<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 March 31, 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
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First Nationwide (Parent) Holdings Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3778550
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 East 62nd Street, New York, New York 10021
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(Address of principal executive offices) (Zip Code)
212-572-8500
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(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 days. 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 May 9, 1997: 1,000 shares
of common stock.
Page 1 of 35 pages
Exhibit index on page: 32
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
FIRST 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
March 31, 1997 (unaudited) and December 31, 1996.............3
Unaudited Consolidated Statements of Operations
Three Months ended March 31, 1997 and 1996...................4
Unaudited Consolidated Statements of Cash Flows
Three Months ended March 31, 1997 and 1996...................5
Notes to Unaudited Consolidated Financial Statements.........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................31
Item 2. Changes in Securities.......................................31
Item 3. Defaults Upon Senior Securities.............................31
Item 4. Submission of Matters to a Vote of Security Holders.........32
Item 5. Other Information...........................................32
Item 6. Exhibits and Reports on Form 8-K............................32
Page 2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND DECEMBER 31, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Assets
Cash and amounts due from banks $ 334,047 $ 135,534
Interest-bearing deposits in other banks 56,384 20,619
Short-term investment securities 108,931 113,716
------------ ------------
Cash and cash equivalents 499,362 269,869
Securities available for sale, at fair value 817,233 542,019
Securities held to maturity 472 4,272
Mortgage-backed securities available for sale, at fair value 4,084,554 1,598,652
Mortgage-backed securities held to maturity 1,552,113 1,621,662
Loans held for sale, net 1,101,886 825,316
Loans receivable, net 19,731,257 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System 394,010 220,962
Office premises and equipment, net 151,923 100,164
Foreclosed real estate, net 79,350 51,987
Accrued interest receivable 181,855 106,034
Intangible assets (net of accumulated amortization of
$23,247 in 1997 and $11,141 in 1996) 704,915 140,564
Mortgage servicing rights 482,097 423,692
Other assets 649,602 469,764
------------ ------------
Total assets $30,430,629 $16,587,540
============ ============
Liabilities, Minority Interest and Stockholder's Equity
Deposits $17,017,961 $ 8,501,883
Securities sold under agreements to repurchase 2,920,895 1,583,387
Borrowings 8,382,786 5,364,894
Other liabilities 697,779 351,913
------------ ------------
Total liabilities 29,019,421 15,802,077
------------ ------------
Commitments and contingencies -- --
Minority interest 1,258,585 613,852
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 16,488 36,975
Retained earnings (substantially restricted) 136,134 134,474
------------ ------------
Total stockholder's equity 152,623 171,611
------------ ------------
Total liabilities, minority interest and stockholder's equity $30,430,629 $16,587,540
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $390,643 $221,161
Mortgage-backed securities available for sale 61,005 29,738
Mortgage-backed securities held to maturity 29,940 34,580
Covered assets -- 722
Loans held for sale 17,253 14,575
Securities available for sale 10,971 6,753
Securities held to maturity 71 4
Interest-bearing deposits in other banks 2,868 643
--------- ---------
Total interest income 512,751 308,176
--------- ---------
Interest expense:
Deposits 187,020 117,513
Securities sold under agreements to repurchase 34,383 30,552
Borrowings 137,992 52,056
--------- ---------
Total interest expense 359,395 200,121
--------- ---------
Net interest income 153,356 108,055
Provision for loan losses 19,950 9,900
--------- ---------
Net interest income after provision for loan losses 133,406 98,155
--------- ---------
Noninterest income:
Loan servicing fees, net 39,716 27,456
Customer banking fees and service charges 22,517 11,803
Management fees 1,895 3,305
Gain (loss) on sales of assets 22 (4,512)
Gain on sales of branches -- 307,905
Gain on sales of loans, net 2,869 13,692
Dividends on FHLB stock 5,962 1,906
Other income 5,858 3,384
--------- ---------
Total noninterest income 78,839 364,939
--------- ---------
Noninterest expense:
Compensation and employee benefits 64,480 60,744
Occupancy and equipment 20,682 13,169
Savings Association Insurance Fund ("SAIF") deposit insurance premium 2,653 6,036
Loan expense 7,824 7,757
Marketing 4,068 2,179
Professional fees 9,360 2,448
Data processing 2,935 2,849
Foreclosed real estate operations, net 1,005 (2,570)
Amortization of intangible assets 12,106 1,729
Other 28,611 23,880
--------- ---------
Total noninterest expense 153,724 118,221
--------- ---------
Income before income taxes and minority interest 58,521 344,873
Income tax expense 10,194 29,003
--------- ---------
Income before minority interest 48,327 315,870
Minority interest 31,839 76,123
--------- ---------
Net income $ 16,488 $239,747
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,488 $ 239,747
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 12,106 1,729
Accretion of purchase accounting premiums and discounts, net (4,475) (3,377)
Accretion of discount on borrowings (186) --
Amortization of mortgage servicing rights 24,285 20,361
