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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, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period fromto
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: 626/960-6311
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
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 Exchange
Cumulative Preferred Stock
Depositary Shares, Each Representing a One-Tenth New York Stock Exchange
Interest in a Share of 6% Cumulative
Convertible Preferred Stock, Series D
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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
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 the 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, 1998, a date within 60 days prior to the date
of filing, was $8,516,126,301.
Common Stock, $.01 par value of registrant outstanding at March 17, 1998--
109,609,505 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS............................................................ 1
General................................................................... 1
Retail Banking............................................................ 2
Residential Real Estate Lending........................................... 3
General................................................................. 3
Interest Rates, Terms and Fees.......................................... 4
Sales of Loans and MBS and Servicing Activities......................... 5
Consumer Lending and Business Banking..................................... 5
Treasury Activities....................................................... 6
Interest Margin........................................................... 6
Asset/Liability Management................................................ 6
Competition............................................................... 7
Regulation................................................................ 8
General................................................................. 8
Savings and Loan Holding Company Regulations............................ 8
Affiliate and Insider Transactions...................................... 8
Limitations on Acquisitions............................................. 8
Payment of Dividends.................................................... 8
Deposit Insurance....................................................... 9
FICO Debt............................................................... 9
Conversion of Deposit Insurance......................................... 10
Classification of Assets................................................ 10
Capital Requirements.................................................... 10
Prompt Corrective Action................................................ 11
Enforcement and Penalties............................................... 12
Loans and Investments................................................... 12
Federal Home Loan Bank System........................................... 12
Federal Reserve System.................................................. 12
Liquidity............................................................... 13
Community Reinvestment Act.............................................. 13
Qualified Thrift Lender................................................. 13
Service Corporations.................................................... 13
Proposed Legislation.................................................... 13
Taxation.................................................................. 13
Federal................................................................. 13
State................................................................... 14
REI Operations............................................................ 14
Other Activities.......................................................... 15
Employees................................................................. 15
ITEM 2. PROPERTIES.......................................................... 15
ITEM 3. LEGAL PROCEEDINGS................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 15
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS................................................................... 16
Market Prices of Stock................................................... 16
Per Share Cash Dividends Data............................................ 16
Stockholders............................................................. 17
ITEM 6. SELECTED FINANCIAL DATA............................................ 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 21
Overview................................................................. 21
Results of Operations.................................................... 25
Net Interest Income.................................................... 25
Credit Costs........................................................... 28
Provision for Loan Losses............................................ 28
Operations of REO.................................................... 28
Noninterest Income..................................................... 29
Gain (Loss) on Sales of MBS.......................................... 29
Gain on Sales of Loans............................................... 30
Loan Servicing Income................................................ 31
Fee Income........................................................... 31
Gain on Sales of Retail Deposit Branch Systems....................... 31
Noninterest Expense.................................................... 32
General and Administrative Expenses.................................. 32
Net Acquisition Costs................................................ 32
Operations of REI.................................................... 32
Amortization of Goodwill and Other Intangible Assets and Cumulative
Effect of Change in Accounting for Goodwill......................... 32
Provision for Income Taxes........................................... 32
Quarterly Results of Operations........................................ 33
Financial Condition...................................................... 34
Loan and MBS Portfolio................................................. 34
Asset/Liability Management and Market Risk ............................ 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.................................................................. 48
Deposits............................................................. 48
Borrowings........................................................... 48
Capital.............................................................. 48
Accounting Developments................................................ 49
Tax Contingency........................................................ 50
Goodwill Litigation.................................................... 50
Year 2000.............................................................. 51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................... 51
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 52
Section 16(a) Beneficial Ownership Reporting Compliance................... 54
ITEM 11. EXECUTIVE COMPENSATION............................................. 55
Summary Compensation Table................................................ 55
Option Grants in Last Fiscal Year......................................... 57
Aggregated Option/SAR Exercises and Year-End Option/SAR Values............ 58
Long-Term Incentive Plan.................................................. 58
Retirement Plans.......................................................... 59
Retirement Plan......................................................... 59
Supplemental Executive Retirement Plan.................................. 60
Senior Supplemental Executive Retirement Plan........................... 61
Employment Agreements..................................................... 61
Compensation of Directors................................................. 62
Compensation Committee Interlocks and Insider Participation............... 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 64
Security Ownership of Certain Beneficial Owners........................... 64
Security Ownership of Management.......................................... 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.... 67
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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 and business 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 (626) 960-6311.
Approximately 98% of the Company's consolidated revenues in 1997 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, 1997. Home Savings is one of the largest savings institutions 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."
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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 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 has made substantial progress in changing its focus from being
a traditional savings institution to being a full-service 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 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 1997, Ahmanson
returned capital to its stockholders by repurchasing 27.6 million shares of
its common stock. On March 2, 1998, Ahmanson also redeemed at par the entire
$195 million of its 8.40% Preferred Stock, Series C. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview--Capital" for additional information.
On February 17, 1997, the Company proposed a merger transaction with Great
Western Financial Corporation. On June 4, 1997, the Company withdrew its
merger proposal. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Net Great Western Costs" for
additional information.
On October 6, 1997, the Company announced a definitive agreement to acquire
Coast Savings Financial, Inc. The acquisition was completed on February 13,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--Coast Savings Financial, Inc.
Acquisition" and Note 2 of Notes to Consolidated Financial Statements for
additional information.
On March 17, 1998, the Company announced a definitive agreement to merge
with and into Washington Mutual, Inc. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" for
additional information.
RETAIL BANKING
At December 31, 1997 Home Savings' deposits totaled $32.3 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, 1997 the Company had 370 retail branches located in three
states and 126 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 retail branch 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 1997 the Company sold four retail branches in Arizona with deposits
totaling $251.4 million
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and 12 retail branches in west Florida with deposits totaling $916.3 million.
On December 4, 1997, the Company announced a definitive agreement to sell its
remaining 27 retail branches in Florida with deposits at December 31, 1997
totaling approximately $3.3 billion.
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.
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 commercial and
industrial real estate loans since 1988. From 1990 through 1997, the Company
chose not to originate for its own portfolio residential loans secured by
multi-family structures located in states other than California.
Home Savings' loans are subject to various approval requirements depending
upon such factors as the size of the loan, the loan-to-value ratio and the
applicant's debt-to-income ratio. 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 high probable maximum losses in the event of an earthquake, 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--Loan and MBS Portfolio."
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."
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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 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. As part of the Company's
asset/liability management strategy, since June 1996, the Company has been
originating fewer ARMs which adjust based upon changes in COFI ("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 Average Treasury ("12 MAT") Index (ARMs which adjust based on changes 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 and Market Risk."
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 in the Company's portfolio 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 1997 and 1996 were
$69.8 million and $103.7 million, respectively. At December 31, 1997 the
amount of interest capitalized on the Company's $41.0 billion ARM portfolio
totaled $118.9 million. Of such amount, $5.4 million represents capitalized
interest on loans with current principal balances that are less than the
original loan amounts. The remaining $113.5 million represents capitalized
interest on loans with an aggregate principal balance at December 31, 1997 of
$4.5 billion compared
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to an aggregate original loan balance of $4.4 billion. At December 31, 1997
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
required monthly payment exceeds the amount that would have been necessary to
amortize or pay the outstanding principal balance at the then applicable
interest rate 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. Home Savings has established underwriting
criteria for its fixed rate mortgage loans such that these loans are normally
readily salable in the secondary market.
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--
Noninterest Income--Gain (Loss) on Sales of MBS" and "--Gain 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--Noninterest Income--Loan Servicing Income"
and Note 4 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 4 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 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 retail branch 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 1997 the Company originated $843.0
million of consumer loans.
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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. By the end of the second quarter of 1997, the Company
was offering business banking loans at most of its California branches. During
1997 the Company originated $90.0 million of small business loans.
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 other
securities investments. See "Regulation--Liquidity." For information
concerning interest and dividends on investments, see Note 3 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 either primary dealers in government
securities or otherwise approved by the Company, 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 3 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 9 and 10 of Notes to Consolidated Financial Statements.
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 of 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
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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 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 and Market Risk."
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.
Federal legislation which became effective on June 1, 1997 generally expanded
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 now 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--FICO Debt."
7
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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.
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 currently 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
8
<PAGE>
("Tier 1 Institution"). At December 31, 1997 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.
OTS has proposed an amendment to its capital distribution regulation. Under
the proposed regulation, an application must be filed with the OTS if the
total amount of capital distributions in a calendar year (including the
proposed distribution) would exceed the institution's year to date net income
plus retained net income for the preceding two years. Savings institution
subsidiaries of savings and loan holding companies, such as Home Savings,
would continue to be required to file a notice with the OTS at least 30 days
before declaring any dividend.
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 89% and 11% of total deposits,
respectively, as of December 31, 1997. 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.
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 1997, the assessment rate for both SAIF and BIF deposits varied
from zero to 0.27% of covered deposits. The Company paid no deposit insurance
premiums to either SAIF or BIF in 1997 compared to $55.1 million in deposit
insurance premiums paid to the SAIF in 1996 and $79.9 million and $4.1 million
paid to the SAIF and the BIF, respectively, in 1995.
DIFA 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 assessed on BIF-insured deposits,
although at a lower rate, as well as on SAIF-insured deposits.
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.
As of January 1, 1998, SAIF deposits are assessed at 1.56 basis points to
pay FICO Debt interest payments while BIF deposits are assessed at 0.31 basis
points to pay such interest. During 1997, the Company paid FICO
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assessments of $19.2 million with respect to its SAIF-insured deposits and
$577,000 with respect to its BIF-insured deposits.
Conversion of Deposit Insurance.
Because 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 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.
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, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--Liquidity
and Capital Resources--Capital."
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
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<PAGE>
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 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, 1997 Home Savings' investment
in its REI subsidiary aggregated $41.0 million, of which $37.5 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, 1997 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 is
assigned the highest rating by the OTS under the Uniform Financial
Institutions 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 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
11
<PAGE>
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. 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 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.
Federal Home Loan Bank 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,
1997 Home Savings' investment in FHLB stock was $412.0 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
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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
quarter, an average daily balance of liquid assets equal to at least 4% of
either (i) its liquidity base, defined as the institution's net withdrawable
accounts plus short-term borrowings, at the end of the preceding calendar
quarter or (ii) the average daily balance of its liquidity base during the
preceding calendar quarter. The OTS Director may vary the required percentage
within a range of 4% to 10% and may also vary the definition of liquid assets.
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."
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, 1997.
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
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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, 1997. 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.
The Internal Revenue Service is currently examining the Company's tax
returns for the years 1990 through 1993.
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 1997
taxable year was approximately 10.84%. 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
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 12 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.
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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 insurance
agencies and a securities brokerage firm. These activities did not make
material contributions to the Company's results of operations in 1997 and are
not expected to make a material contribution to its results of operations in
1998.
EMPLOYEES
At December 31, 1997 the Company employed approximately 6,777 full-time and
2,603 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 (626)
960-6311. The Company owns approximately 27% of the 3.7 million square feet in
which its offices are located and leases the remainder. The Company has 517
offices and other office facilities of which 160 are owned and the remainder
are leased. Annual lease payments total approximately $69.3 million. The net
investment in premises, equipment and leaseholds totaled $364.6 million at
December 31, 1997 compared to $424.6 million at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 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>
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........................................... 45 1/4 32
Second Quarter.......................................... 47 3/8 34 3/4
Third Quarter........................................... 58 1/16 43 5/8
Fourth Quarter.......................................... 68 54 3/16
1998--
First Quarter (through March 25)........................ 81 3/8 51 9/16
</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>
1996--
First Quarter...................................................... $.22
Second Quarter..................................................... .22
Third Quarter...................................................... .22
Fourth Quarter..................................................... .22
1997 --
First Quarter...................................................... .22
Second Quarter..................................................... .22
Third Quarter...................................................... .22
Fourth Quarter..................................................... .22
1998--
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 significant 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."
16
<PAGE>
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 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, 1998 Home Savings could have paid dividends of approximately
$564.4 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, 1998, 109,609,505 shares of Ahmanson
Common Stock were outstanding and were held by 5,934 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 6% Cumulative
Convertible Preferred Stock, Series D.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Five-Year
Consolidated Summary of Financial Condition," "Five-Year Consolidated Summary
of Operations" and "Five-Year Selected Other Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 1997 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, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997, 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,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and investment
securities............. $ 1,580,754 $ 1,876,435 $ 1,645,450 $ 2,773,573 $ 3,906,044
Mortgage-backed
securities (MBS)....... 12,791,391 14,296,512 16,152,142 12,789,420 6,919,997
Loans receivable........ 30,484,191 31,789,158 31,255,379 36,001,745 37,704,368
Real estate............. 308,958 395,428 460,421 475,264 623,519
Goodwill and other
intangible assets...... 280,296 308,083 147,974 468,542 428,444
All other assets........ 1,233,162 1,236,428 868,220 1,218,249 1,288,873
----------- ----------- ----------- ----------- -----------
Total assets.......... $46,678,752 $49,902,044 $50,529,586 $53,726,793 $50,871,245
=========== =========== =========== =========== ===========
Deposits................ $32,268,375 $34,773,945 $34,244,481 $40,655,016 $38,018,653
Borrowings.............. 10,829,266 11,580,521 12,236,428 9,176,085 8,879,345
All other liabilities... 1,037,202 966,116 991,755 931,091 1,024,216
----------- ----------- ----------- ----------- -----------
Total liabilities..... 44,134,843 47,320,582 47,472,664 50,762,192 47,922,214
Company-obligated
mandatorily redeemable
capital securities,
Series A, of subsidiary
trust holding solely
Junior Subordinated
Deferrable Interest
Debentures of the
Company................ 148,464 148,413 -- -- --
Stockholders' equity.... 2,395,445 2,433,049 3,056,922 2,964,601 2,949,031
----------- ----------- ----------- ----------- -----------
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. $46,678,752 $49,902,044 $50,529,586 $53,726,793 $50,871,245
=========== =========== =========== =========== ===========
</TABLE>
18
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
FIVE-YEAR CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income......... $ 3,403,372 $ 3,514,795 $ 3,699,091 $ 3,095,375 $ 3,003,422
Interest expense........ 2,168,487 2,262,281 2,472,336 1,798,454 1,666,350
------------ ------------ ------------ ------------ ------------
Net interest income.... 1,234,885 1,252,514 1,226,755 1,296,921 1,337,072
Provision for loan
losses................. 67,091 144,924 119,111 176,557 574,970
------------ ------------ ------------ ------------ ------------
Net interest income
after provision for
loan losses........... 1,167,794 1,107,590 1,107,644 1,120,364 762,102
------------ ------------ ------------ ------------ ------------
Noninterest income:
Gain (loss) on sales
of loans and MBS...... 18,200 31,420 17,283 (16,168) 101,044
Loan servicing and
other fee income...... 246,493 205,104 164,116 184,809 174,061
Gain on sales of
retail deposit branch
systems............... 57,566 6,861 514,671 77,901 --
Other operating
income................ 7,311 8,413 2,339 13,814 42,723
------------ ------------ ------------ ------------ ------------
Total noninterest
income.............. 329,570 251,798 698,409 260,356 317,828
------------ ------------ ------------ ------------ ------------
Noninterest expense:
SAIF recapitalization.. -- 243,862 -- -- --
Other general and
administrative
expenses.............. 737,496 775,285 818,579 758,560 819,403
------------ ------------ ------------ ------------ ------------
General and
administrative (G&A)
expenses............ 737,496 1,019,147 818,579 758,560 819,403
Net acquisition costs.. 5,475 -- -- -- --
Operations of real
estate held for
development and
investment............ 3,722 34,961 49,481 97,644 229,300
Operations of real
estate owned held for
sale.................. 70,126 105,880 86,788 86,011 212,130
Amortization of
goodwill and other
intangible assets..... 25,763 18,842 26,559 27,835 39,163
------------ ------------ ------------ ------------ ------------
Total noninterest
expense............. 842,582 1,178,830 981,407 970,050 1,299,996
------------ ------------ ------------ ------------ ------------
Income (loss) before
provision for income
taxes (benefit),
extraordinary loss and
cumulative effect of
accounting change...... 654,782 180,558 824,646 410,670 (220,066)
Provision for income
taxes (benefit)........ 241,000 35,300 373,700 173,312 (82,034)
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary loss and
cumulative effect of
accounting change...... 413,782 145,258 450,946 237,358 (138,032)
Extraordinary loss on
early extinguishment of
debt (net of tax
benefit)............... -- -- -- -- (21,607)
Cumulative effect of
change in accounting
for goodwill........... -- -- (234,742) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)....... $ 413,782 $ 145,258 $ 216,204 $ 237,358 $ (159,639)
============ ============ ============ ============ ============
Per share information--
common shares:
Basic(1):
Income (loss) before
extraordinary loss
and cumulative
effect of accounting
change.............. $ 3.91 $ 0.92 $ 3.41 $ 1.60 $ (1.51)
Net income (loss).... 3.91 0.92 1.41 1.60 (1.70)
Diluted(1):
Income (loss) before
extraordinary loss
and cumulative
effect of accounting
change.............. 3.59 0.92 3.22 1.58 (1.51)
Net income (loss).... 3.59 0.92 1.41 1.58 (1.70)
Book value at December
31.................... 20.57 19.09 20.75 19.70 19.61
Tangible book value at
December 31........... 18.79 17.31 19.47 15.70 15.94
Dividends.............. 0.88 0.88 0.88 0.88 0.88
Weighted average number
of common shares
outstanding(1):
Basic.................. 97,162,327 108,650,585 117,204,021 116,826,952 116,501,261
Diluted................ 110,827,985 108,650,585 129,888,329 129,183,669 116,501,261
</TABLE>
- -------
(1) The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" as of December 31, 1997. SFAS No. 128
replaces primary earnings per share ("EPS") with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution of options, warrants and convertible securities. Income per share
amounts for periods prior to December 31, 1997 have been restated to
reflect the adoption of SFAS No. 128.
19
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
FIVE-YEAR SELECTED OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Regulatory capital:
Tangible capital......................... 5.86% 5.55% 5.90% 5.12% 4.97%
Core capital............................. 5.87 5.56 5.91 5.50 5.72
Risk-based capital....................... 11.80 10.78 12.43 12.17 12.59
Ratio of nonperforming assets to total
assets.................................... 1.28 1.70 1.88 1.57 1.89
Return on average assets(1)................ 0.87 0.29 0.41 0.46 (0.32)
Return on average equity(1)................ 17.27 5.26 7.47 8.00 (5.58)
Return on average tangible equity(1),(2)... 19.31 5.91 17.00 9.69 (4.94)
Efficiency ratio(1),(3).................... 49.78 69.92 58.85 51.19 54.22
Ratio of dividends paid to net income
(loss).................................... 28.83 97.48 71.04 64.62 (86.53)
Total number of branches and loan offices.. 496 516 464 439 455
</TABLE>
- --------
(1) The following table summarizes the returns on average assets, average
equity and average tangible equity and the efficiency ratio excluding
certain gains and expenses. The year ended December 31, 1997 excludes the
after-tax effects of the gain on sales of the West Florida and Arizona
retail deposit branch systems of $24.6 million and $9.5 million,
respectively, and the net acquisition costs of $3.2 million. The year
ended December 31, 1996 excludes the after-tax effects of the SAIF
recapitalization of $144.4 million, the FIB branch acquisition costs of
$8.3 million, and the gain on sale of the San Antonio, Texas retail
deposit branch system of $4.1 million.
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Return on average assets.................................... 0.80% 0.59%
Return on average equity.................................... 16.19 10.66
Return on average tangible equity(2)........................ 18.17 11.52
Efficiency ratio(3)......................................... 49.78 52.23
</TABLE>
(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, all on a pre-tax basis.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MERGER WITH WASHINGTON MUTUAL, INC.
On March 16, 1998, Ahmanson and Washington Mutual, Inc., a Washington
corporation ("Washington Mutual"), entered into an Agreement and Plan of
Merger (the "Merger Agreement"), pursuant to which Ahmanson will merge with
and into Washington Mutual (the "Merger"). Following execution of the Merger
Agreement, Ahmanson and Washington Mutual entered into a Stock Option
Agreement pursuant to which Ahmanson granted to Washington Mutual an option to
acquire up to 21,796,426 shares of Ahmanson Common Stock (representing
approximately 19.9% of the outstanding shares of Ahmanson Common Stock) at a
price per share of $79.86. The option is exercisable only upon the occurrence
of certain events, including an agreement by Ahmanson to enter into certain
business combinations with a third party or the acquisition of beneficial
ownership by a third party of 25% or more of the Ahmanson Common Stock.
Pursuant to the Merger Agreement, Ahmanson's stockholders will receive in a
tax-free exchange 1.12 shares of the common stock of Washington Mutual for
each share of Ahmanson Common Stock. Based on the closing price of Washington
Mutual on March 16, 1998 (the last trading day before announcement of the
proposal), the exchange ratio would have produced a value of $80.36 for each
share of Ahmanson Common Stock, or a premium of 22.7% over the closing market
price of Ahmanson Common Stock on March 16, 1998.
The transaction is subject to the approval of the stockholders of both
Ahmanson and Washington Mutual and the Office of Thrift Supervision ("OTS").
1997 FINANCIAL RESULTS
Net income for 1997 was $413.8 million, or $3.59 per diluted common share,
compared to $145.3 million in 1996, or $0.92 per diluted common share. The
1997 results include the after-tax gain of $34.1 million on the sales of Home
Savings' West Florida and Arizona retail deposit branch systems and a net
after-tax cost of $3.2 million relating to the withdrawn merger proposal for
Great Western (the "1997 items"). Excluding the 1997 items, net income would
have been $382.9 million, or $3.31 per diluted common share. The 1996 results
include the after-tax gain of $4.1 million on the sale of Home Savings' San
Antonio, Texas retail deposit branch system, and after-tax costs of $144.4
million and $8.3 million for the Savings Association Insurance Fund ("SAIF")
recapitalization and the First Interstate Bank ("FIB") branch acquisition
charge, respectively, (the "1996 items"). Excluding the 1996 items, net income
would have been $294.0 million, or $2.19 per diluted common share. Excluding
the 1997 items and the 1996 items, net income increased in 1997 by 30% and
income per diluted common share increased in 1997 by 51%. Income per share
increased at a higher rate than net income as a result of the Company's
ongoing stock purchase program. Return on average equity would have been 16.2%
in 1997 compared to 10.7% in 1996, excluding the 1997 items and 1996 items.
21
<PAGE>
Cash net income is computed by the Company by adding to net income the
amortization of goodwill and other intangibles (net of applicable tax
benefit). Cash net income for 1997 and 1996 was $429.0 million and $156.4
million, respectively. The Company's cash net income may not be necessarily
comparable to similarly titled measures reported by other companies. The
Company's cash net income per diluted common share, cash return on average
assets and return on average tangible equity (cash return on average equity)
and the comparable reported data were as follows:
<TABLE>
<CAPTION>
CASH REPORTED
-------------- --------------
FOR THE YEARS FOR THE YEARS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income per diluted common share............. $ 3.72 $ 1.03 $ 3.59 $ 0.92
Return on average assets........................ 0.90% 0.31% 0.87% 0.29%
Return on average equity........................ 19.31% 5.91% 17.27% 5.26%
Excluding the 1997 items and 1996 items:
Net income per diluted common share........... $ 3.44 $ 2.28 $ 3.31 $ 2.19
Return on average assets...................... 0.84% 0.61% 0.80% 0.59%
Return on average equity...................... 18.17% 11.52% 16.19% 10.66%
</TABLE>
RESULTS OF OPERATIONS
Net interest income for 1997 totaled $1.23 billion compared to $1.25 billion
in 1996. The decline in net interest income was primarily due to the decline
in interest-earning assets, offset slightly by an increase in the net interest
margin. The net interest margin was 2.68% for 1997, compared to 2.63% for
1996.
For 1997, noninterest income totaled $329.6 million, compared to $251.8
million in 1996. Included in noninterest income for 1997 was a pre-tax gain of
$57.6 million on the sales of the Company's Arizona and West Florida retail
deposit branch systems. The 1996 results include a pre-tax gain of $6.9
million from the sale of the Company's San Antonio, Texas retail deposit
branch system. Excluding the gains on the sales of the Company's retail
branches in 1997 and 1996, noninterest income would have been $272.0 million
and $244.9 million, respectively. This 11% increase was primarily due to the
Company's continued emphasis on growing fee income from its retail services
and from Griffin Financial Services, a subsidiary offering securities and
insurance products and services.
General and administrative expenses ("G&A") totaled $737.5 million in 1997,
compared to $1.02 billion in 1996. Included in 1996 were pre-tax charges of
$243.9 million for the SAIF recapitalization and $14.0 million relating to the
FIB branch acquisition. The Company's efficiency ratio was 49.8% in 1997
compared to 52.2% in 1996, exclusive of these charges.
For 1997, the Company incurred $137.2 million in credit costs, which
includes the provision for loan losses and expenses for the operations of
foreclosed real estate ("REO"), compared to credit costs of $250.8 million in
1996. The decline in credit costs reflects improved credit quality in 1997.
ASSET QUALITY
At December 31, 1997, nonperforming assets ("NPAs"), which consist of
nonaccrual loans and REO, were $595.3 million, or 1.28% of total assets,
compared to $846.2 million, or 1.70% of total assets at December 31, 1996.
Troubled debt restructurings ("TDRs") totaled $212.3 million at December 31,
1997. NPAs declined throughout most of 1997, reflecting the Company's efforts
in dealing with problem assets and a strengthening in the California economy.
Net loan charge-offs for 1997 totaled $78.9 million compared to $151.4
million in 1996.
22
<PAGE>
LOAN FUNDINGS
In 1997 the Company funded $5.0 billion in real estate mortgages compared to
$5.2 billion in 1996. Approximately 57% of 1997 real estate mortgage fundings
were adjustable rate mortgages ("ARMs") compared to 65% in 1996. For 1997, 7%
of the real estate mortgage loans funded were ARMs that were tied to the
Eleventh District Cost of Funds Index compared to 36% in 1996.
Consumer loan fundings for 1997 totaled $843.0 million compared to $382.2
million in 1996. Of the 1997 production, 81% was secured by real estate or
cash. In December 1997, the Company had its highest volume month ever, funding
$90.0 million in consumer loans.
Business banking fundings for 1997 totaled $89.9 million compared to $44.3
million for 1996. The growing volume of business loan fundings reflects the
completion of the rollout of the business banking program to Home Savings'
California branches in June 1997.
ACQUISITION OF COAST SAVINGS FINANCIAL, INC.
On October 6, 1997, the Company announced a definitive agreement to acquire
Coast Savings Financial, Inc. ("Coast"). At December 31, 1997, Coast had
deposits of $6.4 billion and total assets of $8.8 billion. The merger
agreement called for the tax-free exchange of 0.8082 shares of Ahmanson common
stock for each share of Coast common stock. In addition, immediately prior to
the merger, each holder of the common stock of Coast also received one
Contingent Payment Right Certificate ("CPR Certificate"), issued by the Coast
Federal Litigation Contingent Payment Rights Trust ("CPR Trust"), for each
share of the common stock of Coast. The CPR Certificates represent assignable
and transferable undivided beneficial interests in the assets of the CPR
Trust, including a commitment by the Company to pay to the CPR Trust an amount
equal to any proceeds (net of taxes and expenses, computed under certain
assumptions) that Coast Federal Bank, Federal Savings Bank ("Coast Federal")
(formerly a wholly-owned subsidiary of Coast and following the merger a
wholly-owned subsidiary of the Company), or its successors, may receive from
pending litigation claims against the U.S. government relating to the
government's alleged breach of its agreement with respect to Coast Federal's
regulatory capital.
The merger was completed on February 13, 1998 and was accounted for as a
purchase. Under this method of accounting, assets and liabilities of Coast
were adjusted to their estimated fair values and any excess of the purchase
price over the fair value of the assets acquired, net of the fair value of the
liabilities assumed, was recognized as goodwill. Applicable income tax effects
of such adjustments were included as a component of the Company's net deferred
tax asset with a corresponding offset to goodwill. The Company estimates that
pro forma consolidated assets and consolidated stockholders' equity would be
approximately $56 billion and $3 billion, respectively, at December 31, 1997
if the transaction had closed on that date.
CAPITAL
At December 31, 1997, Home Savings' capital ratios exceeded the regulatory
requirements for an institution to be rated as "well-capitalized," the highest
regulatory standard.
During 1997, Ahmanson purchased a total of 10.6 million shares of its common
stock at an average price of $45.62 per share. Between the initiation of the
first stock purchase program in October 1995 and December 31, 1997, Ahmanson
purchased 27.6 million common shares, or 23% of its outstanding shares at
September 30, 1995, at an aggregate price of $925.9 million, or an average
price of $33.57 per share. The commencement of the fifth stock purchase
program for $400 million occurred in the fourth quarter of 1997. During the
fourth quarter of 1997 Ahmanson purchased a total of 1.8 million common shares
at an average price per share of $60.82. Of the $400 million authorized for
Ahmanson's fifth stock purchase program, $374.4 million remained at December
31, 1997. On March 16, 1998 Ahmanson announced that it was terminating the
stock repurchase plan.
