<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
-------------- ----------------------------
Commission File Number: 333-4026
---------------------------------------------------
First Nationwide (Parent) Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3778550
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Main Street, San Francisco, CA 94105
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-0100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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 d X Yes
No
- ------
The number of shares outstanding of registrant's classes of $1.00 par
value common stock, as of the close of business on November 7, 1997: 1,000
shares of common stock.
Page 1 of 45 pages
Exhibit index on page: 44
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
THIRD QUARTER 1997 REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
September 30, 1997 (unaudited) and December 31, 1996............3
Unaudited Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1996...................4
Unaudited Consolidated Statements of Operations
Three Months ended September 30, 1997 and 1996..................5
Unaudited Consolidated Statement of Stockholder's Equity
Nine months ended September 30, 1997............................6
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996...................7
Notes to Unaudited Consolidated Financial Statements............9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................43
Item 2. Changes in Securities..........................................43
Item 3. Defaults Upon Senior Securities................................43
Item 4. Submission of Matters to a Vote of Security Holders............44
Item 5. Other Information..............................................44
Item 6. Exhibits and Reports on Form 8-K...............................44
Page 2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -------------
<S> <C> <C>
Assets (unaudited)
Cash and amounts due from banks $ 282,727 $ 135,534
Interest-bearing deposits in other banks 36,651 20,619
Short-term investment securities 61,055 113,716
----------- -----------
Cash and cash equivalents 380,433 269,869
Securities available for sale, at fair value 964,436 542,019
Securities held to maturity 58,167 4,272
Mortgage-backed securities available for sale, at fair value 5,146,128 1,598,652
Mortgage-backed securities held to maturity 1,412,820 1,621,662
Loans held for sale, net 1,027,893 825,316
Loans receivable, net 19,230,096 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System 410,834 220,962
Office premises and equipment, net 159,465 100,164
Foreclosed real estate, net 86,635 51,987
Accrued interest receivable 188,968 106,034
Intangible assets (net of accumulated amortization of
$47,946 in 1997 and $11,141 in 1996) 688,388 140,564
Mortgage servicing rights 532,023 423,692
Other assets 679,646 517,297
----------- -----------
Total assets $30,965,932 $16,635,073
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
Deposits $16,660,626 8,501,883
Securities sold under agreements to repurchase 2,567,134 1,583,387
Borrowings 9,627,032 5,364,894
Other liabilities 694,404 399,446
----------- ----------
Total liabilities 29,549,196 15,849,610
----------- ----------
Commitments and contingencies -- --
Minority interest 1,210,857 613,852
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital -- 161
Net unrealized holding gain on securities available for sale 48,842 36,975
Retained earnings (substantially restricted) 157,036 134,474
----------- -----------
Total stockholder's equity 205,879 171,611
----------- -----------
Total liabilities, minority interest and stockholder's equity $30,965,932 $16,635,073
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,166,028 $671,099
Mortgage-backed securities available for sale 216,280 88,107
Mortgage-backed securities held to maturity 86,849 103,495
Covered assets -- 1,413
Loans held for sale 55,898 45,424
Securities available for sale 40,325 23,378
Securities held to maturity 1,672 187
Interest-bearing deposits in other banks 4,839 1,310
----------- ---------
Total interest income 1,571,891 934,413
----------- ---------
Interest expense:
Deposits 562,904 323,246
Securities sold under agreements to repurchase 104,863 89,923
Borrowings 447,364 226,205
----------- ---------
Total interest expense 1,115,131 639,374
----------- ---------
Net interest income 456,760 295,039
Provision for loan losses 59,850 29,700
----------- ---------
Net interest income after provision for loan losses 396,910 265,339
----------- ---------
Noninterest income:
Loan servicing fees, net 109,581 92,150
Customer banking fees and service charges 73,102 34,356
Management fees 5,309 8,016
Gain on sale of loans, net 16,123 13,005
Gain on sale of assets, net 14,845 38,396
Gain on sales of branches 1,069 363,012
Dividends on FHLB stock 18,367 8,161
Gain from termination of Assistance Agreement -- 25,632
Other income 17,737 12,733
----------- ---------
Total noninterest income 256,133 595,461
----------- ---------
Noninterest expense:
Compensation and employee benefits 190,370 155,976
Occupancy and equipment 61,423 37,441
Savings Association Insurance Fund ("SAIF") deposit insurance premium 8,090 77,011
Loan expense 51,838 20,454
Marketing 10,378 7,697
Professional fees 34,084 13,444
Data processing 9,553 8,345
Foreclosed real estate operations, net (2,081) (6,841)
Amortization of intangible assets 36,805 6,877
Other 79,666 59,647
----------- ---------
Total noninterest expense 480,126 380,051
----------- ---------
Income before income taxes, extraordinary item and minority interest 172,917 480,749
Income tax expense (benefit) 31,426 (81,448)
----------- ---------
Income before extraordinary item and minority interest 141,491 562,197
Extraordinary item - loss on early extinguishment of debt, net -- (1,586)
----------- ---------
Income before minority interest 141,491 560,611
Minority interest 98,150 143,535
----------- ---------
Net income $ 43,341 $ 417,076
=========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $386,365 $222,438
Mortgage-backed securities available for sale 81,848 28,445
Mortgage-backed securities held to maturity 27,980 32,735
Loans held for sale 18,271 15,343
Securities available for sale 15,047 8,704
Securities held to maturity 743 70
Interest-bearing deposits in other banks 1,049 402
--------- ---------
Total interest income 531,303 308,137
--------- ---------
Interest expense:
Deposits 188,117 100,590
Securities sold under agreements to repurchase 32,077 27,613
Borrowings 160,074 91,250
--------- ---------
Total interest expense 380,268 219,453
--------- ---------
Net interest income 151,035 88,684
Provision for loan losses 19,950 9,900
--------- ---------
Net interest income after provision for loan losses 131,085 78,784
--------- ---------
Noninterest income:
Loan servicing fees, net 34,526 31,385
Customer banking fees and service charges 26,426 10,550
Management fees 1,220 2,306
Gain (loss) on sale of loans, net 4,765 (665)
Gain (loss) on sale of assets, net 15,059 (62)
Loss on sales of branches -- (238)
Dividends on FHLB stock 6,392 3,470
Gain from termination of Assistance Agreement -- 25,632
Other income 6,458 3,492
---------- ---------
Total noninterest income 94,846 75,870
---------- ---------
Noninterest expense:
Compensation and employee benefits 62,868 45,110
Occupancy and equipment 20,579 11,863
Savings Association Insurance Fund ("SAIF") deposit insurance premium 2,640 65,427
Loan expense 17,872 6,442
Marketing 2,694 2,885
Professional fees 11,329 3,979
Data processing 3,371 2,520
Foreclosed real estate operations, net (1,224) (1,931)
Amortization of intangible assets 12,210 2,673
Other 22,419 18,475
--------- ---------
Total noninterest expense 154,758 157,443
--------- ---------
Income (loss) before income taxes, extraordinary item and minority interest 71,173 (2,789)
Income tax expense 12,208 527
--------- ---------
Income (loss) before extraordinary item and minority interest 58,965 (3,316)
Extraordinary item - loss on early extinguishment of debt, net -- (1,586)
--------- --------
Income (loss) before minority interest 58,965 (4,902)
Minority interest 35,250 8,802
--------- ---------
Net income (loss) $ 23,715 $(13,704)
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Net unrealized
Additional holding gains Total
Common paid-in on securities Retained stockholder's
stock capital available for sale earnings equity
------ ---------- ------------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1 $161 $36,975 $134,474 $171,611
Net income -- -- -- 43,341 43,341
Merger of FN Escrow -- -- -- (931) (931)
Redemption of FN Holdings Preferred
Stock -- -- -- 1,191 1,191
Issuance costs of FN Holdings Preferred
Stock -- -- -- (520) (520)
Issuance costs of REIT Preferred -- (200) (13,841) (14,041)
Change in net unrealized holding gains on
securities available for sale -- -- 11,867 -- 11,867
Dividend to parent -- (10) -- (6,678) (6,688)
Capital contribution -- 49 -- -- 49
-- ------ ------- -------- --------
Balance at September 30, 1997 $1 $ -- $48,842 $157,036 $205,879
== ====== ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 43,341 $ 417,076
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 36,805 6,877
Accretion of purchase accounting premiums and discounts, net (14,705) (11,094)
Amortization of mortgage servicing rights 81,418 65,482
Provision for loan losses 59,850 29,700
Gain on sales of assets, net (14,845) (38,396)
Gain on sale of branches (1,069) (363,012)
Gain on sales of foreclosed real estate, net (10,302) (10,533)
Loss on sale of loans, net 72,917 41,968
Extraordinary loss on early extinguishment of debt, net -- 1,586
Depreciation and amortization of office premises and equipment 11,755 7,905
Amortization of deferred debt issuance costs 5,472 2,067
FHLB stock dividend (18,367) (8,161)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable (89,040) (54,973)
Purchases and originations of loans held for sale (4,458,632) (3,554,652)
Proceeds from the sale of loans held for sale 4,205,318 4,025,868
Decrease (increase) in other assets 111,333 (55,187)
(Increase) decrease in accrued interest receivable (11,967) 16,199
Decrease in other liabilities (68,677) (19,301)
Minority interest 94,277 138,934
----------- ----------
Total adjustments (8,459) 221,277
---------- ----------
Net cash provided by operating activities 34,882 638,353
----------- ----------
</TABLE>
(Continued)
Page 7
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
1997 1996
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition $ (161,196) $ --
SFFed Acquisition -- (83,184)
Home Federal Acquisition -- 79,044
Auto One Acquisition (2,845) --
Mortgage loan servicing rights and operations (34,260) (48,305)
Purchases of securities available for sale (916,571) (322,569)
Proceeds from maturities of securities available for sale 490,797 127,919
Purchases of securities held to maturity (58,833) (9,303)
Proceeds from maturities of securities held to maturity 4,938 1,250
Purchases of mortgage-backed securities available for sale (2,295,151) (149,724)
Principal payments on mortgage-backed securities available for sale 670,837 411,012
Proceeds from sales of mortgage-backed securities available for sale 71,914 --
Principal payments on mortgage-backed securities held to maturity 208,467 309,296
Proceeds from sales of loans 17,909 65,393
Net decrease in loans receivable 783,684 1,261,471
Decrease in covered assets -- 39,349
Purchases of FHLB stock, net -- (61,177)
Purchases of office premises and equipment (45,350) (28,445)
Proceeds from disposal of office premises and equipment 18,095 4,097
Proceeds from sales of foreclosed real estate 135,043 126,386
Purchases of mortgage servicing rights (27,507) (49,527)
Proceeds from sales of mortgage servicing rights 8,620 --
----------- ----------
Net cash flows (used in) provided by investing activities (1,131,409) 1,672,983
----------- ----------
Cash flows from financing activities:
Branch Sales (21,683) (4,585,022)
Net (decrease) increase in deposits (803,685) 238,230
Proceeds from additional borrowings 13,040,268 7,387,037
Principal payments on borrowings (12,578,053) (5,247,157)
Net increase in securities sold under agreements to repurchase 684,212 341,736
Proceeds from FN Escrow Merger 605,347 4,601
Issuance of FN Holdings Preferred Stock, net (520) 144,249
Issuance of REIT Preferred Stock, net 485,959 --
Redemption of FN Holdings/FN Escrow Preferred Stock (17,250) --
Redemption of FN Holdings Preferred Stock (93,750) --
Dividends to Parent (6,678) (339,014)
Dividends paid to minority stockholders, net of taxes (87,115) (31,952)
Capital contribution 49 1,658
Capital distribution to parent (10) (267,055)
---------- -----------
Net cash flows provided by (used in) financing activities 1,207,091 (2,352,689)
----------- -----------
Net change in cash and cash equivalents 110,564 (41,353)
Cash and cash equivalents at beginning of period 269,869 312,571
----------- -----------
Cash and cash equivalents at end of period $ 380,433 $ 271,218
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Certain amounts for the three
and nine month periods in the prior year have been reclassified to conform with
the current period's presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide (Parent) Holdings Inc. ("Parent Holdings" or the "Company"),
which owns directly 80% of the voting common stock of First Nationwide Holdings
Inc. ("FN Holdings"), which owns all of the common stock of California Federal
Bank, A Federal Savings Bank ("California Federal" or "Bank"), formerly First
Nationwide Bank, A Federal Savings Bank ("First Nationwide"), and the Bank's
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. These financial statements
should be read in conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. All terms used but not defined elsewhere herein have
meanings ascribed to them in the Company's Annual Report on Form 10-K.
