the Board; provided, however, that no Common Shares may
-------- -------
be issued under this Plan until it has been approved, directly or indirectly, by
the affirmative votes of the holders of a majority of the securities
5
<PAGE>
of the Company present, or represented, and entitled to vote at a meeting duly
held in accordance with the laws of the State of Delaware.
6
<PAGE>
EXHIBIT 10.3
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE STOCK OPTION AWARD GUIDELINES
OVERVIEW These guidelines govern annual stock options grants to selected
senior executives of the Company and its subsidiaries.
PARTICIPATION Stock option awards under these guidelines will be granted
CRITERIA annually on a date between November 1 and February 10 selected
by the Compensation Committee. Participation is limited to
officers of the Company and its subsidiaries with salary grade
levels of 58 or higher as of the date awards are made under
these guidelines.
STOCK OPTION Each participant will be awarded annual stock options based
AWARDS on the following table. The dollar amount determined by the
table will be converted into a number of stock options using a
Black-Scholes valuation model using as the base price the
average of the high and low trading prices of the Company's
common stock for the most recent thirty trading days ending on
the last day of the month preceding the date of grant
AWARD GUIDELINES
<TABLE>
<CAPTION>
AWARD AS A
GRADE LEVEL OR POSITION PERCENT OF BASE SALARY
----------------------------- ----------------------
<S> <C>
CHIEF EXECUTIVE OFFICER 50%
CHIEF OPERATING OFFICER 45%
CHIEF FINANCIAL OFFICER 45%
GENERAL COUNSEL 45%
60-62 40%
58-59 30%
</TABLE>
The salary and grade level used to determine the size of a
participant's stock option grant will be the participant's
annual base salary rate and grade level in effect as of the
date the options are granted by the Compensation Committee.
OPTIONS TERMS Options will be granted under the terms and conditions of the
Company's 1993 Stock Incentive Plan. Such options will become
exercisable in full six months after the date of grant, will
have a term of ten years and one month, and will have an
exercise price equal to the average of the high and low trading
prices of the Company's common stock on the date of grant.
LIMITATION No participant will be eligible to receive an annual stock
option grant unless the participant's individual performance is
considered satisfactory by the Compensation Committee for the
12 month period preceding the grant.
EMPLOYMENT Upon a participant's termination of employment from the Company
TERMINATION for any reason other than death, permanent disability, normal
retirement, or
<PAGE>
retirement with the consent of the Company at an earlier date,
unexercised stock options previously granted to the participant
must be exercised within a period of 90 days following
termination of employment or be forfeited. Upon a participant's
termination of employment from the Company for reason of death,
permanent disability, normal retirement, or retirement with the
consent of the Company at an earlier date, options previously
granted to the participant may be exercised from time to time
until expiration of the original term of such options.
ADMINISTRATION The Compensation Committee shall administer these guidelines
and shall decide all questions arising in the administration,
interpretation and application thereof. The decision of the
Committee shall be conclusive and binding on all parties,
providing that the Committee acted in good faith.
INTENT It is the intent of the Company that awards under these
guidelines satisfy, and be interpreted in a manner that
satisfy, in the case of Participants who are or may be Covered
Employees (within the meaning of Internal Revenue Code section
162(m)), the applicable requirements of section 162(m), so that
the Company's tax deduction for remuneration in respect of an
Award for services performed by such Covered Employees is not
disallowed in whole or in part by the operation of such
section. If any provision of these guidelines or of any award
would otherwise frustrate or conflict with the intent expressed
herein, that provision to the extent possible shall be
interpreted and deemed amended so as to avoid such conflict. To
the extent of any remaining irreconcilable conflict with such
intent, such provisions shall be deemed void as applicable to
Covered Employees.
2
<PAGE>
EXHIBIT 10.6
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 1
=========================================
PLAN OVERVIEW
--------------------------------
PLAN The plan provides for annual grants of deferred cash incentive
OVERVIEW awards through which a participant is given the opportunity to
earn a cash award payment based on the Company's performance in
terms of objective, quantifiable measures. Such measures and the
relationship between maximum awards and performance will be
determined by the Compensation Committee prior to the beginning
of each three-year performance measurement cycle beginning on
January 1 and ending on December 31 three years later.
Performance measures determined by the Compensation Committee may
be based upon any or all of the following criteria: absolute or
relative total shareholder return, absolute or relative return on
tangible equity and absolute or relative return on assets. Until
further action of the Compensation Committee the performance
measure will be Total Shareholder Return (TSR) and the
relationship between maximum awards and performance will be as
set forth below in this plan. For purposes of the plan, TSR
represents return to shareholders from both stock price
appreciation and dividends over the three-year performance
measurement cycle, assuming dividends are reinvested quarterly.
PARTICIPATION Participation in the plan is limited to selected senior
CRITERIA executives of the Company and its subsidiaries as determined by
the Compensation Committee of the Board of Directors.
AWARD OPPORTUNITY
--------------------------------
TARGET Each participant is assigned a target award opportunity (i.e.,
AWARDS the award level consistent with the Company achieving good
performance) expressed as a percentage of annual base salary and
based on the guidelines in the following table. Actual target
awards for individual participants for a given performance cycle
may vary from the following guidelines and will be determined by
the Compensation Committee.
<TABLE>
<CAPTION>
TARGET AWARD GUIDELINES
GRADE LEVEL TARGET AWARD AS A
-------------- PERCENT OF BASE SALARY
----------------------
<S> <C>
67 90%
65 80%
63 - 64 75%
60 - 62 50% - 70%
58 - 59 45%
</TABLE>
<PAGE>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 2
=========================================
AWARD OPPORTUNITY (CONTINUED)
--------------------------------
The salary and grade level used to determine a participant's
deferred cash incentive award payment will be the participant's
annual base salary rate and grade level in effect on the last day
of the three-year performance cycle for which the payment is
made, except in the case of pro-rata award payments (as provided
under "New Hires/Changes in Responsibility" below).
<PAGE>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 3
=========================================
DEFERRED CASH INCENTIVE
--------------------------------
TSR MEASUREMENT Company TSR performance for calculating deferred cash
incentive payments earned under the plan will be determined by
separately calculating the Company's percentile ranking in TSR
relative to the TSR performance of the individual companies
comprising the S&P 500 Index (excluding the Company) and the
individual companies comprising the S&P Banking Index
(excluding the Company) for each of the twelve calendar
quarters in the performance measurement cycle. For purposes of
this comparison, the Company's relative percentile ranking will
be calculated separately for each Index. The Company's overall
percentile ranking in TSR will then be determined by
calculating the Company's average percentile ranking against
the two Index groups, with the Company's performance against
each Index group weighted equally.
EXAMPLE: If the Company's TSR ranking relative to the S&P 500
Index group for the three-year performance measurement cycle
equals the 50th percentile and its TSR ranking relative to the
S&P Banking Index group equals the 40th percentile, the
Company's overall TSR ranking for plan purposes will equal the
45th percentile.
RANGE OF CASH Actual deferred cash incentive awards earned under the plan
AWARD may range from 0% to 150% of the participant's target award
OPPORTUNITY opportunity; provided that in no event shall it exceed
$2,000,000 for any performance cycle. The actual award earned
within this range will be based on the level of the Company's
TSR performance for the three-year performance cycle according
to the following award/performance table:
<PAGE>
<TABLE>
<CAPTION>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 4
- ------------------------------------------------
DEFERRED CASH INCENTIVE (CONTINUED)
----------------------------------
RANGE OF AWARD/PERFORMANCE TABLE
CASH AWARD TSR PERFORMANCE
OPPORTUNITY
(CONTINUED)
COMPANY PAYOUT AS A
PERCENTILE RANKING. PERCENT OF TARGET
------------------- -----------------
<S> <C>
75th and Above 150%
60th 125%
50th 100%
40th 50%
Below 40th 0%
</TABLE>
If the TSR performance of the Company falls between the
discrete points contained in the above table, the actual
award payout will be interpolated on a linear basis. For
example, Company TSR performance equal to the 55th
percentile of the peer group will generate a payout equal to
112.5% of the deferred cash incentive half of the target
award opportunity.
OTHER LIMITATIONS The size of a participant's deferred cash incentive award
payment will be subject to a reduction of up to 20% based
upon an assessment of the participant's individual
performance during the twelve months immediately prior to
the end of the three-year performance measurement cycle.
Adjustments for individual performance will be at the
discretion of the Compensation Committee.
Also, no participant will be eligible to receive a cash
payment under the plan unless the participant's individual
performance is considered satisfactory by the Compensation
Committee for the calendar year preceding the grant (or if
the grant is made in December, for that calendar year), in
the case of stock options, or preceding the payment, in the
case of cash payments.