23
<PAGE>
The shares repurchased under these plans were recorded as common stock in
treasury. A significant portion of Ahmanson's common stock in treasury were
issued in conjunction with the acquisition of Coast. In addition, common stock
in treasury would be used for the conversion of the Preferred Stock, Series D.
On March 2, 1998, the Company redeemed at par the entire $195 million of its
8.40% Preferred Stock, Series C.
SALE OF EAST FLORIDA BRANCHES
On December 4, 1997, the Company announced the sale of its remaining 27
Florida branches. The branches, with approximately $3.3 billion in deposits at
December 31, 1997, are located on the east coast of Florida. The sale is
expected to close in the third quarter of 1998.
NET GREAT WESTERN COSTS
On February 17, 1997, the Company proposed a merger transaction with Great
Western Financial Corporation ("Great Western"). On June 4, 1997, the Company
withdrew its merger proposal. The Company recognized as "net acquisition
costs" a total of $5.5 million associated with the proposal. Expenses incurred
for legal, printing, advisory and other expenses associated with the Great
Western proposal were $23.1 million, on a pre-tax basis. These costs were
largely offset by the sale of the 3.6 million Great Western common shares the
Company had purchased in connection with the proposal. The sales resulted in a
pre-tax gain of $17.6 million.
FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains certain statements which, to the
extent they do not relate to historical results, are forward looking. These
forward looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated by
such forward looking statements include, among others, the following
possibilities: (1) competitive pressure among depository institutions
increases significantly; (2) changes in the interest rate environment reduce
interest margins; (3) general economic conditions, either nationally or in the
states in which the Company conducts business, are less favorable than
expected; or (4) legislative or regulatory changes adversely affect the
businesses in which the Company engages. In addition, certain forward looking
statements are based on assumptions of future events which may not prove to be
accurate. Further information on factors which could affect the financial
results of the Company may be included in subsequent filings by the Company
with the Securities and Exchange Commission.
24
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $1.23 billion in 1997, a decrease of $17.6 million,
or 1%, from $1.25 billion in 1996, which was an increase of $25.8 million, or
2%, from $1.23 billion in 1995. 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
balances are presented before the deduction of the allowance for loan losses.
The average MBS balances for 1997 periods exclude the effect of the unrealized
gain or loss on MBS available for sale. The average MBS balances for 1996 and
1995 have been restated to be consistent with the presentation for 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
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.................. $31,157,029 $2,315,253 7.43% $31,338,823 $2,296,786 7.33% $33,180,074 $2,405,820 7.25%
MBS.................... 13,770,415 1,020,747 7.41 15,534,412 1,161,487 7.48 15,928,755 1,158,077 7.27
----------- ---------- ----------- ---------- ----------- ----------
Total loans and MBS... 44,927,444 3,336,000 7.42 46,873,235 3,458,273 7.38 49,108,829 3,563,897 7.26
----------- ---------- ----------- ---------- ----------- ----------
Investment securities:
Federal funds sold
and securities
purchased under
agreements to
resell............. 556,529 31,704 5.70 376,527 21,244 5.64 1,441,934 88,943 6.17
Other investments... 429,011 35,668 8.31 446,522 35,278 7.90 777,409 46,251 5.95
----------- ---------- ----------- ---------- ----------- ----------
Total investment
securities........... 985,540 67,372 6.84 823,049 56,522 6.87 2,219,343 135,194 6.09
----------- ---------- ----------- ---------- ----------- ----------
Interest-earning
assets................ 45,912,984 3,403,372 7.41 47,696,284 3,514,795 7.37 51,328,172 3,699,091 7.21
---------- ---------- ----------
Other assets............ 1,902,007 1,962,211 2,024,284
----------- ----------- -----------
Total assets......... $47,814,991 $49,658,495 $53,352,456
=========== =========== ===========
Interest-costing
liabilities:
Deposits:
Checking accounts. $ 3,234,962 21,625 0.67 $ 2,614,110 21,449 0.82 $ 2,508,768 24,833 0.99
Savings accounts.. 7,743,080 245,197 3.17 7,700,613 244,315 3.17 9,053,043 279,345 3.09
Term accounts..... 22,454,861 1,212,616 5.40 23,733,533 1,258,109 5.30 28,418,471 1,531,412 5.39
----------- ---------- ----------- ---------- ----------- ----------
Total deposits....... 33,432,903 1,479,438 4.43 34,048,256 1,523,873 4.48 39,980,282 1,835,590 4.59
----------- ---------- ----------- ---------- ----------- ----------
Borrowings:
Short-term.......... 2,820,566 167,156 5.93 2,289,974 138,182 6.03 3,129,503 197,437 6.31
FHLB................ 4,022,025 248,852 6.19 4,291,810 266,014 6.20 2,937,512 185,966 6.33
Other............... 3,969,877 260,328 6.56 5,108,607 333,223 6.52 3,527,068 253,343 7.18
Capital securities
of subsidiary trust 148,385 12,713 8.53 11,771 989 8.52 -- -- --
----------- ---------- ----------- ---------- ----------- ----------
Total borrowings...... 10,960,853 689,049 6.29 11,702,162 738,408 6.31 9,594,083 636,746 6.64
----------- ---------- ----------- ---------- ----------- ----------
Interest-costing
liabilities........... 44,393,756 2,168,487 4.89 45,750,418 2,262,281 4.94 49,574,365 2,472,336 4.99
---------- ---------- ----------
Other liabilities....... 1,025,006 1,148,943 882,189
Stockholders' equity.... 2,396,229 2,759,134 2,895,902
----------- ----------- -----------
Total liabilities and
stockholders'
equity.............. $47,814,991 $49,658,495 $53,352,456
=========== =========== ===========
Excess interest-earning
assets/ Interest rate
spread................. $ 1,519,228 2.52 $ 1,945,866 2.43 $ 1,753,807 2.22
=========== =========== ===========
Net interest income/ Net
interest margin........ $1,234,885 2.68 $1,252,514 2.63 $1,226,755 2.39
========== ========== ==========
</TABLE>
25
<PAGE>
Net interest income was reduced by provisions for losses of delinquent
interest of $22.6 million, $45.9 million and $46.5 million in 1997, 1996 and
1995, respectively, related to nonaccrual loans. The provisions had the effect
of reducing the net interest margin by five basis points, ten basis points and
nine basis points in 1997, 1996 and 1995, respectively.
The following table presents the changes for 1997 and 1996 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,
--------------------------------------------------------------
1997 VERSUS 1996 1996 VERSUS 1995
INCREASE/DECREASE DUE TO INCREASE/DECREASE DUE TO
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- -------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans................. $ (13,662) $ 32,129 $ 18,467 $(136,096) $ 27,062 $(109,034)
MBS................... (130,024) (10,716) (140,740) (20,448) 23,858 3,410
Federal funds sold and
securities purchased
under agreements to
resell............... 10,232 228 10,460 (94,859) 35,581 (59,278)
Other investments..... (1,204) 1,594 390 (19,864) 470 (19,394)
--------- -------- --------- --------- -------- ---------
Total interest
income............. (134,658) 23,235 (111,423) (271,267) 86,971 (184,296)
--------- -------- --------- --------- -------- ---------
Interest expense on:
Deposits.............. (27,471) (16,964) (44,435) (268,370) (43,347) (311,717)
Short-term borrowings. 31,208 (2,234) 28,974 (50,844) (8,411) (59,255)
FHLB borrowings....... (16,733) (429) (17,162) 83,780 (3,732) 80,048
Other borrowings...... (74,958) 2,063 (72,895) 100,478 (20,598) 79,880
Capital securities of
subsidiary trust..... 11,724 -- 11,724 989 -- 989
--------- -------- --------- --------- -------- ---------
Total interest
expense............ (76,230) (17,564) (93,794) (133,967) (76,088) (210,055)
--------- -------- --------- --------- -------- ---------
Net interest income. $ (58,428) $ 40,799 $ (17,629) $(137,300) $163,059 $ 25,759
========= ======== ========= ========= ======== =========
</TABLE>
Net interest income decreased $17.6 million, or 1%, in 1997 from 1996 due to
lower levels of interest-earning assets, substantially offset by beneficial
changes in average interest rates. The decline in average interest-earning
assets was mainly due to loan and MBS sales and payments, in addition to the
use of a portion of operating cash flows to fund the Company's ongoing common
stock purchases as it redeploys its excess capital to enhance stockholder
value.
Net interest income increased $25.8 million, or 2%, to $1.25 billion in 1996
from 1995 primarily due to 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 in 1996. The excess of interest-earning assets over
interest-costing liabilities, which represents assets funded with noninterest-
costing sources of funds, increased by $192.1 million in 1996 compared to
1995, which also had a positive effect on net interest income in 1996.
26
<PAGE>
The net interest margin increased five basis points in 1997 and 24 basis
points in 1996. The increase in the net interest margin in 1997 was primarily
due to the lower provisions for losses on delinquent interest and changes in
the Company's mix of interest-earning assets and interest-costing liabilities.
The decrease in average rates paid on interest-costing liabilities in 1997 was
primarily due to a decrease in the weighted average cost of deposits and an
increase in deposits, particularly lower cost transaction deposits, as a
percent of total interest-costing liabilities. In addition to the lower
provision for losses on delinquent interest, the increase in the yields on
loans and MBS in 1997 reflects the Company's increased emphasis on originating
real estate loan products tied to indices other than COFI (see discussion
below) and diversification into consumer and business loan products, which
generally produce a higher interest rate than the Company's real estate loans
and MBS. The increase in net interest margin in 1996 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.
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 which adjust based upon changes in COFI ("COFI ARMs") generally
commence accruing interest at the newly announced rate plus the contractual
loan factor at the next payment due date following such announcement.
In 1996, the Company introduced two new adjustable rate loan products, 12
MAT ARMs, tied to the 12-month moving average of the monthly average one-year
constant maturity treasury, and LAMA loans, tied to the London Interbank
Offered Rate ("LIBOR") 12-month moving average of one-month LIBOR, to
diversify the interest sensitivity profile of the Company's interest-earning
assets. The timing and degree of changes in rates on 12 MAT ARMs and LAMA
loans provide a better match than COFI ARMs to the changes in rates of certain
of the Company's interest-costing liabilities.
The Company believes that its net interest income is somewhat insulated from
interest rate fluctuations primarily due to the adjustable rate nature of its
loan and MBS portfolio. At December 31, 1997, 95% of the Company's loan and
MBS portfolio were ARMs, including 83% which were COFI ARMs. At December 31,
1996, 96% were ARMs, including 89% which were COFI ARMs. The Company may
experience margin compression when increases in market rates are not
immediately reflected in the yields on the Company's adjustable and fixed rate
assets or when market conditions cause the Company to pay higher rates for its
funds.
Changes in interest rates influence the types of loan products that the
Company originates and the prepayment of existing loan balances by borrowers.
Increases in interest rates generally have been followed by an increase in ARM
origination and a decrease in prepayment speeds of loans and, conversely,
decreases in interest rates generally have been followed by increases in fixed
rate loan origination and prepayment speeds.
27
<PAGE>
The computed prepayment rate ("CPR") of loans for a period is defined by the
Company as loan principal payments received during such period in excess of
the normal scheduled principal payments, expressed as an annualized percentage
of the principal balance of such loans at the beginning of the period. The CPR
is based on the Company's historical data and is not a projection of future
prepayments. As of December 31, 1997, the Company estimated its most recent 3-
month and 12-month CPRs of certain categories of its $46 billion single family
residential servicing portfolio as follows:
<TABLE>
<CAPTION>
PERCENT OF SINGLE
FAMILY RESIDENTIAL 3-MONTH 12-MONTH
SERVICING PORTFOLIO CPR CPR
-------------------- ------- --------
<S> <C> <C> <C>
By product:
ARMs:
COFI............................. 73% 14% 12%
Other ARMs....................... 10 13 12
Fixed.............................. 17 12 10
---
100%
===
By interest rate:
Greater than 8.000%................ 11% 18% 14%
From 7.501% to 8.000%.............. 31 12 9
From 7.001% to 7.500%.............. 48 14 12
Below 7.001%....................... 10 12 13
---
100%
===
</TABLE>
Substantially all ARMs in the Company's portfolio are contractually limited
as to the lifetime maximum interest rates ("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,
1997, the interest rate on approximately 91% 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 related to COFI and limiting its interest rate risk, see "Financial
Condition--Asset/Liability Management and Market Risk."
CREDIT COSTS
Provision for Loan Losses. The provision for loan losses was $67.1 million
in 1997, a decrease of $77.8 million, or 54%, from $144.9 million in 1996,
which was an increase of $25.8 million, or 22%, from $119.1 million in 1995.
The lower provision for 1997 was due to the continuing decline in the level of
NPAs during 1997, reflecting collection efforts and strengthening of the
California economy. The increase in the provision for 1996 compared to the
provision for 1995 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. For additional information
regarding the allowances for loan losses and NPAs, see "Financial Condition--
Asset Quality--NPAs and Potential Problem Loans" and "Financial Condition--
Asset Quality--Allowance for Loan Losses."
Operations of REO. Losses from operations of REO were $70.1 million in 1997,
a decrease of $35.8 million, or 34%, from $105.9 million in 1996, which was an
increase of $19.1 million, or 22%, from $86.8 million in 1995. The decrease in
1997 was due to declines of $14.3 million in the provision for REO losses,
$13.3 million in the net loss on sales of REO and $8.2 million in operating
costs. The lower REO costs incurred during 1997 were a result of a reduction
in the rate of foreclosures experienced during 1997 and a continuing
improvement in the speed and price at which REO properties were sold. The
higher losses from operations in 1996 compared to 1995 included increases of
$12.5 million in operating expenses and $7.3 million in losses on
28
<PAGE>
sales of REO, which reflect the greater 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. For additional information
regarding REO, see "Financial Condition--Asset Quality--NPAs and Potential
Problem Loans."
NONINTEREST INCOME
Gain (Loss) on Sales of MBS. During 1997, 1996 and 1995, the Company
recognized gains (losses) on sales of MBS with weighted average servicing fees
on such sales as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ -------- ----------
<S> <C> <C> <C>
Book value of MBS sold:
ARM MBS........................................ $ -- $187,603 $2,183,628
Fixed rate MBS................................. 9,906 10,248 29,077
------ -------- ----------
9,906 197,851 2,212,705
------ -------- ----------
Relating to the sale of the New York retail
branch system:
ARM MBS...................................... -- -- 38,722
Fixed rate MBS............................... -- -- 677,006
------ -------- ----------
-- -- 715,728
------ -------- ----------
$9,906 $197,851 $2,928,433
====== ======== ==========
Pre-tax gains (losses) on sales of MBS:
Reported in "Gain (loss) on sale of MBS:"
ARM MBS...................................... $ -- $ 3,103 $ 11,733
Fixed rate MBS............................... (74) (29) 186
------ -------- ----------
(74) 3,074 11,919
------ -------- ----------
Relating to the sale of the New York retail
branch system:
ARM MBS...................................... -- -- 113
Fixed rate MBS............................... -- -- (14,143)
------ -------- ----------
-- -- (14,030)
------ -------- ----------
$ (74) $ 3,074 $ (2,111)
====== ======== ==========
Weighted average servicing fees.................. -- % 0.60% 0.64%
====== ======== ==========
</TABLE>
The loss on sale of MBS related to the sale of the New York retail branch
deposit system was netted against the gain on the sale of the New York retail
branch deposit system 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. The majority of the MBS sold in 1997,
1996 and 1995 were originated by the Company. All MBS sold were designated as
available for sale, except for the $503.3 million in MBS sold in 1995. For
additional information see "Financial Condition--Liquidity and Capital
Resources--MBS."
29
<PAGE>
Gain on Sales of Loans. During 1997, 1996 and 1995, the Company recognized
gains on sales of loans with weighted average servicing fees on such sales as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Book value of loans sold:
Fixed rate................................ $1,837,891 $1,738,474 $1,339,319
COFI ARMs................................. 866,629 618,312 40,409
Treasury ARMs............................. 197,240 270,227 1,944
Prime rate................................ -- 38,708 --
---------- ---------- ----------
$2,901,760 $2,665,721 $1,381,672
========== ========== ==========
Pre-tax gain (loss) on sales of loans:
Fixed rate................................ $ 5,785 $ 17,237 $ 8,275
COFI ARMs................................. 10,321 2,140 (2,903)
Treasury ARMs............................. 2,168 8,969 (8)
---------- ---------- ----------
$ 18,274 $ 28,346 $ 5,364
========== ========== ==========
Weighted average servicing fees............. 0.60% 0.46% 0.23%
========== ========== ==========
</TABLE>
The Company intends to sell the majority of its fixed rate mortgage loan
originations and certain ARM originations in the secondary market.
The gain on sales of loans was $18.3 million in 1997, a decrease of $10.0
million, or 36%, from $28.3 million in 1996, which was an increase of $22.9
million, from $5.4 million in 1995. The decline in 1997 primarily reflects a
more competitive secondary market for fixed rate loan sales.
The Company capitalizes mortgage servicing rights ("MSR") when the related
mortgage loans are sold or securitized as MBS available for sale. The MSR are
amortized in proportion to and over the period of estimated loan servicing
income. The MSR are periodically reviewed for impairment based on their fair
value and potential impairment losses, if any, are recognized through a
valuation allowance and a charge to loan servicing income. Impairment is
measured on a disaggregated basis based on predominant risk characteristics of
the underlying mortgage loans. The risk characteristics used by the Company
for the purposes of capitalization and impairment evaluation include loan
amount, loan type, loan origination date, loan term, the state where the
collateral is located and collateral type. See Note 1 of Notes to Consolidated
Financial Statements for information regarding the Company's policy for MSR.
Included in "Other assets" in the Consolidated Statement of Financial
Condition were MSR as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning balance................................. $ 88,074 $ 63,696 $ 57,812
Originated MSR.................................. 28,545 40,256 16,829
Amortization to:
Interest on MBS............................... (126) (934) --
Loan servicing income......................... (16,058) (14,318) (10,436)
Addition to the valuation allowance............. (4,315) (626) (509)
-------- -------- --------
Ending balance.................................... $ 96,120 $ 88,074 $ 63,696
======== ======== ========
</TABLE>
30
<PAGE>
The Company provided $4.3 million, $0.6 million and $0.5 million for 1997,
1996 and 1995, respectively, to its valuation allowance. There were no charge-
offs against this valuation allowance during 1997, 1996 and 1995. The
valuation allowance was $5.4 million, $1.1 million and $0.5 million at
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, 1996 and
1995, the Company's capitalized MSR had fair values of $136.4 million, $184.6
million and $142.6 million, respectively. At December 31, 1997, the Company's
capitalized MSR relate to approximately $7.0 billion, or 49%, of the Company's
investor loan servicing portfolio.
Loan Servicing Income. Loan servicing income was $63.5 million in 1997, a
decrease of $4.9 million, or 7%, from $68.4 million in 1996, which was an
increase of $7.9 million, or 13%, from $60.5 million in 1995. The decrease in
loan servicing income for 1997 was primarily due to a decline of four basis
points in the average servicing fee rate to 0.66% and an increase of $1.7
million in amortization of MSR due to an increase in the related servicing
asset, partially offset by a $687.0 million increase in the average portfolio
of loans serviced for investors. 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, partially offset by a decrease of three basis points
in the average servicing rate to 0.70% and an increase of $3.9 million in the
amortization of MSR due primarily to an increase in the related servicing
asset. The declines in the servicing fee rate in 1997 and 1996 were due to
paydowns of seasoned loans with servicing rates higher than the remaining
loans being serviced by the Company. At December 31, 1997 and 1996, the
portfolio of loans serviced for investors was $14.2 billion and $13.8 billion,
respectively.
Fee Income. Total fee income, consisting of banking and other retail service
fees plus other fee income, was $183.0 million in 1997, an increase of $46.3
million, or 34%, from $136.7 million in 1996 which was an increase of $33.1
million, or 32%, from $103.6 million in 1995.
Banking and other retail service fees were $115.4 million in 1997, an
increase of $37.3 million, or 48%, from $78.1 million in 1996, which was an
increases of $22.3 million, or 40%, from $55.8 million 1995. The increase in
1997 was due to increases of $23.4 million in service charges on deposit
accounts and $8.6 million in other retail banking fees, primarily due to the
Company's continuing emphasis on growing fee-based services and the
incremental volume of business associated with the 61 former FIB branches
acquired in the third quarter of 1996, plus an increase of $5.3 million in ATM
fees. The increase in 1996 was primarily due to increases of $8.5 million in
service charges on deposit accounts, $7.5 million in ATM fees and $6.3 million
in other retail banking fees.
Fee income from other services was $67.5 million in 1997, an increase of
$8.8 million, or 15%, from $58.7 million in 1996, which was an increase of
$10.8 million, or 23%, from $47.9 million in 1995. The increase in 1997 was
primarily due to increases of $3.5 million in debit card-related fees, $2.7
million in other mortgage-related fees and $2.6 million in commissions on the
higher volume of sales of investment and insurance services and products. 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, $4.3 million
in other mortgage-related fees and $1.7 million in debit card-related fees.
Gain on Sales of Retail Deposit Branch Systems. In March 1997, the Company
sold deposits of $251.4 million and branch premises in Arizona resulting in a
pre-tax gain of $16.0 million. In June 1997, the Company sold deposits of
$916.3 million and branch premises in West Florida resulting in a pre-tax gain
of $41.6 million. The gains are net of expenses associated with the sales.
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.
31
<PAGE>
NONINTEREST EXPENSE
General and Administrative Expenses. G&A expenses were $737.5 million in
1997, a decrease of $281.7 million, or 28%, from $1.0 billion in 1996, which
was an increase of $200.6 million, or 25%, from $818.6 million in 1995. G&A
expenses for 1996 include the SAIF recapitalization of $243.9 million. During
1997, FDIC assessments declined $35.6 million as a result of the
recapitalization of the SAIF. Partially offsetting these declines in deposit
insurance assessments were increases in branch operating expenses related to
Company initiatives to offer a greater range of consumer and business banking
loan products and services and higher operating expenses associated with the
acquisition of the 61 former FIB branches in the third quarter of 1996, which
were partially offset by the sales of the Company's Arizona and West Florida
retail deposit branch systems in 1997. The Company also recognized
approximately $14.0 million in expenses in 1996 related to the FIB branch
acquisition. This compares to charges in 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. 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 financial services company.
The efficiency ratio is defined by the Company as G&A expenses as a
percentage of the sum of net interest income, loan servicing income, banking
and other retail fees and other fee income. The Company's efficiency ratio was
49.8%, 69.9% and 58.9% for 1997, 1996 and 1995, respectively. Excluding the
SAIF recapitalization and FIB branch acquisition costs in 1996, the efficiency
ratio would have been 52.2%.
Net Acquisition Costs. The Company incurred net pre-tax costs of $5.5
million related to its unsuccessful proposal to acquire Great Western.
Approximately $23.1 million of legal, printing, advisory and other expenses
were incurred, partially offset by a $17.6 million gain on the sale of 3.6
million shares of Great Western common stock which the Company had purchased
in connection with the proposal.
Operations of REI. Losses from operations of REI were $3.7 million in 1997,
a decrease of $31.3 million, or 89%, from $35.0 million in 1996, which was a
decrease of $14.5 million, or 29%, from $49.5 million in 1995. The decrease in
1997 is primarily due to declines of $24.3 million in provision for losses,
$5.3 million in REI operating expenses and $1.7 million in losses on sales of
REI. Operations of REI for 1996 include a $19.0 million addition to the
allowance for losses primarily as a result of a revision in the business plan
for the disposition of one commercial project. The decrease in 1996 compared
to 1995 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. 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.
Amortization of goodwill and other intangible assets was $25.8 million in
1997, an increase of $7.0 million, or 37%, from $18.8 million in 1996, which
was a decrease of $7.8 million, or 29%, from $26.6 million in 1995. The
increase in 1997 reflects the amortization of the goodwill resulting from the
purchase of the 61 former FIB branches in the third quarter of 1996. The
decline in 1996 reflects the reductions in the goodwill balance resulting from
the adoption of SFAS No. 72 and the sale of the New York retail deposit branch
system, partially offset by an increase in amortization resulting from the FIB
branch acquisition and an increase in the core deposit premium related to
deposits acquired in 1995.
Provision for Income Taxes. The changes in the provision for income taxes
primarily reflected the changes in pre-tax income for each year. The 1997 and
1996 tax provisions also reflected tax benefits of $3.6 million and
32
<PAGE>
$35.4 million, respectively, related to 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 1997 tax provision also includes
$9.6 million in miscellaneous federal and state tax credits and $7.0 million
of benefit related to the sale of preferred stock of a subsidiary. The
effective tax rates were 36.8% for 1997, 19.6% for 1996 and 45.3% for 1995.
For additional information regarding income taxes and related provision, see
Note 12 of Notes to Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents results of operations by quarter for 1997 and
1996 (in thousands except per share data):
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Total interest income............ $862,103 $851,502 $847,476 $842,291
Total interest expense........... 544,484 543,433 544,641 535,929
-------- -------- -------- --------
Net interest income.......... 317,619 308,069 302,835 306,362
Provision for loan losses........ 24,223 17,989 14,868 10,011
-------- -------- -------- --------
Net interest income after
provision for loan losses....... 293,396 290,080 287,967 296,351
Gain (loss) on sales of
investment securities........... -- 135 181 (10)
Noninterest income............... 88,869 111,657 63,945 64,793
Noninterest expense and taxes.... 279,172 286,216 256,554 261,640
-------- -------- -------- --------
Net income................... $103,093 $115,656 $ 95,539 $ 99,494
======== ======== ======== ========
Net income per common share:
Basic.......................... $ 0.94 $ 1.11 $ 0.91 $ 0.97
======== ======== ======== ========
Diluted........................ $ 0.87 $ 1.01 $ 0.84 $ 0.89
======== ======== ======== ========
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 --
Noninterest income............... 60,530 56,000 56,947 78,008
Noninterest expense and taxes.... 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:
Basic.......................... $ 0.46 $ 0.51 $ (0.85) $ 0.79
======== ======== ======== ========
Diluted........................ $ 0.45 $ 0.50 $ (0.85) $ 0.74
======== ======== ======== ========
</TABLE>
Net interest income increased in the fourth quarter of 1997 compared to the
third quarter of 1997 primarily due to the increase in net interest margin to
2.76% for the fourth quarter of 1997 from 2.70% in the third quarter of 1997.
Net interest income decreased in the fourth quarter of 1997 compared to the
fourth quarter of 1996 primarily due to a decrease in interest-earning assets,
offset slightly by an increase in the net interest margin from 2.68% in the
fourth quarter of 1996. The provision for loan losses decreased in the fourth
quarter of 1997 from the third quarter of 1997 and fourth quarter of 1996 as
the Company realized continuing improvements in
33
<PAGE>
credit quality. Noninterest income includes the gains on sales of retail
branch deposit systems in West Florida, Arizona and San Antonio, Texas of
$41.6 million in the second quarter of 1997, $16.0 million in the first
quarter of 1997 and $6.9 million in the fourth quarter of 1996, respectively.
Noninterest income decreased in the fourth quarter of 1997 compared to the
fourth quarter of 1996 primarily due to the $6.9 million gain on sale of the
San Antonio, Texas retail deposit branch system and lower gains of $3.5
million on sale of MBS and loans recognized in the fourth quarter of 1996.
Noninterest expense increased in the fourth quarter of 1997 compared to the
third quarter of 1997 primarily due to an increase in operating expenses
during the fourth quarter of 1997. Noninterest expense decreased in the fourth
quarter of 1997 compared to the fourth quarter of 1996 primarily due to a
decline in operations of REO.
FINANCIAL CONDITION
The Company's consolidated assets were $46.7 billion at December 31, 1997, a
decrease of $3.2 billion, or 6%, from $49.9 billion at December 31, 1996. This
decrease is primarily due to a decline in the loan and MBS portfolio of $2.8
billion, or 6%, due to sales of and payments on loans and MBS.