Minority interest represents amounts attributable to the preferred stock
of the Bank, the preferred stock of FN Holdings, the preferred stock of
California Federal Preferred Capital Corporation, a wholly owned subsidiary of
the Bank, and the results of operations and equity of FN Holdings attributable
to its class B common stock.
Earnings per share data is not presented due to the limited ownership of
the Company. Parent Holdings is a holding company whose only significant asset
is its indirect ownership of 80% of the common stock of the Bank, and therefore
all activities for the consolidated entity are carried out by the Bank and its
operating subsidiaries.
(2) Acquisitions
On January 3, 1997, FN Holdings acquired 100% of the outstanding common
stock of Cal Fed Bancorp Inc. ("Cal Fed Bancorp") and California Federal Bank,
A Federal Savings Bank ("Cal Fed"), pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated July 27, 1996, among FN Holdings, Cal Fed
Bancorp and Cal Fed. The aggregate consideration paid under the Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
litigation interests (the "Cal Fed Acquisition"). In connection with the Cal
Fed Acquisition, Cal Fed Bancorp was liquidated and First Nationwide was merged
with and into Cal Fed. Effective on January 3, 1997, First Nationwide changed
its name to California Federal Bank, A Federal Savings Bank.
In connection with the Cal Fed Acquisition, FN Holdings made a capital
contribution to the Bank on January 3, 1997 of approximately $685 million.
Page 9
<PAGE>
<TABLE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<CAPTION>
Estimated
Cal Fed Bank Remaining
Carrying Fair Value Carrying Lives
Value Adjustments Value (in years)
--------- ----------- -------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Cash and cash equivalents $ 1,027,491 $ -- $ 1,027,491 --
Securities 6,013 12 6,025 1
Mortgage-backed securities 1,963,869 4,532 1,968,401 6-9
Loans receivable, net 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net 58,900 (17,765) 41,135 3-10
Investment in FHLB System 166,786 -- 166,786 --
Foreclosed real estate, net 18,482 (16) 18,466 --
Accrued interest receivable 71,868 -- 71,868 --
Mortgage servicing rights 4,759 39,738 44,497 2-7
Other assets 87,096 142,634 229,730 2-5
Deposits (8,985,630) (9,699) (8,995,329) 1-8
Borrowings (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities (198,454) (188,892) (387,346) 1-10
Preferred stock (172,500) -- (172,500) --
------------ --------- ----------
$ 664,846 $(56,365) 608,481
============ ========
Purchase price 1,188,687
-----------
Excess cost over fair value of net $ 580,206 15
===========
assets acquired
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
in the transaction based on estimates of fair value at the date of purchase.
Since the date of purchase, the results of operations related to such assets
and liabilities have been included in the Company's 1997 consolidated
statements of operations.
Effective May 31, 1997, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")), acquired
a residential mortgage loan servicing portfolio of approximately $3.2 billion
from WMC Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million,
of which $.7 million remains payable at September 30, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Mortgage Banking Operations."
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
and its wholly owned subsidiary Auto Depot ("Auto One") in a purchase
transaction (the "Auto One Acquisition"). Auto One primarily engages in
indirect sub-prime auto financing activities, providing loan processing,
funding and loan servicing for over 800 franchised automobile dealers. Auto One
is a licensed lender in 47 states. The company is headquartered in Dallas,
Texas, and operates as a subsidiary of the Bank.
On September 3, 1997, the Bank entered into an agreement to sell the
retail deposits and all related retail banking facilities in the state of Texas
(consisting of three branches) to Bank United for a premium of approximately
4.1%. As of September 30, 1997, the carrying value of such deposits was
approximately $64 million. The sale is subject to regulatory approval and is
expected to close in December 1997.
On September 30, 1997, FNMC sold servicing rights for 51,626 loans with an
unpaid principal balance of approximately $2.3 billion for a gain of $14.0
million (the "Servicing Sale").
Page 10
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following pro forma financial information combines the historical
results of the Company as if the Cal Fed Acquisition and the issuances of the
REIT Preferred Stock (as defined herein), the FN Holdings 10-5/8% Notes (as
defined herein) and the Parent Senior Notes (as defined herein) had occurred as
of the beginning of the first period presented (in thousands):
Nine months ended September 30,
-------------------------------
1997 1996
----- ------
Net interest income $ 458,266 $ 523,835
Net income 41,812 99,640
========= =========
The gains recognized related to the Branch Sales, net of related taxes,
and certain sales of branches by Cal Fed are excluded from the above table. The
pro forma information does not include the effect of the Home Federal
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser
Purchase, the Auto One Acquisition, the Servicing Sale, the Branch Sales or the
issuance of the FN Holdings Senior Subordinated Notes (as defined herein)
because such effect is not material. The pro forma results are not necessarily
indicative of the results which would have actually been obtained if the Cal
Fed Acquisition and the issuances of the REIT Preferred Stock, the FN Holdings
10- 5/8% Notes and the Parent Senior Notes had been consummated in the past nor
do they project the results of operations in any future period.
(3) FN Escrow Merger
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In
connection therewith, FN Holdings acquired the net proceeds from the issuance
of FN Escrow's $575 million of senior subordinated notes due 2003 (the "FN
Holdings 10-5/8% Notes") and assumed FN Escrow's obligations under the FN
Holdings 10-5/8% Notes and indenture. Deferred issuance costs associated with
the FN Holdings 10-5/8% Notes of $19 million were included in FN Escrow's other
assets and are being amortized over the term of the FN Holdings 10-5/8% Notes.
Concurrent with the issuance of the FN Holdings 10-5/8% Notes, FN Escrow
issued approximately $36 million aggregate liquidation value of cumulative
perpetual preferred stock (the "FN Escrow Preferred Stock") to Trans Network
Insurance Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred
Stock had a stated liquidation value of $10,000 per share, plus accrued and
unpaid dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as the
FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the
FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million,
representing its stated liquidation value and accrued and unpaid dividends to
January 3, 1997. At the same time, a $19 million loan receivable from an
affiliate of FN Holdings was forgiven.
(4) Cash, Cash Equivalents, and Statement of Cash Flows
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the nine months ended September 30, 1997
and 1996 was $1.0 billion and $619.5 million, respectively.
During the nine months ended September 30, 1997, noncash activity
consisted of transfers of $143.8 million from loans receivable and $1.2 million
from loans held for sale (at lower of cost or market) to foreclosed real
estate, the issuance of additional FN Holdings Preferred Stock through FN
Holdings Preferred Stock dividends to minority shareholders of $1.9 million and
the forgiveness of a $19 million loan from an affiliate of FN Holdings in
exchange for the redemption of the FN Holdings/FN Escrow Preferred Stock.
During the nine months ended September 30, 1996, noncash activity
consisted of transfers from loans receivable to foreclosed real estate of $87.4
million, and the transfers of certain consumer loans from loans held for sale
to loans receivable (at lower of cost or market) totalling $27.7 million.
Page 11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(5) Minority Interest
REIT Preferred Stock
In November 1996, the Bank formed First Nationwide Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT") for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Preferred Capital Corp. entered into a subservicing agreement with FNMC
pursuant to which FNMC services Preferred Capital Corp.'s mortgage assets.
Effective January 6, 1997, Preferred Capital Corp. changed its name to
California Federal Preferred Capital Corporation.
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
its 9-1/8% noncumulative exchangeable preferred stock (the "REIT Preferred
Stock"), raising $500 million. The REIT Preferred Stock has a stated
liquidation value of $25 per share, plus declared and unpaid dividends, if any.
The annual cash dividends on the 20,000,000 shares of REIT Preferred Stock,
assuming such dividends have been declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, distributions on the REIT
Preferred Stock will be a dividends paid deduction by Preferred Capital Corp.
for tax purposes.
Cal Fed Preferred Stock
In connection with the Cal Fed Acquisition, the Bank assumed Cal Fed's
10-5/8% preferred stock with a liquidation value of $172.5 million (the "Cal
Fed Preferred Stock"). Cash dividends on the Cal Fed Preferred Stock are
noncumulative and are payable at an annual rate of 10-5/8% per share if, when,
and as declared by the Board of Directors of the Bank. The Cal Fed Preferred
Stock is generally not redeemable prior to April 1, 1999. The Cal Fed Preferred
Stock is redeemable at the option of California Federal, in whole or in part,
at $105.313 per share on or after April 1, 1999 and prior to April 1, 2000, and
at prices decreasing annually thereafter to the liquidation preference of
$100.00 per share on or after April 1, 2003, plus declared but unpaid
dividends. In addition, in the event of a change of control, the Cal Fed
Preferred Stock is redeemable at the option of California Federal or its
successor on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, at $114.50 per share.
(6) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year the
effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12
and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities
lending and similar transactions. SFAS No. 127 provides additional guidance on
the types of transactions for which the effective date of SFAS No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transaction occurring during calendar-year 1997 is part of a repurchase
agreement, dollar-roll, securities lending, or similar transaction, then
paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company
adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. Such
adoption did not have a material impact on the Company's consolidated financial
statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 establishes standards for disclosing information about
an entity's capital structure and applies to all entities. This statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion-1966,
and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations,
Page 12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
for entities that were subject to the requirements of those standards. This
statement supersedes specific disclosure requirements of Opinions 10 and 15 and
Statement 47 and consolidates them in this statement for ease of retrieval and
for greater visibility to non-public entities. This statement is effective for
financial statements for periods ending after December 15, 1997. It is not
expected that the Company will experience any material revision in its
disclosures when SFAS No. 129 is adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. This statement
has no impact on the financial condition or results of operations of the
Company, but will require changes in the Company's disclosure requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments of
a Business Enterprise, but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative informative for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will require
changes in the Company's disclosure requirements.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding liquidity, provision for loan losses,
capital resources and anticipated expense levels in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition, in
those and other portions of this document, the words "anticipate," "believe,"
"estimate," "expect," "intend," and other similar expressions, as they relate
to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on April 25, 1996 (File No.
333-4026) and declared effective on May 15, 1996. The Company assumes no
obligation to update any such forward-looking statement.
OVERVIEW
The principal business of Parent Holdings, through California Federal,
consists of (i) operating retail deposit branches, (ii) originating and/or
purchasing residential real estate loans and, to a lesser extent, certain
commercial and consumer loans, for investment and (iii) mortgage banking
activities, including originating and servicing residential real estate loans
for others. Revenues are derived primarily from interest earned on loans,
interest received on government and agency securities and mortgage-backed
securities, gains on sales of loans and other investments and fees received in
connection with loan servicing, securities brokerage and other customer service
transactions. Expenses primarily consist of interest on customer deposit
accounts, interest on short-term and long-term borrowings, provisions for
losses, general and administrative expenses consisting of compensation and
benefits, advertising and marketing, premises and equipment, loan expenses,
deposit insurance assessments, data processing and other general and
administrative expenses.
Acquisitions and Sales
On January 3, 1997, the Company consummated the Cal Fed Acquisition
involving assets totalling $13.5 billion, retail deposits totalling $9.0
billion, and including 113 branches in California and six in Nevada. On May 9,
1997, the Bank consummated the sale of deposit accounts and related retail
banking assets comprised of cash on hand, loans on deposits and facilities
totalling $21.7 million to Humbolt Bank at a gross price representing a deposit
premium of 4.5% (the "Garberville Branch Sale"), and resulting in a net gain on
sale of $1.1 million. On September 1, 1997, the Bank acquired Auto One for a
premium of $5 million.
On May 31, 1997, FNMC acquired a residential loan servicing portfolio of
approximately $3.2 billion for $37.1 million. On September 30, 1997, FNMC sold
servicing rights for 51,626 loans with an unpaid principal balance of
approximately $2.3 billion, resulting in a gain of $14.0 million.
The period-to-period comparisons set forth below, including the changes in
magnitude of various items between periods, have been affected by the
significant growth of the Bank through acquisitions accounted for as purchases
during the periods involved and the restructuring of the Bank's retail deposit
network in California resulting in the sale of certain non-California deposits
funded with wholesale borrowings. See note 2 to the accompanying unaudited
consolidated financial statements for information regarding the Cal Fed
Acquisition.