The Compensation Committee may, in its discretion determine
not to pay cash incentive awards under the plan if Home
Savings of America's core capital as a percent of total
assets as of the end of the plan year falls below the level
mandated in Section 301 of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989.
PAYMENT OF Subject to the limitations described in the prior
EARNED AWARDS paragraphs, earned deferred cash incentive awards will be
paid in cash as soon as possible after the end of each
performance measurement cycle, following written
certification of the Company's relative TSR performance
ranking by the Compensation Committee.
<PAGE>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 5
=========================================
OTHER PROVISIONS
--------------------------------
NEW HIRES/ Individuals hired or promoted into a position that would
CHANGES IN qualify for participation in the plan may be added to the
RESPONSIBILITY plan at any time at the discretion of the Compensation
Committee. In addition, such participants will be eligible to
receive a full deferred cash incentive award payment for that
cycle, provided that the individual participates in the plan
for at least six months during the cycle and the Committee does
not decide to pay a prorated award to such individual. Deferred
cash incentive awards for individuals moved into positions
eligible for higher or lower award levels will be prorated
based on time employed in each position during the performance
cycle. Pro-rata deferred cash incentive awards will be
determined based on the number of full months that an
individual participates in the plan (or in different award
levels, as the case may be) during the performance measurement
cycle, divided by 36 unless otherwise determined by the
Compensation Committee.
TERMINATION OF If a participant's employment with the Company terminates for
EMPLOYMENT any reason other than death, permanent disability or normal
retirement prior to the payment of deferred cash incentive
awards for a performance measurement cycle, the participant
will be ineligible to receive a deferred cash incentive award
payment for that cycle. In the event that a participant's
employment with the Company terminates for reason of death,
permanent disability or normal retirement prior to the payment
of deferred cash incentive awards for a performance cycle, the
participant, or in the event of death, the participant's heirs,
will receive, at minimum, a pro-rata deferred cash incentive
award for the cycle. Pro-rata awards for this purpose will be
determined based on the number of full months that the
individual participated in the plan during the performance
cycle prior to termination of employment, divided by 36 unless
otherwise determined by the Compensation Committee.
Deferred cash incentive awards for individuals who terminate
employment with the Company for any reason during a performance
measurement cycle will be paid (if an award is otherwise
payable under the terms of the plan) at the same time as
deferred cash incentive awards are paid to other participants
in the plan. For purposes of the plan, normal retirement refers
to retirement at or after age 65 in accordance the Company's
executive retirement policies and program.
<PAGE>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 6
=========================================
OTHER PROVISIONS (CONTINUED)
------------------------------------
TRANSITION FROM This plan is effective as of November 25, 1996 and supersedes
EXISTING LONG- the Company's prior Executive Long-Term Incentive Plan.
TERM PLAN
<PAGE>
H.F. AHMANSON & COMPANY NOVEMBER 15, 1996
EXECUTIVE LONG-TERM INCENTIVE PLAN PAGE 7
=========================================
OTHER PROVISIONS (CONTINUED)
---------------------------------------
ADMINISTRATION The Compensation Committee shall administer this plan and
AND INTERPRETATION shall decide all questions arising in the administration,
interpretation and application of the plan, including all
questions of awards and payments. The decision of the
Committee shall be conclusive and binding on all parties,
providing that the Committee acted in good faith.
It is the intent of the Company that this plan and Awards
hereunder satisfy, and be interpreted in a manner that
satisfy, in the case of Participants who are or may be
Covered Employees (within the meaning of Internal Revenue
Code section 162(m)), the applicable requirements of
section 162(m), so that the Company's tax deduction for
remuneration in respect of an Award for services performed
by such Covered Employees is not disallowed in whole or in
part by the operation of such section. If any provision of
this plan or of any Award would otherwise frustrate or
conflict with the intent expressed herein, that provision
to the extent possible shall be interpreted and deemed
amended so as to avoid such conflict. To the extent of any
remaining irreconcilable conflict with such intent, such
provisions shall be deemed void as applicable to Covered
Employees.
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of February 6, 1996 by
and between H. F. Ahmanson & Company, a Delaware corporation ("Employer"), and
("Executive").
WITNESSETH:
WHEREAS, Executive and Employer have entered into an Amended and
Restated Employment Agreement dated as of , (the "Prior
Agreement"); and
WHEREAS, Employer desires to obtain the benefit of continued services
by Executive, and Executive desires to continue to render services to the
Employer; and
WHEREAS, the Compensation Committee of the Board of Directors of the
Employer (the "Board") has determined that it is in the Employer's best interest
and that of its stockholders to recognize the substantial contribution that
Executive has made and is expected to continue to make to the Employer's
business and to retain his services in the future; and
WHEREAS, the Employer and Executive desire to terminate and supersede
the Prior Agreement and to set forth in this Agreement the terms and conditions
of Executive's continued employment with the Employer;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Employer and Executive agree as follows:
1. EMPLOYMENT. The Employer agrees that Executive will be employed
----------
by the Employer or by one or more of the Employer's subsidiary corporations to
render the services specified herein upon the terms and conditions and for the
compensation herein provided, and Executive agrees to be so employed and to
render the services as specified. All compensation paid to Executive by the
Employer or any subsidiary of the Employer, and all benefits and perquisites
received by Executive from the Employer or any of its subsidiaries, will be
aggregated in determining whether Executive has received the compensation and
benefits provided for herein.
2. TERM OF EMPLOYMENT.
------------------
(a) End of Term. The term of the employment of Executive
-----------
hereunder will be for the period commencing on the date of this Agreement and
ending on the earliest of:
(i) months after notice of
termination is given by the Employer to Executive;
<PAGE>
(ii) the date of termination of Executive's employment by
Executive at his election and without "Good Reason" (as defined in Section 8
hereof), it being understood that Executive shall not be liable for damages or
breach of contract on account of any such termination by Executive pursuant to
this clause (ii);
(iii) the date of termination of Executive's employment by the
Employer for "Cause" (as defined in Section 7 hereof) or by the Employer without
Cause in accordance with Section 8 or by Executive for Good Reason pursuant to
Section 8 (including any termination authorized by Section 9(c));
(iv) the earlier of Executive's sixty fifth (65th) birthday
or the date of Executive's voluntary retirement in accordance with the
Employer's plans and policies;
(v) the date of Executive's death; or
(vi) the Disability Effective Date (as that term is defined
in Section 5 hereof) following Executive's Disability (as that term is defined
in Section 5 hereof).
It is understood that at each and every moment of time the remaining term of
employment hereunder shall be years, unless earlier terminated in
accordance with the provisions of this Section 2.
(b) Date of Termination. As used herein the term "Date of
-------------------
Termination" means (i) if Executive's employment is terminated by the Employer
pursuant to clause (i) of Section 2(a) hereof, the date that is
months after the date of Executive's receipt of the notice of termination or any
later date specified therein, as the case may be, (ii) if Executive terminates
his employment at his election and without Good Reason pursuant to clause (ii)
of Section 2(a), the date of the Employer's receipt of the notice of termination
from Executive or any later date specified therein, as the case may be, (iii) if
Executive's employment is terminated by the Employer for Cause or by the
Employer without Cause pursuant to Section 8, or by Executive for Good Reason,
fifteen (15) days after the date of receipt of the notice of termination by
Executive or the Employer, respectively, or any later date specified therein, as
the case may be, (iv) if Executive's employment terminates by reason of
Executive's voluntary retirement, the date that such retirement becomes
effective in accordance with the Employer's plans and policies; and (v) if
Executive's employment is terminated by reason of death or Disability, the date
of death of Executive or the Disability Effective Date (as that term is defined
in Section 5 hereof).
2
<PAGE>
3. SERVICES TO BE RENDERED; EXCLUSIVITY.
------------------------------------
(a) Service and Location. The services to be rendered by
--------------------
Executive hereunder are set forth in Schedule I attached hereto and by this
reference incorporated herein, which includes a description and, if applicable,
a title of Executive's position or positions with the Employer and/or its
subsidiaries under this Agreement and which specifies his reporting
responsibilities. During the term of Executive's employment under this
Agreement, the Employer shall not assign to Executive any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities or status specified in Schedule I hereto, or adversely change
(from Executive's perspective) Executive's reporting responsibilities, position
or title specified in Schedule I or take any other action which results in a
material diminution in such position, authority, duties or responsibilities.
Executive shall perform such services at the Employer's principal executive
offices in Irwindale, California or in such other place in reasonable proximity
to Irwindale, California to which the Employer's principal executive offices may
be relocated; provided, however, that Executive agrees to perform a reasonable
-------- -------
amount of services on behalf of the Employer outside of the Los Angeles area
(which amount may not exceed, at any time during the months
following a Change in Control (as hereinafter defined in Section 9(b)), fifteen
(15) calendar days in any calendar quarter); and provided, further, that during
-------- -------
the months following a Change in Control the Employer shall
not be entitled to relocate its principal executive offices to a site that is
more than thirty (30) miles from Irwindale, California without regard to whether
such site would be considered to be within reasonable proximity of Irwindale,
California.