LOAN AND MBS PORTFOLIO
The Company's loan and MBS portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Residential loans:
Single family....... $18,714,254 $20,407,622 $20,684,133 $26,084,783 $28,764,402
Multi-family........ 9,859,143 9,582,129 9,284,131 8,518,510 7,219,708
Commercial and
industrial........... 1,128,320 1,343,348 1,566,470 1,734,793 2,012,307
----------- ----------- ----------- ----------- -----------
29,701,717 31,333,099 31,534,734 36,338,086 37,996,417
Consumer loans(1):
Home equity........... 860,573 570,656 30,676 -- --
Savings account
secured.............. 65,256 77,190 83,635 106,366 110,549
Other................. 121,511 112,777 1,009 -- --
----------- ----------- ----------- ----------- -----------
1,047,340 760,623 115,320 106,366 110,549
Business banking loans.. 65,738 53,717 -- -- --
Other loans............. 25,862 31,598 21,010 18,556 148,805
----------- ----------- ----------- ----------- -----------
30,840,657 32,179,037 31,671,064 36,463,008 38,255,771
Deferred loan costs
(fees) and interest.... 11,606 (13,176) (31,439) (55,184) (90,959)
Unearned premiums
(discounts)............ 9,279 12,432 (3,360) (5,847) (21,658)
Allowance for loan
losses................ (377,351) (389,135) (380,886) (400,232) (438,786)
----------- ----------- ----------- ----------- -----------
Loans receivable........ 30,484,191 31,789,158 31,255,379 36,001,745 37,704,368
MBS..................... 12,791,391 14,296,512 16,152,142 12,789,420 6,919,997
----------- ----------- ----------- ----------- -----------
$43,275,582 $46,085,670 $47,407,521 $48,791,165 $44,624,365
=========== =========== =========== =========== ===========
</TABLE>
- --------
(1) Beginning in 1997, consumer loans include loans secured by savings
accounts. Prior periods have been restated to reflect this change.
34
<PAGE>
At December 31, 1997, approximately 97% of the real estate loan and MBS
portfolio was secured by residential properties, including 74% secured by
single family properties. The Company's loan and MBS portfolio is concentrated
in the state of California with approximately 75% of the portfolio secured by
properties in the state. Only one other state, Florida, represents outstanding
portfolio balances greater than 5% of the total. Due to the concentration of
the portfolio in California, the Company has been and will continue to be most
significantly impacted, beneficially and adversely, by economic cycles of the
state.
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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Single family (one to four units).............. 77% 78% 81% 79% 86%
Multi-family (five units and over)............. 23 22 19 21 14
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
The Company's loan originations are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
------------------------- -------------------------
LOAN PERCENT OF LOAN PERCENT OF
ORIGINATIONS ORIGINATIONS ORIGINATIONS ORIGINATIONS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Real estate loans:
Single family:
Fixed rate.............. $2,093,788 35.5% $1,753,056 31.0%
COFI ARMs............... 283,000 4.8 1,087,997 19.3
12 MAT ARMs............. 721,908 12.3 884,042 15.6
Other Treasury ARMs..... 177,176 3.0 343,639 6.1
LAMA.................... 521,825 8.8 42 --
---------- ----- ---------- -----
3,797,697 64.4 4,068,776 72.0
Multi-family:
Fixed rate.............. 41,530 0.7 89,682 1.6
COFI ARMs............... 54,121 0.9 787,591 13.9
12 MAT ARMs............. 631,276 10.7 221,751 3.9
LAMA.................... 439,381 7.5 58,626 1.0
---------- ----- ---------- -----
1,166,308 19.8 1,157,650 20.4
Consumer loans:
Home equity............... 585,158 9.9 138,224 2.5
Savings account secured... 103,340 1.8 111,934 2.0
Other..................... 154,473 2.6 132,079 2.3
---------- ----- ---------- -----
842,971 14.3 382,237 6.8
Business banking loans...... 89,933 1.5 44,301 0.8
---------- ----- ---------- -----
$5,896,909 100.0% $5,652,964 100.0%
========== ===== ========== =====
</TABLE>
Approximately 71% of real estate loan originations in 1997 were on
properties located in California compared to 68% in 1996. Other Treasury ARMs
are loans which provide for interest rates that adjust based upon changes in
the yields of certain U.S. Treasury securities.
The Company originates consumer loans through its entire distribution
network. The Company began originating business banking loans through some of
its California branches in the fourth quarter of 1996 and was offering
business banking loans at most of its California branches by the end of the
second quarter of 1997. Both
35
<PAGE>
activities are designed to further the Company's objective of positioning
itself as a full-service consumer and financial services company.
For additional information regarding these loan products, see "Results of
Operations--Net Interest Income" and "Financial Condition--Asset/Liability
Management and Market Risk."
The real estate loan and MBS portfolio includes approximately $5.9 billion
in mortgage loans that were originated with loan-to-value ("LTV") ratios
exceeding 80%, or 14% of the portfolio at December 31, 1997. The majority of
the higher LTV loans in the portfolio at December 31, 1997 were secured by
single family properties. 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.
The Company was committed to fund the following loans (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
COMMITMENTS COMMITMENTS COMMITMENTS COMMITMENTS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Real estate loans:
Fixed rate.................... $184,123 51.8% $ 92,828 28.1%
COFI ARMs..................... 4,077 1.1 38,863 11.8
12 MAT ARMs................... 81,322 22.9 188,350 57.0
Other Treasury ARMs........... 7,378 2.1 10,308 3.1
LAMA.......................... 78,801 22.1 -- --
-------- ----- -------- -----
$355,701 100.0% $330,349 100.0%
======== ===== ======== =====
Consumer loans:
Home equity:
Lines of credit............. $508,888 60.0% $269,733 56.4%
Loans....................... 21,633 2.5 15,092 3.2
Unsecured lines of credit..... 316,144 37.3 187,505 39.2
Secured lines of credit....... 659 0.1 1,191 0.2
Other......................... 1,217 0.1 4,598 1.0
-------- ----- -------- -----
$848,541 100.0% $478,119 100.0%
======== ===== ======== =====
Business banking loans.......... $104,045 100.0% $ 50,959 100.0%
======== ===== ======== =====
</TABLE>
The Company expects to fund such loans from its liquidity sources. It is
likely that some of these loan commitments will expire without being drawn
upon.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company's principal objective of asset/liability management is to
maximize net interest income, subject to net interest margin volatility and
liquidity constraints. Net interest margin volatility results when the rate
reset (or repricing) characteristics of the Company's assets are materially
different from those of the Company's liabilities. Liquidity risk results from
the mismatching of asset and liability cash flows. The Company manages various
market risks in the ordinary course of business, including interest rate risk,
liquidity risk and credit risk.
In order to manage the interest rate risk inherent in its portfolios of
interest-earning assets and interest-costing liabilities, the Company
emphasizes the origination of ARMs for retention in the loan and MBS
portfolio. Until recently the majority of originated ARMs were indexed to
COFI. The interest rates on COFI ARMs do not immediately reflect current
market rate movements (referred to as the "COFI lag"). The COFI lag arises
because (1) COFI is determined based on the average cost of all FHLB Eleventh
District member savings institutions' interest-costing liabilities, some of
which do not reprice immediately, and (2) the Company's COFI ARMs
36
<PAGE>
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
savings institutions, the aggregate liabilities and the mix of liabilities at
such institutions, and legislative and regulatory developments which affect
the business of such institutions. Due to the unique characteristics of COFI,
the secondary market for COFI loans and MBS is not as consistently liquid as
it is for various other loans and MBS.
The Company offers and increasingly emphasizes the origination of other ARM
loan products, such as 12 MAT ARMs and LAMA loans, over COFI ARMs in an effort
to diversify the interest sensitivity of its loan portfolio. Because 12 MAT
and LAMA are moving averages of historical interest rates, the interest rates
on 12 MAT ARMs and LAMA loans do not immediately reflect market interest rate
movements. However, the timing and degree of changes in rates on 12 MAT ARMs
and LAMA loans provide a better match than COFI ARMs to the changes in rates
of certain of the Company's interest-costing liabilities, in part because 12
MAT and LAMA are not subject to influences other than changes in market
interest rates. The emphasis on these other ARM loan products and the sale of
certain COFI ARMs is intended to diversify the interest sensitivity and
liquidity profile of the Company's interest-earning assets. However, due to
the long-time emphasis on originating COFI ARMs and their predominant balance
in the current portfolio, benefits from loans tied to other indices will be
realized slowly over time. At December 31, 1997, approximately 83% of the
Company's $43.6 billion gross loan and MBS portfolio consisted of COFI ARMs,
compared to approximately 89% of the $46.5 billion gross loan and MBS
portfolio at December 31, 1996. For information regarding the Company's loan
diversification, see "Financial Condition--Loan and MBS Portfolio."
Residential real estate lending is a key component of the Company's
business. The FIB branch acquisition in the third quarter of 1996 accelerated
the Company's progress in building its portfolio of consumer and business
banking loans which generally earn higher rates of interest and have
maturities shorter than residential real estate loans. However, the
origination of consumer and business banking loans involves risks different
from those associated with originating residential real estate loans. For
example, credit risk associated with consumer and business banking loans is
generally higher than for mortgage loans, the sources and level of competition
may be different and, compared to residential real estate lending, consumer
and business banking lending is a relatively new business for the Company.
These different risk factors are considered in the underwriting and pricing
standards established for consumer and business banking loans.
The Company's approach to managing interest rate risk includes the changing
of repricing terms and spreading of maturities on term deposits and other
interest-costing liabilities. The Company manages the maturities of its
borrowings to balance changes in the demand for deposit maturities. The
Company has a strategy to increase the percentage of transaction accounts in
its deposit portfolio, which the Company believes is a lower costing funding
source than other funding sources. At December 31, 1997, transaction accounts
comprised 34% of the deposit base compared to 32% at December 31, 1996. A
portion of this increase is due to the Company's "money market index account,"
which was introduced in 1997. This product offers depositors some of the
liquidity of a transaction account, with a higher interest rate, but at a
lower cost to the Company than its traditional term accounts. The Company's
money market index account balance was $1.4 billion at December 31, 1997.
Approximately 46% of deposits to the money market index account were from
sources outside of the Company and approximately 6% of the deposits were
transfers from lower rate interest-bearing term accounts at the Company. 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 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, 1997 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
REPRICING PERIODS
PERCENT --------------------------------------------------------------
OF WITHIN 6 MONTHS 1-5 5-10 YEARS OVER
BALANCE TOTAL MONTHS 7-12 YEARS YEARS 10
----------- ------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities:
Cash equivalents....... $ 555,310 1% $ 555,310 $ -- $ -- $ -- $ --
Other investment
securities............ 9,669 -- 7,248 -- 2,421 -- --
FHLB stock............. 411,978 1 411,978 -- -- -- --
Impact of hedging
(LIBOR-indexed
amortizing swaps)..... -- -- (20,607) -- 20,607 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Total investment
securities............. 976,957 2 953,929 -- 23,028 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Loans and MBS:
MBS:
ARMs................. 12,473,485 28 12,473,485 -- -- -- --
Other................ 317,906 1 -- -- 1,852 -- 316,054
Loans:
ARMs................. 28,529,788 65 27,184,971 391,778 657,356 23,095 272,588
Other................ 1,954,403 4 73,330 -- -- -- 1,881,073
----------- --- ----------- ----------- ----------- ----------- ----------
Total loans and MBS..... 43,275,582 98 39,731,786 391,778 659,208 23,095 2,469,715
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-earning
assets................ $44,252,539 100% $40,685,715 $ 391,778 $ 682,236 $ 23,095 $2,469,715
=========== === =========== =========== =========== =========== ==========
INTEREST-COSTING
LIABILITIES:
Deposits:
Checking............... $ 3,271,579 8% $ 3,271,579 $ -- $ -- $ -- $ --
Statement savings...... 1,475,191 3 1,475,191 -- -- -- --
Money market savings... 6,338,539 15 6,338,539 -- -- -- --
Term accounts:
Under $100,000....... 20,600,689 48 12,490,809 5,829,934 2,273,665 6,228 53
Over $100,000........ 582,377 1 289,323 275,097 17,957 -- --
----------- --- ----------- ----------- ----------- ----------- ----------
Total deposits.......... 32,268,375 75 23,865,441 6,105,031 2,291,622 6,228 53
----------- --- ----------- ----------- ----------- ----------- ----------
Borrowings:
Repurchase
agreements............ 1,675,000 4 1,675,000 -- -- -- --
FHLB................... 4,812,813 11 3,448,280 1,087,292 217,743 5,653 53,845
Other.................. 4,341,453 10 2,339,266 715,538 1,038,301 248,348 --
Capital securities of
subsidiary trust...... 148,464 -- -- -- -- 148,464 --
----------- --- ----------- ----------- ----------- ----------- ----------
Total borrowings........ 10,977,730 25 7,462,546 1,802,830 1,256,044 402,465 53,845
----------- --- ----------- ----------- ----------- ----------- ----------
Total interest-costing
liabilities........... $43,246,105 100% $31,327,987 $ 7,907,861 $ 3,547,666 $ 408,693 $ 53,898
=========== === =========== =========== =========== =========== ==========
Hedge-adjusted interest-
earning assets
more/(less) than
interest-costing
liabilities............ $ 1,006,434 $ 9,357,728 $(7,516,083) $(2,865,430) $ (385,598) $2,415,817
=========== =========== =========== =========== =========== ==========
Cumulative interest
sensitivity gap........ $ 9,357,728 $ 1,841,645 $(1,023,785) $(1,409,383) $1,006,434
=========== =========== =========== =========== ==========
Percentage of hedge-
adjusted interest-
earning assets to
interest-costing
liabilities............ 102.33%
Percentage of cumulative
interest sensitivity
gap to total assets.... 2.16%
</TABLE>
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Interest
rate swaps and other derivative instruments may be used to manage interest
rates, duration and other credit and market risks. The Company does not hold
or issue derivative financial instruments for trading purposes. The Company
currently utilizes certain off-balance sheet financial instruments, including
forward sales of and options to sell loans and MBS, to help manage its
interest rate exposure with respect to fixed rate loans (or loans with certain
periods at a fixed rate) in its loan origination pipeline and in its
portfolio. The fair values of the Company's forward sales and options at
December 31, 1997 and 1996 were not significant.
38
<PAGE>
The contractual maturities, average interest rates and fair values for the
Company's financial instruments that are sensitive to changes in interest
rates as of December 31, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AVERAGE WITHIN 1-2 2-3 3-5 10-15 YEARS FAIR
YIELD/RATE 1 YEAR YEARS YEARS YEARS 5-10 YEARS YEARS OVER 15 VALUE
---------- ----------- ---------- ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE
ASSETS:
Investment
securities:
Cash equivalents... 6.33% $ 555,310 $ -- $ -- $ -- $ -- $ -- $ -- $ 555,310
Other investment
securities........ 4.96 7,248 2,421 -- -- -- -- -- 9,675
FHLB stock......... 5.80 411,978 -- -- -- -- -- -- 411,978
Impact of hedging
(LIBOR-indexed
amortizing swaps). -- (20,607) 20,607 -- -- -- -- -- (85)
Loans and MBS:
MBS:
ARMs............. 7.61 -- -- 720,594 501,171 309,415 -- 10,942,305 12,516,780
Other............ 7.58 1 -- 1,193 658 -- 275,928 40,126 317,941
Loans:
Residential loans:
ARMs............. 7.56 22,063 25,692 58,343 109,382 2,101,105 749,794 24,116,663 27,562,943
Other............ 7.78 20,157 12,585 10,324 24,834 82,728 294,556 616,936 1,065,235
Commercial and
industrial real
estate loans:
ARMs............. 7.68 23,051 19,282 30,978 196,153 521,364 22,425 144,541 951,808
Other............ 9.53 7,657 12,440 9,208 20,464 57,721 17,978 953 132,261
Consumer loans..... 8.49 1,269 2,223 8,224 54,475 89,288 578,184 336,298 1,083,786
Business banking
loans............. 10.01 52,668 2,330 1,365 2,296 1,275 713 523 62,662
Other loans........ 7.89 23,683 -- -- -- -- -- -- 24,280
MSR................. -- 3 -- -- 2 1,383 6,234 88,498 136,413
----------- ---------- ---------- -------- ---------- ---------- ----------- -----------
$ 1,104,481 $ 97,580 $ 840,229 $909,435 $3,164,279 $1,945,812 $36,286,843 $44,830,987
=========== ========== ========== ======== ========== ========== =========== ===========
INTEREST-SENSITIVE LIABILITIES:
Deposits:
Checking........... 0.99% $ 3,271,579 $ -- $ -- $ -- $ -- $ -- $ -- $ 3,271,579
Statement savings.. 1.95 1,475,191 -- -- -- -- -- -- 1,475,191
Money market
savings........... 3.81 6,338,539 -- -- -- -- -- -- 6,338,539
Term accounts...... 5.42 18,833,025 1,836,800 344,984 161,977 6,227 53 -- 21,215,926
Borrowings:
Repurchase
agreements........ 6.28 1,675,000 -- -- -- -- -- -- 1,693,928
FHLB............... 6.19 3,605,572 983,272 122,928 41,542 5,654 53,164 681 4,869,653
Other.............. 6.44 2,334,804 820,471 673,891 263,939 248,348 -- -- 4,420,710
Capital securities
of subsidiary
trust............. 8.53 -- -- -- -- -- 148,464 -- 162,498
----------- ---------- ---------- -------- ---------- ---------- ----------- -----------
$37,533,710 $3,640,543 $1,141,803 $467,458 $ 260,229 $ 201,681 $ 681 $43,448,024
=========== ========== ========== ======== ========== ========== =========== ===========
INTEREST-SENSITIVE
OFF- BALANCE SHEET
ITEMS:
Commitments to
extend credit..... $ 425,159
Unused lines of
credit............ 883,128
Pipeline hedges.... 738,000
</TABLE>
For information regarding net interest income, interest-earning assets and
interest-costing liabilities, see "Results of Operations--Net Interest Income"
and for additional fair value information, see Notes 1 and 11 of Notes to
Consolidated Financial Statements.
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
other impaired major loans. Other impaired major loans are major loans which
are less than 90 days delinquent which the Company believes will be collected
in full, but which the Company believes it is probable will not be collected
in accordance with the contractual terms of the loans and which may be
dependent upon operation and/or sale of the collateral property for repayment.
See Note 1 of Notes to Consolidated Financial Statements for information
regarding the Company's policy for nonaccrual and impaired loans.
The Company's nonaccrual loans, REO, past due loans, TDRs and other impaired
major loans as of the dates indicated are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................... $432,898 $598,661 $723,791 $681,026 $780,400
REO................................ 162,440 247,577 225,566 161,948 179,862
TDRs............................... 212,299 185,635 163,844 121,365 100,751
Other impaired major loans......... 144,630 114,332 51,018 12,158 391,044
</TABLE>
40
<PAGE>
The Company's NPAs, TDRs and other impaired major loans, net of related
specific loss allowances, by type as of the dates indicated are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ INCREASE
1997 1996 (DECREASE)
-------- -------- ---------
<S> <C> <C> <C>
Nonaccrual loans:
Single family.............................. $376,421 $537,243 $(160,822)
Multi-family............................... 20,631 44,972 (24,341)
Commercial and industrial real estate...... 32,171 14,837 17,334
Consumer................................... 3,608 1,410 2,198
Business banking........................... 67 199 (132)
-------- -------- ---------
Total.................................... $432,898 $598,661 $(165,763)
======== ======== =========
REO:
Single family.............................. $137,114 $214,720 $ (77,606)
Multi-family............................... 15,657 19,239 (3,582)
Commercial and industrial real estate...... 9,669 13,618 (3,949)
-------- -------- ---------
Total.................................... $162,440 $247,577 $ (85,137)
======== ======== =========
Total NPAs:
Single family.............................. $513,535 $751,963 $(238,428)
Multi-family............................... 36,288 64,211 (27,923)
Commercial and industrial real estate...... 41,840 28,455 13,385
Consumer................................... 3,608 1,410 2,198
Business banking........................... 67 199 (132)
-------- -------- ---------
Total.................................... $595,338 $846,238 $(250,900)
======== ======== =========
TDRs:
Single family.............................. $162,257 $ 91,422 $ 70,835
Multi-family............................... 32,636 58,027 (25,391)
Commercial and industrial real estate...... 17,406 36,186 (18,780)
-------- -------- ---------
Total.................................... $212,299 $185,635 $ 26,664
======== ======== =========
Other impaired major loans:
Multi-family............................... $107,814 $ 96,383 $ 11,431
Commercial and industrial real estate...... 36,816 17,949 18,867
-------- -------- ---------
Total.................................... $144,630 $114,332 $ 30,298
======== ======== =========
Ratio of NPAs to total assets................ 1.28% 1.70%
======== ========
Ratio of NPAs and TDRs to total assets....... 1.73% 2.07%
======== ========
Ratio of allowances for losses on loans and
REO to NPAs................................. 64.07% 47.96%
======== ========
</TABLE>
41
<PAGE>
The Company's NPAs, TDRs and other impaired major loans by state at December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
NPAS
------------------------------------------------------
REAL ESTATE
---------------------------
OTHER
COMMERCIAL IMPAIRED
SINGLE MULTI- AND BUSINESS MAJOR
FAMILY FAMILY INDUSTRIAL CONSUMER BANKING TOTAL TDRS LOANS
-------- ------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $373,697 $35,201 $32,648 $3,418 $ 67 $445,031 $169,500 $136,971
New York................ 36,436 452 1,246 -- -- 38,134 22,777 2,626
Florida................. 36,764 -- -- -- -- 36,764 5,028 --
Texas................... 9,102 377 -- -- -- 9,479 1,677 1,220
Other................... 57,536 258 7,946 190 -- 65,930 13,317 3,813
-------- ------- ------- ------ ---- -------- -------- --------
$513,535 $36,288 $41,840 $3,608 $ 67 $595,338 $212,299 $144,630
======== ======= ======= ====== ==== ======== ======== ========
</TABLE>
Total NPAs were $595.3 million at December 31, 1997, or a ratio of NPAs to
total assets of 1.28%, a decrease of $250.9 million, or 30%, during 1997 from
$846.2 million, or 1.70% of total assets, at December 31, 1996. The major
reasons for the decrease in NPAs during 1997 were continuing improvement in
the California economy and California real estate market and the Company's
continuing efforts to improve the collection process.
Single family NPAs were $513.5 million at December 31, 1997, a decrease of
$238.5 million, or 32%, from $752.0 million at December 31, 1996 primarily due
to declines in NPAs secured by properties in California ($219.0 million), New
York ($11.3 million) and Florida ($2.4 million). Multi-family NPAs totaled
$36.3 million at December 31, 1997, a decrease of $27.9 million, or 43%, from
$64.2 million at December 31, 1996 primarily due to declines in NPAs secured
by properties in California ($23.5 million) and New York ($2.0 million).
Commercial and industrial NPAs totaled $41.8 million at December 31, 1997, an
increase of $13.3 million, or 47%, from $28.5 million at December 31, 1996
primarily due to an increase in California ($13.4 million).
TDRs totaled $212.3 million at December 31, 1997, an increase of $26.7
million, or 14%, during 1997 from $185.6 million at December 31, 1996
primarily due to an increase in single family TDRs, primarily in California
($54.3 million), partially offset by a decrease in multi-family TDRs primarily
in California ($11.9 million) and a decline in commercial and industrial TDRs
primarily in New York ($11.8 million). The increase in single family TDRs is
due to a change in the Company's TDR policy during the second quarter of 1996.
The change was to increase the conditional period, to at least 12 months, that
a loan must perform in accordance with its original terms before the loan
would be reclassified from a TDR to a performing loan. The conditional period
begins when the modification to the original loan terms has expired. The
increase also 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. At December 31, 1997,
$81.5 million of single family TDRs were in the conditional period, including
$72.8 million that were current.
Other impaired major loans totaled $144.6 million at December 31, 1997, an
increase of $30.3 million from $114.3 million at December 31, 1996 primarily
due to an $18.0 million commercial and industrial loan secured by a property
in California.
The recorded investment in all impaired loans was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR NET RECORDED FOR NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
With specific
allowances........... $330,412 $55,392 $275,020 $305,321 $58,876 $246,445
Without specific
allowances........... 103,352 -- 103,352 89,491 -- 89,491
-------- ------- -------- -------- ------- --------
$433,764 $55,392 $378,372 $394,812 $58,876 $335,936
======== ======= ======== ======== ======= ========
</TABLE>
42
<PAGE>
The Company is continuing its efforts to reduce the amount of its NPAs by
aggressively pursuing loan delinquencies through the collection, workout and
foreclosure processes and, if foreclosed, disposing rapidly of the REO. The
Company sold $383.5 million of single family REO and $55.4 million of multi-
family and commercial and industrial REO in 1997. The Company sold $429.8
million of single family REO and $91.0 million of multi-family and commercial
and industrial REO in 1996. In addition, the Company may, from time to time,
offer packages of NPAs for competitive bid.
Management believes that loans delinquent 60-89 days are a key leading
indicator of future NPAs and credit costs. Loans which were 60-89 days
delinquent by loan type as of the dates indicated are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOAN AND LOAN AND LOAN AND
MBS MBS MBS
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single family........... $71,469 0.23% $120,808 0.35% $143,932 0.39%
Multi-family............ 5,258 0.05 6,968 0.07 34,614 0.37
Commercial and
industrial real
estate................. -- -- 1,934 0.14 2,648 0.17
Consumer................ 2,114 0.20 1,883 0.25 -- --
Business banking........ 34 0.05 102 0.19 -- --
------- -------- --------
$78,875 0.18 $131,695 0.28 $181,194 0.38
======= ======== ========
</TABLE>
The decrease in loans delinquent 60-89 days at December 31, 1997 compared to
December 31, 1996 and the decrease in loans delinquent 60-89 days at December
31, 1996 compared to December 31, 1995 were primarily influenced by the
Southern California economy and real estate market, both of which improved in
1996 and 1997 after continuing to exhibit weakness in 1995. Single family
loans 60-89 days delinquent decreased in 1997 by $49.3 million primarily in
the state of California ($44.5 million) and decreased in 1996 by $23.1 million
primarily in the states of California ($16.9 million) and New York ($4.4
million). Multi-family loans 60-89 days delinquent decreased $1.7 million in
1997 primarily in the state of California ($1.9 million) and decreased
$27.6 million in 1996 primarily in the states of California ($19.9 million)
and New York ($7.7 million). In addition, commercial and industrial real
estate loans 60-89 days delinquent declined in 1997 and 1996 by $1.9 million
and $0.7 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, 1997. The Company's process for evaluating the
adequacy of the allowance for loan losses includes the identification and
detailed review of impaired loans, an assessment of the overall quality and
inherent risk in the loan portfolio, and consideration of loss experience and
trends in problem loans, as well as current economic conditions and trends.
Based upon this process, management determines what it considers to be an
appropriate allowance for loan losses.
The 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 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 loan and MBS category at the dates
indicated are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
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
--------- ------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Single family........... $174,459 72.2% 0.55% $176,120 74.7% 0.51%
Multi-family............ 143,977 22.6 1.46 153,933 20.7 1.60
Commercial and
industrial real
estate................. 40,713 2.6 3.62 45,065 2.9 3.37
Consumer(1)............. 13,402 2.4 1.21 9,217 1.6 1.21
Business banking........ 4,800 0.2 7.28 4,800 0.1 8.81
-------- ----- -------- -----
$377,351 100.0% 0.86 $389,135 100.0% 0.84
======== ===== ======== =====
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1994
--------------------------------- ---------------------------------
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
--------- ------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Single family........... $174,242 77.1% 0.47% $165,000 78.9% 0.42%
Multi-family............ 147,708 19.4 1.59 160,232 17.4 1.88
Commercial and
industrial real
estate................. 58,936 3.3 3.78 75,000 3.5 4.34
Consumer(1)............. -- 0.2 -- -- 0.2 --
-------- ----- -------- -----
$380,886 100.0% 0.80 $400,232 100.0% 0.81
======== ===== ======== =====
<CAPTION>
DECEMBER 31, 1993
---------------------------------
ALLOWANCE
PERCENT OF AS PERCENT
LOAN AND MBS OF LOAN
CATEGORY TO AND MBS
ALLOWANCE TOTAL CATEGORY
--------- ------------ ----------
<S> <C> <C> <C>
Single family........... $155,516 79.3% 0.43%
Multi-family............ 145,097 16.1 2.00
Commercial and
industrial real
estate................. 138,173 4.4 6.90
Consumer(1)............. -- 0.2 --
-------- -----
$438,786 100.0% 0.97
======== =====
</TABLE>
- --------
(1) For 1995, 1994 and 1993, consumer loans consisted entirely of loans
secured by savings accounts.
44
<PAGE>
The allocation of the allowance for loan losses by type at December 31, 1997
reflects continued reduction in the commercial and industrial real estate loan
portfolio and an 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 $3.2 billion, or 9%, in 1997 and $2.1
billion, or 6%, in 1996 due to principal payments and sales, there continues
to be no significant change 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 decline in 1997 in the Company's NPAs, and the
decline in the Company's loan and MBS portfolio, the ratio of allowances for
losses on loans and REO to NPAs increased from 47.96% in 1996 to 64.07% in
1997. For additional information regarding the allowance for loan losses, see
"Financial Condition--Asset Quality--NPAs and Potential Problem Loans."