Net Income
Parent Holdings reported net income for the nine months ended September
30, 1997 of $43.3 million compared with net income of $417.1 million for the
corresponding period in 1996. Net income for the nine months ended September
30, 1997 includes a $29.0 million provision for professional fees and
additional unreimbursable costs related to the foreclosure of single-family
loans serviced for others and a $14.0 million pre-tax gain on the sale of
servicing rights. Net income for the nine months ended September 30, 1996
includes $363.0 million in pre-tax gains on sales of branches,
Page 14
<PAGE>
$40.4 million in pre-tax gains from the sale of ACS stock, $25.6 million in
pre-tax income recognized in connection with the termination of the Assistance
Agreement and the recognition of a $125.0 million deferred tax benefit,
partially offset by a $60.1 million charge for the Special SAIF Assessment. On
a comparative basis, excluding non-recurring and expected non-recurring items,
net income for the nine months ended September 30, 1997 and 1996 was $56.9
million and $71.1 million, respectively.
Net income for the three months ended September 30, 1997 was $23.7 million
compared to a loss of $13.7 million for the similar period in 1996. Net income
for the three months ended September 30, 1997 includes the $14.0 million gain
on sale of servicing rights, partially offset by a $10 million provision for
professional fees and additional unreimbursable costs related to the
foreclosure of single-family loans serviced for others. Net income for the
three months ended September 30, 1996 includes the charge for the $60.1 million
Special SAIF Assessment, offset in part by the income recognized in connection
with the termination of the Assistance Agreement. On a comparative basis,
excluding non-recurring and expected non-recurring items, net income for the
three months ended September 30, 1997 and 1996 was $22.0 million and $14.8
million, respectively.
Net interest income was $151.0 million and $456.8 million, respectively,
for the three and nine months ended September 30, 1997, compared to $88.7
million and $295.0 million in the same periods in 1996. The increases in 1997
over 1996 are primarily due to the increased volumes of interest-bearing assets
and liabilities acquired in the SFFed and Home Federal Acquisitions
(collectively, the "1996 Acquisitions") and the Cal Fed Acquisition, partially
offset by a decrease in the net interest margin during 1997 compared to 1996
due to assets from the Cal Fed Acquisition generally having a lower yield than
the rest of the portfolio, the assumption of the FN Holdings 10-5/8% Notes, the
issuance of $140 million of FN Holdings 9-1/8% senior subordinated notes due
2003 (the "FN Holdings Senior Subordinated Notes") on January 31, 1996 and the
issuance of $455 million of the Company's 12-1/2% Senior Notes due 2003 (the
"Parent Senior Notes") on April 17, 1996.
Project 2000
During the nine months ended September 30, 1997, the Bank has finalized
its plan to address issues related to required changes in computer systems for
the year 2000 ("Project 2000"). Issues arise because computer systems and
related software have been designed to recognize only dates that relate to the
20th century. Accordingly, if no changes are implemented, computer systems
would interpret "1/1/00" as January 1, 1900 instead of January 1, 2000.
Additionally, some equipment, being controlled by microprocessor chips, may not
deal appropriately with a year "00."
The Bank has formed an internal task force to determine what changes are
needed in its custom software and what changes are required to be made in
software purchased from third party vendors as well as what steps will be
necessary to ensure continued operations of the Bank's equipment. The Project
2000 task force is currently conducting an inventory of all computer hardware
and software in use at the Bank, as well as other date-sensitive equipment such
as alarm and building environmental systems, telephone systems and fax
machines.
It is expected that, by December 31, 1998, all issues related to Project
2000 will be addressed, either by programming changes to the Bank's custom
software, by programming changes implemented by third party vendors to
purchased systems, or through the upgrading or purchase of year 2000-compliant
hardware and equipment. Extensive testing is expected to occur during 1999.
Project 2000 is the highest priority project within the Information and
Technology Services unit of the Bank. Management believes there is no material
risk that the Bank will fail to address year 2000 issues in a timely manner. It
is currently expected that costs related to Project 2000 will total
approximately $14 million over the years 1997 to 1999, of which $.8 million has
been incurred during the nine months ended September 30, 1997.
Financial Condition
During the nine months ended September 30, 1997, consolidated total assets
increased $14.3 billion, to $31.0 billion, from December 31, 1996, and total
liabilities increased from $15.8 billion to $29.5 billion, primarily due to the
Cal Fed Acquisition and the assumption of the FN Holdings 10-5/8% Notes.
Page 15
<PAGE>
During the nine months ended September 30, 1997, minority interest
increased by $597.0 million. This increase is the result of the issuance of
$500 million in REIT Preferred Stock, the assumption of the Cal Fed Preferred
Stock with a liquidation value of $172.5 million as well as related accrued but
unpaid dividends of $4.6 million, $1.9 million in stock dividends on the FN
Holdings Preferred Stock and $13.3 million representing that portion of the
results of operations and equity of FN Holdings attributable to its class B
common stock which is owned by Hunter's Glen, partially offset by a $95.3
million redemption of the FN Holdings Preferred Stock.
The Company's non-performing assets, consisting of nonaccrual loans, net
of purchase accounting adjustments and specific allowances for loan losses, and
foreclosed real estate, net, increased to $306 million at September 30, 1997
compared with $224 million at December 31, 1996. Approximately $92.2 million,
or 30.16%, of the total non-performing assets at September 30, 1997 were
acquired in the Cal Fed Acquisition. Total non-performing assets as a
percentage of the Bank's total assets decreased to .99% at September 30, 1997
from 1.37% at December 31, 1996.
Page 16
<PAGE>
RESULTS OF OPERATIONS
Nine months ended September 30, 1997 versus Nine months ended September
30, 1996
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average statements
of financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
---------------------------------------------
Average Average
Balance Interest Rate
---------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,025 $ 47 6.09%
Mortgage-backed securities available for sale 4,292 216 6.72
Mortgage-backed securities held to maturity 1,517 87
Loans held for sale, net 1,051 56 7.09
Loans receivable, net 19,900 1,166 7.81
Covered assets -- -- --
------- ----- -----
Total interest-earning assets 27,785 1,572 7.54%
----- ----
Noninterest-earning assets 2,882
-------
Total assets $30,667
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,832 563 4.47%
Securities sold under agreements to repurchase 2,442 105 5.66
Borrowings (3) 8,923 447 6.70
------- ----- ----
Total interest-bearing liabilities 28,197 1,115 5.29%
----- ----
Noninterest-bearing liabilities 1,111
Minority interest 1,181
Stockholder's equity 178
Total liabilities, minority interest and -------
stockholder's equity $30,667
=======
Net interest income $ 457
=====
Interest rate spread 2.25%
====
Net interest margin 2.18%
====
Average equity to average assets 0.58%
====
</TABLE>
Page 17
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1996
------------------------------------------
Average Average
Balance Interest Rate
-------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 548 $ 25 6.08%
Mortgage-backed securities available for sale 1,723 88 6.81
Mortgage-backed securities held to maturity 1,804 103 7.61
Loans held for sale, net 856 46 7.08
Loans receivable, net 11,097 671 8.06
Covered assets 35 1 5.43
------ ----- -----
Total interest-earning assets 16,063 934 7.75%
----- -----
Noninterest-earning assets 1,192
-------
Total assets $17,255
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $ 9,629 323 4.48%
Securities sold under agreements to repurchase 2,118 90 5.68
Borrowings (3) 4,354 226 6.93
------- ---- ----
Total interest-bearing liabilities 16,101 639 5.30%
---- ----
Noninterest-bearing liabilities 357
Minority interest 465
Stockholder's equity 332
-------
Total liabilities, minority interest and
stockholder's equity $17,255
=======
Net interest income $295
====
Interest rate spread 2.45%
====
Net interest margin 2.44%
====
Average equity to average assets 1.92%
====
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 18
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Nine months ended September 30, 1997 vs. 1996
Increase (Decrease) Due to
-----------------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $ 22 $ -- $ 22
Mortgage-backed securities available for sale 129 (1) 128
Mortgage-backed securities held to maturity (16) -- (16)
Loans held for sale, net 10 -- 10
Loans receivable, net 515 (20) 495
Covered assets (1) -- (1)
----- ---- ----
Total 659 (21) 638
----- ---- ----
INTEREST EXPENSE:
Deposits 241 (1) 240
Securities sold under agreements to repurchase 15 -- 15
Borrowings 228 (7) 221
---- ---- ----
Total 484 (8) 476
---- ---- ----
Change in net interest income $175 $(13) $162
==== ===== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 1997 compared to the corresponding
period in 1996 are largely due to the additional $17.0 billion in
interest-earning assets acquired and $16.9 billion in interest-bearing
liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the
issuance of the $455 million Parent Senior Notes and the assumption of the FN
Holdings 10-5/8% Notes. The negative total rate variance of $13 million is
attributed to assets from the Cal Fed Acquisition generally having a lower
yield than the rest of the portfolio, the assumption of the FN Holdings 10-5/8%
Notes, the issuances of the FN Holdings Senior Subordinated Notes on January
31, 1996 and the Parent Senior Notes on April 17, 1996 and the impact of the
additional wholesale borrowings used to finance the Branch Sales.
Interest Income. Total interest income was $1.6 billion for the nine
months ended September 30, 1997, an increase of $637.5 million from the nine
months ended September 30, 1996. The interest-earning assets acquired in the
Cal Fed Acquisition and the 1996 Acquisitions resulted in total
interest-earning assets for the nine months of 1997 averaging $27.8 billion,
compared to $16.1 billion for the corresponding period in 1996. The yield on
total interest-earning assets during the nine months ended September 30, 1997
decreased to 7.54% compared to 7.75% for the nine months ended September 30,
1996, primarily due to assets from the Cal Fed Acquisition generally having a
lower yield than the rest of the portfolio.
Parent Holdings earned $1.2 billion of interest income on loans receivable
for the nine months ended September 30, 1997, an increase of $494.9 million
from the nine months ended September 30, 1996. The loans acquired in the Cal
Fed Acquisition and the 1996 Acquisitions contributed most of the additional
interest income in 1997 and resulted in an increase in the average balance of
loans receivable to $19.9 billion for the nine months ended September 30, 1997
from $11.1 billion for the nine months ended September 30, 1996. The weighted
average yield on loans receivable decreased to 7.81% for the nine months ended
September 30, 1997 from 8.06% for the comparable period in 1996, due primarily
to the addition of $10.1 billion in loans from the Cal Fed Acquisition
generally having a lower yield than the rest of the portfolio.
In addition, Parent Holdings earned $55.9 million of interest income on
loans held for sale for the nine months ended September 30, 1997, an increase
of $10.5 million from the nine months ended September 30, 1996. The average
Page 19
<PAGE>
balance of loans held for sale was $1.1 billion for the nine months ended
September 30, 1997, an increase of $195 million from the comparable period in
1996, due to increased originations. The weighted average yield on loans held
for sale increased slightly to 7.09% for the nine months ended September 30,
1997 from 7.08% for the nine months ended September 30, 1996.
Interest income on mortgage-backed securities available for sale was
$216.3 million for the nine months ended September 30, 1997, an increase of
$128.2 million from the nine months ended September 30, 1996. The average
portfolio balances increased $2.6 billion, to $4.3 billion, during the nine
months ended September 30, 1997 compared to the same period in 1996. The
weighted average yield on these assets decreased from 6.81% for the nine months
ended September 30, 1996 to 6.72% for the nine months ended September 30, 1997.
The increase in the volume and decrease in the weighted average yield is
primarily due to the acquisition of $2.0 billion in mortgage-backed securities
from Cal Fed and the purchase of $2.3 billion in other mortgage-backed
securities during the first nine months of 1997.
Interest income on mortgage-backed securities held to maturity was $86.8
million for the nine months ended September 30, 1997, a decrease of $16.6
million from the nine months ended September 30, 1996. The average portfolio
balance decreased $287 million, to $1.5 billion, during the nine months ended
September 30, 1997 compared to the same period in 1996. The weighted average
rate increased from 7.61% for the nine months ended September 30, 1996 to 7.63%
for the nine months ended September 30, 1997, primarily due to upward rate
adjustments of adjustable-rate mortgage-backed securities.
There was no interest income from Covered Assets for the nine months ended
September 30, 1997, as a result of the disposal of all remaining Covered Assets
in August 1996.
Interest income from securities and interest-bearing deposits in banks was
$46.8 million for the nine months ended September 30, 1997, an increase of
$22.0 million from the nine months ended September 30, 1996. The average
portfolio balance increased to $1.0 billion from $548 million during the nine
months ended September 30, 1997 and 1996, respectively, primarily due to the
assets acquired in the Cal Fed Acquisition and purchases of short-term
investment securities made by the Bank during 1997 to meet liquidity needs, as
well as the issuance of the FN Holdings Preferred Stock on September 19, 1996.