Provision for loan losses 19,950 9,900
(Gain) loss on sales of assets, net (22) 4,512
Gain on sales of branches -- (307,905)
Loss on sales of loans, net 23,024 4,106
Gain on sales of foreclosed real estate, net (3,066) (2,797)
Depreciation and amortization of office premises and equipment 3,638 2,382
Amortization of deferred debt issuance costs 1,315 405
FHLB stock dividend (5,962) (1,426)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable (25,893) (17,798)
Purchases and originations of loans held for sale (1,502,274) (1,036,680)
Proceeds from the sales of loans held for sale 1,201,502 1,500,905
Decrease (increase) in other assets 78,370 (68,227)
(Increase) decrease in accrued interest receivable (4,854) 6,688
(Decrease) increase in other liabilities (615) 43,693
Minority interest 28,026 67,477
----------- -----------
Total adjustments (155,131) 223,948
----------- -----------
Net cash flows (used in) provided by operating activities (138,643) 463,695
----------- -----------
</TABLE>
(Continued)
Page 5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition $ (161,196) $ --
SFFed Acquisition -- (83,184)
Mortgage loan servicing operations -- (48,305)
Purchases of securities available for sale (394,709) (180,082)
Proceeds from maturities of securities available for sale 105,810 81,744
Proceeds from maturities of securities held to maturity 3,800 1,250
Purchases of mortgage-backed securities available for sale (686,510) (94,858)
Principal payments on mortgage-backed securities available for sale 147,843 160,344
Proceeds from sale of mortgage-backed securities available for sale 7,589 --
Principal payments on mortgage-backed securities held to maturity 69,400 131,593
Proceeds from sales of loans receivable 2,000 34,498
Net decrease in loans receivable 460,166 377,765
Purchases of FHLB stock, net -- (38,211)
Purchases of office premises and equipment (12,815) (17,157)
Proceeds from disposal of office premises and equipment 5,282 3,941
Proceeds from sales of foreclosed real estate 34,181 36,222
Purchases of mortgage servicing rights (11,697) (9,481)
----------- -----------
Net cash flows (used in) provided by investing activities (430,856) 356,079
----------- -----------
Cash flows from financing activities:
Branch Sales -- (3,797,547)
Net (decrease) increase in deposits (476,129) 544,462
Proceeds from additional borrowings 3,821,502 3,654,048
Principal payments on borrowings (4,605,063) (1,790,788)
Net increase in securities sold under agreements to repurchase 1,037,114 686,940
Issuance of REIT Preferred Stock, net 486,120 --
Redemption of FN Holdings Preferred Stock (31,250) --
Proceeds from FN Escrow Merger 605,347 --
Redemption of FN Holdings/FN Escrow Preferred Stock (17,250) --
Redemption of class C common stock -- (39,141)
Dividends on class C common stock -- (4,859)
Dividends paid to minority shareholders (20,959) --
Capital distribution to parent (440) --
----------- -----------
Net cash flows provided by (used in) financing activities 798,992 (746,885)
----------- -----------
Net change in cash and cash equivalents 229,493 72,889
Cash and cash equivalents at beginning of period 269,869 312,571
----------- -----------
Cash and cash equivalents at end of period $ 499,362 $ 385,460
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<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 months ended March 31, 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 month
period 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) Cal Fed Acquisition
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 7
<PAGE>
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.
<TABLE>
<CAPTION>
Estimated
Cal Fed Bank Remaining
Carrying Fair Value Carrying Lives
Value Adjustments Value (in years)
----- ----------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,027,491 $ -- $ 1,027,491 --
Securities 6,013 12 6,025 1
Mortgage-backed securities 1,963,869 (641) 1,963,228 6-9
Loans receivable, net 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net 58,900 (11,058) 47,842 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 40,342 45,101 2-7
Other assets 87,096 142,690 229,786 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) (187,375) (385,829) 1-10
Preferred stock (172,500) -- (172,500) --
------------- --------- -----------
$ 664,846 $ (52,654) 612,192
============= =========
Purchase price 1,188,687
-----------
Excess cost over fair value
of net assets acquired $ 576,495 15
===========
</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 statement of operations.
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):
Three months ended March 31,
----------------------------
1997 1996
---- ----
Net interest income $154,896 $173,443
Net income 14,764 (1,938)
========== ===========
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 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.
Page 8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(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 three months ended March 31, 1997
and 1996 was $318.9 million and $188.3 million, respectively.
During the three months ended March 31, 1997, noncash activity consisted
of transfers of $41.2 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 preferred
stock dividends to minority stockholders of $.8 million and the forgiveness of
a $19 million loan from an affiliate of FN Holdings in exchange for the
redemption of FN Holdings/FN Escrow Preferred Stock.
During the three months ended March 31, 1996, noncash activity consisted
of transfers from loans receivable to foreclosed real estate of $31.2 million,
and the transfers of certain consumer loans from loans held for sale to loans
receivable (at lower of cost or market) totalling $26.8 million.