The changes in the Company's allowance for loan losses and the loss
experience for the years indicated are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
the year..................... $ 389,135 $ 380,886 $ 400,232 $ 438,786 $ 434,114
Provision for loan losses..... 67,091 144,924 119,111 176,557 574,970
Loan loss allowance on
loans purchased.............. -- 14,710 -- -- 20,365
--------- --------- --------- --------- ----------
456,226 540,520 519,343 615,343 1,029,449
--------- --------- --------- --------- ----------
Charge-offs:
Single family............... (74,269) (111,212) (87,240) (97,865) (469,204)
Multi-family................ (24,940) (59,262) (53,263) (114,323) (76,189)
Commercial and
industrial real
estate..................... (8,860) (19,599) (22,115) (40,546) (68,135)
Consumer.................... (5,447) (398) -- -- --
Business banking............ (502) (69) -- -- --
Credit cards................ -- -- -- -- (10,207)
--------- --------- --------- --------- ----------
(114,018) (190,540) (162,618) (252,734) (623,735)
--------- --------- --------- --------- ----------
Recoveries:
Single family............... 26,580 28,835 14,967 14,759 18,392
Multi-family................ 6,753 8,199 7,405 15,314 7,365
Commercial and
industrial real
estate..................... 1,767 2,121 1,789 7,550 7,315
Business banking............ 43 -- -- -- --
--------- --------- --------- --------- ----------
35,143 39,155 24,161 37,623 33,072
--------- --------- --------- --------- ----------
Net charge-offs........... (78,875) (151,385) (138,457) (215,111) (590,663)
--------- --------- --------- --------- ----------
Balance at end of the
year......................... $ 377,351 $ 389,135 $ 380,886 $ 400,232 $ 438,786
========= ========= ========= ========= ==========
Ratio of net charge-offs
to average loans and
MBS outstanding during
the year..................... 0.18% 0.32% 0.28% 0.46% 1.34%
========= ========= ========= ========= ==========
</TABLE>
The declines in the provision for loan losses and gross charge-offs during
1997 are due to lower levels of NPAs and delinquent loans in 1997. During
1997, NPAs declined $250.9 million, reaching their lowest level since July
1990. The recent economic upturn in California has contributed to the
significant improvement in the Company's credit costs. 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 experienced prior to the second half of 1996.
45
<PAGE>
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 FIB 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 is 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 the economies of the
areas in which the Company lends and upon future events, including natural
disasters, such as earthquakes. Management believes that the principal risk
factor which could potentially require an increase in the allowance for loan
losses would be the reversal of recent improvements in the residential
purchase market in California, particularly in Southern California, the
Company's primary lending market.
REI. The Company accounts for REI in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." 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 $1.4 million, or 1%, to $146.5 million at
December 31, 1997 from $147.9 million at December 31, 1996. The allowance for
losses on REI was $107.8 million or 42.4% of gross REI at December 31, 1997,
compared to $132.4 million or 47.2% of gross REI at December 31, 1996. The
decline in net REI was primarily due to the continued development and sale of
ongoing residential projects and the sale of three commercial development
projects.
The Company's REI by type at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
GROSS ALLOWANCE
BOOK FOR NET BOOK
VALUE LOSSES VALUE
-------- --------- --------
<S> <C> <C> <C>
REI held for sale:
Residential REI............................... $ 11,513 $ 8,794 $ 2,719
Commercial and industrial REI and undeveloped
land......................................... 84,158 5,618 78,540
-------- -------- --------
95,671 14,412 81,259
Long-term REI:
Residential REI............................... 70,879 44,685 26,194
Commercial and industrial REI and undeveloped
land......................................... 87,741 48,676 39,065
-------- -------- --------
158,620 93,361 65,259
-------- -------- --------
Total REI....................................... $254,291 $107,773 $146,518
======== ======== ========
</TABLE>
At December 31, 1997, REI totaling $65.3 million were classified as long-
term consisting of four projects located in California and one in Maryland. At
December 31, 1997, REI totaling $81.3 million were classified as held for sale
consisting of four projects located in California and one in North Carolina
which the Company expects to sell in the near term. There were no specific
impairment allowances recognized on these REI assets at December 31, 1997 as
management believes that the general valuation allowances established were
adequate to cover impairment.
46
<PAGE>
The Company is continuing its strategy of exiting the real estate investment
business. Although the Company does not intend to acquire new properties, it
intends to develop, hold and/or sell its current properties depending on
economic conditions. No new projects have been initiated since 1990.
The Company may establish general valuation allowances based on management's
assessment of the risk of further reductions in carrying values. The Company's
basis for such estimates include project business plans monitored and approved
by management, market studies and other information. Although management
believes the carrying values of the REI and the related allowance for losses
are fairly stated, declines in carrying values and additions to the allowance
for losses could result from continued weakness in the specific project
markets, changes in economic conditions and revisions to project business
plans, which may reflect decisions by the Company to accelerate the
disposition of the properties.
For additional information regarding REI, see Note 6 of Notes to
Consolidated Financial Statements. For additional information regarding SFAS
No. 121, see Note 1 of Notes to Consolidated Financial Statements.
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 from these
sources.
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 effective November
24, 1997 require an institution regulated by the OTS to maintain an average
daily balance of liquid assets in each calendar quarter of not less than four
percent of either (1) its liquidity base at the end of the preceding quarter,
or (2) the average daily balance of its liquidity base during the preceding
quarter. Home Savings has elected to calculate its average liquidity ratio
using the first method. Compared to the prior regulation, the new regulation
defines the liquidity base more narrowly, expands the categories of liquid
assets that count in satisfying the liquidity requirement, requires quarterly
rather than monthly calculations, reduces the requirement from five percent to
four percent of the liquidity base and eliminates the separate short-term
liquidity requirement. Therefore, institutions regulated by the OTS now
operate in a less restrictive environment for purposes of managing their
required liquidity. For December 1997 the average liquidity ratio of Home
Savings was 6.87%.
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 financial 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 1997 cash of $5.6 billion was used to originate
loans. Principal payments on loans were $3.8 billion in 1997, an increase of
$1.1 billion, or 41%, from $2.7 billion in 1996. During 1997 the Company sold
loans totaling $2.9 billion. At December 31, 1997, the Company had $455.7
million of loans held
47
<PAGE>
for sale. The loans designated for sale included $429.7 million of fixed rate
loans, $24.2 million of Treasury ARMs, $1.6 million of LAMA loans and 12 MAT
ARMs and $0.2 million of COFI ARMs. For information regarding the Company's
loan sales, see "Results of Operations--Noninterest Income--Gain on Sales of
Loans."
MBS. The Company designates certain MBS as available for sale. During 1997,
the Company sold $9.9 million of fixed rate MBS available for sale. At
December 31, 1997 the Company had $8.5 billion of MBS available for sale,
comprised of $8.2 billion of ARM MBS and $275.9 million of fixed rate MBS.
These MBS had an unrealized gain of $51.6 million at December 31, 1997. The
change from a net unrealized loss on MBS available for sale, at December 31,
1996, to a net unrealized gain, at December 31, 1997, is largely due to the
Company's change in methodology to recognize the fair value of MSR associated
with the MBS. The unrealized gain is due to temporary market-related
conditions and the Company expects no significant effect on its future
interest income.
Deposits. Deposits were $32.3 billion at December 31, 1997, a decrease of
$2.5 billion, or 7%, from $34.8 billion at December 31, 1996, partially due to
the Arizona and West Florida branch sales which closed during 1997. Excluding
these transactions, there was a net deposit outflow of $1.3 billion primarily
due to maturities of term accounts which have more sensitivity to market
interest rates than transaction accounts. Excluding sales, term deposits
decreased $1.4 billion during 1997, while transaction accounts increased
$79.2 million during 1997. The Company manages its borrowings to balance
changes in deposits.
In December 1997, the Company announced the sale of all 27 of its East Coast
of Florida branches with deposits at December 31, 1997 of approximately $3.3
billion. The sale is expected to close in the third quarter of 1998 and is
subject to regulatory approval.
At December 31, 1997, 82% of the Company's deposits were in California,
compared to 79% at December 31, 1996. Substantially all deposits acquired from
Coast are in California. The Company may engage in additional branch purchases
and sales to consolidate its presence in key strategic markets.
Borrowings. Borrowings totaled $10.8 billion at December 31, 1997, a
decrease of $751.3 million, or 7%, from $11.6 billion at December 31, 1996,
reflecting a decline in FHLB and other borrowings of $1.2 billion, partially
offset by an increase in short-term borrowings of $482.3 million.
In March 1997, the Company issued two medium term notes totaling $80 million
which will mature in March, 1998, bearing an interest rate of 6.15%. In April
1997, the Company issued two medium term notes totaling $100 million which
will mature within two years and bear a weighted average interest rate of
6.26%. In August 1997, the Company issued $125 million in subordinated debt
which will mature on August 15, 2004 and bears an interest rate of 6.50%. In
1997, the Company issued term notes totaling $920.0 million to various
brokerage firms. The notes will mature in one to two years and have a weighted
average interest rate of 5.68%. Such borrowings are being used for general
corporate purposes.
For a description of the Company's borrowings, see Notes 9 and 10 of Notes
to Consolidated Financial Statements.
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 1997, Ahmanson returned capital
to its stockholders by purchasing 27.6 million shares of its common stock. On
March 2, 1998, the Company redeemed at par the entire $195 million of its
8.40% Series C Preferred Stock.
Stockholders' equity decreased $37.6 million, or 2%, to $2.4 billion at
December 31, 1997. The decrease is primarily due to payments of $481.4 million
to purchase 10.6 million shares of the Company's common stock and dividends
paid to common and preferred stockholders of $119.3 million, partially offset
by net income of $413.8 million and a net change of $105.2 million to the net
unrealized gain on securities available for sale. The net unrealized gain on
securities available for sale at December 31, 1997 was $31.1 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.
At December 31, 1997 Home Savings exceeded the regulatory standards. The
following table shows the capital amounts and ratios of Home Savings at
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
WELL-
CAPITAL CAPITALIZED
AMOUNT RATIO STANDARD
---------- ----- -----------
<S> <C> <C> <C>
Tangible capital (to adjusted total assets)... $2,703,074 5.86% N/A
Core capital (to adjusted total assets)....... 2,706,337 5.87 5.00%
Core capital (to risk-weighted assets)........ 2,706,337 9.14 6.00
Total risk-based capital (to risk-weighted
assets)...................................... 3,494,471 11.80 10.00
</TABLE>
ACCOUNTING DEVELOPMENTS
The Company adopted SFAS No. 128, "Earnings per Share" as of December 31,
1997. SFAS No. 128 simplifies the standards for computing and presenting
earnings per share ("EPS") from those previously prescribed by Accounting
Principles Board Opinion No. 15, "Earnings per Share." SFAS No. 128 replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in issuance of common stock that then
shared in earnings. SFAS No. 128 also requires dual presentation of basic and
diluted EPS on the face of the income statement and a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure," as of December 31, 1997. SFAS No. 129 consolidates existing
reporting standards for disclosing information about an entity's capital
structure. SFAS No. 129 also supersedes previously issued accounting
statements. The impact on the Company of adopting SFAS No. 129 was not
material as the Company's existing disclosure practices have generally been in
compliance with the disclosure requirements in SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The impact on the Company of
adopting SFAS No. 130 is not expected to be material to the Company's existing
disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim reports to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997, with comparative information for earlier years to be
restated. The Company is currently assessing the effect of adopting SFAS No.
131.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures About
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits;
requires additional information on changes in the benefit obligations and fair
values of
49
<PAGE>
plan assets; and eliminates certain disclosures required by SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination of Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997, with comparative information
for earlier years to be restated. The impact on the Company of adopting SFAS
No. 132 is not expected to be material.
TAX CONTINGENCY
The Company's financial statements do not contain any benefit related to the
Company's determination that it is entitled to the deduction of the tax bases
in certain state branching rights when the Company sells its deposit branch
businesses, thereby abandoning such branching rights in those states. The
Company's position is that the tax bases result from the tax treatment of
property received as assistance from the Federal Savings and Loan Insurance
Corporation ("FSLIC") in conjunction with FSLIC-assisted transactions. From
1981 through 1985, the Company acquired thrift institutions in six states
through FSLIC-assisted transactions. The Company's position is that assistance
received from the FSLIC included out-of-state branching rights valued at
approximately $740 million. As of December 31, 1997, 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, 1997 could approach
$167 million. The potential deferred tax benefit related to branching rights
not abandoned could approach $130 million.
The Internal Revenue Service ("IRS") is currently examining the Company's
federal income tax returns for the years 1990 through 1993, including the
Company's proposed adjustment related to the abandonment of its Missouri
branching rights. The IRS field team recently informed the Company of their
intent to request a Technical Advice Memorandum from the IRS National Office
regarding the Missouri branching rights. The Company, after consultation with
its tax advisors, believes that its position with respect to the tax treatment
of these rights is the correct interpretation under the tax and regulatory
law. However, the Company also believes that its position has never been
directly addressed by any judicial or administrative authority. It is
therefore impossible to predict either the IRS response to the Company's
position, or if the IRS contests the Company's position, the ultimate outcome
of litigation that the Company is prepared to pursue. Because of these
uncertainties, the Company cannot presently determine if any of the above
described tax benefits will ever be realized and there is no assurance to that
effect. Therefore, in accordance with generally accepted accounting
principles, the Company does not believe it is appropriate at this time to
reflect these tax benefits in its financial statements. This position will be
reviewed by the Company from time to time as these uncertainties are resolved.
GOODWILL LITIGATION
On August 31, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") was enacted. Among other things, FIRREA raised the
minimum capital requirements for savings institutions and required a phase-out
of the amount of supervisory goodwill which could be included in satisfying
certain regulatory capital requirements. The exclusion of supervisory goodwill
from capital led many savings institutions to either replace the lost capital
by issuing new qualifying debt or equity securities or reduce assets. On
August 31, 1989, Home Savings had supervisory goodwill totaling $572.0 million
resulting from its prior acquisitions of 18 savings institutions in Florida,
Missouri, Texas, Illinois, New York and Ohio. In September 1992, Home Savings
filed a lawsuit against the U.S. government for unspecified damages involving
supervisory goodwill related to its acquisitions of troubled savings
institutions from 1981 to 1988.
In March 1998, the U.S. government conceded that Home Savings had contracts
with the U.S. government and that the U.S. government took actions that were
inconsistent with those contracts. These contracts relate to Home Savings'
purchase of troubled savings institutions in Florida, Missouri, Texas and
Illinois and the purchase of Century Federal Savings of New York, which
resulted in unamortized supervisory goodwill of $374.8 million as of August
31, 1989. The government denied both the existence of additional contracts and
any action
50
<PAGE>
inconsistent with a contract in connection with Home Savings' purchase of
savings institutions in Ohio and The Bowery Savings Bank of New York, which
resulted in unamortized supervisory goodwill of $197.2 million as of August
31, 1989.
The U.S. government's response represents a concession of liability and is
not a concession that Home Savings was damaged by the U.S. government's breach
of contract. In addition, there has been no determination as to the amount of
damages that Home Savings may have sustained as a result of the breach of
contract. Home Savings is continuing to pursue its case with respect to
supervisory goodwill claims including those for The Bowery Savings Bank and
savings institutions in Ohio.
If the proposed merger with Washington Mutual is consummated, Home Savings'
rights in the litigation against the U.S. government will become an asset of
Washington Mutual.
YEAR 2000
Many computer systems, including most of those used by the Company, identify
dates using only the last two digits of the year. These systems are unable to
distinguish between dates in the year 2000 and dates in the year 1900. That
inability (referred to as the "Year 2000 issue"), if not addressed, could
cause these systems to fail or provide incorrect information after December
31, 1999 or when using dates after December 31, 1999. This in turn could have
a material adverse impact on the Company and its ability to process customer
transactions or provide customer services.
The Company has implemented a process for identifying, prioritizing and
modifying or replacing systems that may be affected by the Year 2000 issue.
The Company is also monitoring the adequacy of the processes and progress of
third party vendors of systems that may be affected by the Year 2000 issue.
While the Company believes its process is designed to be successful, because
of the complexity of the Year 2000 issue, it is possible that the Company's
efforts or those of third party vendors will not be satisfactorily completed
in a timely fashion. In addition, the Company interacts with a number of other
entities, including government entities. The failure of these entities to
address the Year 2000 issue could adversely affect the Company.
The Company currently estimates that its Year 2000 project, including costs
incurred in 1997 and through the year 2000, may cost approximately $45
million. These costs include estimates for employee compensation on the
project team, consultants, hardware and software lease expense and
depreciation of equipment purchased as part of the project. Year 2000 costs
are expensed as incurred and approximately $8.8 million was expensed in 1997.
As the Company progresses in addressing the Year 2000 issue, estimates of
costs could change, including as a result of the failure of third party
vendors to address the Year 2000 issue in a timely fashion. However, the
Company's estimated Year 2000 expenses are not expected to result in a dollar
for dollar increase in the Company's overall information systems expenditures
because the Company is likely to initiate fewer other major systems projects
during the pendency of the Year 2000 project.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition--Asset/Liability Management and Market
Risk" for quantitative and qualitative information about market risk and its
potential effect on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included on page 73 and the Financial Statements which begin
on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
AGE AS OF DIRECTOR
NAME POSITION MARCH 31, 1998 SINCE
---- -------- -------------- --------
<S> <C> <C> <C>
Byron Allumbaugh Director 66 1987
Anne-Drue M. Anderson* Executive Vice President 37 --
Harold A. Black Director 52 1995
Richard M. Bressler Director 67 1987
John E. Bryson Director 54 1997
David R. Carpenter Director 59 1995
Jan R. Cloyde* Executive Vice President 47 --
Carl W. Forsythe* Executive Vice President 40 --
Madeleine A. Kleiner* Senior Executive Vice 46 --
President, Chief
Administrative Officer,
General Counsel and
Secretary
E. Nancy Markle* Executive Vice President 56 --
Ray Martin Director 62 1998
Phillip D. Matthews Director 59 1995
Robert McAuslan* Executive Vice President 49 --
George Miranda* First Vice President and 50 --
Principal Accounting Officer
Richard L. Nolan Director 57 1995
Delia M. Reyes Director 56 1992
Charles R. Rinehart* Chairman of the Board and 51 1990
Chief Executive Officer
Frank M. Sanchez Director 54 1995
Elizabeth A. Sanders Director 52 1990
Arthur W. Schmutz Director 76 1993
William D. Schulte Director 65 1991
Jaynie Studenmund* Executive Vice President 43 --
Kevin M. Twomey* Vice Chairman and Chief 51 1997
Financial Officer
Bruce G. Willison* Director, President and Chief 49 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. BRYSON is Chairman and Chief Executive Officer of Edison International
Company, the parent company of subsidiaries providing energy-related products
and services, and Southern California Edison Company, an electric utility. Mr.
Bryson also serves as a director of The Boeing Company and The Times Mirror
Company.
52
<PAGE>
MR. CARPENTER is Chairman and Chief Executive Officer of Paradigm Partners
International, a financial services management firm, and Chairman and Chief
Executive Officer of UniHealth, a California non-profit health care
organization. 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. CLOYDE joined Home Savings as Executive Vice President in September 1996
and became Executive Vice President of Ahmanson in May 1997. From June 1994 to
April 1996, Ms. Cloyde was Executive Vice President for Cash Management at
First Interstate Bancorp. From December 1992 to June 1994, Ms. Cloyde was
Executive Vice President and Manager of Cash Management and Corporate Services
at First Interstate Bank of California.
MR. FORSYTHE joined Home Savings as Executive Vice President in November
1995 and became Executive Vice President of Ahmanson in May 1997. From August
1993 until joining Home Savings, Mr. Forsythe was Senior Vice President and
Chief Retail Officer at Banc One Ohio Corporation. From January 1993 until
August 1993, Mr. Forsythe was Chief Operating Officer of First Madison Bank.
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 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.
MR. MARTIN is a retired Chairman and Chief Executive Officer of Coast
Savings Financial, Inc. Mr. Martin also serves as a Litigation Trustee for the
Coast Federal Litigation Contingent Payment Rights Trust.
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. and SIZZLER International, Inc.
MR. McAUSLAN joined Ahmanson as First Vice President in January 1997 and
became Executive Vice President in August 1997. From October 1993 until
December 1996, Mr. McAuslan was President of CitiBank Arizona. From October
1986 until October 1993, Mr. McAuslan was Senior Vice President of CitiBank
Arizona.
DR. NOLAN is the William Barclay Harding 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 a Licensee of McDonald's Corporation.
MS. SANDERS is a business consultant. Ms. Sanders also serves as a director
of Advantica Restaurant Group, 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 Vastar Resources, Inc.
53
<PAGE>
MS. STUDENMUND joined Ahmanson as Executive Vice President in September
1997. From April 1996 until joining Ahmanson, Ms. Studenmund was director of
retail banking for Great Western Financial Corporation. From 1985 to April
1996, Ms. Studenmund was with First Interstate Bank of California where she
served as an Executive Vice President since May 1991 in various retail banking
management positions, including director of retail banking.
MR. TWOMEY joined Ahmanson in June 1993, became Executive Vice President and
Chief Financial Officer in July 1993, became Senior Executive Vice President
in March 1995 and became Vice Chairman in August 1997. From February 1993
until joining Ahmanson, he worked in corporate finance at MacAndrews and
Forbes.
MR. WILLISON joined Ahmanson in April 1996 and became President and Chief
Operating Officer 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 Enron Corp.
No directors or executive officers of Ahmanson are related.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 1997 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.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE(1)
The following table sets forth the compensation for services rendered in all
capacities to Ahmanson and its subsidiaries earned during the years indicated
by each of Ahmanson's Chief Executive Officer and the four most highly
compensated executive officers of Ahmanson (other than the Chief Executive
Officer) who were employed by Ahmanson as of December 31, 1997 (collectively
referred to as the "named executive officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION(2)
-------------------------------- ---------------------------------
AWARDS PAYOUTS
---------------------- ----------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(3) ($)(4) ($)(5) SARS(#)(6) ($)(7) ($)(8)
------------------ ---- -------- ---------- ------------ ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles R. Rinehart........... 1997 $842,501 $1,900,000 $ -- $ -- 42,692 $1,161,278 $228,549
Chairman of the 1996 760,008 891,763 -- -- 136,759 778,058 214,476
Board and Chief 1995 760,008 851,200 -- 370,427 208,613 795,150 178,647
Executive Officer
Bruce G. Willison(9).......... 1997 600,000 936,000 -- -- 22,602 614,790 --
President and Chief 1996 322,602 308,007 -- 584,375 159,469 273,000 --
Operating Officer 1995 -- -- -- -- -- -- --
Kevin M. Twomey............... 1997 465,417 733,200 -- -- 17,705 577,903 120,626
Vice Chairman and 1996 415,008 438,258 -- -- 71,570 424,864 98,782
Chief Financial Officer 1995 381,254 327,600 -- 213,842 90,234 340,031 74,566
Madeleine A. Kleiner(10)...... 1997 347,917 477,750 368,268 -- 13,184 412,423 --
Senior Executive Vice 1996 325,008 321,765 80,026 -- 55,669 324,409 --
President, Chief 1995 210,517 225,225 -- 108,908 55,175 113,344 --
Administrative Officer,
General Counsel and
Secretary
Anne-Drue M. Anderson(11)..... 1997 322,917 436,800 -- -- 21,426 350,350 28,929
Executive Vice 1996 300,000 297,007 -- -- 51,278 322,481 22,302
President 1995 273,758 246,960 -- 131,357 63,052 244,125 15,078
</TABLE>
- --------
(1) Includes bonuses and long-term compensation payouts earned in the
performance measurement period ending on December 31 of such year although
the payout was not authorized by the Compensation Committee until the
following year.
(2) Stockholdings of Messrs. Rinehart, Willison and Twomey and Mmes. Kleiner
and Anderson of 15,197, 25,000, 8,773, 4,468 and 5,389 shares,
respectively, were subject to vesting restrictions, and had a net market
value at December 31, 1997 of $1,017,249, $1,673,438, $587,243, $299,077
and $360,726, respectively, not accounting for the effect of the vesting
restrictions. Except for Mr. Willison, who received a restricted stock
award upon joining Ahmanson in 1996, all such stock represents shares
issued as payouts under Ahmanson's 1993 Stock Incentive Plan and was
reflected in the table under the heading "Restricted Stock Awards" for the
year granted.
(3) Portions of the awards granted pursuant to the Executive Short-Term
Incentive Plan and Executive Long-Term Incentive Plan were not tax
qualified but all were tax deductible for Ahmanson.
(4) Excludes compensation in the form of other personal benefits, which, for
each of the named executive officers, other than Ms. Kleiner in 1996 and
1997, did not exceed the lesser of $50,000 or 10 percent of the total of
annual salary and bonus reported for each year. Other Annual Compensation
for Ms. Kleiner in 1997 includes reimbursement of relocation expenses of
$186,705 and reimbursement for payment of taxes related to relocation
assistance of $171,344 and in 1996 includes reimbursement of relocation
expenses of $70,518.
55
<PAGE>
(5) The 33,827 restricted stock award shares granted to Messrs. Rinehart and
Twomey and Mmes. Kleiner and Anderson for 1995 were granted in February
1996. The 25,000 restricted stock award shares granted to Mr. Willison
for 1996 were granted in April 1996. Restricted stock award shares
granted for 1995 and 1996 vest in three equal annual installments
beginning three years after the grant. Dividends are paid on restricted
stock award shares prior to the lapse of restrictions to the same extent
that dividends are paid on all other shares of Ahmanson Common Stock.
(6) In 1994 Ahmanson adopted an amendment of its Executive Long-Term
Incentive Plan which, among other things, changed the timing of grants of
options from the end to the beginning of the performance measurement
period. Therefore, for 1995 includes option grants made as awards under
the Executive Long-Term Incentive Plan for the 39-month performance
period ended December 31, 1995, option grants under the Plan, as amended,
for the three-year performance periods beginning January 1, 1996, and an
additional option grant made to Ms. Kleiner in connection with her
joining Ahmanson. In 1996 Ahmanson adopted an amendment which deleted the
provision for stock option awards at the beginning of the performance
measurement period and adopted Stock Option Award Guidelines. Therefore,
for 1996 includes option grants made as awards under the Plan for the 39-
month performance period ended December 31, 1996, options granted under
the Stock Option Award Guidelines and an additional option grant made to
Mr. Willison in connection with his joining Ahmanson. For 1995 and 1996
includes options granted in lieu of cash contributions under the 1989
Contingent Deferred Compensation Plan. For 1997 includes option grants
made pursuant to the Stock Option Award Guidelines and includes an
additional option grant made to Ms. Anderson in October 1997 as a special
award in recognition of her new responsibilities as the director of
residential lending.
(7) For 1995, 1996 and 1997, represents the cash component of payouts
pursuant to Ahmanson's Executive Long-Term Incentive Plan for the 39-
month performance period ended December 31, 1995, the 39-month
performance period ended December 31, 1996, and the 36-month performance
period ended December 31, 1997, respectively. Ahmanson's Executive Long-
Term Incentive Plan provides for mandatory deferral of that portion of a
cash payout for which Ahmanson would not be allowed a tax deduction
pursuant to Section 162(m) of the Internal Revenue Code. Pursuant to this
provision, $573,000 of Mr. Rinehart's payout for 1995 was deferred. No
deferrals were made in 1996 or 1997.
(8) Includes for 1997 the value to the participant of premiums paid by
Ahmanson under the Senior Executive Life Insurance Plan.
(9) Mr. Willison became an executive officer of Ahmanson in May 1996.
(10) Ms. Kleiner became an executive officer of Ahmanson in May 1995.
(11) Ms. Anderson became an executive officer of Ahmanson in March 1995.
56
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to the named executive officers during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
PERCENTAGE OF
NUMBER OF SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO GRANT DATE(1)
NAME OPTIONS GRANTED EMPLOYEES EXERCISE PRICE EXPIRATION DATE PRESENT VALUE
---- ---------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Charles R. Rinehart..... 42,692 4.00% $61.1875 12/06/07 $1,031,439
Bruce G. Willison....... 22,602 2.11 61.1875 12/06/07 546,064
Kevin M. Twomey......... 17,705 1.65 61.1875 12/06/07 427,753
Madeleine A. Kleiner.... 13,184 1.23 61.1875 12/06/07 318,525
Anne-Drue M. Anderson... 10,000 0.93 58.3750 11/06/07 232,900
11,426 1.07 61.1875 12/06/07 276,052
</TABLE>
- --------
(1) Options which expire on November 6, 2007 and December 6, 2007 were granted
on October 6, 1997 and November 6, 1997, respectively. Present values were
calculated using the Black-Scholes option valuation model with the
following assumptions:
<TABLE>
<CAPTION>
OCTOBER 6, 1997 NOVEMBER 6, 1997
GRANT GRANT
--------------- ----------------
<S> <C> <C>
Term........................................ 10 years 10 Years
Exercise price.............................. $58.38 $61.19
Volatility.................................. 28% 27.1%
Dividend yield.............................. 1.51% 1.44%
Risk-free interest rate..................... 6.14% 6.03%
Discount for forfeiture risk................ 5.9% 5.9%
</TABLE>
The actual value, if any, which a named executive officer may realize will
be based upon the difference between the market price of Ahmanson Common
Stock on the date of exercise and the exercise price. The dividend yield
assumption is based upon the dividend rate on the respective grant dates.