The weighted average yield on these assets increased to 6.09% for the nine
months ended September 30, 1997 from 6.08% for the nine months ended September
30, 1996.
Interest Expense. Total interest expense was $1.1 billion for the nine
months ended September 30, 1997, an increase of $475.8 million from the nine
months ended September 30, 1996. The increase is the result of additional
interest-bearing liabilities assumed in the Cal Fed Acquisition and the 1996
Acquisitions, the assumption of the FN Holdings 10-5/8% Notes, the issuances of
the FN Holdings Senior Subordinated notes on January 31, 1996 and the Parent
Senior Notes on April 17, 1996, and incrementally higher rates paid on the
additional borrowings used to replace the retail deposits sold in the Branch
Sales.
Interest expense on customer deposits, including brokered deposits, was
$562.9 million for the nine months ended September 30, 1997, an increase of
$239.7 million from the nine months ended September 30, 1996. The average
balance of customer deposits outstanding increased from $9.6 billion to $16.8
billion for the nine months ended September 30, 1996 and 1997, respectively.
The increase in the average balance is primarily due to $9.0 billion in
deposits assumed in the Cal Fed Acquisition. The overall weighted average cost
of deposits was 4.47% for the nine months ended September 30, 1997 and 4.48%
for the nine months ended September 30, 1996.
Interest expense on securities sold under agreements to repurchase
totalled $104.9 million for the nine months ended September 30, 1997, an
increase of $14.9 million from the nine months ended September 30, 1996. The
average balance of such borrowings for the nine months ended September 30, 1997
and 1996 was $2.4 billion and $2.1 billion, respectively. The increase in the
average balance is primarily attributed to $1.1 billion of such liabilities
assumed in the Cal Fed Acquisition and the 1996 Acquisitions, partially offset
by maturities and payoffs that were refinanced with FHLB advances and deposits
acquired in the Cal Fed and Home Federal Acquisitions. The weighted average
interest rate on these instruments decreased to 5.66% during the nine months
ended September 30, 1997 from 5.68% for the nine months ended September 30,
1996, primarily due to a decrease in rates on new borrowings compared to such
borrowings during 1996.
Page 20
<PAGE>
Interest expense on borrowings totalled $447.4 million for the nine months
ended September 30, 1997, an increase of $221.2 million from the nine months
ended September 30, 1996. The increase is attributed to the net effect of an
increase for borrowings assumed in the Cal Fed Acquisition and the 1996
Acquisitions, the assumption of the FN Holdings 10-5/8% Notes, the issuances of
the FN Holdings Senior Subordinated Notes and the Parent Senior Notes, and
additional borrowings to replace deposits sold in the Branch Sales, partially
offset by the impact of a slight decrease in the rates paid on such borrowings.
The average balance outstanding for the nine months ended September 30, 1997
and 1996 was $8.9 billion and $4.4 billion, respectively. The weighted average
interest rate on these instruments decreased to 6.70% during the nine months
ended September 30, 1997 from 6.93% for the nine months ended September 30,
1996, primarily due to the shorter average maturity of the portfolio at
September 30, 1997 compared to September 30, 1996, partially offset by the
higher rates paid on the Parent Senior Notes, the FN Holdings Senior
Subordinated Notes and the FN Holdings 10-5/8% Notes.
Net Interest Income. Net interest income was $456.8 million for the nine
months ended September 30, 1997, an increase of $161.7 million from the nine
months ended September 30, 1996. The interest rate spread decreased to 2.25%
for the nine months ended September 30, 1997 from 2.45% for the nine months
ended September 30, 1996.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the Branch
Sales and on sales of loans and loan servicing, was $256.1 million for the nine
months ended September 30, 1997, a decrease of $339.3 million from the nine
months ended September 30, 1996. Income for the nine months ended September 30,
1997 includes a $14.0 million gain from the Servicing Sale. The activities in
1996 include (i) gains on sales of branches of $363.0 million, (ii) gain from
the sale of ACS stock of $40.4 million, (iii) income recognized in connection
with the termination of the Assistance Agreement of $25.6 million, and (iv)
gain from the sale of consumer loans of $7.5 million.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $109.6 million for the nine months ended September 30, 1997, compared to
$92.2 million for the nine months ended September 30, 1996. This increase is
primarily due to the addition of the mortgage servicing portfolios acquired in
the Cal Fed Acquisition, the 1996 Acquisitions, the LMUSA 1996 Purchase and the
Weyerhaeuser Purchase, as well as servicing rights originated through the
increased origination capacity provided by the Cal Fed Acquisition, partially
offset by portfolio paydowns. The single-family residential loan servicing
portfolio, excluding loans serviced for the Bank, increased from $42.7 billion
at September 30, 1996 to $49.8 billion at September 30, 1997. During the nine
months ended September 30, 1997, the Company sold $4.2 billion in single-family
mortgage loans originated for sale as part of its ongoing mortgage banking
operations compared to $3.7 billion of such sales for the corresponding period
in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $73.1 million for the nine months ended
September 30, 1997, compared to $34.4 million for the nine months ended
September 30, 1996. The increase is primarily attributed to the impact of
increased revenues from the retail banking operations acquired in the Cal Fed
Acquisition and the 1996 Acquisitions, partially offset by the impact of the
Branch Sales.
Management fees totalled $5.3 million for the nine months ended September
30, 1997, compared to $8.0 million for the nine months ended September 30,
1996. The decrease is attributed principally to the reduced number of
commercial real estate assets under management for others as a result of an
increase in dispositions of assets and contracts which have expired.
Gain on sales of loans was $16.1 million for the nine months ended
September 30, 1997, compared to a gain of $13.0 million for the nine months
ended September 30, 1996. The increase is primarily attributed to early
pay-offs of commercial loans with unamortized discounts, partially offset by a
$7.5 million gain from the sale of $298.0 million of consumer loans during the
first quarter of 1996.
Gain on sales of assets was $14.8 million for the nine months ended
September 30, 1997 compared to a gain of $38.4 million for the nine months
ended September 30, 1996. The gain in 1996 is primarily the result of a $40.4
million gain from the sale of ACS stock, partially offset by a permanent
impairment in the mortgage-backed securities available- for-sale portfolio. The
gain in 1997 is primarily attributed to a $14.0 million gain related to the
Servicing Sale.
Page 21
<PAGE>
Gain on sale of branches was $1.1 million for the nine months ended
September 30, 1997, primarily attributed to the Garberville Branch Sale. For
information on the 1996 gain on Branch Sales, see Note 2 to the Company's 1996
consolidated financial statements on Form 10-K.
Dividends on FHLB stock were $18.4 million for the nine months ended
September 30, 1997, an increase of $10.2 million from the nine months ended
September 30, 1996, representing an increase in the amount of such stock owned
by the Company, primarily as a result of the Cal Fed Acquisition.
Gain from the termination of the Assistance Agreement was $25.6 million
for the nine months ended September 30, 1996.
Other noninterest income was $17.7 million for the nine months ended
September 30, 1997, an increase of $5.0 million from the nine months ended
September 30, 1996. The increase is primarily attributed to a settlement
received related to the condemnation of a building, an increase in disbursement
float interest income and the recognition of a previously deferred gain on sale
of certain retail operations, partially offset by a favorable outcome of an
arbitration hearing during the nine months ended September 30, 1996.
Noninterest Expense. Total noninterest expense was $480.1 million for the
nine months ended September 30, 1997, an increase of $100.1 million from the
nine months ended September 30, 1996. The increase is principally due to the
growth of the Company through the Cal Fed Acquisition and the 1996 Acquisitions
and a $29.0 million provision recorded in 1997 for professional fees and
unreimbursable costs related to the foreclosure of single-family loans serviced
for others, partially offset by a $60.1 million charge recorded in 1996 for the
Special SAIF Assessment.
Total compensation and employee benefits expense was $190.4 million for
the nine months ended September 30, 1997, an increase of $34.4 million from the
nine months ended September 30, 1996. The increase in expense is primarily
attributed to 1,753 additional employees of the Bank at September 30, 1997
compared to September 30, 1996, as a result of the Cal Fed Acquisition,
partially offset by a reduction in expense from September 30, 1996 to September
30, 1997 of $27.7 million related to a management incentive plan ("Incentive
Plan") between FN Holdings and certain executive officers of the Bank. Parent
Holdings has no employees of its own.
Occupancy and equipment expense was $61.4 million for the nine months
ended September 30, 1997, an increase of $24.0 million from the nine months
ended September 30, 1996, attributed primarily to the Cal Fed Acquisition and
the 1996 Acquisitions, partially offset by operations sold in the Branch Sales.
SAIF deposit insurance premiums decreased $68.9 million, to $8.1 million,
for the nine months ended September 30, 1997 compared to the same period in
1996, due to a decrease in the quarterly assessment rate from 5.75 cents to
1.58 cents per $100 of deposits, partially offset by an increase in the deposit
assessment base as a result of the net impact of the Cal Fed Acquisition, the
1996 Acquisitions and the Branch Sales. In addition, the nine months ended
September 30, 1996 includes a $60.1 million charge for the Special SAIF
Assessment.
Loan expense was $51.8 million for the nine months ended September 30,
1997, an increase of $31.4 million from the nine months ended September 30,
1996. The increase includes a $25.0 million provision for unreimbursable costs
related to the foreclosure of single family loans serviced for others. The
increase is also attributed to additional expenses associated with the higher
volume of loans serviced, and higher outside appraisal fees, inspection fees
and provision for loss on FHA and VA loans serviced.
Marketing expense was $10.4 million for the nine months ended September
30, 1997, an increase of $2.7 million from the nine months ended September 30,
1996, attributed primarily to the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by reduced nationwide marketing efforts as a
result of the Branch Sales.
Professional fees increased $20.6 million, to $34.1 million, for the nine
months ended September 30, 1997 compared to the same period in 1996. This
increase includes additional legal, consulting and audit expenses related to
the Cal Fed Acquisition and the 1996 Acquisitions, as well as $4.0 million in
higher fees paid to professional firms in connection with the foreclosure of
loans serviced for others.
Page 22
<PAGE>
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $2.1 million for the nine months ended September 30, 1997 compared
to a net gain of $6.8 million for the same period in 1996. The change is
primarily attributed to an increase in write-downs of residential and
commercial foreclosed real estate.
Amortization of intangible assets increased to $36.8 million for the nine
months ended September 30, 1997 from $6.9 million for the corresponding period
in 1996, primarily due to amortization of additional intangible assets recorded
in connection with the Cal Fed Acquisition and the 1996 Acquisitions.
Other noninterest expense was $79.7 million for the nine months ended
September 30, 1997, an increase of $20.0 million from the nine months ended
September 30, 1996, primarily due to amortization of deferred issuance costs
related the FN Holdings 10-5/8% Notes and an increase in provisions for retail
branch and subservicing losses, telecommunications, postage, office supplies,
insurance, OTS assessments and travel expenses, all of which are attributed
primarily to the Cal Fed Acquisition and the 1996 Acquisitions.
Provision for Income Tax. During the nine months ended September 30, 1997
and 1996, Parent Holdings recorded income tax expense of $31.4 million and
income tax benefit of $81.4 million, respectively. Parent Holdings' effective
Federal tax rate was 2% and (24)% during the nine months ended September 30,
1997 and 1996, respectively, while its statutory Federal tax rate was 35%
during both periods. The difference between the effective and statutory rates
was primarily the result of the utilization of net operating loss carryforwards
for both periods and the recognition of a $125.0 million deferred tax benefit
in the second quarter of 1996. Parent Holdings' effective state tax rate,
before extraordinary item, increased to 16% from 7% during the nine months
ended September 30, 1997 compared to the same period in 1996, primarily as a
result of the Company's increased presence in California where the state tax
rate is generally higher than in other states and nondeductible goodwill
amortization from the Cal Fed Acquisition and the 1996 Acquisitions.
Extraordinary Item. During the nine months ended September 30, 1996, the
Bank repurchased $44 million aggregate principal amount of the $50 million in
Senior Notes assumed in the SFFed Acquisition, resulting in a loss of $1.6
million, net of income taxes.
Minority Interest. Minority interest in income includes dividends on the
preferred stock of the Bank, the FN Holdings Preferred Stock and the REIT
Preferred Stock totalling $39.5 million, $11.0 million and the $30.5 million,
respectively during the nine months ended September 30, 1997. Minority interest
relative to the REIT Preferred Stock is reflected on the consolidated statement
of operations net of the income tax benefit of $3.9 million which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes. Minority interest in income includes $21.0 million representing that
portion of FN Holdings' income attributable to its class B common stock which
is owned by Hunter's Glen.