(b) Full Time Efforts. During the term of this Agreement and
-----------------
excluding any periods of vacation, family or sick leave or holidays to which
Executive is entitled, Executive shall devote his full business time and energy
to the business, affairs and interests of the Employer and its subsidiaries, and
matters related thereto, and shall use his reasonable best efforts and ability
to promote the interests of the Employer and its subsidiaries. Executive agrees
that he will diligently endeavor to promote the business, affairs and interests
of the Employer and its subsidiaries and perform services contemplated hereby in
accordance with the policies established by the Board from time to time.
Executive agrees to serve without additional remuneration in such senior
executive capacities for one or more direct or indirect subsidiaries of the
Employer as the Employer may from time to time request, subject to appropriate
authorization by the subsidiary or subsidiaries involved and any limitations
under applicable law and indemnification on the same terms as Executive is
indemnified by Employer. The failure of Executive to discharge an order or
perform a function because Executive reasonably and in good faith believes such
would
3
<PAGE>
violate a law or regulation or be dishonest shall not be deemed a breach by him
of his obligations or duties hereunder and shall not entitle the Employer to
terminate this Agreement pursuant to any of its provisions.
(c) Certain Permissible Activities. Executive may serve as a
------------------------------
director or in any other capacity of any business enterprise, including an
enterprise whose activities may involve or relate to the business of the
Employer or any of its subsidiaries provided that such service is expressly
approved by the Employer in writing. Executive may (i) make and manage personal
business investments of his choice, (ii) teach at educational institutions and
deliver lectures, and (iii) serve in any capacity with any civic, educational or
charitable organization, or any governmental entity or trade association, in
each such case without seeking or obtaining approval by the Employer so long as
such activities and service do not materially interfere or conflict with the
performance of his duties hereunder. It is agreed that to the extent that the
Employer shall have approved any service of Executive pursuant to the first
sentence of this Section 3(c) prior to a Change in Control Date (as hereinafter
defined in Section 9), or to the extent that Executive may have engaged in
activities pursuant to the second sentence of this Section 3(c) prior to such
Change in Control Date, the continued conduct of such activities or the conduct
of activities similar in nature and scope thereto during the
months subsequent to such Change in Control Date shall be permissible and not in
violation of any provisions of this Agreement and such Employer approval may not
be revoked or limited in any material respect during the
months following such Change in Control Date.
4. COMPENSATION AND BENEFITS.
-------------------------
(a) Base Salary. The Employer agrees that Executive will be paid
-----------
for his services under this Agreement a salary at the annual rate of at least
$ , payable in periodic installments not less frequently than monthly in
accordance with the Employer's normal salary payment dates for executives. Such
salary as in effect from time to time is referred to herein as Executive's "Base
Salary."
(b) Additional Benefits. Executive shall also be entitled during
-------------------
the term of this Agreement to all rights and benefits for which he is otherwise
eligible under any bonus plan, stock option plan, stock purchase plan,
participation or extra compensation plan, pension plan, supplemental executive
retirement plan, deferred compensation plan, profit-sharing plan, life, medical
and dental insurance policy, director and officer liability insurance plan or
indemnification program, vacation, sick leave, family leave and holiday program
or plan, or plans that confer the use of automobiles or condominiums (and pay
the related expenses thereof) or that pay for club membership fees or
4
<PAGE>
tax or financial counseling or other plans or benefits, in any such case, which
the Employer or any of its subsidiaries (i) may provide for Executive or (ii)
provided Executive is eligible to participate therein, may provide generally to
officers of the Employer who are of a similar class and station as those of
Executive or (iii) may provide to employees (collectively, "Additional
Benefits"). This Agreement shall not affect adversely (from the perspective of
Executive) the provisions of any other compensation, retirement or other benefit
program or plan of the Employer or any of its subsidiaries and shall not be
considered to be a guarantee that Executive will receive any awards or other
benefits under any plans, policies or arrangements which are performance-
related.
(c) Expense Reimbursement. Executive will be entitled to receive
---------------------
reimbursement from the Employer for all reasonable travel, entertainment and
other business expenses incurred by Executive on behalf of the Employer.
(d) Office and Support Staff. During the period of Executive's
------------------------
employment under this Agreement, the Employer shall furnish Executive with an
office or offices of a size and with furnishings and other appointments, and
exclusive secretarial and other assistance, suitable for Executive's position
and responsibilities and no less favorable to Executive than those provided to
the Employer's officers who are of a similar class and station as those of
Executive. In the event of a Change in Control, the office or offices and the
furnishings and appointments therein, and the secretarial and other assistance,
provided to Executive during the remaining term of this Agreement shall be at
least equal to the most favorable of the foregoing provided to Executive at any
time preceding the Change in Control Date or, if more favorable to Executive, as
provided generally at any time after the Change in Control Date to other senior
officers of the Employer and its subsidiaries who are of a similar class and
station as those of Executive.
(e) Biennial Review; Limitations on Reductions. The Board shall
------------------------------------------
review Executive's Base Salary and Additional Benefits then being paid and
provided to him not less frequently than biennially in the light of Executive's
services for the preceding period, the responsibilities which attend his office
and duties hereunder, the profitability and progress of the Employer and its
subsidiaries and concurrent salaries and benefits then being paid to others
holding similar positions. Following such review, the Employer may increase the
Base Salary and/or Additional Benefits paid or provided to Executive, but may
not decrease the Base Salary or any of the Additional Benefits from the then
existing levels; provided, however, that the Employer shall have the right to
-------- -------
reduce one or more Additional Benefits in conjunction with a corollary reduction
of such benefits applicable to all of the Employer's officers who are of a
similar class and station as those of Executive. Any increase
5
<PAGE>
in Executive's Base Salary shall not serve to limit or reduce any other
obligation to Executive under this Agreement.
5. TERMINATION UPON DISABILITY.
---------------------------
(a) Continuation of Benefits upon Disability. If Executive
----------------------------------------
becomes totally unable to perform his duties because of any Disability (as
hereinafter defined in this Section 5) during the term of his employment
hereunder, Executive's full-time employment hereunder shall terminate effective
on the thirtieth (30th) day after Executive's receipt of written notice of
termination from the Employer (such thirtieth (30th) day being referred to
herein as the "Disability Effective Date"). In addition to the payments
specified in Section 6 hereof, in the event of termination of Executive's
employment pursuant to this Section 5, the Employer shall continue to pay or
provide Executive the following:
(i) until the earliest to occur of Executive's death,
Executive's 65th birthday, years after the Disability Effective Date
or the date of Executive's return to full-time employment hereunder pursuant to
Section 5(e) (such earliest day being referred to herein as the "Disability
Termination of Benefits Date"), Base Salary at the rate applicable to Executive
immediately prior to the Disability Effective Date, with such payments of Base
Salary to be made in conformity with payments of Base Salary to Executive prior
to the Disability Effective Date (as the same may be modified to comply with
changes in applicable law after the date of such termination);
(ii) cash bonuses under the Employer's Executive Short-Term
Incentive Plan (the "Short-Term Plan") as in effect on Executive's Disability
Effective Date concurrent with the payment of bonuses to the Employer's other
senior executives (whether or not such payment is before the Disability
Termination of Benefits Date) with respect to each fiscal year of the Employer
or other bonus period (each a "Bonus Period") ending on or prior to the first
anniversary of the Disability Termination of Benefits Date, determined using the
dollar amount of Executive's target bonus award (which is currently 80% of
Executive's "Target Award Guideline" [determined without taking into
consideration company performance and without adjustment based on individual
performance] multiplied by his Base Salary ["Target Bonus Amount"]) in effect on
Executive's Disability Effective Date with bonuses for any partial Bonus Period
calculated pro rata based on the number of full weeks during the Bonus Period
prior to the earlier to occur of the end of such Bonus Period and the Disability
Termination of Benefits Date.