There is no assurance that the assumed dividend rate will be maintained or
that the actual realized value will be at or near the value estimated by
the Black-Scholes model.
The October 6, 1997 grant to Ms. Anderson was a special award in recognition
of her new responsibilities as the director of residential lending. The
November 6, 1997 grants were issued under the 1993 Stock Incentive Plan and
were made pursuant to the Stock Option Award Guidelines, which provide for
annual awards based on a percent of base salary ranging from 25% to 100% using
a Black-Scholes valuation model.
The options become exercisable six months after grant or, if earlier, in
full upon the employee's death, disability or normal retirement or a change in
control of Ahmanson and expire three months after termination of employment
other than as a result of death, disability or retirement. Payment of tax
withholding obligations may be satisfied by withholding shares otherwise
issuable upon exercise.
57
<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND YEAR-END OPTION/SAR VALUES
The following table sets forth certain information with respect to exercises
by the named executive officers of stock options and stock appreciation rights
("SARs") during 1997 and the value of all unexercised employee stock options
and SARs as of December 31, 1997 held by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE-MONEY OPTIONS/SARS AT
ACQUIRED OPTIONS/SARS FISCAL YEAR-END(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Rinehart..... -- $1,572,045 587,846 42,692 $25,660,536 $256,152
Bruce G. Willison....... -- 728,750 139,469 22,602 5,445,563 135,612
Kevin M. Twomey......... -- 1,416,278 236,001 17,705 9,938,775 106,230
Madeleine A. Kleiner.... -- 487,500 90,844 13,184 3,327,642 79,104
Anne-Drue M. Anderson... -- 2,550,747 82,010 21,426 2,976,722 156,681
</TABLE>
- --------
(1) The actual amount realized from unexercised options is dependent upon the
price of Ahmanson Common Stock at the time shares obtained upon exercise
of such options are sold and, as to unexercisable options, whether
restrictions upon exercise of such options lapse.
LONG-TERM INCENTIVE PLAN
Under Ahmanson's Executive Long-Term Incentive Plan, senior executives of
Ahmanson and its subsidiaries who are designated by the Compensation Committee
are assigned a cash target award opportunity expressed as a percentage of base
annual salary in the last year of the three-year performance measurement
period.
The Plan also has provided for the grant of nonqualified stock options
relating to Ahmanson Common Stock which are granted at the beginning of the
performance measurement period (provided, however, that for performance
measurement periods commencing before January 1, 1994, any grants of options
were made at the end of the performance measurement period). In November 1996
this Plan was amended to delete the provision for stock option awards at the
beginning of each performance cycle.
58
<PAGE>
The following table sets forth certain information as to target cash award
opportunities under the Executive Long-Term Incentive Plan. Actual payout
amounts will be based upon total stockholder return. Notwithstanding the
satisfaction of such criteria, the Compensation Committee may, in its
discretion, reduce the cash amount paid based upon an assessment of the
executive's performance during the last 12 months of the performance
measurement period and/or the performance of the business unit or
organizational area of Ahmanson and its subsidiaries that directly employs the
participant, if the performance of Ahmanson and its subsidiaries is not
adequately reflected in the objective measures previously determined by the
Compensation Committee and/or if Home Savings' core capital is below the level
mandated by law. Estimated future payout amounts indicated are calculated
using the named executive officers' current salaries.
Long-Term Incentive Plan -- Awards in Last Fiscal Year
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
PERFORMANCE UNDER
OR OTHER PERIOD NON-STOCK PRICE-BASED PLANS
UNTIL MATURATION -----------------------------
NAME OF PAYOUT THRESHOLD TARGET MAXIMUM
---- ---------------- --------- -------- ----------
<S> <C> <C> <C> <C>
Charles R. Rinehart........... 3 years $425,000 $850,000 $1,275,000
Bruce Willison................ 3 years 236,250 472,500 708,750
Kevin M. Twomey............... 3 years 236,250 472,500 708,750
Madeleine A. Kleiner.......... 3 years 140,625 281,250 421,875
Anne-Drue M. Anderson......... 3 years 121,875 243,750 365,625
</TABLE>
RETIREMENT PLANS
Retirement Plan. Ahmanson's Retirement Plan is a qualified, noncontributory,
defined benefit retirement plan governed by the Employee Retirement Income
Security Act of 1974. The Retirement Plan is administered by a committee
appointed by the Board of Directors. With some exceptions, all employees of
Ahmanson and its participating subsidiaries (including officers) are eligible
to participate provided they meet certain age and service requirements.
The following table illustrates the estimated annual retirement benefits
payable under the Retirement Plan to participants in the following specific
average annual earnings and years of service classifications. Benefits under
the Retirement Plan are reduced in part to the extent a participant receives
Social Security benefits. Benefits paid to a participant in the Retirement
Plan who is also a participant in Ahmanson's Supplemental Executive Retirement
Plan ("SERP") or Senior Supplemental Executive Retirement Plan reduce any
benefit payable to such participant under the SERP or Senior Supplemental
Executive Retirement Plan by 100 percent of the amount of the benefit under
the Retirement Plan.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
-----------------------------------------------------
FINAL AVERAGE
EARNINGS 15 20 25 30 35 40
------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $ 37,338 $ 49,785 $ 65,355 $ 80,926 $ 87,177 $ 93,426
150,000 45,463 60,618 79,522 98,426 105,926 113,426
175,000 53,588 71,451 93,688 115,926 124,676 130,000
200,000 61,713 82,285 107,855 130,000 130,000 130,000
225,000 69,838 93,118 122,022 130,000 130,000 130,000
250,000 77,963 103,951 130,000 130,000 130,000 130,000
300,000 94,213 125,618 130,000 130,000 130,000 130,000
350,000 110,463 130,000 130,000 130,000 130,000 130,000
400,000 126,713 130,000 130,000 130,000 130,000 130,000
450,000 130,000 130,000 130,000 130,000 130,000 130,000
500,000 (and above) 130,000 130,000 130,000 130,000 130,000 130,000
</TABLE>
59
<PAGE>
Benefits are paid to or on behalf of each participant upon retirement,
normally at age 65, and under certain circumstances upon death or disability.
The Retirement Plan provides for an annual benefit equal to 65 percent of
final average annual earnings reduced by 40 percent of the participant's
Social Security benefits. "Final average annual earnings" is the annual
average compensation paid to a participant during the final 120 months of
employment, consisting of salary and cash bonuses, subject to certain
adjustments and a cap as to the amount of compensation which may be included
for each year, currently $160,000. If the participant has fewer than 30 years
of credited service in the Retirement Plan, the participant's final average
earnings are proportionately reduced. Benefits shown in the table above are
stated in the form of a single life annuity benefit payment option and assume
commencement of benefits at normal retirement age (age 65). Participants with
more than 20 years of credited service receive an additional benefit amount
equal to 1/2 of 1 percent of final average earnings for each year of credited
service in excess of 20. Participants with more than 30 years of credited
service receive an additional 1/2 of 1 percent of final average annual
earnings for each year of credited service in excess of 30. However, in no
event may a participant's benefits exceed the maximum amount permitted under
the Internal Revenue Code, which for 1997 was $130,000. Retirement benefits
generally vest after five years or upon the participant's 65th birthday while
employed by Ahmanson or a participating subsidiary. The benefits payable under
the Retirement Plan are actuarially adjusted to reflect the form of payment
elected by the participant and are subject to limitations on maximum benefits
imposed by applicable law. As of February 28, 1998 the full years of credited
service for Messrs. Rinehart, Willison and Twomey and Mmes. Kleiner and
Anderson were 8, 1, 4, 2 and 4, respectively.
Supplemental Executive Retirement Plan. Ahmanson's SERP is a noncontributory
defined benefit, nonqualified plan under which Ahmanson pays benefits to
certain officers of Ahmanson and its subsidiaries designated by the
Compensation Committee of the Board of Directors in an amount equal to a
specified percentage of the participant's average annual earnings for the 36
consecutive months during the final ten years of the participant's employment
which produce the highest average annual earnings.
The following table illustrates the estimated annual retirement benefits
payable under the SERP to participants in the following specific average
annual earnings and years of service classifications. Benefits under the SERP
are reduced to the extent a participant receives benefits from primary Social
Security or Ahmanson's Retirement Plan.
<TABLE>
<CAPTION>
YEARS OF CUMULATIVE SERVICE
----------------------------
THREE YEAR
AVERAGE
ANNUAL 15 AND
EARNINGS 5 10 OVER
---------- -------- -------- ----------
<S> <C> <C> <C>
$ 250,000 $ 50,000 $100,000 $ 150,000
500,000 100,000 200,000 300,000
750,000 150,000 300,000 450,000
1,000,000 200,000 400,000 600,000
1,250,000 250,000 500,000 750,000
1,500,000 300,000 600,000 900,000
1,750,000 350,000 700,000 1,050,000
</TABLE>
The participant's average annual earnings include salary, annual bonuses
under the Ahmanson Executive Short-Term Incentive Plan and the cash value of
any stock option awards made in lieu of contingent deferred compensation
grants. The compensation for purposes of the SERP of each of the named
executive officers is substantially equivalent to the respective amounts set
forth in the Summary Compensation Table under the headings "Salary" and
"Bonuses".
The annual benefit payable to a participant under the SERP is equal to four
percent of the participant's average annual earnings multiplied by the
participant's years of cumulative service, subject to a maximum of 15 years of
cumulative service except for determination of whether a participant is
entitled to benefits upon early retirement. Service must generally continue to
at least the participant's normal retirement date for a participant to receive
full benefits under the SERP. However, a participant may retire early and
receive reduced benefits
60
<PAGE>
upon early retirement if the sum of the participant's age and years of service
equals at least 75 and the participant is at least 55. The SERP provides for
accelerated accrual and vesting of participants' interests in the event of a
change in control of Ahmanson. Benefits generally commence under the SERP upon
the participant's retirement and are paid on a modified joint and survivor
basis, which provides for a lesser annual benefit to the participant's
designated beneficiary upon the death of the participant. The SERP provides
for a pre-retirement survivor benefit equal to the survivor benefits a
participant's spouse would have received if the participant had elected early
retirement, offset by executive life insurance. The SERP permits participants
to elect to receive a lump sum benefit, equal to 90 percent of the present
value of the participant's accrued benefits at any time after retirement or
100 percent of the present value of the participant's accrued benefits upon
retirement if the election is made in a timely manner before retirement. Mr.
Rinehart was granted additional years of service for purposes of the
Supplemental Executive Retirement Plan and has more than the maximum 15 full
years of cumulative service. Mr. Willison was granted seven years of service
for purposes of the Supplemental Executive Retirement Plan in connection with
his joining Ahmanson. As of February 28, 1998 the full years of cumulative
service for Messrs. Willison and Twomey and Mmes. Kleiner and Anderson were 8,
4, 2 and 4, respectively.
Senior Supplemental Executive Retirement Plan. Certain officers of Ahmanson
and its subsidiaries, as designated by the Compensation Committee, participate
in an auxiliary version of the SERP, the Senior Supplemental Executive
Retirement Plan, under which a portion of the amount otherwise payable to the
participant under the SERP is offset by the participant's interest in the cash
value of split-dollar life insurance policies purchased under Ahmanson's
Senior Executive Life Insurance Plan. The post-retirement survivor benefit
payable to the participant's designated beneficiary is equal to the amount
which would have been payable under Ahmanson's SERP reduced by the additional
post-retirement death benefit payable under Ahmanson's Senior Executive Life
Insurance Plan. The pre-retirement survivor benefit payable to the
participant's designated beneficiary is equal to the amount which would have
been payable under Ahmanson's SERP reduced by the death benefit payable under
Ahmanson's Senior Executive Life Insurance Plan.
EMPLOYMENT AGREEMENTS
Ahmanson has entered into employment agreements with each of its executive
officers. Such agreements generally provide for continually renewed terms of
employment and for minimum annual salaries, payable regardless of the
disability of the employee and under certain circumstances payable for a
period of time after the termination of the officer's actual employment. The
agreements with Messrs. Rinehart, Willison and Twomey and Mmes. Kleiner and
Anderson provide for minimum annual salaries of $850,000, $630,000, $630,000,
$375,000 and $325,000, respectively.
The employment agreements with Messrs. Rinehart, Willison and Twomey and
Mmes. Kleiner and Anderson also provide that the employee may terminate the
agreement at any time with or without cause. Cause includes, among other
things, Ahmanson's failure to perform its obligations under the employment
agreement. Upon termination by the employee with cause or termination by
Ahmanson without cause, as defined in the employment agreements, Ahmanson is
obligated to pay or provide the employee, for a specified period of time after
the date of termination, his or her current salary, his or her current medical
and other insurance type benefits, continuation of vesting of all unvested
restricted stock, stock options, SARs and certain deferred compensation awards
and continuation of accrual and vesting of SERP and Senior Supplemental
Executive Retirement Plan benefits. Such benefits will be paid or provided to
each of the named executive officers for a period of three years. Special
provisions apply in the event of the employee's death or receipt of any
salary, cash bonus or other benefits from another employer during the
specified period unless such termination occurs after a change in control.
The employment agreements with the named executive officers provide for a
30-day period one year after a change in control during which a voluntary
termination of employment will trigger severance benefits and include the
annual bonus as part of the compensation afforded severance protection. Upon a
change in control, the agreements add service and vesting credits under
Ahmanson's SERP equal to the remaining term of the agreement. In addition, all
restricted stock, stock options, SARs, contingent deferred compensation and
similar
61
<PAGE>
grants which are unvested immediately vest upon a change in control. The
agreements contain a gross-up provision for federal excise taxes on excess
parachute payments after a change in control.
COMPENSATION OF DIRECTORS
Directors who are also employees of Ahmanson or any of its subsidiaries
receive no additional compensation for their services as directors, including
service on committees of the Board of Directors. Each other director receives
an annual fee of $24,000 for serving on the Board of Directors and $1,500 for
each meeting of the Board of Directors attended. Each member of the Executive
Committee receives an annual fee of $3,000 and each member of the Audit,
Compensation, Nominating and Technology Committees receives an annual fee of
$2,400 for each such committee on which the director serves. Each Chairperson
of the Audit, Compensation, Nominating and Technology Committees receives an
additional fee of $9,900. Each director receives an additional payment of $600
for each committee meeting attended. Directors, and in limited circumstances,
their spouses, are reimbursed for travel and other expenses related to
attendance at Board of Directors and committee meetings.
Directors of Ahmanson who are not employees of Home Savings or any of its
subsidiaries receive additional fees for attending meetings of the Board of
Directors of Home Savings that are not held jointly with meetings of the
Ahmanson Board of Directors. The Board of Directors of Home Savings held seven
meetings during 1997 separately from the Ahmanson Board of Directors.
Ahmanson's Outside Director Retirement Plan is a nonqualified retirement
plan for directors of Ahmanson who are not also employees of Ahmanson or any
of its subsidiaries. Under the Plan a participating director receives an
annual retirement benefit equal to the director's annual fee during the 12
month period immediately preceding the participant's retirement from the
Board. Benefits under this Plan generally are payable for a period equal to
the participant's aggregate years and months of service on the Board of
Directors plus time spent in certain governmental service, with a lifetime
benefit payable to participants with 15 or more years of service. Benefit
payments commence when the participant ceases being a director. Upon the death
of the participant, the participant's designated beneficiary is entitled to 50
percent of the benefits otherwise payable to the participant. Such death
benefits commence one month after the participant's death and continue for the
payment period applicable to the participant or, if the participant had
already begun receiving benefits under the Plan, for the participant's
remaining payment period with a maximum of 15 years of payment. The Plan
permits participants to elect to receive a lump sum benefit equal to 90
percent of the present value of the participant's accrued benefits at any time
after retirement or 100 percent of the present value of the participant's
accrued benefits upon retirement if the election is made in a timely manner
before retirement.
Ahmanson's 1996 Nonemployee Directors' Stock Incentive Plan (the "1996
Plan") provides for the grant of stock options to any director of Ahmanson who
is not an employee of Ahmanson or any of its present or future parent or
subsidiary corporations (a "Nonemployee Director"). Whenever any person
becomes a Nonemployee Director, such person is granted automatically options,
the date of grant of which is the date such person becomes a Nonemployee
Director, to purchase 2,000 shares of Ahmanson Common Stock. In addition, on
the first business day of each calendar year during the term of the 1996 Plan,
each Nonemployee Director then in office is automatically granted options to
purchase 2,000 shares of Ahmanson Common Stock. However, no Nonemployee
Director may receive in any calendar year under the foregoing provisions of
the 1996 Plan options to purchase more than 2,000 shares of Ahmanson Common
Stock.
Additional options will be granted automatically on the first business day
of each calendar year to any Nonemployee Director who files with Ahmanson an
irrevocable election to receive options in lieu of all or part of annual
directors' fees to be earned in each succeeding calendar year.
Options granted under the 1996 Plan may be exercisable for a term no longer
than ten years and one month. The options become exercisable one year after
grant (six months for options granted in lieu of directors' fees) as
to half of the shares subject to the options and two years (one year for
options granted in lieu of directors' fees)
62
<PAGE>
after grant as to the balance of the shares or, if earlier, in full upon the
director's death, disability or normal retirement or a change in control of
Ahmanson and expire three months after termination of directorship other than
as a result of death, disability or normal retirement.
Ahmanson's 1996 Nonemployee Directors' Stock Incentive Plan replaced the
1988 Plan pursuant to which directors had received options with substantially
similar terms.
In March 1997, the Board of Directors adopted stock ownership guidelines for
Ahmanson's directors providing for ownership of Ahmanson Common Stock by the
end of a five-year period. The guidelines for directors provide for the
ownership of Ahmanson Common Stock by each director in an amount equal to five
times their annual retainer.
Ahmanson also provides at no charge to its nonemployee directors health and
dental benefits substantially comparable to those afforded to its employees
under Ahmanson's group insurance plans and provides retiree health benefits at
no charge.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1997 were Byron Allumbaugh,
Richard M. Bressler, Phillip D. Matthews, Delia M. Reyes and Elizabeth A.
Sanders.
Certain directors, including two members of the Compensation Committee,
officers and stockholders of Ahmanson and their associates were depositors,
borrowers and customers of and engaged in transactions with Home Savings, and
certain other subsidiaries of Ahmanson in the ordinary course of business
during 1997. Similar transactions are expected to occur in the future. All
such loans and transactions with members of the Compensation Committee were
made on substantially the same terms, including interest rates, fees and
security, as those prevailing at the time for comparable loans and
transactions with other persons and did not involve more than the normal risk
of collectibility or present any other unfavorable features.
63
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of December 31, 1997 (i) the name and
address of the beneficial owners of more than five percent of the outstanding
shares of Ahmanson Common Stock, (ii) the total number of shares of Ahmanson
Common Stock beneficially owned and (iii) the percent of the outstanding
shares of Ahmanson Common Stock so owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- ----------------- --------
<S> <C> <C>
Princeton Services, Inc. ....................... 6,154,867(1) 6.61%
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Putnam Investments, Inc. ....................... 8,150,210(2) 8.75%
One Post Office Square
Boston, MA 02109
</TABLE>
- --------
(1) Princeton Services, Inc. ("PSI") is deemed to be the beneficial owner of
these shares because it serves as the corporate managing general partner
of Merrill Lynch Asset Management L.P. and Fund Asset Management L.P.,
both of which are registered investment advisers. The number of shares
reported includes 410 shares resulting from the assumed conversion of
200 Depositary Shares representing interests in the Preferred Stock. PSI
has shared voting and dispositive power in all of the shares, and
disclaims beneficial ownership of the shares.
(2) Putnam Investments Inc. ("PI") is deemed to be the beneficial owner of
these shares by virtue of the direct or indirect investment and/or voting
discretion that its subsidiaries possess pursuant to the provisions of
investment advisory agreements with various clients, none of whom is known
by Ahmanson to own beneficially more than five percent of the outstanding
shares of Ahmanson Common Stock. PI has two subsidiaries, Putnam
Investment Management, Inc., which holds shared dispositive power in
7,784,546 shares, sole dispositive power in none of the shares and voting
power in none of the shares, and Putnam Advisory Company, Inc., which
holds shared voting power in 218,120 shares, sole voting power in none of
the shares, sole dispositive power in none of the shares and shared
dispositive power in 365,664 shares. PI and Marsh & McLennan Companies,
Inc., of which PI is a wholly-owned subsidiary, both have disclaimed
beneficial ownership of the shares.
All information with respect to beneficial ownership of the shares referred
to above and under "Security Ownership of Management" below is based upon
filings made by the respective beneficial owners with the Securities and
Exchange Commission or information provided to Ahmanson by such beneficial
owners.
64
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following information sets forth the number of shares of Ahmanson Common
Stock beneficially owned as of February 28, 1998 by each of the directors,
each of the individuals included in the "Summary Compensation Table" and all
directors and executive officers as a group. No director or executive officer
owns Depositary Shares representing interests in Ahmanson's Preferred Stock.
<TABLE>
<CAPTION>
NAME OR NUMBER OF NUMBER OF VOTING PERCENT OF
PERSONS IN GROUP SHARES OWNED OPTIONS(1) POWER ONLY TOTAL CLASS(2)
----------------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Byron Allumbaugh........ 4,500 17,000 -- 21,500 --
Anne-Drue M. Anderson... 5,589 82,010 -- 87,599 --
Harold A. Black......... -- 5,000 -- 5,000 --
Richard M. Bressler..... 22,000 17,000 -- 39,000 --
John E. Bryson.......... -- -- -- -- --
David R. Carpenter...... 290 8,301 -- 8,591 --
Madeleine A. Kleiner.... 4,468 90,844 -- 95,312 --
Ray Martin.............. 79,000 -- -- 79,000 --
Phillip D. Matthews..... 6,000 8,301 -- 14,301 --
Richard L. Nolan........ 1,000 4,000 -- 5,000 --
Delia M. Reyes.......... -- 11,149 -- 11,149 --
Charles R. Rinehart..... 80,848 378,642 837,454(3) 1,296,944 1.18%
Frank M. Sanchez........ 2,000 4,485 -- 6,485 --
Elizabeth A. Sanders.... 3,000 14,000 -- 17,000 --
Arthur W. Schmutz....... 5,000 9,000 -- 14,000 --
William D. Schulte...... 2,500 13,000 -- 15,500 --
Kevin M. Twomey......... 12,010 236,001 -- 248,011 --
Bruce G. Willison....... 35,000 139,469 -- 174,469 --
All directors and
executive officers as a
group (24 persons)..... 289,564 1,210,059 837,454 2,337,077 2.13%
</TABLE>
- --------
(1) Represents shares subject to options which are presently exercisable or
exercisable within 60 days of February 28, 1998.
(2) Percentage information is omitted for those individuals whose beneficially
owned shares represent less than one percent of the outstanding shares of
Ahmanson Common Stock.
(3) Mr. Rinehart has disclaimed beneficial ownership of such shares because
his interest in such shares is limited to an irrevocable proxy from Wells
Fargo Bank, as trustee. The trust instruments covering such shares provide
that the trustee shall grant to the Chairman of the Board of Ahmanson upon
request a proxy to vote such shares, and the trustee has granted an
irrevocable proxy for a term of seven years, expiring in January 2001, to
Mr. Rinehart as Chairman of the Board and his successors as Chairman of
the Board.
65
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For many years Home Savings had a home loan program under which directors,
officers and employees of Home Savings, Ahmanson and certain affiliated
companies could obtain loans, secured by a first deed of trust on the
borrower's principal residence, at a fixed rate at least one percent above
Home Savings' cost of funds for the first six months and adjusted thereafter
based upon changes in the monthly weighted average cost of funds of savings
institutions headquartered in the Eleventh District of the Federal Home Loan
Bank System as long as the borrower remained, or retired as, a director,
officer or employee of Home Savings, Ahmanson or certain affiliated companies.
The current program prohibits directors, executive officers and certain other
senior officers from obtaining loans at a discounted rate.
The following table sets forth as to each present executive officer of
Ahmanson who had a home loan from Home Savings under this home loan program
(i) the largest aggregate indebtedness outstanding from January 1, 1997 to
February 28, 1998, (ii) the amount of such indebtedness outstanding on
February 28, 1998 and (iii) the rate of interest on such indebtedness on
February 28, 1998. No present director of Ahmanson had a home loan from Home
Savings under this home loan program.
<TABLE>
<CAPTION>
HIGHEST UNPAID BALANCE INTEREST RATE ON
INDEBTEDNESS SINCE ON FEBRUARY 28, FEBRUARY 28,
NAME DECEMBER 31, 1996 1998 1998
---- ------------------ --------------- ----------------
<S> <C> <C> <C>
George Miranda........... $194,967 $188,359 5.963%
</TABLE>
Arthur W. Schmutz, a director of Ahmanson and a member of its Executive and
Audit Committees, is a retired partner of the law firm of Gibson, Dunn &
Crutcher, which has represented Ahmanson and its subsidiaries for more than
the past year and continues to do so.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS
-------
<C> <S>
2 Agreement and Plan of Merger, dated as of March 16, 1998, by and
between H. F. Ahmanson and Washington Mutual, Inc. (Exhibit 2 to
Form 8-K for the event on March 16, 1998).
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 to Form
8-K for the event on November 7, 1997).
3.3 Certificate of Designations dated July 30, 1993 (Exhibit 4.1 to
Form 8-K for the event on July 29, 1993).
3.4 Certificate of Designations dated December 3, 1997.
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 November 7, 1997, between H. F. Ahmanson &
Company and First Chicago Trust Company of New York, as Rights
Agent (Exhibit 4 to Form 8-K for the event on November 7, 1997).
4.4 Amendment to Rights Agreement, dated March 16, 1988, to Rights
Agreement, dated November 7, 1997, between H. F. Ahmanson &
Company and First Chicago Trust Company of New York, as Rights
Agent (Exhibit 4.2 to Form 8-K for the event on March 16, 1998).
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
(Exhibit 10.2 to Form 10-K for year ended December 31, 1996).
10.3 H. F. Ahmanson & Company Executive Stock Option Award Guidelines
(Exhibit 10.3 to Form 10-K for year ended December 31, 1996).
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 (Exhibit 10.6 to Form 10-K for year ended December 31,
1996).
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).
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS
-------
<C> <S>
10.8.2 Second Amendment to 1989 Contingent Deferred Compensation Plan of
H. F. Ahmanson & Company (Exhibit 10.8.2 to Form 10-K for year
ended December 31, 1996).
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 (Exhibit 10.9.2 to Form 10-K for year ended
December 31, 1996).
10.10 Capital Accumulation Plan of H. F. Ahmanson & Company (Exhibit
10.10 to Form 10-K for year ended December 31, 1996).
10.10.1 First Amendment to Capital Accumulation Plan of H. F. Ahmanson &
Company (Exhibit 10.10.1 to Form 10-K for year ended December 31,
1996).
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 (Exhibit 10.11.1 to Form 10-K for year ended
December 31, 1996).
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 (Exhibit 10.13.2 to Form 10-K for year ended December
31, 1996).
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).
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS
-------
<C> <S>
10.18.2 Second Amendment to Outside Directors' Elective Deferred
Compensation Plan of H. F. Ahmanson & Company (Exhibit 10.18.2 to
Form 10-K for year ended December 31, 1996).
10.19 Outside Directors' Capital Accumulation Plan of H. F. Ahmanson &
Company (Exhibit 10.19 to Form 10-K for year ended December 31,
1996).
10.19.1 First Amendment to Outside Directors' Capital Accumulation Plan of
H. F. Ahmanson & Company (Exhibit 10.19.1 to Form 10-K for year
ended December 31, 1996).
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 (Exhibit 10.22 to Form 10-K for
year ended December 31, 1996).
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).
10.24 Stock Option Agreement, dated as of March 16, 1998, by and between
H. F. Ahmanson & Company and Washington Mutual, Inc. (Exhibit 10
to Form 8-K for the event on March 16, 1998).
21 Subsidiaries of H. F. Ahmanson & Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
</TABLE>
- --------
* 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 73 and the Financial Statements which begin on
page F-2.
69
<PAGE>
REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
-------------- --------------
<C> <S>
October 6, 1997......... ITEM 5. OTHER EVENTS.
On October 5, 1997, H. F. Ahmanson & Company and
Coast Savings Financial Inc. entered into an
agreement and plan of merger pursuant to which Coast
Savings Financial Inc. will merge with and into H. F.
Ahmanson & Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99(a) Press release, dated October 6, 1997.
99(b) Analyst's Presentation.