During the nine months ended September 30, 1996, minority interest in
income included $34.6 million in dividends on the Preferred Stock of the Bank,
$.1 million in dividends on the FN Holdings Preferred Stock and $108.8 million
representing the portion of FN Holdings' income attributable to its class B
common stock which is owned by Hunter's Glen.
Page 23
<PAGE>
Three Months ended September 30, 1997 versus Three Months ended September
30, 1996
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average statements
of financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three months ended
September 30, 1997
-------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
Interest-earning assets (1):
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks (2) $ 1,068 $ 17 6.31%
Mortgage-backed securities available for sale 4,970 82 6.59
Mortgage-backed securities held to maturity 1,452 28 7.71
Loans held for sale, net 1,021 18 7.16
Loans receivable, net 19,704 386 7.84
------- ----- ----
Total interest-earning assets 28,215 531 7.53%
----- ----
Noninterest-earning assets 2,740
-------
Total assets $30,955
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,806 188 4.44%
Securities sold under agreements to repurchase 2,233 32 5.62
Borrowings (3) 9,589 160 6.62
------- ----- ----
Total interest-bearing liabilities 28,628 380 5.27%
----- ----
Noninterest-bearing liabilities 929
Minority interest 1,204
Stockholder's equity 194
Total liabilities, minority interest and -------
stockholder's equity $30,955
=======
Net interest income $151
====
Interest rate spread 2.26%
====
Net interest margin 2.19%
====
Average equity to average assets 0.63%
====
</TABLE>
Page 24
<PAGE>
<TABLE>
<CAPTION>
Three months ended
September 30, 1996
-------------------------------------------
Average Average
Balance Interest Rate
-------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 591 $ 9 6.09%
Mortgage-backed securities available for sale 1,662 29 6.74
Mortgage-backed securities held to maturity 1,735 33 7.61
Loans held for sale, net 849 15 7.23
Loans receivable, net 11,105 222 8.01
Covered assets 26 -- --
------- ---- ----
Total interest-earning assets 15,968 308 7.72%
---- ----
Noninterest-earning assets 1,282
-------
Total assets $17,250
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $ 9,001 101 4.46%
Securities sold under agreements to repurchase 1,908 28 5.84
Borrowings (3) 5,254 90 6.89
------- ---- ----
Total interest-bearing liabilities 16,163 219 5.39%
---- ----
Noninterest-bearing liabilities 386
Minority interest 538
Stockholder's equity 163
Total liabilities, minority interest -------
and stockholder's equity $17,250
=======
Net interest income $ 89
====
Interest rate spread 2.33%
====
Net interest margin 2.26%
====
Average equity to average assets 0.94%
====
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 25
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended September 30, 1997 vs. 1996
Increase (Decrease) Due to
--------------------------------------------
Volume Rate Net
-------- ----- ---
<S> <C> <C> <C>
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $ 8 $ -- $ 8
Mortgage-backed securities available for sale 54 (1) 53
Mortgage-backed securities held to maturity (5) -- (5)
Loans held for sale 3 -- 3
Loans receivable, net 169 (5) 164
---- ---- ----
Total 229 (6) 223
---- ---- ----
INTEREST EXPENSE:
Deposits 88 (1) 87
Securities sold under agreements to repurchase 5 (1) 4
Borrowings 73 (3) 70
----- ---- ----
Total 166 (5) 161
---- ---- ----
Change in net interest income $ 63 $ (1) $ 62
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
from the three months ended September 30, 1997 to the corresponding period in
1996 are largely due to the additional $13.1 billion in interest-earning assets
acquired and $12.5 billion in interest-bearing liabilities assumed in the Cal
Fed Acquisition, as well as the assumption of the FN Holdings 10-5/8% Notes.
The negative total rate variance of $1 million is primarily attributed to
assets from the Cal Fed Acquisition generally having a lower yield than the
rest of the portfolio and the assumption of the FN Holdings 10-5/8% Notes.
Interest Income. Total interest income was $531.3 million for the three
months ended September 30, 1997, an increase of $223.2 million from the three
months ended September 30, 1996. The interest-earning assets acquired in the
Cal Fed Acquisition primarily resulted in total interest-earning assets for the
three months ended September 30, 1997 averaging $28.2 billion, compared to
$16.0 billion for the corresponding period in 1996. The yield on total
interest-earning assets during the three months ended September 30, 1997
decreased to 7.53% compared to 7.72% for the three months ended September 30,
1996, primarily due to assets from the Cal Fed Acquisition generally having a
lower yield than the rest of the portfolio.
Parent Holdings earned $386.4 million of interest income on loans
receivable for the three months ended September 30, 1997, an increase of $163.9
million from the three months ended September 30, 1996. The loans acquired in
the Cal Fed Acquisition contributed most of the additional interest income in
1997 and resulted in an increase in the average balance of loans receivable to
$19.7 billion for the three months ended September 30, 1997 from $11.1 billion
for the three months ended September 30, 1996. The weighted average yield on
loans receivable decreased to 7.84% for the three months ended September 30,
1997 from 8.01% for the comparable period in 1996, due primarily to the
addition of $10.1 billion in loans from the Cal Fed Acquisition generally
having a lower yield than the rest of the portfolio.
Parent Holdings earned $18.3 million of interest income on loans held for
sale for the three months ended September 30, 1997, an increase of $2.9 million
from the three months ended September 30, 1996. The average balance of loans
held for sale was $1.0 billion for the three months ended September 30, 1997,
an increase of $172 million from the comparable period in 1996, due to
increased originations. The weighted average yield on loans held for sale
Page 26
<PAGE>
decreased to 7.16% for the three months ended September 30, 1997 from 7.23% for
the three months ended September 30, 1996 primarily due to a decrease in rates
on fixed-rate mortgages and a higher comparative percentage of fixed rate loans
in the portfolio in 1997 compared to 1996.
Interest income on mortgage-backed securities available for sale was $81.8
million for the three months ended September 30, 1997, an increase of $53.4
million from the three months ended September 30, 1996. The average portfolio
balances increased $3.3 billion, to $5.0 billion, during the three months ended
September 30, 1997 compared to the same period in 1996. The weighted average
yield on these assets decreased from 6.74% for the three months ended September
30, 1996 to 6.59% for the three months ended September 30, 1997. The increase
in the volume and decrease in the weighted average yield is primarily due to
the acquisition of $2.0 billion in mortgage-backed securities from Cal Fed and
the purchase of $.5 billion in other mortgage-backed securities during the
three months ended September 30, 1997.
Interest income on mortgage-backed securities held to maturity was $28.0
million for the three months ended September 30, 1997, a decrease of $4.8
million from the three months ended September 30, 1996. The average portfolio
balance decreased $283 million, to $1.5 billion, during the three months ended
September 30, 1997 compared to the same period in 1996. The weighted average
rate increased from 7.61% for the three months ended September 30, 1996 to
7.71% for the three months ended September 30, 1997, primarily due to upward
rate adjustments of adjustable-rate mortgage-backed securities.
Interest income from securities and interest-bearing deposits in banks was
$16.8 million for the three months ended September 30, 1997, an increase of
$7.7 million from the three months ended September 30, 1996. The average
portfolio balance increased to $1.1 billion from $591 million during the three
months ended September 30, 1997 and 1996, respectively, primarily due to the
assets acquired in the Cal Fed Acquisition and purchases made by the Bank
during 1997 to meet liquidity needs. The weighted average yield on these assets
increased to 6.31% for the three months ended September 30, 1997 from 6.09% for
the three months ended September 30, 1996.
Interest Expense. Total interest expense was $380.3 million for the three
months ended September 30, 1997, an increase of $160.8 million from the three
months ended September 30, 1996. The increase is primarily the result of
additional interest-bearing liabilities assumed in the Cal Fed Acquisition and
the assumption of the FN Holdings 10-5/8% Notes.
Interest expense on deposits was $188.1 million for the three months ended
September 30, 1997, an increase of $87.5 million from the three months ended
September 30, 1996. The average balance of customer deposits outstanding
increased from $9.0 billion to $16.8 billion for the three months ended
September 30, 1996 and 1997, respectively. The increase in the average balance
is primarily due to $9.0 billion in deposits assumed in the Cal Fed
Acquisition. The overall weighted average cost of deposits decreased to 4.44%
for the three months ended September 30, 1997 from 4.46% for the three months
ended September 30, 1996.
Interest expense on securities sold under agreements to repurchase
totalled $32.1 million for the three months ended September 30, 1997, an
increase of $4.5 million from the three months ended September 30, 1996. The
average balance of such borrowings for the three months ended September 30,
1997 and 1996 was $2.2 billion and $1.9 billion, respectively. The increase in
the average balance is primarily attributed to liabilities assumed in the Cal
Fed Acquisition, partially offset by maturities and payoffs that were
refinanced with FHLB advances. The weighted average interest rate on these
instruments decreased to 5.62% during the three months ended September 30, 1997
from 5.84% for the three months ended September 30, 1996, primarily due to a
decrease in rates on new borrowings compared to such borrowings during 1996.
Interest expense on borrowings totalled $160.1 million for the three
months ended September 30, 1997, an increase of $68.8 million from the three
months ended September 30, 1996. The increase is primarily attributed to
borrowings assumed in the Cal Fed Acquisition and the 1996 Acquisitions and the
assumption of the FN Holdings 10-5/8% Notes, partially offset by the impact of
decreases in the rates paid on such borrowings. The average balance outstanding
for the three months ended September 30, 1997 and 1996 was $9.6 billion and
$5.3 billion, respectively. The weighted average interest rate on these
instruments decreased to 6.62% during the three months ended September 30, 1997
from 6.89% for the three months ended September 30, 1996, primarily due to the
shorter average maturity of the portfolio at September 30, 1997 compared to
September 30, 1996.
Page 27
<PAGE>
Net Interest Income. Net interest income was $151.0 million for the three
months ended September 30, 1997, an increase of $62.4 million from the three
months ended September 30, 1996. The interest rate spread decreased to 2.26%
for the three months ended September 30, 1997 from 2.33% for the three months
ended September 30, 1996.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the Branch
Sales and on sales of loans and loan servicing, was $94.8 million for the three
months ended September 30, 1997, an increase of $19.0 million from the three
months ended September 30, 1996. The three months ended September 30, 1997
includes a nonrecurring gain of $14.0 million from the Servicing Sale and
additional income due to the growth of the Company through the Cal Fed
Acquisition. The three months ended September 30, 1996 includes a nonrecurring
gain of $25.6 million recognized in connection with the termination of the
Assistance Agreement.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $34.5 million for the three months ended September 30, 1997, compared to
$31.4 million for the three months ended September 30, 1996. This increase is
due to the addition of the mortgage servicing portfolios acquired in the Cal
Fed Acquisition and the Weyerhaeuser Purchase, as well as servicing rights
originated through the increased origination capacity provided by the Cal Fed
Acquisition, partially offset by portfolio paydowns. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $42.7 billion at September 30, 1996 to $49.8 billion at
September 30, 1997. During the three months ended September 30, 1997, the
Company sold $1.2 billion in single-family mortgage loans originated for sale
as part of its ongoing mortgage banking operations compared to $1.5 billion of
such sales for the corresponding period in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $26.4 million for the three months ended
September 30, 1997, compared to $10.6 million for the three months ended
September 30, 1996. The increase is primarily attributed to the impact of
increased revenues from the retail banking operations acquired in the Cal Fed
Acquisition.
Management fees totalled $1.2 million for the three months ended September
30, 1997, compared to $2.3 million for the three months ended September 30,
1996. The decrease is attributed principally to the reduced number of assets
under management as a result of an increase in dispositions of assets being
managed and contracts with third parties which have expired.
Gain on sales of loans was $4.8 million for the three months ended
September 30, 1997, compared to a loss of $.7 million for the three months
ended September 30, 1996. The increase is primarily attributed to early
pay-offs of commercial loans with unamortized discounts in 1997.
Gain on sales of assets was $15.1 million for the three months ended
September 30, 1997 compared to a loss of $.1 million for the three months ended
September 30, 1996. The 1997 gain is primarily the result of a $14.0 million
gain related to the Servicing Sale.
There were no branch sales during the three months ended September 30,
1997.
Dividends on FHLB stock were $6.4 million for the three months ended
September 30, 1997, an increase of $2.9 million from the three months ended
September 30, 1996 representing an increase in the amount of such stock owned
by the Company, primarily as a result of the Cal Fed Acquisition.