(iii) until the Disability Termination of Benefits Date,
medical, dental and other insurance and welfare type Additional Benefits which
were applicable to Executive immediately prior to the Disability Effective Date
(including,
6
<PAGE>
without limitation, medical, dental, life and disability insurance and the
Employer's Executive Medical Reimbursement Plan), each such benefit to be
continued in a manner no less favorable to Executive than the benefit to which
he was entitled immediately prior to the Disability Effective Date; provided,
--------
however, that if the Disability Termination of Benefits Date occurs due to
- -------
Executive's death during the months after the Disability
Effective Date, the Employer shall continue to pay or provide medical, dental
and other insurance and welfare type benefits, on the basis described in this
clause (iii), to Executive's family members who were covered for such benefits
immediately prior to Executive's death for the balance of such
month period;
(iv) until the Disability Termination of Benefits Date, a
continuation of vesting of all unvested awards theretofore granted by the
Employer to Executive under the Employer's 1989 Contingent Deferred Compensation
Plan (the "Deferred Plan") and all unvested restricted stock, stock options and
stock appreciation rights granted by the Employer to Executive, such vesting to
occur in accordance with the terms of each such grant as in effect on the
Disability Effective Date and upon the assumption that no termination of
employment had occurred provided, however, that if the Disability Termination of
-------- -------
Benefits Date occurs due to Executive's death during the
months immediately after the Disability Effective Date or if a Change in Control
occurs prior to the Disability Termination of Benefits Date, such vesting shall
include any vesting which would occur upon Executive's death or a Change in
Control during employment with the Employer; and provided, further, that, if and
-------- -------
to the extent further vesting is prohibited by the terms of any one or more of
such grants or otherwise, Executive shall be entitled to in-lieu cash payments
from the Employer on each date (each a "Vesting Date") when vesting would have
occurred absent such termination, but in no event beyond the Disability
Termination of Benefits Date, equal to (A) the fair market value of restricted
stock that would have otherwise vested on such Vesting Date, (B) the spread on
such Vesting Date between the exercise price and fair market value of stock
subject to stock options or stock appreciation rights that would have otherwise
vested on such Vesting Date, and (C) Executive's interest in his Accounts under
the Deferred Plan that would have vested on such Vesting Date; and provided,
--------
further, that if, prior to the Disability Termination of Benefits Date, it is or
- -------
becomes impossible on any date to continue to calculate any future in-lieu cash
payments based on such continuation of vesting, Executive shall thereupon be
entitled immediately to the additional vesting which would normally have
occurred during such month period following the Disability
Effective Date with respect to the affected type of in-lieu cash payments
described under (A), (B) or (C) above and shall be entitled immediately to
receive payment of the amount specified under (A), (B) or (C) for such type of
in-lieu
7
<PAGE>
cash payments based on such additional vesting as of such date; and
(v) until the Disability Termination of Benefits Date, if
Executive is a participant in such plans on Executive's Disability Effective
Date, a continuation of crediting of additional years of Cumulative Service (for
all purposes, including for purposes of accrual and vesting of benefits) under
the Employer's Supplemental Executive Retirement Plan and Senior Supplemental
Executive Retirement Plan (collectively, the "SERP") in accordance with the
terms of the SERP and upon the assumption that no termination of employment had
occurred; provided, however, that if the Disability Termination of Benefits Date
-------- -------
occurs due to Executive's death during the months
immediately after the Disability Effective Date or if a Change in Control occurs
prior to the Disability Termination of Benefits Date, such continuation shall
include any further accrual and vesting which would occur upon Executive's death
or a Change in Control during employment with the Employer; and
(vi) a pro rata cash award under the Employer's Executive
--- ----
Long-Term Incentive Plan (the "Long-Term Plan") as in effect on Executive's
Disability Effective Date concurrent with the first payment of any corresponding
cash awards to the Employer's other senior executives (whether or not such
payment is before the Disability Termination of Benefits Date) with respect to
each performance measurement cycle (as that term is defined in the Long-Term
Plan, a "Performance Measurement Cycle") that had commenced but had not been
completed prior to Executive's Disability Effective Date, which pro rata cash
--- ----
award shall be determined based on the number of full months that Executive
participated in the Long-Term Plan during each Performance Measurement Cycle
prior to the Disability Effective Date using Executive's target cash award
(which is currently 80% of the cash award half of Executive's "Target Award
Guideline") without adjustment based on individual performance, multiplied by
(y) the actual company performance percentage for each Performance Measurement
Cycle (calculated using company performance for the calendar quarters during
each Performance Measurement Cycle that Executive participated in the Long-Term
Plan) and (z) his Base Salary, (such resulting product, "Target Cash Award") in
effect on the Disability Effective Date under the Long-Term Plan.
(b) Offset for Insurance, etc. The obligations of the Employer
-------------------------
to pay Executive, pursuant to this Section 5, Base Salary and bonus amounts
following his Disability shall be reduced prospectively to the extent that
Executive receives payment of amounts under any salary continuation or similar
feature contained in any disability insurance policy covering Executive or under
any salary continuation or similar feature under Social Security or any similar
federal, state or local program. In addition, any medical, dental and other
insurance
8
<PAGE>
and welfare type Additional Benefits to be provided by the Employer pursuant to
clause (iii) of Section 5(a) shall be secondary to any similar benefits provided
by Social Security, Medicare, any private insurance maintained by or covering
Executive or any other similar plan or program covering Executive. Executive
shall provide to the Employer upon written request from time to time a
certification as to the types and amounts of the benefits referred to in the
first two sentences of this Section 5(b) received by Executive or to which he is
entitled.
(c) Substitution of Benefits. If Executive's full-time services
------------------------
are terminated due to his Disability and Executive is entitled under the terms
of this Agreement to, but is no longer eligible under the relevant Plan for,
Additional Benefits because of such termination, Executive (or in the event of
his death prior to the date that is months after the
Disability Effective Date, his designated Beneficiaries (as hereinafter defined
in Section 6)) shall be entitled to, and the Employer shall provide, to the
extent provided in this Agreement, benefits substantially equivalent to such
Additional Benefits to which Executive was entitled immediately prior to his
Disability and shall do so for the period during which he remains entitled to
receive such Additional Benefits as provided in this Section 5. With respect to
the continuation of such benefits, Executive (or such Beneficiaries) shall also
be paid by the Employer an amount which, after federal, state, local or other
income or other taxes on such amount, shall reimburse Executive (or his
Beneficiaries) for any additional tax liabilities incurred by Executive (or any
such Beneficiary) by reason of the receipt of such benefits after the
termination of, rather than during the term of, his employment under this
Agreement.
(d) Partial Disability. In the event of a partial Disability of
------------------
Executive, it is understood that Executive will provide such part-time services
as may be consistent with the nature and extent of such Disability and his
position, duties, responsibilities and status specified in Schedule I, the
Employer shall not be entitled to terminate Executive's employment hereunder as
a result of such partial Disability, and the terms and conditions of this
Agreement shall remain in full force and effect after such partial Disability.
(e) Definition of Disability. As used in this Agreement, the
------------------------
term "Disability" means the failure of Executive to render for six (6)
consecutive calendar months, or for shorter periods aggregating one hundred
thirty (130) or more business days in any twelve (12) month period, the services
contemplated by this Agreement which a physician selected by the Employer or its
insurers and reasonably acceptable to Executive or Executive's legal
representative determines is due to mental or physical illness or injury.
9
<PAGE>
(f) Return from Disability. If and to the extent Executive
----------------------
recovers from any such Disability, he will resume his duties and
responsibilities hereunder partially or fully to the extent of his recovery, and
the term of Executive's employment under this Agreement shall be reinstated as
if Executive's employment had not been terminated pursuant to Section 5(a)
hereof.
6. PAYMENTS AND BENEFITS UPON TERMINATION OF EMPLOYMENT FOR ANY
------------------------------------------------------------
REASON. On the Date of Termination of Executive's employment under this
- ------
Agreement for any reason whatsoever, Executive's Base Salary hereunder will
cease thereafter to accrue except as specifically provided in Sections 5 or 8
and Executive (or in the event of his death, his designated beneficiaries, his
personal representative, or the executor or administrator of his estate (his
"Beneficiaries")) will be entitled to such rights and benefits under the
Employer's compensation and benefit plans, policies and arrangements in which
Executive is then a participant as may be provided for under such plans,
policies and arrangements (which shall not be modified adversely to Executive or
his Beneficiaries after his Date of Termination). In addition, the Employer
shall:
(a) pay and deliver to Executive (or, in the event of his death,
to his Beneficiaries) not later than ten (10) days after his Date of Termination
or such later date as Executive or such Beneficiaries may request in writing,
all amounts of money and all stock or other property owed to him by the Employer
as of the Date of Termination, including but not limited to his accrued Base
Salary, any amounts payable in lieu of accrued vacation, amounts payable to him
under any expense reimbursement plans or policies for expenses incurred through
the Date of Termination, the amount of the bonus due under the Short-Term Plan
or Long-Term Plan to Executive for any Bonus Period or Performance Measurement
Cycle of the Employer that ended prior to the Date of Termination which remained
unpaid on the Date of Termination and any compensation previously deferred by
Executive and any accrued interest on earnings on such deferred compensation to
the extent not previously paid to Executive;
(b) cause the trustee of any trusteed plan of the Employer to pay
and deliver, and the Employer shall pay and deliver under any similar non-
trusteed plan of the Employer, to Executive (or, in the event of his death, to
his Beneficiaries), at the earliest practicable date after payments become due,
all money, stock and other property which such plans require to be paid or
delivered or are otherwise payable or deliverable to him after the termination
of his employment;
(c) continue to insure Executive (or, in the event of his death,
his Beneficiaries) with respect to his activities as a director, officer or
employee of the Employer or any of its subsidiaries, for a period of
years after such Date of Termination, under such policies of director and
10
<PAGE>
officer liability insurance as Employer shall provide for its senior officers
generally; provided, however, that if a Change in Control shall have occurred
-------- -------
prior to such Date of Termination or shall thereafter occur, such policies of
insurance shall be no less favorable to Executive than such policies as may have
been in effect for Executive at any time during the one hundred twenty (120) day
period immediately preceding the Change in Control Date; and
(d) continue to honor such rights to indemnification as Executive
(or, in the event of his death, his Beneficiaries) may be entitled pursuant to
any plan of indemnification or indemnification agreement in effect at the Date
of Termination.