October 14, 1997........ ITEM 5. OTHER EVENTS.
On October 14, 1997, H. F. Ahmanson & Company issued
a press release reporting its results of operations
during the quarter and nine months ended September
30, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
99.1Press release dated October 14, 1997 reporting
results of operations during the quarter and nine
months ended September 30, 1997.
November 7, 1997........ ITEM 5. OTHER EVENTS.
On November 7, 1997, the Board of Directors of H. F.
Ahmanson & Company adopted a new Stockholder Rights
Plan as well as amendments to its By-laws.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
3By-Laws of H. F. Ahmanson & Company, as amended.
4Rights Agreement, dated November 7, 1997, between
H. F. Ahmanson & Company and First Chicago Trust
Company of New York, as Rights Agent.
</TABLE>
70
<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 24th day of March 1998.
H. F. AHMANSON & COMPANY
By /s/ Kevin M. Twomey
___________________________________
Kevin M. Twomey
Vice Chairman 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 24th day of March 1998.
/s/ Byron Allumbaugh
-----------------------------------
Byron Allumbaugh
Director
/s/ Harold A. Black
-----------------------------------
Harold A. Black
Director
/s/ Richard M. Bressler
-----------------------------------
Richard M. Bressler
Director
/s/ John E. Bryson
-----------------------------------
John E. Bryson
Director
/s/ David R. Carpenter
-----------------------------------
David R. Carpenter
Director
/s/ Ray Martin
-----------------------------------
Ray Martin
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
71
<PAGE>
/s/ Charles R. Rinehart
-----------------------------------
Charles R. Rinehart
Director
Principal Executive Officer
/s/ Frank M. Sanchez
-----------------------------------
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/ Kevin M. Twomey
-----------------------------------
Kevin M. Twomey
Director
Principal Financial Officer
/s/ Bruce G. Willison
-----------------------------------
Bruce G. Willison
Director
/s/ George Miranda
-----------------------------------
George Miranda
Principal Accounting Officer
72
<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, 1997
and 1996 .............................................................. F-2
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 ................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996
and 1995 .............................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 ................................................... 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.
73
<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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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, 1998, except as to
Note 2 of Notes to Consolidated
Financial Statements, which is as of
February 13, 1998 and Note 19 of
Notes to Consolidated Financial
Statements, which is as of
March 16, 1998
F-1
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash and amounts due from banks..................... $ 603,797 $ 691,578
Federal funds sold and securities purchased under
agreements to resell............................... 550,200 737,500
Other short-term investments........................ 5,110 14,782
----------- -----------
Total cash and cash equivalents.................. 1,159,107 1,443,860
Other investment securities held to maturity [market
value $2,427 (1997) and $2,456 (1996)]............. 2,421 2,438
Other investment securities available for sale [am-
ortized cost $6,440 (1997) and $8,541 (1996)]...... 7,248 9,159
Investment in stock of Federal Home Loan Bank
(FHLB), at cost.................................... 411,978 420,978
Mortgage-backed securities (MBS) held to maturity
[market value $4,365,909 (1997) and $5,111,367
(1996)]............................................ 4,322,579 5,066,670
MBS available for sale [amortized cost $8,417,188
(1997) and $9,359,058 (1996)]...................... 8,468,812 9,229,842
Loans receivable less allowance for losses of
$377,351 (1997) and $389,135 (1996)................ 30,028,540 30,723,398
Loans held for sale [market value $461,620 (1997)
and $1,080,046 (1996)]............................. 455,651 1,065,760
Accrued interest receivable......................... 194,038 209,839
Real estate held for development and investment
(REI) less allowance for losses of $107,773 (1997)
and $132,432 (1996)................................ 146,518 147,851
Real estate owned held for sale (REO) less allowance
for losses of $11,400 (1997) and $32,137 (1996).... 162,440 247,577
Premises and equipment.............................. 364,626 424,567
Goodwill and other intangible assets................ 280,296 308,083
Other assets........................................ 674,498 602,022
----------- -----------
$46,678,752 $49,902,044
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing............................... $ 1,116,050 $ 985,594
Interest bearing................................... 31,152,325 33,788,351
----------- -----------
32,268,375 34,773,945
Securities sold under agreements to repurchase...... 1,675,000 1,820,000
Other short-term borrowings......................... 837,861 210,529
FHLB and other borrowings........................... 8,316,405 9,549,992
Other liabilities................................... 954,470 917,198
Income taxes........................................ 82,732 48,918
----------- -----------
Total liabilities................................ 44,134,843 47,320,582
----------- -----------
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.......................... 148,464 148,413
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized
10,000,000 shares:
8.40% Series C, outstanding 780,000 shares;
liquidation preference $195,000................... 8 8
6.00% Cumulative Convertible Series D, outstanding
568,398 shares (1997) and.........................
575,000 shares (1996); liquidation preference
$284,199 (1997) and $287,500 (1996)............... 6 6
Common stock, $0.01 par value; authorized
220,000,000 shares:
Issued 121,101,011 shares (1997) and 119,543,614
shares (1996)..................................... 1,211 1,195
Additional paid-in capital.......................... 1,156,581 1,112,045
Net unrealized gain (loss) on securities available
for sale, net of taxes............................. 31,118 (74,124)
Retained earnings................................... 2,141,847 1,847,367
Common stock in treasury, at cost:
27,809,534 shares (1997) and 17,390,562 shares
(1996)............................................ (932,360) (450,922)
----------- -----------
2,398,411 2,435,575
Unearned compensation............................... (2,966) (2,526)
----------- -----------
Total stockholders' equity....................... 2,395,445 2,433,049
----------- -----------
$46,678,752 $49,902,044
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans...................................... $2,315,253 $2,296,786 $2,405,820
MBS........................................ 1,020,747 1,161,487 1,158,077
Investments................................ 67,372 56,522 135,194
---------- ---------- ----------
Total interest income.................... 3,403,372 3,514,795 3,699,091
---------- ---------- ----------
Interest expense:
Deposits................................... 1,479,438 1,523,873 1,835,590
Short-term borrowings...................... 167,156 138,182 197,437
FHLB and other borrowings.................. 521,893 600,226 439,309
---------- ---------- ----------
Total interest expense................... 2,168,487 2,262,281 2,472,336
---------- ---------- ----------
Net interest income...................... 1,234,885 1,252,514 1,226,755
Provision for loan losses................... 67,091 144,924 119,111
---------- ---------- ----------
Net interest income after provision for
loan losses............................. 1,167,794 1,107,590 1,107,644
---------- ---------- ----------
Noninterest income:
Gain (loss) on sales of MBS................ (74) 3,074 11,919
Gain on sales of loans..................... 18,274 28,346 5,364
Loan servicing income...................... 63,534 68,365 60,490
Banking and other retail service fees...... 115,431 78,061 55,766
Other fee income........................... 67,528 58,678 47,860
Gain on sales of retail deposit branch
systems................................... 57,566 6,861 514,671
Gain on sales of investment securities..... 306 313 187
Other operating income..................... 7,005 8,100 2,152
---------- ---------- ----------
Total noninterest income................. 329,570 251,798 698,409
---------- ---------- ----------
Noninterest expense:
Compensation and other employee expenses... 355,744 369,264 378,851
Occupancy expenses......................... 104,217 122,740 148,250
Federal deposit insurance premiums and
assessments............................... 25,014 60,641 86,909
SAIF recapitalization...................... -- 243,862 --
Other general and administrative expenses.. 252,521 222,640 204,569
---------- ---------- ----------
Total general and administrative
expenses................................ 737,496 1,019,147 818,579
Net acquisition costs...................... 5,475 -- --
Operations of REI.......................... 3,722 34,961 49,481
Operations of REO.......................... 70,126 105,880 86,788
Amortization of goodwill and other
intangible assets......................... 25,763 18,842 26,559
---------- ---------- ----------
Total noninterest expense................ 842,582 1,178,830 981,407
---------- ---------- ----------
Income before provision for income taxes and
cumulative effect of accounting change..... 654,782 180,558 824,646
Provision for income taxes.................. 241,000 35,300 373,700
---------- ---------- ----------
Income before cumulative effect of
accounting change.......................... 413,782 145,258 450,946
Cumulative effect of change in accounting
for goodwill............................... -- -- (234,742)
---------- ---------- ----------
Net income.................................. $ 413,782 $ 145,258 $ 216,204
========== ========== ==========
Net income attributable to common shares:
Basic...................................... $ 380,183 $ 100,337 $ 165,744
========== ========== ==========
Diluted.................................... $ 397,402 $ 100,337 $ 183,024
========== ========== ==========
Income per common share--basic:
Income before cumulative effect of
accounting change......................... $ 3.91 $ 0.92 $ 3.41
Cumulative effect of change in accounting
for goodwill.............................. -- -- (2.00)
---------- ---------- ----------
Net income................................. $ 3.91 $ 0.92 $ 1.41
========== ========== ==========
Income per common share--diluted:
Income before cumulative effect of
accounting change......................... $ 3.59 $ 0.92 $ 3.22
Cumulative effect of change in accounting
for goodwill.............................. -- -- (1.81)
---------- ---------- ----------
Net income................................. $ 3.59 $ 0.92 $ 1.41
========== ========== ==========
</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, 1997, 1996 AND 1995
(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,
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)
Net income.............. 413,782 -- -- -- -- 413,782 -- --
Dividends on Common
Stock ($0.88 per
share)................. (85,716) -- -- -- -- (85,716) -- --
Dividends on Preferred
Stock.................. (33,586) -- -- -- -- (33,586) -- --
Unrealized gains on
securities available
for sale, net of tax
effect of $75,788...... 105,242 -- -- -- 105,242 -- -- --
Restricted stock awards
granted, net of
cancellations.......... (9) -- -- 1,039 -- -- (60) (988)
Unearned compensation
amortized to expense... 548 -- -- -- -- -- -- 548
Stock options exercised. 28,357 -- 16 28,341 -- -- -- --
Repurchase of 10,552,645
shares................. (481,379) -- -- -- -- -- (481,379) --
Conversion of Preferred
Stock, Series D, 6,602
shares................. -- -- -- (1) -- -- 1 --
Tax benefits from
restricted stock awards
and stock options...... 15,157 -- -- 15,157 -- -- -- --
---------- ---- ------ ---------- -------- ---------- --------- --------
BALANCE, DECEMBER 31,
1997................... $2,395,445 $ 14 $1,211 $1,156,581 $ 31,118 $2,141,847 $(932,360) $(2,966)
========== ==== ====== ========== ======== ========== ========= ========
</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, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 413,782 $ 145,258 $ 216,204
Adjustments to reconcile net income to
net cash provided by operating
activities:
Interest capitalized on loans and MBS
(negative amortization)............. (69,761) (103,716) (156,367)
Provision for losses on loans, real
estate and MSR...................... 98,956 212,418 210,478
Depreciation and amortization........ 99,864 97,705 98,539
Cumulative effect of change in
accounting for goodwill............. -- -- 234,742
Write-off of goodwill related to
sales of retail deposit branch
systems............................. -- -- 106,906
Gain on sale of Great Western stock.. (17,639) -- --
Merger and acquisition expense....... 23,114 -- --
(Increase) decrease in accrued
interest receivable................. 15,801 18,272 (15,164)
FHLB stock dividends................. (25,088) (25,176) (23,838)
Cash gain on sales of loans.......... (20,740) (37,346) (9,037)
Cash (gain) loss on sales of MBS..... 74 (3,074) 2,111
Proceeds from sales of loans
originated for sale................. 2,922,500 2,703,067 1,390,709
Loans originated for sale............ (2,264,479) (1,695,988) (1,330,034)
Loans repurchased from investors..... (56,249) (96,984) (72,842)
Proceeds from loan origination fees
(costs)............................. (23,273) (9,101) 5,276
Purchase of Great Western stock...... (163,971) -- --
Proceeds from sales of Great Western
stock............................... 181,610 -- --
Loans on sales of real estatee....... 8,517 23,439 4,771
Provision for deferred income taxes.. 28,222 74,621 54,192
SAIF recapitalization accrual........ -- 243,862 --
Increase (decrease) in other
liabilities......................... (27,452) (340,700) 11,949
Other, net........................... (67,936) (273,290) 44,753
----------- ----------- -----------
Net cash provided by operating
activities......................... 1,055,852 933,267 773,348
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of MBS available
for sale.............................. 9,832 200,925 2,433,462
Proceeds from sales of MBS held to
maturity.............................. -- -- 491,100
Principal payments on loans............ 3,773,953 2,728,707 1,943,758
Principal payments on MBS.............. 1,503,081 1,451,670 1,282,114
Loans originated for investment, net
of refinances......................... (3,305,694) (3,523,325) (4,960,754)
Loans purchased........................ (11,963) (1,142,696) (44,590)
MBS purchased.......................... (9,906) (10,173) (535)
Proceeds from maturities of other
investment securities................. 1,854 -- 258,756
Proceeds from sales of other
investment securities available for
sale.................................. 2,399 14,532 26,519
Other investment securities
purchased............................. (1,827) (13,433) (8,546)
Purchases of FHLB stock................ -- -- (22,209)
Redemption of FHLB stock............... 34,088 90,136 --
Proceeds from sales of REI............. 9,644 72,418 128,416
Proceeds from sales of REO............. 424,935 451,268 332,359
Proceeds from sales of premises and
equipment............................. 31,959 3,244 161,167
Additions to real estate............... (18,595) (30,382) (51,152)
Goodwill from First Interstate Bank
branch acquisition.................... -- (185,021) --
Other, net............................. 46,694 (84,542) (89,791)
----------- ----------- -----------
Net cash provided by investing
activities......................... 2,490,454 23,328 1,880,074
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits.... (1,337,877) (1,162,378) 413,597
Proceeds from deposits purchased....... -- 1,888,849 1,299,322
Deposits sold.......................... (1,167,693) (197,007) (8,123,454)
Net increase (decrease) in borrowings
maturing in 90 days or less........... (257,668) (848,782) 1,565,506
Proceeds from other borrowings......... 7,771,151 3,952,817 4,289,070
Repayment of other borrowings.......... (8,266,648) (3,762,102) (2,797,370)
Common stock purchased for treasury.... (481,379) (381,933) (62,595)
Preferred stock, Series B redeemed..... -- (175,000) --
Net proceeds from capital securities
of subsidiary trust................... -- 148,400 --
Dividends to stockholders.............. (119,302) (141,595) (153,593)
Other, net............................. 28,357 18,840 16,631
----------- ----------- -----------
Net cash used in financing
activities......................... (3,831,059) (659,891) (3,552,886)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (284,753) 296,704 (899,464)
Cash and cash equivalents at beginning
of year................................ 1,443,860 1,147,156 2,046,620
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 1,159,107 $ 1,443,860 $ 1,147,156
=========== =========== ===========
Supplemental cash flow information:
Interest paid on deposits.............. $ 1,477,861 $ 1,525,164 $ 1,828,836
Interest paid on borrowings............ 680,903 772,072 556,907
Income tax payments.................... 267,817 73,243 208,731
Non-cash investing activities:
Loans securitized into MBS............. 1,314,897 205,089 7,441,138
Loans transferred from held to
maturity to held for sale............. -- 1,258,728 1,024,324
Additions to REO....................... 295,028 453,281 385,770
Loans originated to sell REO........... 40,367 86,394 58,263
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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 and business banking operations. In addition, Ahmanson has other
subsidiaries which are engaged primarily in related financial services
activities, including securities and insurance brokerage 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, 1997 the required reserves totaled $39.5 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 1997, 1996 or 1995.
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 banking 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 business banking 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 determines 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, the related valuation allowance is
adjusted for resulting gains or 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 if loan payments which have been collected restore the loan to a status
less than 90 days past due and if the loan is expected to perform according to
its contractual terms.
F-7
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 the economies of the areas in which the Company lends and upon
future events, including natural disasters, such as earthquakes.
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. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB No. 125, an
Amendment of FASB No. 125" as of January 1, 1997. 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.
In accordance with SFAS No. 125, the Company capitalizes mortgage servicing
rights ("MSR") when the related mortgage loans are sold or securitized as MBS
available for sale. The total amortized cost of the mortgage loans sold or
securitized 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
period of estimated 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 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. Potential impairment
losses are recognized through a valuation allowance. Impairment is measured on
a
F-8
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 loan origination pipeline and in its
portfolio. 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 part of the gain (loss) on sale of loans and
MBS. The fair values of the Company's forward sales and options at December
31, 1997 and 1996 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 records its long-lived assets, which include premises and
equipment and REI, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
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.
F-9
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 is recorded if there is a further deterioration in
fair value or an increase in estimated disposition costs after acquisition.
REO also is reviewed for impairment in accordance with SFAS No. 121. 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
also are 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. Significant 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 recognized
in 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. Under SFAS No. 72, which is permitted but
not required for acquisitions prior to September 30, 1982, goodwill resulting
from the acquisition of banking or thrift institutions in which the fair value
of liabilities assumed by the acquiring entity exceeds the fair value of
tangible and intangible assets acquired is amortized over a period no longer
than the estimated remaining life of the acquired long-term interest-earning
assets.
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, 1997 totaled $228.3
million. Such goodwill is being amortized over a period not exceeding 25
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. At December 31, 1997, the unamortized core deposit
premium was $52.0 million.
F-10
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation." 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 Note 16 of these Notes
to Consolidated Financial Statements.
Income Per Share
The Company adopted SFAS No. 128, "Earnings per Share" as of December 31,
1997. SFAS No. 128 simplifies the standards for computing and presenting
earnings per share ("EPS") from those previously prescribed by APB No. 15,
"Earnings per Share." SFAS No. 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in issuance of common stock that then shared in earnings. SFAS No.
128 also requires dual presentation of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation.
Capital Structure
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure," as of December 31, 1997. SFAS No. 129 consolidates existing
reporting standards for disclosing information about an entity's capital
structure. SFAS No. 129 also supersedes previously issued accounting
statements. The impact on the Company of adopting SFAS No. 129 was not
material as the Company's existing disclosure practices have generally been in
compliance with the disclosure requirements in SFAS No. 129.
F-11
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Year 2000
The Company expenses all costs related to modifying systems that may be
affected by the Year 2000 issue.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The impact on the Company of
adopting SFAS No. 130 is not expected to be material to the Company's existing
disclosure.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim reports to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997, with comparative information for earlier years to be
restated. The Company is currently assessing the effect of adopting SFAS No.
131.
(2) COAST SAVINGS FINANCIAL, INC. (UNAUDITED)
On October 6, 1997, the Company announced a definitive agreement to acquire
Coast Savings Financial, Inc. ("Coast"). At December 31, 1997, Coast had
deposits of $6.4 billion and total assets of $8.8 billion. The merger
agreement called for the tax-free exchange of 0.8082 shares of Ahmanson common
stock for each share of Coast common stock. Ahmanson reissued shares of its
common stock held in treasury in exchange for Coast common stock. The value of
Ahmanson common stock issued was approximately $925 million on February 13,
1998, the date on which the merger was completed.
In addition, immediately prior to the merger, each holder of the common
stock of Coast also received one Contingent Payment Right Certificate ("CPR
Certificate"), issued by the Coast Federal Litigation Contingent Payment
Rights Trust ("CPR Trust"), for each share of the common stock of Coast. The
CPR Certificates represent assignable and transferable undivided beneficial
interests in the assets of the CPR Trust, including a commitment by the
Company to pay to the CPR Trust an amount equal to any proceeds (net of taxes
and expenses, computed under certain assumptions) that Coast Federal Bank,
Federal Savings Bank ("Coast Federal") (formerly a wholly-owned subsidiary of
Coast and following the merger a wholly-owned subsidiary of the Company), or
its successors, may receive from pending litigation claims against the U.S.
government relating to the government's alleged breach of its agreement with
respect to Coast Federal's regulatory capital.
Pursuant to the terms of the merger agreement, the Company received 420,457
CPR Certificates relating to Coast stock appreciation rights and performance
share awards exercised between the date of the definitive agreement and
February 13, 1998. On February 13, 1998, the closing price of the CPR
Certificates was $13.88.
F-12
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The CPR Certificates received by the Company were recorded as investment
securities available for sale. The CPR Certificates are currently listed for
trading on the NASDAQ National Market.
The merger was accounted for as a purchase. Under this method of accounting,
assets and liabilities of Coast were adjusted to their estimated fair values
and any excess of the purchase price over the fair value of the assets
acquired, net of the fair value of the liabilities assumed, was recognized as
goodwill. The goodwill and core deposit intangible acquired will be amortized
over 25 years and 10 years, respectively. Applicable income tax effects of
such adjustments will be included as a component of the Company's net deferred
tax asset with a corresponding offset to goodwill.
(3) INVESTMENTS
The Company purchases securities under agreements to resell ("repurchase
agreements"). At December 31, 1997 the average maturity of these repurchase
agreements was 9 days. At December 31, 1997, amounts outstanding with
individual brokers which exceeded ten percent of stockholders' equity were
(dollars in thousands):
<TABLE>
<CAPTION>
MARKET VALUE OF THE
BOOK PLEDGED SECURITIES
VALUE, ----------------------
WEIGHTED INCLUDING OTHER U.S.
AVERAGE ACCRUED MARKETABLE GOVERNMENT
SELLING PARTY MATURITY INTEREST SECURITIES OBLIGATIONS
------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Salomon Brothers................... 4 days $333,930 $349,524 $407
</TABLE>
Repurchase agreements averaged $543.4 million, $376.5 million and $1.4
billion during 1997, 1996 and 1995, respectively, and the maximum amounts
outstanding at any month-end during 1997, 1996 and 1995 were $837.1 million,
$737.5 million and $2.1 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.
The Company also sells federal funds. At December 31, 1997, federal funds
sold matured within 2 days. Federal funds sold averaged $31.1 million for 1997
and the maximum amount outstanding at any month-end during 1997 was $113.0
million.
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 5.73%. The
amortization of the notional amounts is based upon monthly changes in either
LIBOR, for one of the agreements, or the two year constant maturity treasury
rate, for the other. Under these agreements, there is a collateral protection
clause in which collateral is required if certain conditions are not met. At
December 31, 1997, no collateral was required. The original notional amounts
totaled $210.0 million, of which $51.4 million was outstanding at December 31,
1997. 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-13
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other investment securities at December 31, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------- --------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- ------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. government and GSE
obligations........... $2,421 $ 6 $-- $2,427 $2,432 $ 18 $-- $2,450
Industrial and other... -- -- -- -- 6 -- -- 6
------ ---- --- ------ ------ ---- --- ------
$2,421 $ 6 $-- $2,427 $2,438 $ 18 $-- $2,456
====== ==== === ====== ====== ==== === ======
Available for sale:
U.S. government and GSE
obligations........... $ -- $ 4 $-- $ 4 $ -- $ 3 $-- $ 3
Marketable equity
securities............ 6,440 804 -- 7,244 8,541 615 -- 9,156
------ ---- --- ------ ------ ---- --- ------
$6,440 $808 $-- $7,248 $8,541 $618 $-- $9,159
====== ==== === ====== ====== ==== === ======
</TABLE>
At December 31, 1997, the Company did not hold other investment securities
with any single issuer which exceeded ten percent of stockholders' equity.
At December 31, 1997, all debt securities owned by the Company and
classified as held to maturity had contractual maturities of one through five
years. The amortized cost and fair value of such securities were $2.4 million
at December 31, 1997.
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 and 1995. There were no sales of debt
securities classified as available for sale in 1997. There were no sales of
investment securities classified as held to maturity in 1997, 1996 or 1995.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Proceeds from sales............................... $12,731 $25,994
======= =======
Gross realized gains.............................. $ -- $ 9
Gross realized losses............................. -- (67)
------- -------
Net losses....................................... $ -- $ (58)
======= =======
</TABLE>
Interest and dividends on investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Interest on repurchase agreements and federal
funds sold....................................... $31,705 $21,244 $ 88,943
Interest on other short-term and other investment
securities....................................... 10,169 9,658 21,971
Dividends on FHLB stock........................... 25,088 25,216 23,896
Dividends on other investment securities.......... 410 404 384
------- ------- --------
$67,372 $56,522 $135,194
======= ======= ========
</TABLE>
F-14
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LOANS, MBS, SALES AND SERVICING ACTIVITIES
Portfolio Composition
The loan and MBS portfolio is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Real estate mortgage loans:
Single family (1-4 units)............................ $18,268,677 $19,354,683
Multi-family (5 units and over)...................... 9,859,143 9,582,129
Commercial and industrial............................ 1,128,320 1,343,348
----------- -----------
29,256,140 30,280,160
Consumer loans:
Home equity.......................................... 852,288 558,493
Savings account secured.............................. 65,256 77,190
Other................................................ 121,511 112,777
----------- -----------
1,039,055 748,460
Business banking loans................................ 65,738 53,717
Other loans........................................... 25,862 31,598
Deferred loan costs (fees) and interest............... 9,817 (13,834)
Unearned premiums on loans............................ 9,279 12,432
Allowance for loan losses............................. (377,351) (389,135)
----------- -----------
Loans receivable.................................. 30,028,540 30,723,398
Loans held for sale................................... 455,651 1,065,760
MBS held to maturity.................................. 4,322,579 5,066,670
MBS available for sale................................ 8,468,812 9,229,842
----------- -----------
Total loans receivable and MBS.................... $43,275,582 $46,085,670
=========== ===========
</TABLE>
At December 31, 1997 the Company was committed to fund residential mortgage
loans totaling $355.7 million, consumer loans totaling $848.5 million, of
which $825.7 million were lines of credit, and business banking loans totaling
$104.0 million. 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. At December 31, 1997, the
Company had commitments to sell loans totaling $237.5 million.
The weighted average yield on the Company's loan and MBS portfolio at
December 31, 1997 and 1996, 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 7.60% and 7.35%,
respectively.
F-15
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997 and 1996 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 $1.31 billion
and $205.1 million in 1997 and 1996, respectively. Such MBS increase the
Company's ability to sell assets in the secondary market and 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 at December 31, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------- -------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
MPTs:
GSE................... $ 1,852 $ 36 $ 1 $ 1,887 $ 2,834 $ 43 $ 2 $ 2,875
Other................. 4,320,727 141,536 98,241 4,364,022 5,063,836 142,020 97,364 5,108,492
---------- -------- -------- ---------- ---------- -------- -------- ----------
$4,322,579 $141,572 $ 98,242 $4,365,909 $5,066,670 $142,063 $ 97,366 $5,111,367
========== ======== ======== ========== ========== ======== ======== ==========
Available for sale:
MPTs:
GSE................... $3,424,003 $110,348 $ -- $3,534,351 $3,760,004 $ -- $ 28,803 $3,731,201
Other................. 23,641 1,085 -- 24,726 28,069 1,106 -- 29,175
CMOs:
GSE................... 4,969,544 57,957 117,766 4,909,735 5,570,985 33,468 134,987 5,469,466
---------- -------- -------- ---------- ---------- -------- -------- ----------
$8,417,188 $169,390 $117,766 $8,468,812 $9,359,058 $ 34,574 $163,790 $9,229,842
========== ======== ======== ========== ========== ======== ======== ==========
</TABLE>
The Company believes that the gross unrealized gains and losses on MBS at
December 31, 1997 and 1996 were due to temporary market-related conditions.
The contractual maturities of all MBS at December 31, 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
MBS AVAILABLE FOR
MBS HELD TO MATURITY SALE
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Within one year................. $ 1 $ 1 $ -- $ --
After one year through five
years.......................... 1,851 1,886 1,144,266 1,221,765
After five years through ten
years.......................... -- -- 304,654 309,414
After ten years................. 4,320,727 4,364,022 6,968,268 6,937,633
---------- ---------- ---------- ----------
$4,322,579 $4,365,909 $8,417,188 $8,468,812
========== ========== ========== ==========
</TABLE>
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 broker-
dealers, 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,
F-16
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and receives a variable rate equal to 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.
Under these agreements, there is a collateral protection clause in which
collateral is required if certain conditions are not met. At December 31,
1997, no collateral was required. In 1997, 1996 and 1995 interest income was
reduced by $2.8 million, $15.2 million and $25.4 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 $88.5 million at December 31, 1997. A summary of the
activity for the notional amounts of these interest rate swaps for the years
1997, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Beginning balance......................... $ 516,000 $1,243,860 $1,444,820
Expired agreements...................... (427,550) (727,860) (200,960)
--------- ---------- ----------
Ending balance............................ $ 88,450 $ 516,000 $1,243,860
========= ========== ==========
</TABLE>
The interest rate swap agreements outstanding at December 31, 1997 will
mature in 1998. In 1998, the Company will pay a fixed interest rate of 5.51%
and will receive a weighted average interest rate equal to monthly COFI.