Gain from the termination of the Assistance Agreement was $25.6 million
during the three months ended September 30, 1996.
Other noninterest income was $6.5 million for the three months ended
September 30, 1997, an increase of $3.0 million from the three months ended
September 30, 1996. The increase is primarily attributed to a settlement
received related to the condemnation of a building and an increase in
disbursement float interest income.
Noninterest Expense. Total noninterest expense was $154.8 million for the
three months ended September 30, 1997, a decrease of $2.7 million from the
three months ended September 30, 1996. The decrease is principally due to a
$60.1 million accrual for the Special SAIF Assessment during the third quarter
of 1996, partially offset by additional
Page 28
<PAGE>
expenses during the third quarter of 1997 due to the growth of the Company
through the Cal Fed Acquisition and a $10.0 million provision for professional
fees and unreimbursable costs related to the foreclosure of single-family loans
serviced for others.
Total compensation and employee benefits expense was $62.9 million for the
three months ended September 30, 1997, an increase of $17.8 million from the
three months ended September 30, 1996. The increase in expense is primarily
attributed to the salaries and benefits associated with 1,753 additional
employees of the Bank at September 30, 1997 compared to September 30, 1996,
primarily as a result of the Cal Fed Acquisition, partially offset by a
reduction in expense from September 30, 1996 to September 30, 1997 of $1.1
million related to the Incentive Plan between FN Holdings and certain executive
officers of the Bank. Parent Holdings has no employees of its own.
Occupancy and equipment expense was $20.6 million for the three months
ended September 30, 1997, an increase of $8.7 million from the three months
ended September 30, 1996, attributed primarily to the Cal Fed Acquisition.
SAIF deposit insurance premiums decreased from $65.4 million to $2.6
million for the three months ended September 30, 1996 and 1997, respectively,
due to a reduction in the quarterly assessment rate from 5.75 cents to 1.58
cents per $100 of deposits, partially offset by an increase in deposits as a
result of the Cal Fed Acquisition. In addition, 1996 includes a $60.1 million
charge for the Special SAIF Assessment.
Loan expense was $17.9 million for the three months ended September 30,
1997, an increase of $11.4 million from the three months ended September 30,
1996. The increase includes an $8.9 million provision for unreimbursable costs
related to the foreclosure of single-family loans serviced for others. The
increase is also attributed to additional expenses associated with the higher
volume of loans serviced and higher outside appraisal fees, inspection fees and
provision for loss on FHA and VA loans serviced.
Professional fees increased $7.4 million, to $11.3 million, for the three
months ended September 30, 1997, compared to the same period in 1996. This
increase includes additional legal, consulting and audit expenses related to
the Cal Fed Acquisition, as well as $1.1 million in higher fees paid to
professional firms in connection with the foreclosure of loans serviced for
others.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $1.2 million for the three months ended September 30, 1997 compared
to a net gain of $1.9 million for the same period in 1996. The change is
primarily attributed to an increase in write-downs of residential and
commercial foreclosed real estate.
Amortization of intangible assets increased to $12.2 million for the three
months ended September 30, 1997 from $2.7 million for the corresponding period
in 1996, primarily due to the amortization of intangible assets recorded in
connection with the Cal Fed Acquisition.
Other noninterest expense was $22.4 million for the three months ended
September 30, 1997, an increase of $3.9 million from the three months ended
September 30, 1996, due to increased telecommunications, postage, office
supplies, insurance, OTS assessments and travel expenses, all of which are
attributed primarily to the Cal Fed Acquisition.
Provision for Income Tax. During the three months ended September 30, 1997
and 1996, Parent Holdings recorded income tax expense of $12.2 million and $.5
million, respectively. Parent Holdings' effective Federal tax rate, before
extraordinary item, was 2% and 17% during the three months ended September 30,
1997 and 1996, respectively, while its statutory Federal tax rate was 35%
during both periods. The difference between the effective and statutory rate
was primarily the result of the utilization of net operating loss carryforwards
for both periods and amortization of non-tax deductible intangible assets.
Parent Holdings' effective state tax rate, before extraordinary item, increased
to 15% from (36)% during the three months ended September 30, 1997 compared to
the same period in 1996.
Extraordinary Item. During the three months ended September 30, 1996, the
Bank repurchased $44 million aggregate principal amount of the $50 million in
Senior Notes assumed in the SFFed Acquisition, resulting in a loss of $1.6
million, net of income taxes.
Minority Interest. Minority interest in income includes dividends on the
preferred stock of the Bank, the FN Holdings Preferred Stock and the REIT
Preferred Stock totalling $13.2 million, $2.8 million and $11.4 million,
Page 29
<PAGE>
respectively, during the three months ended September 30, 1997. Minority
interest relative to the REIT Preferred Stock is reflected on the consolidated
statement of operations net of the income tax benefit of $1.5 million which
will inure to the Company as a result of the deductibility of such dividends
for income tax purposes. Minority interest in income also includes $9.3 million
representing that portion of FN Holdings' income attributable to its class B
common stock which is owned by Hunter's Glen.
During the three months ended September 30, 1996, minority interest in
income included $8.6 million in dividends on the Preferred Stock of the Bank
and $.2 million representing that portion of FN Holdings' income attributable
to its class B common stock which is owned by Hunter's Glen.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. The Company charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. The Company established
provisions for loan losses of $59.9 million and $29.7 million during the nine
months ended September 30, 1997 and 1996, respectively. The increase in the
provision for loan losses during the nine months ended September 30, 1997
compared to the same period in 1996 is primarily due to the increase in the
loan portfolio as a result of the Cal Fed Acquisition. The allowance for loan
losses is increased by provisions for loan losses and allowances on acquired
loans, while it is decreased by charge-offs (net of recoveries).
Activity in the allowance for loan losses during the nine months ended
September 30, 1997 and 1996 is as follows (in thousands):
1997 1996
---- ----
Balance - January 1 $246,556 $210,484
Purchase - 1996 Acquisitions -- 44,793
Purchase - Cal Fed Acquisition 143,820 --
Allowance on acquired loans 1,596 --
Provision for loan losses 59,850 29,700
Charge-offs (43,283) (43,897)
Recoveries 2,028 2,570
-------- --------
Balance - September 30 $410,567 $243,650
======== ========
The ultimate collectibility of the loans is susceptible to changes in the
economic conditions in the region. A significant portion of the Company's loans
are secured by real estate located in Southern California where real estate
prices, although improved during the past year, have not increased as rapidly
as real estate prices in the Company's other primary lending areas.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on past loan loss experience, known and inherent risks in the
portfolio, potential adverse situations that may affect the borrower's ability
to repay, the estimated value of underlying collateral, and current and
prospective economic conditions.
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
Page 30
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Bank and thrift institutions are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread is
referred to as asset and liability management. The objective of the Company's
asset and liability management is to maximize its net interest income over
changing interest rate cycles within the constraints imposed by prudent lending
and investing practices, liquidity needs and capital planning.
The Company actively pursues investment and funding strategies intended to
minimize the sensitivity of its earnings to interest rate fluctuations while
maintaining the flexibility required to execute its business strategies. The
Company measures the interest rate sensitivity of the balance sheet through gap
and duration analysis, as well as net interest income and market value
simulation, and, after taking into consideration both the variability of rates
and the maturities of various instruments, evaluates strategies which may
reduce the sensitivity of its earnings to interest rate and market value
fluctuations. An important decision is the selection of interest-bearing
liabilities and the generation of interest-bearing assets which best match
relative to interest rate changes. In order to reduce interest rate risk by
increasing the percentage of interest sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Company seeks to purchase
assets or originate real estate loans that reprice frequently and that on the
whole adjust in accordance with the repricing of its liabilities. At September
30, 1997, approximately 92.0% of the Company's real estate loan portfolio
consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, many ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Company's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs now offered by the Company have a
fixed monthly payment for a given period, with any changes as a result of
market interest rates reflected in the unpaid principal balance through
negative amortization. From the lender's perspective, these loans respond most
quickly to rate changes because interest accruals immediately reflect the loans
as though they were fully indexed.
In connection with the FN Acquisition and the Cal Fed Acquisition, the
Company acquired the rights and assumed the obligations under certain interest
rate swap agreements. The swaps provide a means of hedging the interest rate
exposure relative to the Company's FHLB advances. Under the terms of these
agreements, the Company pays the variable rate based on LIBOR and receives
fixed rates or a variable rate based on the yield of discount notes issued by
the FHLB System. During the nine months ended September 30, 1997, the Company's
net interest income increased by $3.2 million as a result of these interest
rate swap agreements, largely due to a decrease in the variable rate paid due
to changing market interest rates, net of the fixed rate payments received and
the amortization of the premium assigned to these agreements at the time of
acquisition. Gains and losses on early termination of these agreements would be
included in the carrying amount of the FHLB advances and amortized over the
remaining terms of such advances. The requirements that must be satisfied in
order to account for the swap agreements in this manner are as follows: (1) the
FHLB advances must expose the Company to interest rate risk, and (2) at the
inception of the hedge and throughout the hedge period, high correlation of
changes in the market value of the swaps and the fair value of the FHLB
advances shall be probable so that the results of the swaps will substantially
offset the effects of interest rate changes on the FHLB advances. If these
requirements are not met, the swaps would be considered speculative and marked
to market with changes in market value reflected in noninterest income. For
additional information, see Note 22 to the Company's 1996 consolidated
financial statements on Form 10-K.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined interest
earned on interest-earning assets and the combined interest paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
given periods.
Page 31
<PAGE>
A gap is considered positive when the interest rate sensitive assets exceed
interest rate sensitive liabilities, while the opposite results in a negative
gap. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, and a positive gap would tend to result
in an increase in net interest income, while the opposite would tend to occur
in a period of falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of September
30, 1997. Prepayment rates are assumed in each period on substantially all of
the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at September 30, 1997 is as
follows:
Page 32
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
-------------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------- ----- ----- -------- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 156 $ -- $ -- $ -- $ 156
Securities available for sale (3) 266 698 -- -- 964
Mortgage-backed securities
available for sale (3) 4,844 285 17 -- 5,146
Mortgage-backed securities
held to maturity (1)(4) 1,404 4 -- -- 1,408
Loans held for sale, net (3)(5) 1,027 -- -- -- 1,027
Loans receivable, net (1)(6) 17,439 1,823 79 -- 19,341
Investment in FHLB 411 -- -- -- 411
------- ------ -------- ------ -------
Total interest-earning assets 25,547 2,810 96 -- 28,453
Noninterest-earning assets -- -- -- 2,513 2,513
------- ------ -------- ------ -------
$25,547 $2,810 $ 96 $2,513 $30,966
======= ====== ======== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $14,609 $2,046 $ 6 $ -- $16,661
Securities sold under agreements to 2,567
repurchase (1) 2,567 -- -- --
FHLB advances (1) 6,977 1,052 1 -- 8,030
Other borrowings (1) 56 212 1,329 -- 1,597
------- ------ -------- ------ -------
Total interest-bearing liabilities 24,209 3,310 1,336 -- 28,855
Noninterest-bearing liabilities -- -- -- 694 694
Minority interest -- -- -- 1,211 1,211
Stockholder's equity -- -- -- 206 206
------- ------ -------- ------ -------
$24,209 $3,310 $ 1,336 $2,111 $30,966
======= ====== ======== ====== =======
Gap before interest rate swap agreements $1,338 $(500) $ (1,240) $(402)
Interest rate swap agreements (8) -- -- -- --
------- ------ -------- -------
Gap adjusted for interest rate swap agreements $1,338 $(500) $ (1,240) $(402)
======= ====== ======== =======
Cumulative gap $1,338 $838 $ (402) $(402)
====== ==== ======== =====
Gap as a percentage of total assets 4.32% (1.62)% (4.00)% (1.30)%
==== ==== ======== ====
Cumulative gap as a percentage of total assets 4.32% 2.70% (1.30)% (1.30)%
==== ==== ======== ====
</TABLE>
- ------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 1997.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Company's prepayment
estimates.
(2) Consists of $58 million of securities held to maturity, $37 million of
interest-bearing deposits in other banks and $61 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying loans on nonaccrual status of $5.1 million.
(5) Excludes nonaccrual loans of $1.1 million.
(6) Excludes allowance for loan losses of $411 million and nonaccrual loans of
$300 million.
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<PAGE>
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
(8) Agreements with notional amounts of $700 million maturing by
April 1998 have no impact within the time periods presented.