(5) Minority Interest
REIT Preferred Stock
In November 1996, First Nationwide 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 the
Bank's wholly owned mortgage banking subsidiary, First Nationwide Mortgage
Corporation ("FNMC") pursuant to which FNMC will service 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
Page 9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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, dividends on the REIT Preferred
Stock will be tax deductible by Preferred Capital Corp.
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.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
consumer loans, for investment, (iii) managing its commercial real estate loan
portfolio and (iv) mortgage banking and loan servicing. Revenues are derived
primarily from interest charged 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.
During the three months ended March 31, 1997, the Bank made significant
progress in the implementation of its strategies to concentrate its retail
banking operations in California. On January 3, 1997, the Bank 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.
Acquisitions and Sales
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 three months ended March 31,
1997 of $16.5 million compared with net income of $239.7 million for the
corresponding period in 1996. Net income for the three months ended March 31,
1996 includes $283.3 million in after-tax gains on sales of branches.
Excluding after-tax gains on sales of branches and Incentive Plan (as defined
herein) charges, the Company reported net income of $18.2 million and a net
loss of $24.1 million for the three months ended March 31, 1997 and 1996,
respectively.
Net interest income was $153.4 million and $108.1 million for the three
months ended March 31, 1997 and 1996, respectively. 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, and increased interest expense from 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.
Page 11
<PAGE>
Financial Condition
During the three months ended March 31, 1997, consolidated total assets
increased $13.8 billion, to $30.4 billion, from December 31, 1996, and total
liabilities increased from $15.8 billion to $29.0 billion primarily due to the
Cal Fed Acquisition and the assumption of the FN Holdings 10-5/8% Notes.
During the three months ended March 31, 1997, minority interest increased
by $644.7 million. The increase is the result of the issuance of $500 million
in REIT Preferred Stock, the acquisition of the Cal Fed Preferred Stock with a
liquidation value of $172.5 million and related accrued but unpaid dividends
of $4.5 million, and $.7 million in stock dividends on the FN Holdings
Preferred Stock, partially offset by a $31.6 million redemption of the FN
Holdings Preferred Stock and $1.4 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.
During the three months ended March 31, 1997, stockholder's equity
decreased by $19.0 million. The decrease in stockholder's equity is the net
result of $13.9 million in issuance costs related to the REIT Preferred Stock,
$.4 million in FN Holdings Preferred Stock issuance costs, a $.9 million
reduction in equity resulting from the FN Escrow Merger, and a decrease in the
net unrealized gain on securities available for sale of $20.5 million, offset
partially by $16.5 million in net income for the period and $.2 million
related to the partial 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 $342 million at March 31, 1997
compared with $224 million at December 31, 1996. Approximately $89.4 million,
or 26.1%, of the total non-performing assets at March 31, 1997 were acquired
in the Cal Fed Acquisition. Total non-performing assets as a percentage of the
Bank's total assets decreased to 1.13% March 31, 1997 from 1.37% of the Bank's
total assets at December 31, 1996.
Page 12
<PAGE>
RESULTS OF OPERATIONS
Three Months ended March 31, 1997 versus Three Months ended March 31,
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
March 31, 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) $ 950 $ 14 5.86%
Mortgage-backed securities
available for sale 3,552 61 6.87
Mortgage-backed securities
held to maturity 1,577 30 7.59
Loans held for sale, net 991 17 6.96
Loans receivable, net 20,054 391 7.79
Covered assets -- -- --
------- ----- ----
Total interest-earning assets 27,124 513 7.56%
----- ----
Noninterest-earning assets 3,114
-------
Total assets $30,238
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,845 187 4.50%
Securities sold under
agreements to repurchase 2,457 34 5.60
Borrowings (3) 8,246 138 6.79
------- ----- ----
Total interest-bearing liabilities 27,548 359 5.29%
----- ----
Noninterest-bearing liabilities 1,428
Minority interest 1,100
Stockholder's equity 162
-------
Total liabilities, minority interest and
stockholder's equity $30,238
=======
Net interest income $154
=====
Interest rate spread 2.27%
====
Net interest margin 2.19%
====
Average equity to average assets 0.54%
====
</TABLE>
Page 13
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31, 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) $ 501 $ 7 5.59%
Mortgage-backed securities
available for sale 1,728 30 6.95
Mortgage-backed securities
held to maturity 1,621 35 8.39
Loans held for sale, net 860 14 6.97
Loans receivable, net 11,013 221 8.04
Covered assets 39 1 7.36
-------- ------- ----
Total interest-earning assets 15,762 308 7.82%
------- ----
Noninterest-earning assets 1,117
--------
Total assets $16,879
========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $ 10,373 118 4.56%
Securities sold under
agreements to repurchase 2,167 30 5.74
Borrowings (3) 3,188 52 6.54
-------- ---- ----
Total interest-bearing liabilities 15,728 200 5.10%
---- ----