7. TERMINATION OF EMPLOYMENT BY EMPLOYER FOR CAUSE.
-----------------------------------------------
(a) Definition of Cause. The Employer may terminate Executive's
-------------------
employment under this Agreement if the termination is for Cause upon compliance
with the requirements of Section 7(b) hereof. For purposes of this Agreement,
the Employer shall have "Cause" to terminate Executive's employment hereunder
if, and only if, any of the following shall occur:
(i) Executive's conviction by a court of competent
jurisdiction or entry of a plea of nolo contendere for an act on Executive's
part constituting a felony and resulting or intended to result directly or
indirectly in demonstrably material injury to the Employer or any of its
affiliates or substantial gain or personal enrichment to Executive at the
expense of the Employer or any of its affiliates; or
(ii) a willful breach by Executive of any provisions of this
Agreement if such breach results in demonstrably material injury to the
Employer.
(b) Procedural Requirements. Executive's employment hereunder
-----------------------
shall not be subject to termination for Cause without: (i) reasonable notice to
Executive setting forth the reasons for Employer's intention to terminate and
specifying the particulars thereof in detail, (ii) an opportunity for Executive
to cure any such breach, if possible, within fifteen (15) days after receipt of
such notice, (iii) an opportunity for Executive, together with his counsel, to
be heard before the Board, and (iv) delivery to Executive of a notice of
termination stating that at least two-thirds of the authorized number of
Employer's directors have found that Executive was guilty of conduct set forth
in Section 7(a) and specifying the particulars thereof in detail. Any such
termination will be effective upon fifteen (15) days' prior written notice to
Executive.
11
<PAGE>
8. TERMINATION OF EMPLOYMENT BY EXECUTIVE FOR GOOD REASON OR BY
------------------------------------------------------------
EMPLOYER WITHOUT CAUSE.
- ----------------------
(a) Definition of Good Reason. Executive may terminate his
-------------------------
employment under this Agreement and all of his obligations hereunder to the
Employer accruing after the date of such termination (other than his obligations
under Section 8(e), 8(f) 9(f), 11 and 12), if the termination is for "Good
Reason," which for purposes of this Agreement is defined as:
(i) failure by the Employer to perform any of its obligations
hereunder (including, but not limited to, Employer's obligations under Sections
3 and 4) other than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Employer promptly after
receipt of notice thereof given by Executive; or
(ii) failure to reelect or removal of Executive as a member of
the Employer's Board of Directors or its Executive Committee, if Executive is
now or hereafter becomes such a member.
Any such termination will be effective upon fifteen (15) days' prior written
notice from Executive to the Employer.
(b) Employer's Termination Without Cause. The Employer may
------------------------------------
terminate Executive's employment under this Agreement without Cause (as defined
in Section 7 hereof) by written notice to Executive. Any such termination shall
become effective upon fifteen (15) days' prior written notice from the Employer
to Executive.
(c) Compensation and Benefits Upon Section 8 Termination. In
----------------------------------------------------
addition to the payments specified in Section 6 hereof, in the event of
termination of Executive's employment pursuant to this Section 8, the Employer
shall continue to pay or provide to Executive the following:
(i) until the earliest to occur of the date that is
months after such Date of Termination, Executive's 65th
birthday, or Executive's death (such earliest date being referred to herein as
the "Section 8 Termination of Benefits Date"), Base Salary at the rate
applicable to Executive immediately prior to his Date of Termination, with such
payments of Base Salary to be made in conformity with payments of Base Salary to
Executive prior to such termination (as the same may be modified to comply with
changes in applicable law after the date of such termination);
(ii) cash bonuses under the Short-Term Plan as in effect on
Executive's Date of Termination concurrent with the payment of bonuses to the
Employer's other senior executives (whether or not such payment is before the
Section 8 Termination of Benefits Date) with respect to each Bonus Period ending
on or
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<PAGE>
prior to the first anniversary of the Section 8 Termination of Benefits Date,
determined using Executive's Target Bonus Amount in effect on Executive's Date
of Termination with bonuses for any partial Bonus Period calculated pro rata
based on the number of full weeks during the Bonus Period prior to the earlier
to occur of the end of such Bonus Period and the Section 8 Termination of
Benefits Date.
(iii) until the Section 8 Termination of Benefits Date,
medical, dental and other insurance and welfare type Additional Benefits which
were applicable to Executive immediately prior to such Date of Termination
(including, without limitation, medical, dental, life and disability insurance
and Executive Medical Reimbursement Plan), each such benefit to be continued in
a manner no less favorable to Executive than the benefit to which he was
entitled immediately prior to such termination; provided, however, that if the
Section 8 Termination of Benefits Date occurs due to Executive's death during
the months after the Date of Termination, the Employer
shall continue to pay or provide medical, dental and other insurance and welfare
type benefits, on the basis described in this clause (iii), to Executive's
family members who were covered for such benefits immediately prior to
Executive's death for the balance of such month period;
(iv) until the Section 8 Termination of Benefits Date, a
continuation of vesting of all unvested awards granted by the Employer to
Executive under the Deferred Plan and all unvested restricted stock, stock
options, stock appreciation rights granted by the Employer to Executive, such
vesting to occur in accordance with the terms of each such grant as in effect on
the Date of Termination and upon the assumption that no termination of
employment had occurred; provided, however, that if the Section 8 Termination of
-------- -------
Benefits Date occurs due to Executive's death during such
month period immediately after the Date of Termination or a Change of Control
occurs prior to the Section 8 Termination of Benefits Date, such vesting shall
include any vesting which would occur upon Executive's death or a Change in
Control during employment with the Employer; and provided, further, that, if and
-------- -------
to the extent further vesting is prohibited by the terms of any one or more of
such grants or otherwise, Executive shall be entitled to in-lieu cash payments
from the Employer on each date (each, a "Vesting Date") when vesting would have
occurred absent such termination, but in no event beyond the Section 8
Termination of Benefits Date, equal to (A) the fair market value of restricted
stock that would have otherwise vested on such Vesting Date, (B) the spread on
such Vesting Date between the exercise price and fair market value of stock
subject to stock options or stock appreciation rights that would have otherwise
vested on such Vesting Date, and (C) Executive's interest in his Accounts under
the Deferred Plan that would have vested on such Vesting Date; and provided,
--------
further, that if, prior to the Section 8 Termination of Benefits Date, it is or
- -------
becomes impossible on any date to continue to
13
<PAGE>
calculate any future in-lieu cash payments based on such continuation of
vesting, Executive shall thereupon be entitled immediately to the additional
vesting which would normally have occurred during such
month period following the Date of Termination with respect to the affected type
of in-lieu cash payments described under (A), (B) or (C) above and shall be
entitled immediately to receive payment of the amount specified under (A), (B)
or (C) for such type of in-lieu cash payments based on such additional vesting
as of such date; and
(v) until the Section 8 Termination of Benefits Date, a
continuation of crediting of additional years of Cumulative Service (for all
purposes, including for purposes of accrual and vesting of benefits) under the
SERP in accordance with the terms of the SERP and upon the assumption that no
termination of employment had occurred; provided, however, that if the Section 8
-------- -------
Termination of Benefits Date occurs due to Executive's death during the
months immediately after the Date of Termination or if a Change in Control
occurs prior to the Section 8 Termination of Benefits Date, such continuation
shall include any further accrual and vesting which would occur upon Executive's
death or a Change in Control during employment with the Employer; and
(vi) a pro rata cash award under the Long-Term Plan concurrent
--- ----
with the first payment of any corresponding cash awards to the Employer's other
senior executives (whether or not such payment is before the Section 8
Termination of Benefits Date) with respect to each Performance Measurement Cycle
that had commenced but had not been completed prior to Executive's Date of
Termination, which pro rata cash award shall be determined based on the number
--- ----
of full months that Executive participated in the Long-Term Plan during each
Performance Measurement Cycle prior to such Date of Termination using
Executive's Target Cash Award in effect on the Date of Termination under the
Long-Term Plan.