At September 30, 1997, interest-bearing liabilities of the Company
exceeded interest-earning assets by approximately $402 million. At December 31,
1996, interest-bearing liabilities of the Company exceeded interest-earning
assets by approximately $206 million. The change in the cumulative gap between
the two periods is due principally to the Cal Fed Acquisition and the
assumption of the FN Holdings 10-5/8% Notes.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between product
features and pricing, market rates and future management of the balance sheet
mix. The Company utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate funding,
and the establishment of asset product priorities by formulating performance
evaluation criteria, risk evaluation techniques and a system to standardize the
analysis and reporting of originations, competitive trends, profitability and
risk. On a quarterly basis, the Board of Directors of the Bank is apprised of
ALCO strategies adopted and their impact on operations, and, at least annually,
the Board of Directors of the Bank reviews the Bank's interest rate risk
management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government securities and other specified securities
to deposits and borrowings due within one year. The OTS has currently
established a minimum liquidity requirement for the Bank of 5.00%. California
Federal's liquidity ratio was 5.19% and 5.32% at September 30, 1997 and
December 31, 1996, respectively.
A major source of the Company's funding is expected to be the Bank's
retail deposit branch network, which management believes will be sufficient to
meet its long-term liquidity needs. The ability of the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and brokered deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
The Company's primary uses of funds are the origination or purchase of
loans, the funding of maturing certificates of deposit, demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit scheduled
to mature during the twelve months ending September 30, 1998 aggregate $8.9
billion. The Company may renew these certificates, attract new replacement
deposits, replace such funds with other borrowings, or it may elect to reduce
the size of the balance sheet. In addition, at September 30, 1997, Parent
Holdings had securities sold under agreements to repurchase, FHLB advances and
other borrowings aggregating $8.2 billion maturing within twelve months. The
Company may elect to pay off such debt or to replace such borrowings with
additional FHLB advances or other borrowings at prevailing rates.
During 1994, the Bank issued 3,007,300 shares of preferred stock
("Preferred Stock"). Cash dividends on such Preferred Stock are noncumulative
and are payable at an annual rate of 11-1/2% if, when, and as declared by the
Board of Directors of the Bank. The payment of dividends by the Bank is subject
to certain federal laws applicable to savings
Page 34
<PAGE>
associations. Preferred Stock dividends totalling $25.9 million were declared
and paid during each of the nine months ended September 30, 1997 and 1996.
On September 19, 1996, FN Holdings issued 10,000 shares of preferred stock
with a liquidation value of $150 million (the "FN Holdings Preferred Stock").
The annual cash dividends on the FN Holdings Preferred Stock, assuming such
dividends have been declared by the Board of Directors of FN Holdings,
approximate $15 million per year.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of Cal Fed: (i) $50 million of 10.66%
senior subordinated notes due 1998, (ii) $2.7 million of 6-1/2% convertible
subordinated debentures due 2001, (iii) $4.3 million of 10% subordinated
debentures due 2003 and (iv) $172.5 million of the Cal Fed Preferred Stock. The
annual interest cost from the assumed notes is $5.9 million, and the annual
dividend requirement on the Cal Fed Preferred Stock is $18.3 million.
The annual dividends, net of taxes, on the REIT Preferred Stock are
expected to approximate $39.8 million.
In the FN Escrow Merger, FN Holdings assumed the FN Holdings 10-5/8% notes
which have an annual interest cost of $61.1 million.
Parent Holdings' primary source of cash to pay the interest on and
principal of its Parent Senior Notes is expected to be distributions from FN
Holdings. The annual interest on the Parent Senior Notes is $56.9 million.
Although Parent Holdings expects that distributions from FN Holdings will be
sufficient to pay interest when due and the principal amount of the Parent
Senior Notes at Maturity, there can be no assurance that earnings from
California Federal will be sufficient to make distributions to FN Holdings, or
that FN Holdings will make distributions to Parent Holdings in amounts
sufficient to enable Parent Holdings to pay interest on the Parent Senior Notes
when due or principal of the Parent Senior Notes at maturity or that such
distributions will be permitted by the terms of any debt instrument of Parent
Holdings' subsidiaries then in effect, including the FN Holdings 10-5/8% Notes,
the FN Holdings Senior Notes (as defined herein) and the FN Holdings Senior
Subordinated Notes, by the terms of any class of preferred stock issued by FN
Holdings, including the FN Holdings Preferred Stock or any class of preferred
stock issued by California Federal, including the Preferred Stock and the Cal
Fed Preferred Stock, or under applicable federal thrift laws or regulations.
FN Holdings' primary source of cash to pay the interest on and principal
of the FN Holdings 10-5/8% Notes, its $200 million of 12-1/4% Senior Notes due
2001 (the "FN Holdings Senior Notes") and its $140 million of FN Holdings
Senior Subordinated Notes is expected to be distributions from the Bank. The
annual interest on the FN Holdings Senior Notes and FN Holdings Senior
Subordinated Notes is $24.5 million and $12.8 million, respectively. Although
FN Holdings expects that distributions from the Bank will be sufficient to pay
interest when due and the principal amount of the FN Holdings Senior Notes, the
FN Holdings Senior Subordinated Notes, and the FN Holdings 10-5/8% Notes at
maturity, there can be no assurance that earnings from the Bank will be
sufficient to make such distributions to FN Holdings. In addition, there can be
no assurance that such distributions will be permitted by the terms of any debt
instruments of FN Holdings' subsidiaries then in effect, by the terms of any
class of preferred stock issued by the Bank, including the Preferred Stock and
the Cal Fed Preferred Stock, or under applicable federal thrift laws.
The Company anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements in the foreseeable future. In addition to
cash and cash equivalents of $380.4 million at September 30, 1997, the Company
has substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the nine months ended September 30, 1997 were net loan repayments
of $783.7 million, $13.0 billion in additional borrowings, a $684.2 million net
increase in securities sold under agreements to repurchase, $486.0 million from
the issuance of the REIT Preferred Stock, net of issuance costs, $1.2 billion
in proceeds from principal payments and maturities of securities and
mortgage-backed securities available for sale and $605.3 million in proceeds
from the FN Escrow Merger. The primary uses of funds were $12.6 billion in
principal payments on borrowings, $3.2 billion in purchases of securities and
mortgage-backed securities available for sale, $803.7 million from a net
decrease in deposits and $161.2 million in net cash paid for the Cal Fed
Acquisition.
Page 35
<PAGE>
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including nonaccrual loans, troubled debt restructurings,
and performing loans which exhibit, among other characteristics, high LTV
ratios, low debt-coverage ratios or other indications that the borrowers are
experiencing increased levels of financial difficulty. The Company bases the
measurement of collateral-dependent impaired loans on the fair value of the
loan's collateral. The amount, if any, by which the recorded investment of the
loan exceeds the measure of the impaired loan's value is recognized by
recording a valuation allowance.
At September 30, 1997, the carrying value of loans that are considered to
be impaired totalled $116.4 million (of which $23.5 million were on nonaccrual
status). The average recorded investment in impaired loans during the nine
months ended September 30, 1997 was approximately $118.2 million. For the nine
months ended September 30, 1997, Parent Holdings recognized interest income on
those impaired loans of $8.0 million, which included $.3 million of interest
income recognized using the cash basis method of income recognition.
Page 36
<PAGE>
The following table presents the amounts, net of specific allowances for
loan losses and purchase accounting adjustments, of the Company's nonaccrual
loans, foreclosed real estate, troubled debt restructurings and impaired loans
as of the dates indicated. These categories are not mutually exclusive; certain
loans are included in more than one classification.
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------
Nonaccrual Impaired Restructured
-------------------------------------------------------
<S> <C> <C> <C>
(in millions)
Real Estate:
1-4 unit residential $189 $ 0 $ 3
5+ unit residential 17 49 8
Commercial and other 6 65 26
Land -- -- --
Construction 1 2 --
---- ---- ---
Total real estate 213 116 37
Non-real estate 6 -- --
---- ---- ---
Total loans, net 219 $116 (b) $37
==== ===
Foreclosed real estate, net 87
----
Total non-performing assets $306 (a)
====
December 31, 1996
-------------------------------------------------------
Nonaccrual Impaired Restructured
-------------------------------------------------------
(in millions)
Real Estate:
1-4 unit residential $146 $ -- $ 3
5+ unit residential 13 47 55
Commercial and other 9 54 28
Land -- -- 1
Construction 1 1 --
---- ---- ---
Total real estate 169 102 87
Non-real estate 3 -- --
---- ---- ---
Total loans 172 $102 (b) $87
==== ===
Foreclosed real estate, net 52
----
Total non-performing assets $224 (a)
====
</TABLE>
------------------
(a) Includes loans securitized with recourse on nonaccrual status of $5.1
million and $6.0 million at September 30, 1997 and December 31, 1996,
respectively, and loans held for sale on nonaccrual status of $1.1
million at September 30, 1997.
(b) Includes $23.5 million and $22.6 million of loans on nonaccrual status
at September 30, 1997 and December 31, 1996, respectively. Also
includes $14.1 million and $18.3 million of loans classified as
troubled debt restructurings at September 30, 1997 and December 31,
1996, respectively.
There were no accruing loans contractually past due 90 days or more at
September 30, 1997 or December 31, 1996.
Parent Holdings' non-performing assets, consisting of nonaccrual loans,
net of purchase accounting adjustments, and foreclosed real estate, net,
increased to $306 million at September 30, 1997, compared with $224 million at
December 31, 1996, primarily as a result of assets acquired in the Cal Fed
Acquisition. On the other hand, non-performing assets as a percentage of the
Bank's total assets decreased to .99% at September 30, 1997, from 1.37% at
December 31, 1996.
Page 37
<PAGE>
Parent Holdings, through the Bank, manages its credit risk by regularly
assessing the current and estimated future performance of the real estate
markets in which it operates. The Company continues to place a high degree of
emphasis on the management of its asset portfolio. The Company has three
distinct asset management functions: performing loan asset management, problem
loan asset management and credit review. These three functions are charged with
the responsibility of reducing the risk profile within the commercial and
multi-family asset portfolios by applying asset management and risk evaluation
techniques that are consistent with the Company's portfolio management strategy
and regulatory requirements. In addition to these asset management functions,
the Company has a specialized credit risk management group that is charged with
the development of credit policies and performing credit risk analyses for all
asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1997:
<TABLE>
<CAPTION>
Total
Nonaccrual Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- ------ ------------- -------------
<S> <C> <C> <C> <C>
(dollars in millions)
Region:
California $140 $55 $195 65.13%
Northeast (1) 34 19 53 17.49
Other regions 39 13 52 17.38
---- --- ---- ------
Total $213 $87 $300 100.00%
==== === ==== ======
</TABLE>
- ------------------
(1) Includes Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments and specific allowances for losses.
At September 30, 1997, the Company's largest non-performing asset was
approximately $5.6 million, and it had eight non-performing assets over $2
million in size with balances averaging approximately $3.6 million. The Company
has 2,293 non-performing assets below $2 million in size, including 2,174
non-performing 1-4 unit residential assets.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and CommercialConsumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
<S> <C> <C> <C> <C>
(dollars in millions)
Balance - December 31, 1996 $123 $115 $ 9 $247
Purchases/acquisitions 54 79 12 145
Provision for loan losses 45 9 6 60
Charge-offs (28) (7) (8) (43)
Recoveries 1 -- 1 2
---- ---- --- ----
Balance - September 30, 1997 $195 $196 $20 $411
==== ==== === ====
Ratio of allowance for loan losses to non-performing loans:
December 31, 1996 83.9% 503.2% 280.9% 143.2%
----- ----- ----- -----
September 30, 1997 103.0% 829.5% 316.0% 187.5%
===== ===== ===== =====
</TABLE>
Page 38
<PAGE>
MORTGAGE BANKING OPERATIONS
The Company, through FNMC, has significantly expanded its mortgage banking
operations. On May 31, 1997, FNMC consummated the Weyerhaeuser Purchase
involving the acquisition of a residential mortgage loan servicing portfolio of
approximately $3.2 billion and 42,000 loans for a purchase price of $37.1
million. On September 30, 1997, FNMC sold servicing rights for 51,626 loans
with an unpaid principal balance of approximately $2.3 billion for a gain of
$14.0 million. With the consummation of the Weyerhaeuser Purchase, the
acquisition of additional single-family loan servicing portfolios in the Cal
Fed Acquisition and the originated servicing, the single-family residential
loans serviced for others totalled $49.8 billion at September 30, 1997, an
increase of $6.7 billion and $7.1 billion from December 31, 1996 and September
30, 1996, respectively. During the nine months ended September 30, 1997, the
Company, through FNMC, originated $4.5 billion and sold (generally with
servicing retained) $4.2 billion single-family residential loans. Gross
revenues from mortgage loan servicing activities for the nine months of 1997
totalled $185.1 million, an increase of $29.6 million from the nine months
ended September 30, 1996.