Noninterest-bearing liabilities 387
Minority interest 360
Stockholder's equity 404
--------
Total liabilities, minority interest
and stockholder's equity $16,879
========
Net interest income $108
====
Interest rate spread 2.72%
====
Net interest margin 2.73%
====
Average equity to average assets 2.39%
====
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity of $4.2
million and related interest income of less than $.1 million for the
period ended March 31, 1997 compared to $4 million of securities held
to maturity and related interest of less than $.01 million for the
period ended March 31, 1996, with the remainder representing
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 14
<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 March 31, 1997 vs. 1996
Increase (Decrease) Due to
------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 6 $ 1 $ 7
Mortgage-backed securities available for sale 32 (1) 31
Mortgage-backed securities held to maturity (1) (4) (5)
Loans held for sale, net 2 1 3
Loans receivable, net 176 (6) 170
Covered assets (1) -- (1)
----- ----- -----
Total $ 214 $ (9) $ 205
----- ----- -----
INTEREST EXPENSE:
Deposits $ 70 $ (1) $ 69
Securities sold under agreements to repurchase 4 -- 4
Borrowings 85 1 86
----- ----- -----
Total $ 159 $ -- $ 159
----- ----- -----
Change in net interest income $ 55 $ (9) $ 46
===== ===== =====
</TABLE>
The volume variances in total interest income and total interest expense
from the three months ended March 31, 1997 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 $9.0 million is primarily attributed to assets
from the Cal Fed Acquisition generally having a lower yield than the rest of
the portfolio, the issuances of the Senior Subordinated Notes on January 31,
1996 and the Parent Senior Notes, the assumption of the 10-5/8% Notes and the
impact of the additional wholesale borrowings used to finance the Branch
Sales.
Interest Income. Total interest income was $512.8 million for the three
months ended March 31, 1997, an increase of $204.6 million from the three
months ended March 31, 1996. The interest-earning assets acquired in the Cal
Fed Acquisition and the 1996 Acquisitions resulted in total interest-earning
assets for the three months of 1997 averaging $27.1 billion, compared to $15.8
billion for the corresponding period in 1996. The yield on total
interest-earning assets during the three months ended March 31, 1997 decreased
to 7.56% compared to 7.82% for the three months ended March 31, 1996,
primarily due to assets from the Cal Fed Acquisition generally having a lower
yield than the rest of the portfolio.
Parent Holdings earned $390.6 million of interest income on loans
receivable for the three months ended March 31, 1997, an increase of $169.5
million from the three months ended March 31, 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 $20.1 billion for the three months ended March
31, 1997 from $11.0 billion for the three months ended March 31, 1996. The
weighted average yield on loans receivable decreased to 7.79% for the
Page 15
<PAGE>
three months ended March 31, 1997 from 8.04% for the same period in 1996, due
primarily to the addition of $10.1 billion in loans from the Cal Fed
Acquisition.
Parent Holdings earned $17.3 million of interest income on loans held for
sale for the three months ended March 31, 1997, an increase of $2.7 million
from the three months ended March 31, 1996. The average balance of loans held
for sale was $991 million for the three months ended March 31, 1997, an
increase of $131 million from the same period in 1996, due to additional
originations from the operations acquired in the LMUSA 1996 Purchase as well
as increased origination capacity provided by the Cal Fed Acquisition and the
1996 Acquisitions. The weighted average yield on loans held for sale decreased
to 6.96% for the three months ended March 31, 1997 from 6.97% during the three
months ended March 31, 1996.
Interest income on mortgage-backed securities available for sale was
$61.0 million for the three months ended March 31, 1997, an increase of $31.3
million from the three months ended March 31, 1996. The average portfolio
balances increased $1.8 billion, to $3.6 billion, during the three months
ended March 31, 1997 compared to the same period in 1996. The weighted average
yield on these assets decreased from 6.95% for the three months ended March
31, 1996 to 6.87% for the three months ended March 31, 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.
Interest income on mortgage-backed securities held to maturity was $29.9
million for the three months ended March 31, 1997, a decrease of $4.6 million
from the three months ended March 31, 1996. The average portfolio balances
were $1.6 billion during both periods. The weighted average rate decreased
from 8.39% for the three months ended March 31, 1996 to 7.59% for the three
months ended March 31, 1997, primarily due to an increase in nonaccrual loans
underlying securitized loan pools and assets from the Cal Fed Acquisition
generally having a lower yield than the rest of the portfolio.
There was no interest income from Covered Assets for the three months
ended March 31, 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 $13.9 million for the three months ended March 31, 1997, an increase of
$6.5 million from the three months ended March 31, 1996. The average portfolio
balances during the three months ended March 31, 1997 and 1996 increased to
$950 million from $501 million, 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 5.86% for the three months ended March 31, 1997 from 5.59% for the three
months ended March 31, 1996, primarily due to significant purchases of
higher-yielding investment securities during 1997.