(d) Substitution of Benefits. If Executive's employment is
------------------------
terminated pursuant to this Section 8 and Executive is entitled under the terms
of this Agreement to, but is no longer eligible under the relevant plan for,
Additional Benefits because of such termination, Executive (or in the event of
his death, his designated Beneficiaries) shall be entitled to, and the Employer
shall provide, to the extent provided in this Agreement, benefits substantially
equivalent to such Additional Benefits to which Executive was entitled
immediately prior to such termination and shall do so for the period during
which he remains entitled to receive such Additional Benefits as provided in
this Section 8. With respect to the continuation of such benefits, Executive (or
such Beneficiaries) shall also be paid by the Employer an amount which, after
federal, state, local or other income or other taxes on such amount, shall
reimburse Executive (or his Beneficiaries) for any additional tax liabilities
incurred by Executive (or any such Beneficiary) by reason of the receipt of such
benefits after the termination of,
14
<PAGE>
rather than during the term of his employment under this Agreement.
(e) Mitigation; Certain Reductions in Benefits. In the event of
------------------------------------------
termination of Executive's employment pursuant to this Section 8, Executive
shall have no duty to seek other employment or otherwise mitigate the Employer's
obligations hereunder. However, the Employer and Executive agree that if
Executive receives any income for services rendered by Executive to persons or
entities other than the Employer or any of its subsidiaries during or with
respect to any period prior to the Section 8 Termination of Benefits Date, the
amounts payable by the Employer with respect to any month during such
month period shall be reduced by an amount equal to one hundred per cent (100%)
of the income received by Executive for services rendered with respect to such
month and, if such income received by Executive with respect to any month during
such month period exceeds the amounts payable by the
Employer with respect to such month, such excess shall be carried forward to
reduce the obligation of the Employer to pay Executive pursuant to Section 8
with respect to any subsequent month. In addition, if Executive receives any
benefits of the kind referred to in clause (iii) of Section 8(c) that are
attributable to services rendered by Executive to persons or entities other than
the Employer or any of its subsidiaries, such benefits shall be applied to
reduce the Employer's obligation to provide such benefits under clause (iii) of
Section 8(c) by having such successor be the primary provider of such benefits.
(f) Notification of Other Employment; Accountings. If Executive's
---------------------------------------------
employment is terminated pursuant to this Section 8, Executive shall give the
Employer prompt written notice if Executive renders services to any person or
entity other than the Employer or any of its subsidiaries at any time prior to
the Section 8 Termination of Benefits Date. In addition, Executive shall
provide to the Employer upon written request from time to time a certification
from Executive as to the benefits provided to Executive and his dependents in
connection with such services. If Executive's employment is terminated pursuant
to this Section 8, then not later than thirty (30) days after each December 31
occurring prior to the second anniversary of the Section 8 Termination of
Benefits Date, Executive shall account to the Employer with respect to all
payments received by Executive which are required to be offset against payments
by Employer pursuant to Section 8. If the Employer has paid amounts with
respect to any year pursuant to Section 8 in excess of those to which Executive
was entitled (after giving effect to the offsets provided above), Executive
shall reimburse the Employer for such excess by the January 30 immediately
following such year.
15
<PAGE>
9. CHANGE IN CONTROL.
-----------------
(a) Effectiveness of Section. If at any time during the term of
------------------------
Executive's employment by the Employer pursuant to this Agreement, a Change in
Control of the Employer (as hereinafter defined in this Section 9) shall occur,
the provisions of this Section 9 shall become effective without any limitation
on any other rights Executive may have hereunder. Sections (d) and (e) of this
Section 9 shall become ineffective with respect to such Change in Control on the
third anniversary of the date on which such Change in Control occurs (the
"Change in Control Date") unless Executive's employment has theretofore been
terminated for any reason; provided, however, that if another Change in Control
-------- -------
occurs after such third anniversary, Sections 9(d) and (e) shall become
effective once again with respect to such subsequent Change in Control. If
Executive's employment so terminates prior to such third anniversary, the
provisions of Sections 9(d) and (e) shall survive so long as Executive or his
Beneficiaries are entitled to any benefits under this Agreement.
(b) Definition of Change in Control. For the purpose of this
-------------------------------
Agreement, a "Change in Control" shall mean:
(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-
five percent (25%) or more of either (A) the then outstanding shares of common
stock of the Employer (the "Outstanding Employer Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Employer
entitled to vote generally in the election of directors (the "Outstanding
Employer Voting Securities"); provided, however, that for purposes of this
-------- -------
clause (i), the following acquisitions shall not constitute a Change in Control:
(w) any acquisition directly from the Employer, (x) any acquisition by the
Employer, (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Employer or any corporation controlled by the
Employer or (z) any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of clause (iii) of this Section
9(b); or
(ii) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
-------- -------
director subsequent to the date hereof whose election, or nomination for
election by the Employer's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result
16
<PAGE>
of an actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Employer (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of the Persons
who were the beneficial owners, respectively, of the Outstanding Employer Common
Stock and Outstanding Employer Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Employer or all or
substantially all of the Employer's assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Employer
Common Stock and Outstanding Employer Voting Securities, as the case may be, (B)
no Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Employer or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, twenty-five percent 25% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the stockholders of the Employer of a
complete liquidation or dissolution of the Employer.
(c) Additional Termination Right. If a Change in Control of the
----------------------------
Employer shall occur, Executive shall have the right to terminate his employment
with the Employer for any reason or no reason by written notice to the Employer
given at any time during the thirty (30) day period commencing on the first
anniversary of the Change in Control Date, and such termination shall be deemed
to be termination for Good Reason pursuant to Section 8 hereof and shall thereby
entitle the Executive to the benefits set forth in Section 9(e).
17
<PAGE>
(d) Certain Restrictions Following Change in Control. If a
------------------------------------------------
Change in Control of the Employer occurs, then the following provisions shall
apply:
(i) the Employer shall not be entitled to reduce, terminate or
adversely (from the Executive's point of view) affect, pursuant to the proviso
to the second sentence of Section 4(e), any Additional Benefits which are
described in Section 4(b) to which Executive shall thereafter be entitled even
in connection with a reduction in such benefits applicable to all of the
Employer's officers who are of a similar class and station as those of
Executive;
(ii) in addition to Executive's Base Salary, Executive shall be
paid, for each Bonus Period ending prior to his Date of Termination, an annual
bonus (an "Annual Bonus") in cash at least equal to 125% of Executive's Target
Bonus Amount in effect on the Change in Control Date under the Short-Term Plan
as in effect on the Change in Control Date; and
(iii) all restricted stock, stock options, stock appreciation
rights, Contingent Deferred Compensation and similar grants theretofore or
thereafter made which are unvested shall immediately vest effective as of the
Change in Control Date.
(e) Provisions Applicable to Termination of Employment. If a
--------------------------------------------------
Change in Control shall occur and Executive's employment is thereafter
terminated by the Employer other than for Cause, or by Executive for Good Reason
pursuant to Section 8 (including a termination under the authority granted in
Section 9(c) hereof):
(i) Executive shall be entitled to the payments and benefits
provided in Section 6 hereof;
(ii) in lieu of the payments required by the provisions of
clauses (i), (ii) and (vi) of Section 8(c) hereof the Employer shall pay to
Executive in a lump sum in cash within ten (10) days after the Date of
Termination (or such later date as Executive may elect) the aggregate of the
following amounts:
(A) an amount equal to the product of (1) the higher of (y)
125% of Executive's Target Bonus Amount in effect on the Change in Control Date
under the Short-Term Plan as in effect on the Change in Control Date or (z) 125%
of Executive's Target Bonus Amount in effect on the Date of Termination under
the Short-Term Plan as in effect on the Change in Control Date or under any
other bonus plan then maintained by the Employer (such higher amount being
referred to herein as the "Termination Bonus Amount"), multiplied by (2) a
fraction, the numerator of which is the number of days that have elapsed in the
current Bonus Period of the Employer through the Date of Termination and the
denominator of which is 365;
18
<PAGE>
(B) an amount equal to the product of three multiplied
times the sum of (y) Executive's Base Salary as in effect on the Date of
Termination plus (z) the Termination Bonus Amount for Executive; and
(C) with respect to each Performance Measurement Cycle that
had commenced but had not been completed prior to such Date of Termination under
the Long-Term Plan, an amount equal to the product of (1) the higher of (y) 125%
of Executive's Target Cash Award for such Performance Measurement Cycle as in
effect immediately prior to the Change in Control Date or (z) 125% of
Executive's Target Cash Award for such Performance Measurement Cycle as in
effect immediately prior such Date of Termination, multiplied by (2) a fraction,
the denominator of which is the number of days in such Performance Measurement
Cycle and the numerator of which is the number of days elapsing from the date
such Performance Measurement Cycle commenced through such Date of Termination;
(iii) the provisions of the second sentence of Section 8(e) and
the last two sentences of Section 8(f) shall not be operative following a
termination of Executive's employment pursuant to Section 8;
(iv) the Employer shall reimburse Executive upon demand for up
to an aggregate of Ten Thousand Dollars ($10,000) of fees and disbursements paid
to Executive's legal, accounting, tax and financial advisors for services
rendered by them to Executive in connection with or as a result of his
termination of employment hereunder; and
(v) the Employer shall, at its sole expense as incurred,
provide Executive with outplacement services the scope and provider of which
shall be selected by Executive in his sole discretion.