Changes in long-term interest rates generally cause an acceleration or
deceleration of mortgage loan prepayments and, consequently, in the
amortization of mortgage servicing rights, resulting in a change in the market
value of mortgage servicing rights and in the Company's servicing fee income.
In order to reduce the sensitivity of its earnings to interest rate and market
value fluctuations, the Company initiated a program to hedge the change in
value of its servicing rights based on changes in interest rates ("MSR Hedge").
At September 30, 1997, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002. The
Company paid counterparties a premium in exchange for cash payments in the
event that the 10-year Constant Maturity Treasury rate falls below negotiated
strike prices. At September 30, 1997, the notional amount of the interest rate
floors was $970 million and the strike prices were between 5.0% and 6.5%. In
addition, the Company, through FNMC, entered into principal-only swap
agreements related to principal-only securities with a market value of $103.3
million. The estimated market values of interest rate floor contracts and swaps
designated as hedges against mortgage servicing rights at September 30, 1997
were $11.9 million and $8.1 million, respectively.
The premium paid by the Company on the interest rate floor contracts is
amortized against the carrying value of mortgage servicing rights ("MSRs")
based on the option decay rate. Amounts received or paid under the
principal-only swap agreements are included in the carrying value of mortgage
servicing rights. Gains and losses on early termination of these hedges would
be included in the carrying amount of the related MSRs and amortized over the
remaining terms of the assets. Two requirements must be met in order to use
these hedge accounting methods: (i) MSRs must expose the Company to interest
rate risk, and (ii) at the inception of the hedge and throughout the hedge
period, high correlation of changes in the market value of the interest floor
contracts and the principal-only swaps and the fair value of the MSRs shall be
probable so that the results of the interest floor contracts and the
principal-only swaps will substantially offset the effects of interest rate
changes on the MSRs. If these requirements are not met, the interest floor
contracts and the principal-only swaps would be considered speculative and
marked to market with changes in market value reflected in current earnings.
Page 39
<PAGE>
The following is a summary of activity in MSRs and the MSR Hedge for the
nine months ended September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
-------- --------- -------
<S> <C> <C>
Balance at December 31, 1996 $420,187 $3,505 $423,692
Additions - Cal Fed Acquisition 45,101 -- 45,101
Additions - Weyerhaeuser Purchase 41,949 -- 41,949
Originated servicing 89,040 -- 89,040
Additions - other 21,537 -- 21,537
Sales - Servicing Sale (16,792) -- (16,792)
Premium on interest rate floor contracts, net -- 6,662 6,662
Net amount paid under principal-only swap agreements 2,252 -- 2,252
Amortization (79,017) (2,401) (81,418)
Impairment -- -- --
-------- ------ --------
Balance at September 30, 1997 $524,257 $7,766 $532,023
======== ====== ========
</TABLE>
Capitalized mortgage servicing rights are amortized over the period of
estimated future net servicing income. SFAS No. 122 requires enterprises to
measure the impairment of servicing rights based on the difference between the
carrying amount of the servicing rights and their current fair value. At
September 30, 1997 and December 31, 1996, no allowance for impairment of the
mortgage servicing rights was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core (leverage) capital and risk-based
capital. In general, an institution's tangible capital, which must be at least
1.5% of adjusted total assets, is the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interest in equity accounts of fully consolidated subsidiaries, less
disallowed intangibles. An institution's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 3%. Core capital
generally is the sum of tangible capital plus certain qualifying intangibles.
Under the risk-based capital requirement, a savings bank must have total
capital (core capital plus supplementary capital) equal to at least 8% of
risk-weighted assets (which equals assets plus the credit risk equivalent of
certain off-balance sheet items, each multiplied by the appropriate risk
weight). Supplementary capital, which may not exceed 100% of core capital for
purposes of the risk- based requirements, includes, among other things, certain
permanent capital instruments such as qualifying cumulative perpetual preferred
stock, as well as some forms of term capital instruments, such as qualifying
subordinated debt. The capital requirements are viewed as minimum standards by
the OTS, and most institutions are expected to maintain capital levels well
above the minimum. In addition, the OTS regulations provide that minimum
capital levels higher than those provided in the regulations may be established
by the OTS for individual savings associations, depending upon their particular
circumstances. The Bank is not subject to any such individual minimum
regulatory capital requirement. These capital requirements are applicable to
the Bank but not to Parent Holdings.
Page 40
<PAGE>
At September 30, 1997, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.73%, 5.73% and 11.83%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
September 30, 1997:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
--------- ------- -------
<S> <C> <C> <C>
(dollars in millions)
Stockholders' equity of the Bank at $2,297 $ 2,297 $2,297
September 30, 1997
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities available for
sale, net (61) (61) (61)
Non-qualifying loan-servicing rights (53) (53) (53)
Non-allowable capital:
REIT Preferred Stock in excess of 25% of
Tier 1 capital (72) (72) (72)
Intangible assets (688) (688) (688)
Goodwill Litigation Asset (100) (100) (100)
Investment in subsidiaries (51) (51) (51)
Excess deferred tax asset (59) (59) (59)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 102
General loan loss reserves -- -- 213
Assets required to be deducted:
Equity investments required to be deducted -- -- (27)
Land loans with more than 80% LTV ratio -- -- (4)
------ ------- ------
Regulatory capital of the Bank 1,713 1,713 1,997
Minimum regulatory capital requirement 449 897 1,351
Fully capitalized items -- -- 2
------ ------- ------
Excess above minimum capital requirement $1,264 $ 816 $ 644
====== ======= ======
Regulatory capital of the Bank 5.73% 5.73% 11.83%
Minimum regulatory capital requirement 1.50 3.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.23% 2.73% 3.83%
==== ==== =====
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $29.9 billion. Risk-weighted assets used for the risk-based capital
ratio amounted to $16.9 billion.
The Bank is also subject to the provisions of the FDICIA, which, among
other things, define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions categorized
as "undercapitalized" or worse are subject to certain restrictions, including
the requirement to file a capital plan with the OTS, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by the OTS or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
Page 41
<PAGE>
To be considered "well capitalized," a savings institution must generally
have a core capital ratio of at least 5.00%, a Tier 1 (core capital) risk-based
capital ratio of at least 6.00%, and a total risk-based capital ratio of at
least 10.00%. An institution is deemed to be "critically undercapitalized" if
it has a tangible equity ratio of 2.00% or less. At September 30, 1997, the
Bank's capital levels were sufficient for it to be considered "well
capitalized":
Risk-based
Core -------------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.73% 10.14% 11.83
Well capitalized ratio 5.00 6.00 10.00
---- ----- -----
Excess above well capitalized ratio .73% 4.14% 1.83%
==== ===== =====
OTS capital regulations allow a savings bank to include a net deferred tax
asset in regulatory capital, subject to certain limitations. To the extent that
the realization of a deferred tax asset depends on a savings bank's future
taxable income, such deferred tax asset is limited for regulatory capital
purposes to the lesser of the amount that can be realized within one year or 10
percent of core capital. At September 30, 1997, $59 million of the net tax
benefit was determined to be attributable to the amount of taxable income that
may be realized in periods beyond one year. Accordingly, such amount has been
excluded from regulatory capital at September 30, 1997.
Page 42
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Parent Holdings and California Federal are involved in legal proceedings
on claims incidental to the normal conduct of its business. Although it is
impossible to predict the outcome of any outstanding legal proceedings,
management believes that such legal proceedings and claims, individually or in
the aggregate, will not have a material effect on the financial condition or
results of operations of the Company.
In addition to legal proceedings within the normal course of business, the
Bank is the plaintiff in a claim against the United States in the lawsuit,
California Federal Bank v. United States, Civil Action No. 92-138C (the "Cal
Fed Litigation"). In the Cal Fed Litigation, which the Bank assumed in the Cal
Fed Acquisition, the Bank alleges, among other things, that the United States
breached certain contractual commitments regarding the computation of its
regulatory capital for which the Bank seeks damages and restitution. Cal Fed's
claims arose from changes, mandated by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for
computing regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings
for a determination of the appropriate measure and amount of damages, which to
date have not been awarded.
On October 30, 1996, Cal Fed filed a motion for partial summary judgment
as to the Federal government's liability to Cal Fed for breach of contract,
which has been opposed by the Federal government. In addition, the government
filed a cross-motion for partial summary judgment as to certain liability
issues on December 30, 1996. A hearing on the motions for partial summary
judgment on liability was held on August 7, 1997, at which time the judge took
the motions under advisement for a later ruling. Although the decision of the
Supreme Court has been rendered, a court may still determine that Cal Fed's
claims involve sufficiently different facts and/or legal issues as to render
the Winstar Cases inapplicable to the Cal Fed Litigation and thereby compel a
different conclusion from that of the Winstar Cases. The trial of the Bank's
case is currently expected to begin in late 1998.
In connection with the Cal Fed Acquisition, the Company recorded as an
asset the estimated after-tax cash recovery from the Cal Fed Litigation that
will inure to the Company, net of amounts payable to holders of the Litigation
Interests and the Secondary Litigation Interests (the "Goodwill Litigation
Asset"). The Goodwill Litigation Asset was recorded at its estimated fair value
of $100 million, net of estimated tax liabilities, as of January 3, 1997, and
is included in the unaudited consolidated statement of financial condition as
of September 30, 1997.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Page 43
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Third Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-4026).)
3.2 By-laws of the Registrant. (Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (File
No. 333-4026).)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
Page 44
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Nationwide (Parent) Holdings Inc.
/s/ Laurence Winoker
----------------------------------------------------
By: Laurence Winoker
Vice President and Controller
(Signing on behalf of the Registrant and as the
Principal Accounting Officer)
November 13, 1997
Page 45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of financial condition and operations found
on pages 3 and 4 of the Company's Form 10-Q for the nine months ended
September 30, 1997.
</LEGEND>
<CIK> 0001013229
<NAME> FIRST NATIONWIDE (PARENT) HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 282,727
<INT-BEARING-DEPOSITS> 36,651
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,110,564
<INVESTMENTS-CARRYING> 1,470,987
<INVESTMENTS-MARKET> 1,470,987
<LOANS> 20,257,989<F1>
<ALLOWANCE> 410,567
<TOTAL-ASSETS> 30,965,932
<DEPOSITS> 16,660,626
<SHORT-TERM> 8,171,202
<LIABILITIES-OTHER> 694,404
<LONG-TERM> 4,022,964
0
0<F2><F3><F4><F5>
<COMMON> 1
<OTHER-SE> 205,878
<TOTAL-LIABILITIES-AND-EQUITY> 30,965,932
<INTEREST-LOAN> 1,221,926
<INTEREST-INVEST> 349,965
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,571,891
<INTEREST-DEPOSIT> 562,904
<INTEREST-EXPENSE> 1,115,131
<INTEREST-INCOME-NET> 456,760
<LOAN-LOSSES> 59,850
<SECURITIES-GAINS> 104
<EXPENSE-OTHER> 480,126
<INCOME-PRETAX> 172,917
<INCOME-PRE-EXTRAORDINARY> 141,491
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,491
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.54
<LOANS-NON> 218,932
<LOANS-PAST> 0
<LOANS-TROUBLED> 37,398
<LOANS-PROBLEM> 78,722
<ALLOWANCE-OPEN> 246,556
<CHARGE-OFFS> 43,283
<RECOVERIES> 2,028
<ALLOWANCE-CLOSE> 410,567<F6>
<ALLOWANCE-DOMESTIC> 6,876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 403,691
<FN>
<F1>Loans includes Loans held for sale of $1,027,893 and Allowance for loan losses
of $410,567
<F2>Preferred excludes $486,457 in Minority interest for the preferred stock of
California Federal Bank
<F3>Preferred excludes $166,945 in Minority interest for the class B common
stock of FN Holdings Inc.
<F4>Preferred excludes $57,455 in Minority interest for the preferred stock of FN
Holdings Inc.
<F5>Preferred excludes $500,000 in Minority interest for the preferred stock of
California Federal Preferred Capital Corporation
<F6>Allowance-close includes $143,820 related to loans acquired in the Cal Fed
Acquisition
</FN>
</TABLE>