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, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
MULTI- COMMERCIAL AND
SINGLE FAMILY PROPERTIES FAMILY 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
----- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $22,298,375 1.18% $9,395,571 0.21% $ 943,241 2.44% $32,637,187 0.94%
Florida................. 2,330,488 1.30 52,845 -- 2,614 -- 2,385,947 1.27
New York................ 1,695,948 1.84 113,720 0.40 74,013 1.68 1,883,681 1.74
Texas................... 1,065,180 0.68 51,285 -- 12,134 -- 1,128,599 0.64
Other................... 4,157,830 1.08 245,722 0.01 96,318 8.25 4,499,870 1.18
----------- ---------- ---------- -----------
$31,547,821 1.19 $9,859,143 0.21 $1,128,320 2.85 $42,535,284 1.01
=========== ========== ========== ===========
</TABLE>
At December 31, 1997, the Company had $1.05 billion in gross consumer loans
and $65.7 million in gross business banking loans, with nonaccrual loan ratios
of 0.34% and 0.10%, respectively. The majority of these loans were originated
in California.
F-17
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Allowance for Loan Losses
The changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Beginning balance.......................... $ 389,135 $ 380,886 $ 400,232
Provision for loan losses................. 67,091 144,924 119,111
Allowance for loan losses on First
Interstate Bank loans purchased.......... -- 14,710 --
Charge-offs............................... (114,018) (190,540) (162,618)
Recoveries................................ 35,143 39,155 24,161
--------- --------- ---------
Ending balance............................. $ 377,351 $ 389,135 $ 380,886
========= ========= =========
</TABLE>
Nonaccrual Loans, TDRs and Other Impaired Major Loans
Nonaccrual loans, TDRs and other impaired major loans are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans.................................. $432,898 $598,661 $723,791
TDRs.............................................. 212,299 185,635 163,844
Other impaired major loans........................ 144,630 114,332 51,018
-------- -------- --------
Total......................................... $789,827 $898,628 $938,653
======== ======== ========
</TABLE>
At December 31, 1997 and 1996, impaired loans recognized in accordance with
SFAS No. 114, and the related specific loan loss allowances, were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR NET RECORDED FOR NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
With specific
allowances........... $ 10,680 $ 3,142 $ 7,538 $ 25,132 $ 6,850 $ 18,282
Without specific
allowances........... 13,905 -- 13,905 17,687 -- 17,687
-------- ------- -------- -------- ------- --------
24,585 3,142 21,443 42,819 6,850 35,969
-------- ------- -------- -------- ------- --------
TDRs:
With specific
allowances........... 196,809 23,591 173,218 160,684 23,174 137,510
Without specific
allowances........... 39,081 -- 39,081 48,125 -- 48,125
-------- ------- -------- -------- ------- --------
235,890 23,591 212,299 208,809 23,174 185,635
-------- ------- -------- -------- ------- --------
Other impaired major
loans:
With specific
allowances........... 122,923 28,659 94,264 119,505 28,852 90,653
Without specific
allowances........... 50,366 -- 50,366 23,679 -- 23,679
-------- ------- -------- -------- ------- --------
173,289 28,659 144,630 143,184 28,852 114,332
-------- ------- -------- -------- ------- --------
Total impaired loans.... $433,764 $55,392 $378,372 $394,812 $58,876 $335,936
======== ======= ======== ======== ======= ========
</TABLE>
F-18
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The average net recorded investment in impaired loans for the years ended
December 31, 1997, 1996 and 1995 was $366.6 million, $333.6 million and $236.9
million, respectively. Interest income of $33.3 million, $20.2 million and
$17.9 million was recognized in 1997, 1996 and 1995, respectively, on impaired
loans during the period of impairment.
Loans in nonaccrual status as of December 31, 1997, 1996 and 1995 had
interest due but not recognized of approximately $24.0 million, $34.0 million
and $43.0 million, respectively. Net interest forgone related to TDRs totaled
$0.7 million, $0.8 million and $0.5 million in 1997, 1996 and 1995,
respectively. Interest income recorded on TDRs for 1997, 1996 and 1995 was
$21.4 million, $13.5 million and $14.0 million, respectively. The Company has
no commitments to lend additional funds to borrowers whose loans were
classified as TDRs.
Sales and Servicing Activities
During 1997, 1996 and 1995, the Company recognized gains (losses) on sales
of MBS as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ -------- ----------
<S> <C> <C> <C>
Book value of MBS sold:
ARM MBS........................................ $ -- $187,603 $2,183,628
Fixed rate MBS................................. 9,906 10,248 29,077
------ -------- ----------
9,906 197,851 2,212,705
------ -------- ----------
Relating to the sale of the New York retail
branch system:
ARM MBS........................................ -- -- 38,722
Fixed rate MBS................................. -- -- 677,006
------ -------- ----------
-- -- 715,728
------ -------- ----------
$9,906 $197,851 $2,928,433
====== ======== ==========
Pre-tax gains (losses) on sales of MBS:
Reported in "Gain (loss) on sale of MBS:"
ARM MBS........................................ $ -- $ 3,103 $ 11,733
Fixed rate MBS................................. (74) (29) 186
------ -------- ----------
(74) 3,074 11,919
Relating to the sale of the New York retail
branch system:
ARM MBS........................................ -- -- 113
Fixed rate MBS................................. -- -- (14,143)
------ -------- ----------
-- -- (14,030)
------ -------- ----------
$ (74) $ 3,074 $ (2,111)
====== ======== ==========
</TABLE>
F-19
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The changes to MSR, which are included in "Other assets," were as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning balance.............................. $ 88,074 $ 63,696 $ 57,812
Originated MSR................................ 28,545 40,256 16,829
Amortization to:
Interest on MBS.............................. (126) (934) --
Loan servicing income........................ (16,058) (14,318) (10,436)
Addition to the valuation allowance........... (4,315) (626) (509)
-------- -------- --------
Ending balance................................. $ 96,120 $ 88,074 $ 63,696
======== ======== ========
</TABLE>
At December 31, 1996, MSR attributable to loans held for sale totaled $7.0
million. The Company provided $4.3 million, $0.6 million and $0.5 million for
1997, 1996 and 1995, respectively, to its valuation allowance. There were no
charge-offs against this valuation allowance during 1997, 1996 and 1995. The
valuation allowance at December 31, 1997 and 1996 was $5.4 million and $1.1
million, respectively.
The Company enters into certain contracts to offset interest rate risk on
its commitments to fund fixed rate loans for sale. At December 31, 1997, the
notional amount of outstanding contracts was $738 million. These had an
estimated market value loss of $1.5 million. These contracts are expected to
settle during the first four months of 1998.
The Company has sold certain loans and MBS with different types of credit
enhancement features. The unpaid principal balance of loans and MBS sold with
various credit enhancement features at December 31, 1997 and 1996 was $3.8
billion and $4.3 billion, respectively. The maximum exposure under the
Company's credit enhancement obligations at December 31, 1997 was
approximately $1.1 billion. Approximately $877.4 million of this exposure is
associated with $877.4 million of loans sold to FHLMC on which the Company is
obligated to absorb all losses associated with foreclosures. An additional
$172.9 million in exposure under credit enhancement obligations relates to
loans totaling $2.9 billion. Losses incurred by the Company on its credit
enhancement obligations totaled $9.0 million, $12.8 million and $14.3 million
in 1997, 1996 and 1995, respectively. At December 31, 1997, the total
allowance for credit enhancement obligations included in "Other liabilities"
was $31.5 million. The Company does not believe that its credit enhancement
obligations subject it to material risk of loss in the future.
At December 31, 1997, 1996 and 1995 the Company was engaged in servicing for
investors $14.2 billion, $13.8 billion and $13.1 billion, respectively, in
unpaid principal amount of loan participations, whole loans and MBS.
Set forth below is a summary by year of the components of loan servicing
income (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Gross servicing income......................... $ 96,813 $ 99,263 $ 87,791
GSE guarantee and other fees................... (15,119) (15,954) (16,356)
Amortization of MSR............................ (16,058) (14,318) (10,436)
Valuation adjustment on MSR.................... (2,102) (626) (509)
-------- -------- --------
Loan servicing income........................ $ 63,534 $ 68,365 $ 60,490
======== ======== ========
</TABLE>
F-20
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Interest on:
Repurchase agreements and federal funds sold............. $ 950 $ 829
Investment securities.................................... 320 288
MBS...................................................... 54,049 62,816
Loans receivable......................................... 138,719 145,906
-------- --------
$194,038 $209,839
======== ========
</TABLE>
(6) OPERATIONS OF REAL ESTATE
REI
The Company's REI was $146.5 million, net of an allowance of $107.8 million,
and $147.9 million, net of an allowance of $132.4 million, at December 31,
1997 and 1996, respectively. The following table presents the Company's REI by
type at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
GROSS ALLOWANCE NET
BOOK FOR BOOK
VALUE LOSSES VALUE
-------- --------- --------
<S> <C> <C> <C>
REI held for sale:
Residential REI................................ $ 11,513 $ 8,794 $ 2,719
Commercial and industrial REI and undeveloped
land.......................................... 84,158 5,618 78,540
-------- -------- --------
95,671 14,412 81,259
-------- -------- --------
Long-term REI:
Residential REI................................ 70,879 44,685 26,194
Commercial and industrial REI and undeveloped
land.......................................... 87,741 48,676 39,065
-------- -------- --------
158,620 93,361 65,259
-------- -------- --------
Total REI....................................... $254,291 $107,773 $146,518
======== ======== ========
</TABLE>
There was no impairment of these REI at December 31, 1997.
Included in other expenses are operations of REI, summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Net loss (gain) on sales............................ $ 909 $ 2,546 $(8,872)
Provision for losses................................ 2,000 26,296 49,660
Net operating expense............................... 813 6,119 8,693
------ ------- -------
Total loss........................................ $3,722 $34,961 $49,481
====== ======= =======
</TABLE>
F-21
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The changes in the allowance for losses on REI are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Beginning balance............................. $132,432 $ 283,748 $333,825
Provision for losses......................... 2,000 26,296 49,660
Charge-offs.................................. (26,659) (177,612) (99,737)
-------- --------- --------
Ending balance................................ $107,773 $ 132,432 $283,748
======== ========= ========
</TABLE>
REO
Included in other expenses are operations of REO, summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Net loss on sales................................... $ 7,608 $ 20,893 $13,643
Provision for losses................................ 26,297 40,572 41,198
Net operating expense............................... 36,221 44,415 31,947
------- -------- -------
Total loss........................................ $70,126 $105,880 $86,788
======= ======== =======
</TABLE>
The changes in allowance for losses on REO are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning balance.............................. $ 32,137 $ 38,080 $ 44,726
Provision for losses........................... 26,297 40,572 41,198
Charge-offs.................................... (47,034) (46,515) (47,844)
-------- -------- --------
Ending balance............................... $ 11,400 $ 32,137 $ 38,080
======== ======== ========
</TABLE>
(7) PREMISES AND EQUIPMENT
Premises and equipment at cost are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land................................................... $ 105,778 $ 114,602
Buildings.............................................. 157,624 192,944
Furniture, fixtures and equipment...................... 348,782 336,081
Leasehold improvements................................. 140,529 138,007
--------- ---------
752,713 781,634
Less accumulated depreciation and amortization......... (388,087) (357,067)
--------- ---------
$ 364,626 $ 424,567
========= =========
</TABLE>
There were no impairment losses recognized in the years ended December 31,
1997 and 1996.
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, 1997, 1996 and 1995 was $69.3 million, $73.4 million and
$78.2 million, respectively.
F-22
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule by years of minimum future rentals on
noncancelable operating leases, related principally to premises, as of
December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 65,552
1999............................................................. 61,294
2000............................................................. 56,679
2001............................................................. 53,513
2002............................................................. 51,416
Thereafter....................................................... 379,573
--------
$668,027
========
</TABLE>
(8) DEPOSITS
Deposits are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED DECEMBER 31,
AVERAGE RATE AT ------------------------------------
DECEMBER 31, 1997 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Transaction accounts:
Checking:
Non-interest bearing.. $ 1,116,050 3.5% $ 985,594 2.8%
Interest bearing...... 0.99% 2,155,529 6.7 2,285,955 6.6
Statement savings...... 1.95 1,475,191 4.6 1,585,345 4.6
Money market savings... 3.81 6,338,539 19.6 6,328,235 18.2
----------- ----- ----------- -----
Total transaction
accounts............. 11,085,309 34.4 11,185,129 32.2
----------- ----- ----------- -----
Term accounts:
Certificates of deposit
under $100,000........ 5.42 20,600,689 63.8 23,187,593 66.7
Jumbo certificates of
deposit............... 5.55 582,377 1.8 401,223 1.1
----------- ----- ----------- -----
Total term accounts... 21,183,066 65.6 23,588,816 67.8
----------- ----- ----------- -----
$32,268,375 100.0% $34,773,945 100.0%
=========== ===== =========== =====
</TABLE>
On June 19, 1997, the Company sold deposits totaling $916.3 million and
branch premises of its 12 West Coast Florida branches for a pre-tax gain of
$41.6 million.
On March 21, 1997, the Company sold deposits totaling $251.4 million and
branch premises of its four Arizona branches for a pre-tax gain of $16.0
million.
On November 21, 1996, the Company sold deposits totaling $197.4 million and
branch premises of its four San Antonio, Texas branches for a pre-tax gain of
$6.9 million.
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.
F-23
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate amounts of term account maturities at December 31, 1997 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT MATURING DURING THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
----------- ---------- -------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Term accounts:
2.5% or less.......... $ 9,680 $ 2,083 $ 114 $ 2 $ -- $ -- $ 11,879
2.501%-3.5%........... 98,131 7 -- -- -- -- 98,138
3.501%-4.5%........... 355,395 1,048 52 -- -- -- 356,495
4.501%-5.5%........... 9,897,087 670,076 85,963 13,537 46 1,390 10,668,099
5.501%-6.5%........... 8,404,218 1,081,235 224,779 121,006 20,408 3,732 9,855,378
6.501%-7.5%........... 65,924 73,875 32,535 5,468 1,249 998 180,049
7.501%-8.5%........... 1,251 2,305 907 226 13 37 4,739
8.501%-15.5%.......... 1,339 6,171 634 12 10 123 8,289
----------- ---------- -------- -------- ------- ------ -----------
Total term
accounts........... $18,833,025 $1,836,800 $344,984 $140,251 $21,726 $6,280 $21,183,066
=========== ========== ======== ======== ======= ====== ===========
</TABLE>
The aggregate amounts of certificates of deposit in amounts of $100,000 or
more at December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<S> <C>
3 months or less.................................................... $130,955
Over 3 months through 6 months...................................... 158,368
Over 6 months through 12 months..................................... 275,097
Over 12 months...................................................... 17,957
--------
Total......................................................... $582,377
========
</TABLE>
At December 31, 1997 and 1996 the weighted average interest rate on the
deposits, computed without the effect of compounding interest, was 4.47% and
4.40%, respectively. All government agency deposits, totaling $81.0 million at
December 31, 1997, were secured by certain real estate loans of the Company
amounting to $155.6 million.
Interest expense on deposits by type of account is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Checking.................................... $ 21,625 $ 21,449 $ 24,833
Statement savings........................... 245,197 244,315 279,345
Term accounts............................... 1,212,616 1,258,109 1,531,412
---------- ---------- ----------
$1,479,438 $1,523,873 $1,835,590
========== ========== ==========
</TABLE>
F-24
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Securities sold under agreements to
repurchase ("reverse purchase
agreements"):
Balance at December 31.............. $1,675,000 $1,820,000 $3,519,311
Average balance..................... 2,264,288 2,236,360 3,122,938
Maximum amount outstanding at any
month end.......................... 2,745,000 3,124,303 5,487,682
Average interest rate:
During the year................... 5.98% 6.05% 6.31%
At December 31.................... 6.28 6.10 5.97
Federal funds purchased:
Balance at December 31.............. $ 804,000 $ 200,000 $ --
Average balance..................... 547,589 51,980 6,565
Maximum amount outstanding at any
month end.......................... 890,000 200,000 6,096
Average interest rate:
During the year................... 5.71% 5.46% 5.95%
At December 31.................... 5.79 5.45 --
Other short-term borrowings:
Balance at December 31.............. $ 33,861 $ 10,529 $ --
Average balance..................... 8,689 1,634 --
Maximum amount outstanding at any
month end.......................... 33,861 13,921 --
Average interest rate:
During the year................... 5.20% 5.36% -- %
At December 31.................... 5.18 4.96 --
Accrued interest on short-term
borrowings included in "Other
liabilities"......................... $ 30,237 $ 14,060 $ 58,337
</TABLE>
Reverse repurchase agreements require that the Company repurchase those
securities which were sold. These securities are held by the counterparty. At
December 31, 1997 reverse repurchase agreements are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
COLLATERAL
---------------------
WEIGHTED FEDERAL AGENCY MBS
AVERAGE ---------------------
REPURCHASE INTEREST BOOK
LIABILITY RATE VALUE* FAIR VALUE
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Within 30 days..................... $ 600,000 5.69% $ 660,110 $ 640,712
30-90 days......................... 500,000 5.77 549,944 525,332
90-180 days........................ 575,000 6.08 615,029 598,714
---------- ---------- ----------
$1,675,000 $1,825,083 $1,764,758
========== ========== ==========
</TABLE>
- --------
* Book value includes accrued interest.
F-25
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts outstanding with individual brokers at December 31, 1997 which
exceeded ten percent of stockholders' equity were (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED COLLATERAL
AVERAGE ----------------------
COUNTERPARTY MATURITY BOOK VALUE* BOOK VALUE* FAIR VALUE
------------ -------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Salomon Brothers................. 76 days $306,805 $325,385 $310,823
Nomura Securities Inc. .......... 47 days 455,041 494,560 480,513
Deutsche Morgan Grenfell......... 45 days 254,024 277,094 264,693
</TABLE>
- --------
* Book value includes accrued interest.
(10) FHLB AND OTHER BORROWINGS
These borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
FHLB advances with an effective average interest rate of
6.16% (1997) and 5.94% (1996)........................... $4,412,813 $3,138,725
Notes payable to FHLB with an effective average interest
rate of 6.48% (1997) and 6.50% (1996)................... 400,000 1,302,647
Notes payable to various brokerage firms with an
effective average interest rate of 5.93% (1997) and
5.92% (1996)............................................ 2,066,000 3,915,499
Medium term notes with an average contract interest rate
of 6.64% (1997) and an effective average interest rate
of 6.84% (1997) and an average contract interest rate of
6.82% (1996) and an effective average interest rate of
7.01% (1996), net of unamortized discount of $461 (1997)
and $639 (1996)......................................... 339,539 219,361
Subordinated notes payable with an average contract
interest rate of 6.50% and an effective average interest
rate of 6.62%, net of unamortized discount of $804...... 124,196 --
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 6.10% (1997) and 6.40% (1996)...... 100,000 100,000
Subordinated notes with a weighted average contract
interest rate of 7.93% (1997) and an effective average
interest rate of 8.07% (1997), and a weighted average
contract interest rate of 7.93% (1996) and an effective
average interest rate of 8.08% (1996), net of
unamortized discount of $2,611 (1997) and $3,416
(1996).................................................. 622,389 621,584
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 $1,655 (1997) and $2,003
(1996).................................................. 248,345 247,997
Other, net of unamortized discount of $15 (1997) and $29
(1996).................................................. 3,123 4,179
---------- ----------
Total FHLB and other borrowings.................... $8,316,405 $9,549,992
========== ==========
</TABLE>
At December 31, 1997 the Company had outstanding and unused secured lines of
credit totaling $86 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
$412.0 million and certain real estate loans and MBS of the Company totaling
$4.8 billion at December 31, 1997. All FHLB advances at
F-26
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1997 had prepayment penalty provisions. The notes payable to FHLB
are due at various dates through 1998.
During 1997 and 1996 the Company issued certain notes, all due within two
years, to various lenders and the FHLB. These notes totaled $1.6 billion and
$1.9 billion, at December 31, 1997 and 1996, respectively, and are secured by
Company-owned MBS and/or loans totaling $1.6 billion and $1.9 billion,
respectively. At December 31, 1997, these notes included ten two-year notes
totaling $1.6 billion with an average interest rate of 5.59% and at December
31, 1996, included twelve two-year notes totaling $1.3 billion with an average
interest rate of 5.38%. These notes are callable by the lender monthly,
quarterly or annually. At December 31, 1996, these notes also included four
two-year fixed rate notes for $620 million, with an average interest rate of
5.15%. The notes contain a provision that allows the lender 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.
During 1997 the Company also issued to various lenders and the FHLB, notes
indexed to LAMA, the 12-month moving average of one-month LIBOR. The notes
mature within two years. At December 31, 1997, these notes totaled $250.0
million. At December 31, 1997, the Company had committed to additional LAMA-
indexed borrowings of $900.0 million.
In March 1997, the Company issued two medium term notes totaling $80 million
which will mature in March 1998, bearing an interest rate of 6.15%. In April
1997, the Company issued two medium term notes totaling $100 million which
will mature within two years and bear a weighted average interest rate of
6.26%. In August 1997, the Company issued $125 million in subordinated debt
which will mature on August 15, 2004 and bears an interest rate of 6.50%.
In July 1996, the Company issued Medium Term Notes totaling $60 million. The
notes matured in April 1997 and had 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 of 10.5% subordinated notes.
The aggregate amounts of principal maturities for FHLB and other borrowings,
excluding unamortized discounts, at December 31, 1997 were (dollars in
thousands):
<TABLE>
<S> <C> <C>
1998.................................. $5,102,681 61.3%
1999.................................. 1,804,281 21.7
2000.................................. 798,094 9.6
2001.................................. 41,315 0.5
2002.................................. 265,889 3.2
Thereafter............................ 309,691 3.7
---------- -----
$8,321,951 100.0%
========== =====
</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.
F-27
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) 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.
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
Company elected termination of the agreements as of the end of 1997 and 1996,
respectively.
FHLB Stock
The fair value of FHLB stock approximates its carrying value.
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 broker-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.
F-28
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 banking 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 Financial Accounting Standards Board.
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, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.... $ 1,159,107 $ 1,159,107 $ 1,443,860 $ 1,443,860
Amortizing swap agreements... -- (85) -- (256)
Investment securities........ 9,669 9,675 11,597 11,615
MBS.......................... 12,791,391 12,834,721 14,296,512 14,341,209
Loans receivable, net........ 30,484,191 30,882,975 31,789,158 31,604,189
MSR.......................... 96,120 136,413 88,074 184,646
Deposits..................... 32,268,375 32,301,235 34,773,945 33,137,856
Short-term borrowings........ 2,512,861 2,533,077 2,030,529 2,040,621
FHLB and other borrowings.... 8,316,405 8,451,214 9,549,992 9,597,455
Capital Securities of
Subsidiary Trust............ 148,464 162,498 148,413 151,298
</TABLE>
F-29
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) INCOME TAXES
The provision for income taxes from continuing operations consisted of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $177,737 $(60,283) $258,105
State and local................................ 35,041 20,962 61,403
-------- -------- --------
212,778 (39,321) 319,508
-------- -------- --------
Deferred:
Federal........................................ 15,857 108,349 51,161
State and local................................ 12,365 (33,728) 3,031
-------- -------- --------
28,222 74,621 54,192
-------- -------- --------
$241,000 $ 35,300 $373,700
======== ======== ========
</TABLE>
Total income taxes (benefits) were allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Continuing operations........................... $241,000 $ 35,300 $373,700
Stockholders' equity............................ 60,631 (73,033) 50,656
Other assets or liabilities..................... -- (25) 43
-------- -------- --------
Total income taxes (benefits)............... $301,631 $(37,758) $424,399
======== ======== ========
</TABLE>
F-30
<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, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Provision for losses on loans and REO............... $ 154,877 $ 179,218
Basis differences on REI and partnerships........... 14,916 25,330
Delinquent accrued interest......................... 1,603 2,320
State and local taxes............................... 13,905 --
Purchase accounting differences..................... 29,410 27,857
Compensation differences............................ 14,031 10,688
Net operating and capital losses.................... 13,740 4,876
Investment in subsidiaries.......................... 48,054 52,799
Unrealized loss on securities....................... -- 54,407
Recurring liabilities............................... 2,067 --
Other............................................... 1,355 3,260
--------- ---------
Total deferred tax assets......................... 293,958 360,755
Valuation allowance................................. (7,199) (10,535)
--------- ---------
Total deferred tax assets, net of valuation
allowance........................................ 286,759 350,220
--------- ---------
Deferred tax liabilities:
Loan fee income..................................... (188,814) (191,657)
FHLB stock dividends................................ (133,994) (126,753)
Gains on loan sales................................. (33,121) (23,981)
Accrued interest on tax settlements................. (16,620) (16,909)
Basis difference on premises and equipment.......... (46,196) (35,358)
State and local taxes............................... -- (6,074)
Recurring liabilities............................... -- (5,788)
Unrealized gains on securities...................... (29,807) --
--------- ---------
Total deferred tax liabilities.................... (448,552) (406,520)
--------- ---------
Net deferred tax liability........................ $(161,793) $ (56,300)
========= =========
</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, 1997 and 1996 relates to the realizability of tax
basis differences on subsidiaries.
F-31
<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 36.8%, 19.6% and 45.3% for 1997, 1996 and
1995, respectively. These rates differ from statutory federal income tax
rates. The differences were as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory rate....... $229,174 35.0% $ 63,195 35.0% $288,626 35.0%
Increases (reductions) in
taxes resulting from:
State income tax, net of
federal income tax benefit. 37,145 5.7 8,602 4.7 41,882 5.1
Tax basis adjustments for
assets and liabilities of
companies acquired......... -- -- -- -- 38,983 4.7
Valuation allowance
reduction, net of
applicable federal income
tax........................ (3,600) (0.6) (35,400) (19.6) -- --
Sale of preferred stock of
subsidiary................. (7,000) (1.1) -- -- -- --
Federal and state tax
credits.................... (9,600) (1.5) -- -- -- --
Cash surrender value in
excess of premiums of
company-owned life
insurance.................. (2,009) (0.3) (618) (0.3) (270) (0.1)
Reduction of liabilities
from prior periods......... (2,900) (0.4) (1,000) (0.5) -- --
Other....................... (210) -- 521 0.3 4,479 0.6
-------- ---- -------- ----- -------- ----
Provision for income taxes.... $241,000 36.8% $ 35,300 19.6% $373,700 45.3%
======== ==== ======== ===== ======== ====
</TABLE>
The Company had total net operating losses of $14.3 million at December 31,
1997. Included in the total are $7.0 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 $7.3 million of net operating losses expire in 2011
and are attributable to a subsidiary that is not included in the federal
consolidated income tax return of the Company. The Company also had state
capital losses of $95.7 million which expire in 2001.
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 tax bad debt
deductions, the Act retained existing base year 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 approximates $691 million at
December 31, 1997. Due to the indefinite nature of the recapture provisions,
no tax liability has been established in the accompanying Consolidated
Financial Statements.
The IRS is currently examining the Company's tax returns for the years 1990
through 1993.
(13) 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-32
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) STOCKHOLDERS' EQUITY AND INCOME PER COMMON SHARE
At December 31, 1997, the Company had two series of preferred stock
outstanding: 8.40% Preferred Stock, Series C ("Series C") and 6% Cumulative
Convertible Preferred stock, Series D ("Series D").
Series C paid a dividend rate of 8.40%, payable quarterly on the first
business day of March, June, September and December. Series C had a
liquidation preference of $195.0 million at December 31, 1997. On March 2,
1998, the Company redeemed at par the entire $195.0 million of Series C.
Series D pays a dividend rate of 6.00%, payable quarterly on the first
business day of March, June, September and December. Series D is convertible
to the Company's Common Stock at a rate of $24.335 per share of Common Stock.
At December 31, 1997, there were 568,398 Series D shares outstanding, with a
liquidation preference of $284.2 million, which are convertible into 11.7
million shares of Common Stock.
The following is a summary of the calculation of income per common share
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income:
Net income before cumulative effect of
accounting change.................... $ 413,782 $ 145,258 $ 450,946
Less accumulated dividends on
preferred stock...................... (33,599) (44,921) (50,430)
----------- ----------- -----------
Net income attributable to common
shares before cumulative effect of
accounting change.................... 380,183 100,337 400,516
Cumulative effect of change in
accounting for goodwill.............. -- -- (234,742)
----------- ----------- -----------
Basic net income attributable to
common shares........................ 380,183 100,337 165,774
Add accumulated dividends paid on
convertible preferred stock,
Series D............................. 17,219 -- 17,250
----------- ----------- -----------
Diluted net income attributable to
common shares...................... $ 397,402 $ 100,337 $ 183,024
=========== =========== ===========
Weighted average shares:
Basic weighted average number of
common shares outstanding............ 97,162,327 108,650,585 117,204,021
Dilutive effect of outstanding common
stock equivalents.................... 13,665,658 -- 12,684,308
----------- ----------- -----------
Diluted weighted average number of
common shares outstanding.......... 110,827,985 108,650,585 129,888,329
=========== =========== ===========
Per share:
Basic income per common share before
cumulative effect of accounting
change............................... $ 3.91 $ 0.92 $ 3.41
Cumulative effect of change in
accounting for goodwill.............. -- -- (2.00)
----------- ----------- -----------
Basic income per common share....... $ 3.91 $ 0.92 $ 1.41
=========== =========== ===========
Diluted income per common share before
cumulative effect of accounting
change............................... $ 3.59 $ 0.92 $ 3.22
Cumulative effect of change in
accounting for goodwill.............. -- -- (1.81)
----------- ----------- -----------
Diluted income per common share..... $ 3.59 $ 0.92 $ 1.41
=========== =========== ===========
</TABLE>
F-33
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common stock equivalents identified by the Company in determining its
diluted income per common share are stock options, stock options with stock
appreciation rights and the effect of Series D.