(f) Tax Gross Up.
------------
(i) If any payments or other benefits under this Agreement or
any other payments or benefits received or to be received by Executive in
connection with or as a result of a Change in Control of the Employer, or
Executive's termination of employment, whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Employer, or any
person affiliated with the Employer ("Change in Control Payments"), will be
subject to tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (hereinafter referred to as the "Code," references to which shall be
understood to include any successor statute and references to the applicable
regulations under the Code as promulgated from time to time), or any comparable
provision of state law or any similar tax that may hereafter be imposed ("Excise
Tax"), the Employer shall pay at the times hereinafter specified in this Section
9(f) additional amounts (each a "Gross-Up Payment") such that the net amount
19
<PAGE>
retained by Executive, after withholding or payment of any Excise Tax on the
Change in Control Payments and any federal, state and local income tax and
Excise Tax upon the Gross-Up Payment shall be equal to the Change in Control
Payments. Notwithstanding the foregoing provisions of this Section 9(f), if it
shall be determined that Executive is entitled to a Gross-Up Payment, but that
the Change in Control Payments do not exceed 110% of the greatest amount (the
"Reduced Amount") that could be paid to Executive such that the receipt of
Change in Control Payments would not give rise to any Excise Tax, then no Gross-
Up Payment shall be made to Executive and the Change in Control Payments, in the
aggregate, shall be reduced to an amount such that the receipt of Change in
Control Payments would not give rise to any Excise Tax.
(ii) For purposes of determining whether any of the Change in
Control Payments will be subject to the Excise Tax and the amount of such Excise
Tax, (i) all Change in Control Payments shall be treated as "parachute payments"
within the meaning of Section 28OG(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 28OG(b)(1) shall be treated as subject
to the Excise Tax except to the extent that (in the opinion of tax counsel
selected by the Employer's independent auditors and reasonably acceptable to
Executive, which opinion shall be rendered at the Employer's sole expense and
shall be reasonably acceptable to Executive and which opinion shall, once
accepted by Executive, be binding on all parties) such Change in Control
Payments do not constitute parachute payments, or such excess parachute payments
are reduced pursuant to 28OG(b)(4)(B) of the Code, (ii) the counsel referred to
in clause (i) of this sentence shall be entitled to request and rely, as to
factual matters regarding the determinations called for therein, upon appraisals
and valuations by experts acceptable to the Employer and Executive (and prepared
at the Employer's expense) and (c) the value of any non-cash benefits or any
deferred or contingent payment or benefit shall be determined by the Employer's
independent auditors in accordance with the principles of Section 28OG(d)(3) and
(4) of the Code.
(iii) For purposes of determining the amount of the Gross-Up
Payment, Executive shall be deemed to pay federal income taxes at his highest
marginal rate of federal income taxation on the Date of Termination, and state
and local income taxes at his highest marginal rate of taxation in the
applicable states and localities on the Date of Termination, net of the maximum
reduction in federal income taxes that could be obtained from deduction of such
state and local taxes.
(iv) In the event that the Excise Tax is finally determined to
be less than the amount taken into account hereunder at the time of termination
of Executive's employment, Executive shall repay to the Employer, promptly after
the amount of such reduction in Excise Tax is finally determined, but no later
than thirty days after his receipt of notice from the
20
<PAGE>
Employer in reasonable detail requesting the same, the portion of the Gross-Up
Payment attributable to such reduction, plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the Gross-Up Payment being repaid by him if such repayment results in
a reduction in Excise Tax and/or a federal and state and local income tax
deduction) and interest from the date of his receipt of the Change in Control
Payments on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code (the "Applicable Rate"). For purposes of this
Agreement, the final determination of any Excise Tax shall be deemed to have
occurred at the audit level unless the Employer shall have elected to contest or
requested that Executive contest the matter (with which Executive shall
cooperate, and Executive agrees to notify the Employer promptly in the event of
any audit of his applicable tax returns by any authority) in which case the
final determination shall be the final decision by the appropriate governmental
authority.
(v) In the event that the Excise Tax is finally determined to
exceed the amount taken into account hereunder at the time of the termination of
Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Employer shall make an additional Gross-Up Payment, computed as provided in this
Section 9(f), in respect of the sum of such excess amount plus any interest
payable by Executive to any tax authority with respect to such excess amount as
an additional Change in Control Payment.
10. INDEMNITY. To the extent permitted by applicable law and the By-
---------
Laws of the Employer (as from time to time in effect or if a Change in Control
occurs, as in effect on the Change in Control Date) and without in any way
impairing or affecting any rights to indemnification that Executive has by
reason of any agreement to which he is a party as of the date hereof, the
Employer shall:
(a) indemnify Executive and hold him harmless for any acts or
decisions made by him in good faith while performing services for the Employer;
(b) use reasonable efforts to obtain coverage for him under
liability insurance policies now in force or hereafter obtained during the term
of his full time services under this Agreement (or, if a Change in Control
occurs, as in effect on the Change in Control Date) covering the other officers
or directors of the Employer; and
(c) pay as incurred all expenses, including reasonable attorneys'
fees and the amounts of court approved settlements, actually incurred by
Executive in connection with the defense of any action, suit or proceeding, and
in connection with any appeal thereon, which has been and/or may be brought
21
<PAGE>
against Executive by reason of Executive's services as an officer, director,
employee or agent of the Employer or of any affiliate of the Employer.
11. CONFIDENTIALITY. Executive agrees that he shall not divulge or
---------------
otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business or policies of the Employer or
any of its affiliates which he may have learned as a result of his employment
during the term of this Agreement (including any extension thereof) or prior
thereto as an employee, officer or director of the Employer or any of its
affiliates, except to the extent such use or disclosure is (i) necessary to the
performance of this Agreement and in furtherance of the Employer's best
interests, (ii) required by applicable law, (iii) lawfully obtainable from other
sources or (iv) authorized by the Employer. The provisions of this Section 11
shall survive the suspension or termination, for any reason, of this Agreement.
12. ARBITRATION OF DISPUTES. The provisions of Schedule II are
-----------------------
incorporated herein by reference. In the event of any conflict between Schedule
II and this Agreement, the terms of this Agreement shall prevail.
Notwithstanding the pendency of any dispute or controversy, the Employer will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary,
Annual Bonuses and awards under the Long-Term Plan) and continue Executive as a
participant under all plans, policies, practices or programs in which Executive
was participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in accordance with the procedures described in
Schedule II attached hereto. As used in Schedule II, the term "you" shall also
mean, in the event of Executive's death, his designated beneficiaries, his
personal representative or the executor or administrator of his estate. The
provisions of this Section 12 shall survive the suspension or termination, for
any reason, of this Agreement.
13. GENERAL PROVISIONS.
------------------
(a) Notices. Any notices provided for in this Agreement shall be
-------
sent to the Employer at 4900 Rivergrade Road, Irwindale, California, 91706,
Attention: Executive Vice President -- Legal, with a copy to the Chairman of
the Compensation Committee of the Board at the same address, or to such other
address as the Employer may from time to time in writing designate, and to
Executive at such address as he may from time to time in writing designate (or
his business address of record with the Employer in the absence of such
designation). All notices shall be deemed to have been deposited as certified
mail, return receipt requested, postage paid, or one (1) business day after they
have been deposited as overnight mail, in either event properly addressed to the
designated address of the party to receive the notice, or shall be deemed to
have been given at
22
<PAGE>
the time receipt is acknowledged if given by any form of electronic
communication. Any notice required or permitted to be given under this Agreement
will be deemed given only when it is in fact received by the addressee.
(b) Entire Agreement. Any previous written or oral employment
----------------
agreement between Executive and the Employer or any affiliate of the Employer is
hereby canceled. Subject to the cancellation of any such employment agreement,
the rights of Executive hereunder shall be in addition to, and not in
substitution for or diminution of, the rights of Executive under any other
written plan or agreement between the Employer and Executive which now exists or
is hereafter made. Except for such other plans or agreements, if any, this
Agreement constitutes the entire understanding between the parties with respect
to the subject matter hereof, superseding all negotiations, prior discussions
and preliminary agreements, written or oral.