Interest Expense. Total interest expense was $359.4 million for the three
months ended March 31, 1997, an increase of $159.3 million from the three
months ended March 31, 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 Parent Senior Notes on April 17, 1996 and the FN Holdings Senior
Subordinated Notes on January 31, 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
$187.0 million for the three months ended March 31, 1997, an increase of $69.5
million from the three months ended March 31, 1996. The average balance of
customer deposits outstanding increased from $10.4 billion to $16.8 billion
for the three months ended March 31, 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 4.50% for the three months ended March 31, 1997 from 4.56% for
the three months ended March 31, 1996, due principally to the impact of
deposits acquired in the Cal Fed Acquisition.
Interest expense on securities sold under agreements to repurchase
totalled $34.4 million for the three months ended March 31, 1997, an increase
of $3.8 million from the three months ended March 31, 1996. The average
balance of such borrowings for the three months ended March 31, 1997 and 1996
was $2.5 billion and $2.2 billion, respectively. The
Page 16
<PAGE>
increase in the average balance is 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 5.60%
during the three months ended March 31, 1997 from 5.74% for the three months
ended March 31, 1996, primarily due to the shorter average maturity of the
portfolio at March 31, 1997 compared to March 31, 1996.
Interest expense on borrowings totalled $138.0 million for the three
months ended March 31, 1997, an increase of $85.9 million from the three
months ended March 31, 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 Parent Senior Notes and the FN Holdings Senior Subordinated Notes, and
additional borrowings to replace the deposits sold in the Branch Sales,
partially offset by the impact of decreases in the rates paid on such
borrowings. The average balance outstanding for the three months ended March
31, 1997 and 1996 was $8.2 billion and $3.2 billion, respectively. The
weighted average interest rate on these instruments increased to 6.79% during
the three months ended March 31, 1997 from 6.54% for the three months ended
March 31, 1996, primarily due to the higher rate paid on the Parent Senior
Notes, the FN Holdings Senior Subordinated Notes and the FN Holdings 10-5/8%
Notes, partially offset by the shorter average maturity of the portfolio at
March 31, 1997 compared to March 31, 1996.
Net Interest Income. Net interest income was $153.4 million for the three
months ended March 31, 1997, an increase of $45.3 million from the three
months ended March 31, 1996. The interest rate spread decreased to 2.27% for
the three months ended March 31, 1997 from 2.72% for the three months ended
March 31, 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 assets, was $78.8 million for the three months
ended March 31, 1997, a decrease of $286.1 million from the three months ended
March 31, 1996. This decrease includes gains on sales of branches of $307.9
million in the three months ended March 31, 1996, with no branch sales in the
first quarter of 1997.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $39.7 million for the three months ended March 31, 1997, compared to
$27.5 million for the three months ended March 31, 1996. This increase is due
to the addition of the mortgage servicing portfolios acquired in the LMUSA
1996 Purchase, the Cal Fed Acquisition and 1996 Acquisitions, as well as
servicing rights originated through the increased origination capacity
provided by these acquisitions. The single-family residential loan servicing
portfolio, excluding loans serviced for the Bank, increased from $43.2 billion
at March 31, 1996 to $47.5 billion at March 31, 1997. During the three months
ended March 31, 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 $22.5 million for the three months ended
March 31, 1997, compared to $11.8 million for the three months ended March 31,
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 $1.9 million for the three months ended March
31, 1997, compared to $3.3 million for the three months ended March 31, 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 $2.9 million for the three months ended March
31, 1997, compared to a gain of $13.7 million for the three months ended March
31, 1996. The decrease is attributed in part to a gain of $7.5 million on the
sale of $298.0 million of consumer loans during the first quarter of 1996. In
addition, the Company recorded unrealized losses of $3.0 million relative to
lower of cost or market adjustments to loans in the held-for-sale portfolio
during the three months ended March 31, 1997.
Page 17
<PAGE>
Gain on sales of assets was less than $.1 million for the three months
ended March 31, 1997 compared to a loss of $4.5 million for the three months
ended March 31, 1996. The loss recorded during the first quarter of 1996 was
primarily the result of a writedown in the mortgage-backed securities
available-for-sale portfolio.
Dividends on FHLB stock were $6.0 million for the three months ended
March 31, 1997, an increase of $4.1 million from the three months ended March
31, 1996 representing an increase in the volume of such stock owned by the
Company, primarily as a result of the Cal Fed Acquisition.
Other noninterest income was $5.9 million for the three months ended
March 31, 1997, an increase of $2.5 million from the three months ended March
31, 1996. The increase is primarily attributed to an increase in disbursement
float interest income and the recognition of a previously deferred gain on the
sale of certain retail operations.