Pursuant to a Rights Agreement, dated November 7, 1997, between the Company
and First Chicago Trust Company of New York, as Rights Agent, a dividend of
one preferred share purchase right ("Right") was declared for each share of
the Company's then outstanding common stock. One Right will be issued with
respect to each share of common stock which becomes outstanding after November
7, 1997 but prior to the earlier of the Distribution Date (as defined) or the
Expiration Date (as defined) (provided that under certain circumstances Rights
may be issued with respect to shares of common stock which become outstanding
after the Distribution Date but prior to the Expiration Date).
The Rights become exercisable on the Distribution Date, which is a specified
number of days following (i) an individual or entity becoming the beneficial
owner of 15% or more of the Company's common stock or (ii) the announcement of
a tender or exchange offer which would result in an individual or entity
becoming the beneficial owner of 15% or more of the Company's common stock.
Upon exercise, the holder of a Right is entitled to receive, upon payment of
the exercise price, which is initially $240, one one-thousandth of a share of
Series A Junior Participating Preferred Stock ("Series A Preferred Stock").
Each share of Series A Preferred Stock provides for dividend, voting and
liquidation rights equivalent to 1,000 shares of the Company's common stock.
The exercise price, the number of shares of Series A Preferred Stock subject
to a Right and the terms of the Series A Preferred Stock are subject to
adjustment in certain circumstances, including stock dividends, stock splits,
reverse stock splits and stock reclassifications.
If an individual or entity becomes the beneficial owner of 15% or more of
the Company's common stock (the first occurrence of which is referred to as a
"Flip-In Event"), upon exercise, the holder of a Right (other than the
individual or entity who is the beneficial owner of 15% or more of the
Company's common stock) will be entitled to receive, in lieu of one one-
thousandth of a share of Series A Preferred Stock, that number of shares of
the Company's common stock with a then market value equal to two times the
exercise price.
If, after a Flip-In Event, (i) the Company is consolidated or merged with
another entity or (ii) assets or earning power aggregating 50% or more of the
assets or earning power of the Company are sold or transferred, upon exercise,
the holder of a Right (other than the individual or entity who was the
beneficial owner of 15% or more of the Company's common stock) will be
entitled to receive, in lieu of one one-thousandth of a share of Series A
Preferred Stock or shares of the Company's common stock, that number of shares
of the surviving or purchasing company's common stock with a then market value
equal to two times the exercise price.
The Rights expire on the Expiration Date, which is the earliest of November
6, 2007, the redemption of the rights by the Company (permitted only prior to
a Flip-In Event) or the exchange by the Company of a share of common stock for
each Right (permitted only after a Flip-In Event).
(15) REGULATORY CAPITAL AND DIVIDENDS
The Office of Thrift Supervision ("OTS") has adopted regulations that
contain a capital standard for savings institutions ("OTS Capital
Regulations"). Home Savings is in compliance with the OTS Capital Regulations
at December 31, 1997.
F-34
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, Home Savings' capital amounts and ratios were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
BALANCE RATIO
---------- -----
<S> <C> <C>
Tangible capital (to adjusted total assets)................ $2,703,074 5.86%
Core capital (to adjusted total assets).................... 2,706,337 5.87
Core capital (to risk-weighted assets)..................... 2,706,337 9.14
Total risk-based capital (to risk-weighted assets)......... 3,494,471 11.80
</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
Capital 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, 1998 Home Savings could have paid
dividends of approximately $564.4 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 Capital Regulations.
(16) 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.
The Plan's funded status and liabilities accrued in the Company's
Consolidated Statements of Financial Condition at December 31, 1997 and 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits............................ $277,502 $231,480
Nonvested accumulated benefits......................... 8,514 7,696
-------- --------
Total accumulated benefits........................... $286,016 $239,176
======== ========
Projected benefit obligation for service rendered to
date.................................................. $305,719 $261,027
Plan assets at fair value; primarily listed common
stocks, U.S. government obligations and corporate bonds
and debentures.......................................... 339,665 306,200
-------- --------
Funded status--Plan assets in excess of projected
benefit................................................. 33,946 45,173
Items not yet recognized in income:
Unrecognized net loss.................................. 16,999 10,588
Prior service cost not yet recognized in net periodic
pension cost.......................................... 239 378
Unrecognized transition asset being recognized over 8.8
years................................................. -- (577)
-------- --------
Prepaid pension cost................................. $ 51,184 $ 55,562
======== ========
</TABLE>
F-35
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense for the Plan for 1997, 1996 and 1995 included the
following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period... $11,836 $ 9,863 $ 9,006
Interest cost on projected benefit obligations... 19,685 16,963 16,056
Actual return on plan assets..................... (49,914) (49,920) (43,221)
Net amortization and deferral.................... 22,771 26,172 24,015
------- ------- -------
Net pension expense.......................... $ 4,378 $ 3,078 $ 5,856
======= ======= =======
</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 7.5% and 4.5%, respectively, as of December 31,
1997. 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.
The Company holds life insurance policies in connection with certain
employee and directors' benefits, including the SERP and the ODRP. The Company
is the owner and beneficiary of these policies. The estimated cash surrender
value of the company-owned life insurance, included in "Other assets" of the
Company, was $150.7 million and $124.0 million at December 31, 1997 and 1996,
respectively.
F-36
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Nonqualified Plans' funded status and liabilities accrued in the
Company's Consolidated Statements of Financial Condition at December 31, 1997
and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits............................. $27,358 $25,347
Nonvested accumulated benefits.......................... 943 631
------- -------
Total accumulated benefits............................ $28,301 $25,978
======= =======
Projected benefit obligation for service rendered to
date................................................... $32,038 $28,365
Plan assets at fair value................................. -- --
------- -------
Funded status--Projected benefit in excess of plan assets. 32,038 28,365
Items not yet recognized in income:
Unrecognized net loss................................... (8,109) (5,065)
Prior service cost not yet recognized in net periodic
pension cost........................................... (4,156) (4,680)
Unrecognized net obligation being recognized over 15
years.................................................. (1,135) (1,428)
Adjustment required to reflect minimum liability........ 9,663 8,785
------- -------
Accrued pension cost.................................... $28,301 $25,977
======= =======
</TABLE>
The net pension expense for the Nonqualified Plans for 1997, 1996 and 1995
included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned during the period......... $ 432 $ 315 $ 208
Interest cost on projected benefit obligations......... 2,117 1,956 2,001
Net amortization and deferral.......................... 1,013 891 751
------ ------ ------
Net pension expense................................ $3,562 $3,162 $2,960
====== ====== ======
</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 7.5% and 4.5%,
respectively, as of December 31, 1997.
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 $6.0 million, $6.1 million and $7.2 million in 1997,
1996 and 1995, respectively.
F-37
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 7.50% as of December 31, 1997. 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.
The accumulated postretirement benefits obligation at December 31, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $11,789 $11,333
Fully eligible active employees......................... 504 402
Other active employees.................................. 1,082 656
------- -------
Total accumulated postretirement benefit obligation... 13,375 12,391
Plan assets at fair value................................. -- --
------- -------
Funded status--Accumulated benefit obligation in excess of
plan assets.............................................. 13,375 12,391
Unrecognized transition obligation being recognized over
20 years................................................. (8,737) (11,545)
Unrecognized gain (loss).................................. (3,713) 360
------- -------
Accrued postretirement benefit cost................... $ 925 $ 1,206
======= =======
</TABLE>
The total postretirement benefit expense for the Plan for 1997, 1996 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost........................................... $ 79 $ 131 $ 207
Amortization of transition obligation.................. 676 806 806
Interest cost.......................................... 1,005 1,174 1,400
------ ------ ------
Total postretirement benefit expense................. $1,760 $2,111 $2,413
====== ====== ======
</TABLE>
Stock Compensation Plans
As of December 31, 1997 there were 3,865,199 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 and the 1984 Stock Incentive Plan ("the 1984 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 Plan. 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
F-38
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, stock option awards vest over a period of either six months or
33-1/3% for each of the first three years from the date of grant and have
exercise periods of ten years and one month from the date of grant. The
following table summarizes the option vesting schedule for outstanding
options:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS VESTING BY YEAR
-------------------------------------------------------
OPTIONS PRIOR
EXPIRATION DATE OUTSTANDING TO 1995 1995 1996 1997 1998 1999 2000
- --------------- ----------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prior to 2005........... 448,107 368,676 47,933 31,498 -- -- -- --
2005.................... 699,381 -- 218,259 237,111 111,837 132,174 -- --
2006.................... 1,050,483 -- -- 451,457 322,586 128,222 148,218 --
2007.................... 964,346 -- -- -- 289,909 398,869 137,784 137,784
--------- ------- ------- ------- ------- ------- ------- -------
3,162,317 368,676 266,192 720,066 724,332 659,265 286,002 137,784
========= ======= ======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1997, the Company had three stock compensation plans which
the Company continues to account for in accordance with APB No. 25. Total
compensation (reduction) expense related to these stock compensation plans was
($0.3) million, $1.1 million and $4.7 million for 1997, 1996 and 1995,
respectively. Had compensation expense 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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported..................................... $413,782 $145,258 $216,204
Pro forma....................................... 406,957 140,942 214,601
Basic income per share:
As reported..................................... $ 3.91 $ 0.92 $ 1.41
Pro forma....................................... 3.84 0.88 1.40
Diluted income per share:
As reported..................................... $ 3.59 $ 0.92 $ 1.41
Pro forma....................................... 3.52 0.88 1.40
</TABLE>
The fair value of each option granted in 1997, 1996 and 1995, estimated on
December 31, 1997, 1996 and 1995, using the Black-Scholes option-pricing
model, was computed based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
STOCK STOCK STOCK
OPTIONS RSAS OPTIONS RSAS OPTIONS RSAS
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield............ 2.11% 2.12% 2.71% 2.71% 3.32% 3.32%
Expected volatility....... 30.99 25.96 31.49 24.15 31.96 23.72
Risk-free interest rate... 6.29 6.08 6.29 6.01 5.50 5.24
Expected lives............ 7 years 3 years 7 years 3 years 7 years 3 years
</TABLE>
F-39
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of RSA transactions in 1997, 1996 and 1995. Final
restrictions lapse in the year 2002.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ------------------
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................... 111,526 $24.73 65,416 $15.61 172,514 $14.71
Granted and issued.... 24,000 43.31 113,147 24.67 9,000 21.21
------- ------- --------
135,526 178,563 181,514
Cancelled............. (1,768) 29.06 -- (9,911) 16.20
Restrictions lapsed... (4,698) 27.30 (67,037) 15.74 (106,187) 14.56
------- ------- --------
Balance end of year..... 129,060 28.03 111,526 24.73 65,416 15.61
======= ======= ========
</TABLE>
Total compensation expense related to RSAs was $0.5 million, $0.4 million
and $0.9 million for 1997, 1996 and 1995, respectively.
At December 31, 1997 options to purchase 3,162,317 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
AVERAGE AVERAGE SHARES
RANGE OF EXERCISE EXPIRATION EXERCISE EXERCISE WITH
PRICES SHARES DATE PRICE SHARES PRICE SARS
----------------- --------- ---------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
$ 16.94 17,590 1998 $16.94 17,590 $16.94 --
21.56-22.25 36,624 1999 21.80 36,624 21.80 4,194
13.13 9,903 2000 13.13 9,903 13.13 --
13.94-18.19 57,576 2001 15.82 57,576 15.82 --
14.94 49,307 2002 14.94 49,307 14.94 --
17.13-17.75 277,107 2003 17.73 277,107 17.73 --
16.00-25.94 699,381 2005 19.51 567,207 19.51 --
23.56-31.38 1,050,483 2006 25.46 774,043 25.84 --
32.88-61.19 964,346 2007 44.32 289,909 37.99 --
--------- --------- -----
3,162,317 28.75 2,079,266 24.00 4,194
========= ========= =====
</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 (reduction) expense related to SARs was
($0.9) million, $0.7 million and $3.8 million for 1997, 1996 and 1995,
respectively.
F-40
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option transactions under the 1979, 1984 and 1993 Plans during 1997, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
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................ 3,686,237 $21.08 3,361,164 $18.35 3,412,598 $17.24
Options granted:
Without SARs........ 1,016,846 44.00 1,455,286 25.24 1,203,608 19.71
Options cancelled:
With SARs........... (10,556) 7.74 -- --
Upon exercise of
SARs............... (26,982) 17.75 (16,422) 18.74 (310,915) 16.73
Without SARs........ (108,485) 24.81 (106,615) 19.10 (106,153) 17.66
Options exercised:
Without SARs........ (1,296,670) 20.56 (950,690) 18.13 (765,524) 16.48
With SARs cancelled. (98,073) 16.58 (56,486) 19.75 (72,450) 16.32
---------- --------- ---------
Outstanding at end of
year................... 3,162,317 28.75 3,686,237 21.08 3,361,164 18.35
========== ========= =========
Exercisable at end of
year................... 2,079,266 24.00 2,567,772 19.86 2,342,538 17.68
========== ========= =========
</TABLE>
The weighted average exercise price of options granted during the year was
equal to the weighted average fair value.
As of December 31, 1997, the $90.9 million of stock options outstanding
under the 1984 and 1993 Plans have exercise prices between $13.13 and $61.19
and a weighted average remaining contractual life of 8 years.
F-41
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) 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, 1997, 1996 and 1995
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Savings and lending................... $ 3,591,475 $ 3,632,158 $ 4,307,271
Mortgage banking...................... 104,858 127,420 85,419
Corporate and other................... 36,609 7,015 4,810
----------- ----------- -----------
Consolidated revenues............... $ 3,732,942 $ 3,766,593 $ 4,397,500
=========== =========== ===========
Operating income before taxes and
cumulative effect of accounting change:
Savings and lending................... $ 704,028 $ 232,215 $ 933,734
Mortgage banking...................... 22,589 35,613 18,299
Corporate and other................... (71,835) (87,270) (127,387)
----------- ----------- -----------
Consolidated operating income before
income taxes and cumulative effect
of accounting change............... $ 654,782 $ 180,558 $ 824,646
=========== =========== ===========
Assets:
Savings and lending................... $45,719,893 $48,473,974 $48,997,401
Mortgage banking...................... 756,378 1,331,260 1,201,055
Corporate and other................... 202,481 96,810 331,130
----------- ----------- -----------
Consolidated assets................. $46,678,752 $49,902,044 $50,529,586
=========== =========== ===========
</TABLE>
F-42
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) PARENT COMPANY FINANCIAL INFORMATION
See other Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash and amounts due from banks........................ $ 587 $ 596
Securities purchased under agreements to resell........ 68,800 27,700
Short-term investments due from Home Savings........... 236,104 182,064
Other short-term investments........................... -- 8,976
---------- ----------
Total cash and cash equivalents...................... 305,491 219,336
Accounts and notes receivable from subsidiaries........ 172,374 286,289
Investment in Home Savings............................. 2,959,657 2,885,151
Investment in other subsidiaries....................... 28,804 54,777
Income taxes receivable................................ 42,307 --
Other assets........................................... 149,714 136,694
---------- ----------
$3,658,347 $3,582,247
========== ==========
Liabilities and Stockholders' Equity:
Notes payable.......................................... $ 961,347 $ 840,400
Notes payable to subsidiaries.......................... 259,291 254,547
Accrued expenses and other liabilities................. 42,264 40,973
Income taxes payable................................... -- 13,278
---------- ----------
Total liabilities.................................... 1,262,902 1,149,198
Stockholders' equity................................... 2,395,445 2,433,049
---------- ----------
$3,658,347 $3,582,247
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Income:
Cash dividends from Home Savings............... $505,797 $307,000 $410,000
Cash dividends from other subsidiaries......... 20,414 35,200 32,000
Interest....................................... 36,431 35,188 30,549
Operations of REI.............................. 2,771 -- --
Other income................................... 35 670 774
-------- -------- --------
565,448 378,058 473,323
-------- -------- --------
Expenses:
Interest....................................... 94,113 72,806 64,123
G&A expenses................................... 13,070 10,889 27,197
Operations of REI.............................. -- 5,975 --
Income tax benefit............................. (44,637) (61,324) (30,439)
-------- -------- --------
62,546 28,346 60,881
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries................................. 502,902 349,712 412,442
Equity in undistributed net income of
subsidiaries.................................... (89,120) (204,454) (196,238)
-------- -------- --------
Net income....................................... $413,782 $145,258 $216,204
======== ======== ========
</TABLE>
F-43
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income.................................. $ 413,782 $ 145,258 $ 216,204
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries............................. 89,120 204,454 196,238
Merger and acquisition expense............ 23,114 -- --
Gain on sale of Great Western Stock....... (17,639) -- --
Purchase of Great Western Stock........... (163,971) -- --
Proceeds from sale of Great Western Stock. 181,610 -- --
Provision for deferred income taxes....... (20,399) (33,169) 4,562
Other, net................................ (65,263) 44,255 35,326
--------- --------- ---------
Net cash provided by operating
activities............................. 440,354 360,798 452,330
--------- --------- ---------
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)
Capital contributions to subsidiaries....... (18,000) (1,081) (16,878)
Net decrease (increase) in notes receivable
from subsidiaries.......................... 111,034 (40,008) (229,790)
Purchase of other investment securities..... -- (12,731) (25,788)
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
Other, net.................................. 882 (4,822) (19,281)
--------- --------- ---------
Net cash provided by (used in) investing
activities............................. 93,916 (67,811) (337,411)
--------- --------- ---------
Cash flows from financing activities:
Dividends on Common Stock ($0.88 per share). (85,716) (95,274) (103,163)
Dividends on Preferred Stock................ (33,586) (46,321) (50,430)
Common stock purchased for Treasury......... (481,379) (381,933) (62,595)
Preferred stock, Series B, redeemed......... -- (175,000) --
Net proceeds from issuance of Medium Term
Notes...................................... 179,479 59,835 159,052
Maturity of Medium Term Notes............... (60,000) -- --
Proceeds from issuance of notes payable to
subsidiaries............................... 4,744 229,307 --
Other, net.................................. 28,343 18,827 15,114
--------- --------- ---------
Net cash used in financing activities... (448,115) (390,559) (42,022)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 86,155 (97,572) 72,897
Cash and cash equivalents at beginning of
year......................................... 219,336 316,908 244,011
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 305,491 $ 219,336 $ 316,908
========= ========= =========
</TABLE>
In 1997, Ahmanson contributed the stock, totaling $35.6 million, of Home
Servicing of America to Home Savings, totaling $35.6 million. 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.
F-44
<PAGE>
H. F. AHMANSON & COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) SUBSEQUENT EVENT
On March 16, 1998, Ahmanson and Washington Mutual, Inc., a Washington
corporation ("Washington Mutual"), entered into an Agreement and Plan of
Merger (the "Merger Agreement"), pursuant to which Ahmanson will merge with
and into Washington Mutual (the "Merger"). Following execution of the Merger
Agreement, Ahmanson and Washington Mutual entered into a Stock Option
Agreement pursuant to which Ahmanson granted to Washington Mutual an option to
acquire up to 21,796,426 shares of Ahmanson Common Stock (representing
approximately 19.9% of the outstanding shares of Ahmanson Common Stock) at a
price per share of $79.86. The option is exercisable only upon the occurrence
of certain events, including an agreement by Ahmanson to enter into certain
business combinations with a third party or the acquisition of beneficial
ownership by a third party of 25% or more of the Ahmanson Common Stock.
Pursuant to the Merger Agreement, Ahmanson's stockholders will receive in a
tax-free exchange 1.12 shares of the common stock of Washington Mutual for
each share of Ahmanson Common Stock. Based on the closing price of Washington
Mutual on March 16, 1998 (the last trading day before announcement of the
proposal), the exchange ratio would have produced a value of $80.36 for each
share of Ahmanson Common Stock, or a premium of 22.7% over the closing market
price of Ahmanson Common Stock on March 16, 1998.
The transaction is subject to the approval of the stockholders of both
Ahmanson and Washington Mutual and the OTS.
F-45
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
H. F. AHMANSON & COMPANY
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
H.F. Ahmanson & Company, a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 and 151(g) thereof, DOES HEREBY CERTIFY:
1. That on August 17, 1988, the Corporation filed with the Secretary of
State of the State of Delaware a Certificate of Designation setting forth a
resolution of the Board of Directors of the Corporation designating 1,000,000
shares of the Preferred Stock, par value $.01 per share, of the Corporation as
Series A Junior Participating Preferred Stock, and setting forth the powers,
preferences and relative, participating optional or other rights of the shares
of such series and the qualifications, limitation and restrictions thereof,
pursuant to the authority vested in the Board of Directors in accordance with
the provisions of the Certificate of Incorporation of the Corporation.
2. That none of said shares of Series A Junior Participating Preferred Stock
have been issued.
3. That the Board of Directors of the Corporation on November 7, 1997
adopted the following resolution amending and restating the Certificate of
Designation of the Series A Junior Participating Preferred Stock as follows:
RESOLVED, that the powers, preferences and relative, participating
optional or other rights of the shares of such series and the
qualifications, limitation and restrictions thereof, of the Series A Junior
Participating Preferred Stock of the Corporation be amended to read in their
entirety as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred Stock that
shall be designated as "Series A Junior Participating Preferred Stock," and the
number of shares constituting such series shall be 1,000,000. Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, however, that no decrease shall reduce the number of shares of Series
A Junior Participating Preferred Stock to less than the number of shares then
issued and outstanding plus the number of shares issuable upon exercise of
outstanding rights, options or warrants or upon conversion of outstanding
securities issued by the Corporation.
2. Dividends and Distribution.
A. Subject to the prior and superior rights of the holders of any shares
of any class or series of stock of the Corporation ranking prior and superior to
the shares of Series A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating Preferred
Stock, in preference to the holders of shares of any class or series of stock of
the Corporation ranking junior to the Series A Junior Participating
<PAGE>
Preferred Stock in respect thereof, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of March, June,
September and December, in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a share
of Series A Junior Participating Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $10 or (b) the
adjustment Number (as defined below) times the aggregate per share amount of all
cash dividends, and the Adjustment Number times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, par value $.01 per share, of the Corporation (the "Common Stock")
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Junior Participating Preferred
Stock. The "Adjustment Number" shall initially be 1000. In the event the
Corporation shall at any time after November 7, 1997 (i) declare and pay any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of a
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 60 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to a number of votes equal to the Adjustment
<PAGE>
Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as required by law and by Section 10 hereof, holders of Series
A Junior Participating Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled; or
(iii) purchase or otherwise acquire for consideration any shares of
Series A Junior Participating Preferred Stock, or any shares of stock ranking on
a parity with the Series A Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of Series A Junior
Participating Preferred Stock, or to such holders and holders of any such shares
ranking on a parity therewith, upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired promptly after the acquisition thereof. All such
shares shall upon their retirement become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
<PAGE>
6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation,
dissolution or winding up of the Corporation, voluntary or otherwise, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the holders
of shares of Series A Junior Participating Preferred Stock shall have received
an amount per share (the "Series A Liquidation Preference") equal to the greater
of (i) $1000 plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment, or
(ii) the Adjustment Number times the per share amount of all cash and other
property to be distributed in respect of the Common Stock upon such
liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other classes and series of stock of the
Corporation, if any, that rank on a parity with the Series A Junior
Participating Preferred Stock in respect thereof, then the assets available for
such distribution shall be distributed ratably to the holders of the Series A
Junior Participating Preferred Stock and the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation into or with
another corporation nor the merger or consolidation of any other corporation
into or with the Corporation shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 6.
7. Consolidation, Merger, Etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the outstanding
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. No Redemption. Shares of Series A Junior Participating Preferred Stock
shall not be subject to redemption by the Company.
9. Ranking. The Series A Junior Participating Preferred Stock shall rank
junior to all other series of the Preferred Stock as to the payment of dividends
and as to the distribution of assets upon liquidation, dissolution or winding
up, unless the terms of any such series shall provide otherwise, and shall rank
senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior Participating
Preferred Stock are outstanding, the Amended and Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
11. Fractional Shares. Series A Junior Participating Preferred Stock may be
issued in fractions of a share that shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights,
<PAGE>
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 3rd
day of November 1997.
H.F. AHMANSON & COMPANY
/s/ Tim S. Glassett
By:___________________________
Name: Tim S. Glassett
Title: First Vice President
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF H. F. AHMANSON & COMPANY
(AS OF DECEMBER 31, 1997)
<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
ACD4 California
Ahmanson Capital Trust I Delaware
Ahmanson Developments, Inc. California
Ahmanson Insurance, Inc. California
Ahmanson Land Company California
Ahmanson Marketing, Inc. California
Ahmanson Obligation Company California
Ahmanson Mortgage Company California
Ahmanson Residential 2 California
Ahmanson Residential Development 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. F. Ahmanson & Company Nevada
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
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. 33-57218, No. 33-
50731 and No. 33-57395 on Form S-3 and Registration Statements No. 333-41645 and
No. 333-44167 on Form S-4 of H.F. Ahmanson & Company of our report dated January
15, 1998, except as to Note 2 of notes to Consolidated Financial Statements,
which is as of February 13, 1998, and as to Note 19 of notes to Consolidated
Financial Statements, which is as of March 16, 1998, relating to the
consolidated statements of financial condition of H.F. Ahmanson & Company as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 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.
Our report on the Consolidated Financial Statements of the Company dated January
15, 1998, except as to Note 2 of notes to Consolidated Financial Statements,
which is as of February 13, 1998, and as to Note 19 of notes to Consolidated
Financial Statements, which is as of March 16, 1998, contains an explanatory
paragraph which states, that 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
March 30, 1998
<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 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 603,797 691,578 752,878
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 550,200 737,500 381,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,476,060 9,239,001 10,336,774
<INVESTMENTS-CARRYING> 4,325,000 5,069,108 5,827,724
<INVESTMENTS-MARKET> 4,368,336 5,113,823 5,967,529
<LOANS> 30,484,191 31,789,158 31,255,379
<ALLOWANCE> 377,351 389,135 380,886
<TOTAL-ASSETS> 46,678,752 49,902,044 50,529,586
<DEPOSITS> 32,268,375 34,773,945 34,244,481
<SHORT-TERM> 2,512,861 2,030,529 3,519,311
<LIABILITIES-OTHER> 1,037,202 966,116 991,755
<LONG-TERM> 8,316,405 9,549,992 8,717,117
<COMMON> 1,211 1,195 1,184
0 0 0
14 14 49
<OTHER-SE> 2,394,220 2,431,840 3,055,689
<TOTAL-LIABILITIES-AND-EQUITY> 46,678,752 49,902,044 50,529,586
<INTEREST-LOAN> 2,315,253 2,296,786 2,405,820
<INTEREST-INVEST> 1,088,119 1,218,009 1,293,271
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 3,403,372 3,514,795 3,699,091
<INTEREST-DEPOSIT> 1,479,438 1,523,873 1,835,590
<INTEREST-EXPENSE> 2,168,487 2,262,281 2,472,336
<INTEREST-INCOME-NET> 1,234,885 1,252,514 1,226,755
<LOAN-LOSSES> 67,091 144,924 119,111
<SECURITIES-GAINS> 232 3,387 12,106
<EXPENSE-OTHER> 842,582 1,178,830 981,407
<INCOME-PRETAX> 654,782 180,558 824,646
<INCOME-PRE-EXTRAORDINARY> 654,782 180,558 824,646
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 (234,742)
<NET-INCOME> 413,782 145,258 216,204
<EPS-PRIMARY><F1> 3.91 0.92 1.41
<EPS-DILUTED> 3.59 0.92 1.41
<YIELD-ACTUAL> 2.68 2.63 2.39
<LOANS-NON> 432,898 598,661 723,791
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 212,299 185,635 163,844
<LOANS-PROBLEM> 144,630 114,322 51,018
<ALLOWANCE-OPEN> 389,135 380,886 400,232
<CHARGE-OFFS> 114,018 190,540 162,618
<RECOVERIES> 35,143 39,155 24,161
<ALLOWANCE-CLOSE> 377,351 389,135 380,886
<ALLOWANCE-DOMESTIC> 377,351 389,135 380,886
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
<FN>
<F1> Represents EPS-BASIC.
</FN>
</TABLE>