(c) Governing Law. This Agreement will be governed by and
-------------
construed in accordance with the laws of the State of California.
(d) Savings Clause. Should this Agreement or any of its
--------------
provisions be in violation of applicable law, the Employer will take every
possible action not in violation of applicable law to provide Executive with the
economic benefits intended to be provided to him by this Agreement, or with the
nearest economic equivalents thereto, and any provisions not in violation of
applicable law shall, so far as possible, be given effect and shall not be
affected by such violation. The invalidity or unenforceability of any provision
or portion of this Agreement shall, so far as possible, not affect the validity
or enforceability of the other provisions or portions of this Agreement.
(e) No Assignments; Assumption by Successor. This Agreement is
---------------------------------------
personal to the Employer and to Executive and may not be assigned by either
party without the written consent of the other. The Employer will require any
successor (whether direct or indirect by purchase, merger, consolation or
otherwise) to all or substantially all of the business and/or assets of the
Employer to (i) expressly assume and agree to perform this Agreement in the same
manner and the same extent the Employer would be required to perform it as if no
such succession had taken place; and (ii) notify Executive of the assumption of
this Agreement within ten (10) days of such assumption. Failure of the Employer
to obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement. As used in this Agreement,
"Employer" shall mean H.F. Ahmanson & Company and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise. However, this Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal representatives,
executors,
23
<PAGE>
administrators, successors, heirs, and distributees, devisees and legatees.
(f) No Set-Off. The Employer's obligation to make the payments
----------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right, or action which the Employer may have against
Executive or others. In no event shall Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable,
or benefits to be provided, to Executive under any of the provisions of this
Agreement, and, except as expressly provided in Sections 5(b) and 8 hereof (in
the case of Section 8, as the same may be modified by clause (iii) of Section
9(e)), such amounts shall not be reduced whether or not Executive obtains other
employment.
(g) No Constructive Waivers. Either party's failure to enforce any
-----------------------
provision or provisions of this Agreement will not in any way be construed as a
waiver of any such provision or provisions, or prevent that party thereafter
from enforcing each and every other provision of this Agreement.
(h) Legal Fees and Expenses. The Employer agrees to pay as incurred,
-----------------------
to the full extent permitted by applicable law, all legal fees and expenses
which Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Employer, Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code. As used in this Section
13(h), the term "Executive" shall also mean, in the event of Executive's death,
his designated beneficiaries, his personal representative, or the executor or
administrator of his estate.
(i) Withholdings. The Employer may withhold from any amounts payable
------------
under this Agreement an amount sufficient to satisfy the minimum requirements
set by applicable law to be withheld therefrom for withholding and payroll
taxes.
(j) No Oral Modifications. No modification or waiver of any provision
---------------------
hereof will be binding or valid unless in writing and executed by both parties.
(k) Legal Representation. Executive acknowledges that he has been
--------------------
given the opportunity to consult with counsel of his own choosing in connection
with the negotiation and execution of this Agreement. Executive acknowledges
that neither any attorney employed by the Employer or any outside counsel
employed by the Employer (including, without limitation, Gibson, Dunn &
Crutcher) in connection herewith has provided legal or other
24
<PAGE>
advice to Executive in connection with his negotiation or execution of this
Agreement and that all such counsel have provided services in connection
herewith solely to the Employer.
25
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first above written.
EMPLOYER: H. F. AHMANSON & COMPANY
By:________________________________
EXECUTIVE:
Name:______________________________
Address:___________________________
___________________________
___________________________
26
<PAGE>
SCHEDULE I
SERVICES TO BE RENDERED BY EXECUTIVE
Position Title:
Name of Entity to Which
Services Are to be Rendered:
Position Reports to:
27
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF H. F. AHMANSON & COMPANY
(AS OF DECEMBER 31, 1996)
<TABLE>
<CAPTION>
JURISDICTION
OF
INCORPORATION
-------------
<S> <C>
110 East 42nd Operating Company, Inc........................... Delaware
1905 Agency Incorporated....................................... Delaware
244 West 10th Street, Inc...................................... New York
ACD2........................................................... California
ACD3........................................................... California
Ahmanson Capital Trust I....................................... Delaware
Ahmanson Commercial Development Company........................ California
Ahmanson Developments, Inc..................................... California
Ahmanson Insurance, Inc........................................ California
Ahmanson Land Company.......................................... California
Ahmanson Marketing, Inc........................................ California
Ahmanson Mortgage Company...................................... California
Ahmanson Residential 2......................................... California
Ahmanson Residential Development............................... California
Ahmanson Services, Inc......................................... California
Banyon Tree Holding Corp....................................... California
Bowery Advisors, Inc........................................... Delaware
Commerce Service Corporation................................... California
CPSB Service Corp.............................................. New York
Exchange Enterprises, Inc...................................... Texas
Financial Services of Illinois, Inc............................ Illinois
Flower Street Corporation...................................... California
Griffin Financial Administrators............................... California
Griffin Financial Distributors................................. California
Griffin Financial Investment Advisers.......................... California
Griffin Financial Services..................................... California
Griffin Financial Services, Inc................................ Pennsylvania
Griffin Financial Services Insurance Agency.................... California
Griffin Financial Services Insurance Agency, Inc............... Ohio
Griffin Financial Services Insurance Agency, Inc............... Texas
Griffin Financial Services Managing General Agency, Inc........ Texas
Griffin Financial Services of America, Inc..................... Delaware
H. S. Loan Corporation......................................... California
Hamburg Development Corp....................................... New York
Hamburg Glen Cove Development Corp............................. New York
Home Funding Corporation....................................... Delaware
Home Savings of America........................................ California
Home Savings of America, FSB................................... Federal
Home Servicing of America...................................... California
HSA Travel..................................................... California
HSB Enterprises, Inc........................................... New York
Ladue Service Corporation...................................... Missouri
Mesa Water Company............................................. California
Oxford Ranch, Inc.............................................. California
R & M on the Water, Inc........................................ New York
Rivergrade Investment Corp..................................... California
Savings of America, Inc........................................ California
Serrano Reconveyance Company................................... California
Seville Realty, Inc............................................ Texas
Silver Granite Investment Corp................................. California
Sutter Bay Corporation......................................... California
Tamarack, Inc.................................................. Texas
West Side Condo Corp........................................... New York
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
H. F. Ahmanson & Company:
We consent to incorporation by reference in the Registration Statements No.
33-20076, No. 33-00063, No. 33-65247, No. 33-28254, No. 33-53635 and No. 333-
07955 on Form S-8, and No. 33-31590, No. 33-42394, No. 33-44686, No. 33-27902,
No. 33-57218, No. 33-50731 and No. 33-57395 on Form S-3 and Registration
Statement No. 333-21919 on Form S-4 of H. F. Ahmanson & Company of our report
dated January 15, 1997, except as to Note 18 to the Consolidated Financial
Statements, which is as of March 17, 1997, relating to the consolidated
statements of financial condition of H. F. Ahmanson & Company as of December 31,
1996 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
Annual Report on Form 10-K of H. F. Ahmanson & Company and to the reference to
our firm under the heading "Selected Financial Data" in the Form 10-K.
KPMG Peat Marwick LLP
Los Angeles, California
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K OF
H. F. AHMANSON & COMPANY FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 691,578
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 737,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,239,001
<INVESTMENTS-CARRYING> 5,069,108
<INVESTMENTS-MARKET> 5,113,823
<LOANS> 31,789,158
<ALLOWANCE> 389,135
<TOTAL-ASSETS> 49,902,044
<DEPOSITS> 34,773,945
<SHORT-TERM> 2,030,529
<LIABILITIES-OTHER> 966,116
<LONG-TERM> 9,549,992
0
14
<COMMON> 1,195
<OTHER-SE> 2,431,840
<TOTAL-LIABILITIES-AND-EQUITY> 49,902,044
<INTEREST-LOAN> 2,296,786
<INTEREST-INVEST> 1,218,009
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,514,795
<INTEREST-DEPOSIT> 1,523,873
<INTEREST-EXPENSE> 2,262,281
<INTEREST-INCOME-NET> 1,252,514
<LOAN-LOSSES> 144,924
<SECURITIES-GAINS> 3,387
<EXPENSE-OTHER> 1,178,830
<INCOME-PRETAX> 180,558
<INCOME-PRE-EXTRAORDINARY> 180,558
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,258
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
<YIELD-ACTUAL> 2.63
<LOANS-NON> 598,661
<LOANS-PAST> 0
<LOANS-TROUBLED> 185,635
<LOANS-PROBLEM> 114,322
<ALLOWANCE-OPEN> 380,886
<CHARGE-OFFS> 190,540
<RECOVERIES> 39,155
<ALLOWANCE-CLOSE> 389,135
<ALLOWANCE-DOMESTIC> 389,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