Noninterest Expense. Total noninterest expense was $153.7 million for the
three months ended March 31, 1997, an increase of $35.5 million from the three
months ended March 31, 1996. The increase is principally due to the growth of
the Company through the Cal Fed Acquisition and the 1996 Acquisitions.
Total compensation and employee benefits expense was $64.5 million for
the three months ended March 31, 1997, an increase of $3.7 million from the
three months ended March 31, 1996. The number of full time employees of the
Bank increased by 1,599 at March 31, 1997 compared to March 31, 1996. Parent
Holdings has no employees of its own. The employee additions are primarily
attributed to the Cal Fed and Home Federal Acquisitions, partially offset by
(i) a reduction in employees due to the Michigan Branch Sale, (ii) a Bank-wide
cost reduction program, and (iii) a reduction in expense from March 31, 1996
to March 31, 1997 of $19.6 million related to a management incentive plan
("Incentive Plan") between FN Holdings and certain executive officers of the
Bank.
Occupancy and equipment expense was $20.7 million for the three months
ended March 31, 1997, an increase of $7.5 million from the three months ended
March 31, 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 $3.4 million, to $2.7 million,
for the three months ended March 31, 1997, due to a decrease in the quarterly
assessment rate from 5.75 cents to 1.62 cents per $100 of retail 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.
Marketing expense was $4.1 million for the three months ended March 31,
1997, an increase of $1.9 million from the three months ended March 31, 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 $6.9 million, to $9.4 million, for the three
months ended March 31, 1997. This increase includes additional legal,
consulting and audit expenses related to the Cal Fed Acquisition and the 1996
Acquisitions.
Foreclosed real estate operations, including gains on sales, resulted in
a net loss of $1.0 million for the three months ended March 31, 1997 compared
to a net gain of $2.6 million for the same period in 1996. The change is
primarily attributed to an increase in commercial loan foreclosures due to the
expiration of the Put Agreement and additional writedowns on foreclosed
residential assets as a result of a decline in fair values.
Amortization of intangible assets increased to $12.1 million for the
three months ended March 31, 1997 from $1.7 million for the corresponding
period in 1996, primarily due to the amortization of the additional $705.2
million intangible assets recorded in connection with the Cal Fed Acquisition
and the 1996 Acquisitions.
Other noninterest expense was $28.6 million for the three months ended
March 31, 1997, an increase of $4.7 million from the three months ended March
31, 1996, principally due to increased telecommunications, postage, office
supplies,
Page 18
<PAGE>
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 three months ended March 31, 1997
and 1996, Parent Holdings recorded income tax expense of $10.2 million and
$29.0 million, respectively. Parent Holdings' effective Federal tax rate was
2% during each of the three months ended March 31, 1997 and 1996, 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. Parent Holdings'
effective state tax rate increased to 15% from 6% during the three months
ended March 31, 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 various acquisitions.
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 $13.1 million, $4.5 million and $7.7 million,
respectively, during the three months ended March 31, 1997. Minority interest
relative to the REIT Preferred Stock is reflected on the consolidated
statement of operations net of the income tax benefit ($1.0 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 $7.5
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 March 31, 1996, minority interest in income
included $17.3 million in dividends on the Preferred Stock of the Bank and
$58.8 million representing that portion of FN Holdings' income attributable to
its class B common stock which is owned by Hunter's Glen.
Page 19
<PAGE>
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 $20.0 million and $9.9 million during the three
months ended March 31, 1997 and 1996, respectively. The allowance for loan
losses is increased by provisions for loan losses and decreased by charge-offs
(net of recoveries).
Activity in the allowance for loan losses during the three months ended
March 31, 1997 and 1996 is as follows (in thousands):
1997 1996
---- ----
Balance - January 1 $246,556 $210,484
Purchase - SFFed Acquisition -- 39,829
Purchase - Cal Fed Acquisition 143,820 --
Provision for loan losses 19,950 9,900
Charge-offs (10,773) (8,410)
Recoveries 866 599
-------- --------
Balance - March 31 $400,419 $252,402
======== ========
A significant portion of the Company's loans are secured by real estate
located within markets where real estate prices continue to be weak.
Accordingly, the ultimate collectibility of those loans is susceptible to
changes in the economic conditions in such regions. 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. The increase in the provision for loan losses during the three
months ended March 31, 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.
Although management believes that its present allowance for loan losses
is adequate, 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.
ASSET AND LIABILITY MANAGEMENT
Financial 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 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
Page 20
<PAGE>
and that on the whole adjust in accordance with the repricing of its
liabilities. At March 31, 1997, approximately 92.64% 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, most 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 general, the closer the interest
rate on a portfolio of ARMs is to the ultimate contractual margin over market
rates, the more sensitive the portfolio yield is to changes in market interest
rates.
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. Under the terms of these agreements, the Company pays
the variable rate based on LIBOR and receives fixed rates. During the three
months ended March 31, 1997, the Company's net interest income increased by
$.6 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. 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 yield
earned on interest-earning assets and the combined rate 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
a given period. A gap is considered positive when the interest rate sensitive
assets exceeds 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 March 31,
1997. Prepayment rates are assumed in each period on substantially all of
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 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 March 31, 1997 is as follows:
Page 21
<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) $ 166 $ -- $ -- $ -- $ 166
Securities available for sale (3) 817 -- -- -- 817
Mortgage-backed securities
available for sale (3) 4,085 -- -- -- 4,085
Mortgage-backed securities held
to maturity (1)(4) 1,540 2 2 -- 1,544
Loans held for sale, net (3)(6) 1,094 -- -- -- 1,094
Loans receivable, net (1)(5) 17,177 2,048 659 -- 19,884
Investment in FHLB 394 -- -- -- 394
-------- ------- -------- ------- ---------
Total interest-earning assets 25,273 2,050 661 -- 27,984
Noninterest-earning assets -- -- -- 2,447 2,447
-------- ------- -------- ------- ---------
$ 25,273 $ 2,050 $ 661 $2,447 $30,431
======== ======= ======== ======= =========
INTEREST-BEARING LIABILITIES:
Deposits (7) $ 15,077 $ 1,926 $ 15 $ -- $17,018
Securities sold under agreements
to repurchase (1) 2,867 54 -- -- 2,921
FHLB advances (1) 5,625 1,027 7 -- 6,659
Other borrowings (1) 128 263 1,333 -- 1,724
-------- ------- -------- ------- ---------
Total interest-bearing liabilities 23,697 3,270 1,355 -- 28,322
Noninterest-bearing liabilities -- -- -- 698 698
Minority interest -- -- -- 1,258 1,258
Stockholder's equity -- -- -- 153 153
-------- ------- -------- ------- ---------
$ 23,697 $ 3,270 $1,355 $2,109 $30,431
======== ======= ======== ======= =========
Gap before interest rate swap
agreements $ 1,576 $(1,220) $ (694) $ (338)
Interest rate swap agreements (400) 400 -- --
--------- ------- -------- ---------
Gap adjusted for interest rate
swap agreements $ 1,176 $ (820) $ (694) $ (338)
======== ======== ======== =========
Cumulative gap $ 1,176 $ 356 $ (338) $ (338)
======== ======== ======== =========
Gap as a percentage of total assets 3.9% (2.7%) (2.3%) (1.1%)
=== === === ===
Cumulative gap as a percentage of
total assets 3.9% 1.2% (1.1%) (1.1%)
=== === === ===
</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
Page 22
<PAGE>
by various large brokerage firms as of March 31, 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 $.5 million of securities held to maturity, $56 million of
interest-bearing deposits in other banks and $109 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 $8.4 million.
(5) Excludes allowance for loan losses of $400 million and nonaccrual loans
of $246.9 million.
(6) Excludes nonaccrual loans of $7.4 million.
(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.
At March 31, 1997, interest-bearing liabilities of the Company exceeded
interest-earning assets by approximately $338 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. Being at a 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 to measure the stability of earnings, 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. At least annually, the Board of
Directors of the Bank reviews the Bank's interest rate risk management policy
statements.
Page 23
<PAGE>
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 5.05% and 5.32% at March 31, 1997 and December
31, 1996, respectively.
A major source of the Company's funding is expected to be its 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 be secondary 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 March 31, 1998 aggregate
$9.4 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 March 31, 1997,
Parent Holdings had securities sold under agreements to repurchase, FHLB
advances and other borrowings aggregating $9.8 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 associations. Preferred
Stock dividends totalling $8.6 million were declared and paid during each of
the three months ended March 31, 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 and dividend cost from these assumed
notes and Cal Fed Preferred Stock is $5.9 million and $18.3 million,
respectively.
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
Page 24
<PAGE>
in effect, including the FN Holdings 10-5/8% Notes, the FN Holdings Senior
Notes 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 "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 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 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
regulating liquidity requirements in the foreseeable future. In addition to
cash and cash equivalents of $499.4 million at March 31, 1997, the Company has
substantial additional secured 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 three months ended March 31, 1997 were a net decrease in
loans receivable of $460.2 million, $3.8 billion in additional borrowings, a
$1.0 billion net increase in securities sold under agreements to repurchase,
$605.3 million from the FN Escrow Merger and $486.1 million from the issuance
of the REIT Preferred Stock, net of issuance costs. The primary uses of funds
were $4.6 billion in principal payments on borrowings, $1.1 billion in
purchases of securities and mortgage-backed securities available for sale and
$161.2 million in net cash paid for the Cal Fed Acquisition.
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, which represents substantially all of the Company's loan portfolio, 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 March 31, 1997, the carrying value of loans that are considered to be
impaired totalled $133 million (of which $44.6 million were on nonaccrual
status). The average recorded investment in impaired loans during the three
months ended March 31, 1997 was approximately $135 million. For the three
months ended March 31, 1997, Parent Holdings recognized interest income on
those impaired loans of $2.5 million, which included $.05 million of interest
income recognized using the cash basis method of income recognition.
Page 25
<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>
March 31, 1997
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $212 $ -- $ 4
5+ unit residential 18 58 58
Commercial and other 27 74 56
Land -- 1 --
Construction -- -- --
----- ---- ----
Total real estate 257 133 118
Non-real estate 6 -- --
----- ---- ----
Total loans, net 263 $133(b) $118
==== ====
Foreclosed real estate, net 79
-----
Total non-performing assets $342(a)
=====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $146 $ -- $ 3
5+ unit residential 13 47 68
Commercial and other 9 54 48
Land -- -- 6
Construction 1 1 --
----- ----- ----
Total real estate 169 102 125
Non-real estate 3 -- --
----- ----- ----
Total loans 172 $102(b) $125(c)
===== ====
Foreclosed real estate, net 52
-----
Total non-performing assets $224(a)
=====
</TABLE>
- ------------------
(a) Includes loans securitized with recourse on nonaccrual status of $8.4
million and $6.0 million at March 31, 1997 and December 31, 1996,
respectively, and loans held for sale on nonaccrual status of $7.4
million at March 31, 1997.
(b) Includes $44.6 million and $22.6 million of loans on nonaccrual status at
March 31, 1997 and December 31, 1996, respectively. Also includes $9.1
million and $18.3 million of loans classified as troubled debt
restructurings at March 31, 1997 and December 31, 1996, respectively.
(c) Includes nonaccrual loans of $2.4 million at December 31, 1996. At
December 31, 1996, $2.4 million of these nonaccrual, troubled debt
restructurings were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
March 31, 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 $342 million at March 31, 1997, compared with $224 million at
December 31, 1996. Non-performing assets as a percentage of the Bank's total
assets decreased to 1.13% at March 31, 1997, from 1.37% of the Bank's total
assets at December 31, 1996.
Parent Holdings, through the Bank, manages its credit risk by
continuously 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
Page 26
<PAGE>
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 residential, 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 March 31, 1997:
Total
Nonaccrual Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net(2) Net(2) Assets Concentration
------------- ----------- -------------- -------------
(dollars in millions)
Region:
Northeast (1) $ 47 $10 $ 57 17.0%
California 164 58 222 66.1
Other regions 46 11 57 16.9
------ ---- ------ ------
Total $257 $79 $336 100.0%
====== ==== ====== ======
- ------------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
At March 31, 1997, the Company's largest non-performing asset was
approximately $6.2 million, and it had eight non-performing assets over $2
million in size with balances averaging approximately $3.4 million. Parent
Holdings has 2,459 non-performing assets below $2 million in size, including
2,304 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 three months ended March 31, 1997:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1996 $ 123 $ 115 $ 9 $ 247
Purchases/acquisitions 55 79 10 144
Provision for loan losses 15 3 1 19
Charge-offs (5) (3) (3) (11)
Recoveries -- -- 1 1
----- ----- ----- -----
Balance - March 31, 1997 $ 188 $ 194 $ 18 $ 400
===== ===== ===== =====
Ratio of allowance for loan
losses to non-performing loans:
December 31, 1996 83.9% 503.2% 280.9% 143.2%
===== ===== ===== =====
March 31, 1997 88.2% 434.2% 325.8% 152.4%
===== ===== ===== =====
</TABLE>
Page 27
<PAGE>
MORTGAGE BANKING OPERATIONS
The Company, through FNMC, has significantly expanded its mortgage
banking operations. With the consummation of the LMUSA 1996 Purchase on
January 31, 1996 and the acquisition of additional single-family loan
servicing portfolios in the Cal Fed Acquisition and the 1996 Acquisitions, and
the originated servicing, the single-family residential loans serviced for
others totalled $47.5 billion at March 31, 1997, an increase of $4.4 billion
and $4.3 billion from December 31, 1996 and March 31, 1996, respectively.
During the three months ended March 31, 1997, the Company, through FNMC,
originated and sold (generally with servicing retained) single-family
residential loans totalling approximately $1.5 billion and $1.2 billion,
respectively. Gross revenues from mortgage loan servicing activities for the
three months of 1997 totalled $62.3 million, an increase of $15.1 million from
the three months ended March 31, 1996.
A decline in long-term interest rates generally results in an
acceleration in mortgage loan prepayments. Higher than anticipated levels of
prepayments generally cause the accelerated amortization of mortgage servicing
rights and generally will result in the change of 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. At March 31, 1997,
the Company, through FNMC, was a party to several interest rate floor
contracts maturing from October 2001 through January 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 strike prices. At March
31, 1997, the notional amount of the interest rate floors was $850 million and
the strike prices were 6.5% and 5.0%. In addition, the Company, through FNMC,
entered into principal-only swap agreements with a notional amount of $74
million. The estimated market values of interest rate floor contracts and
swaps designated as hedges against mortgage servicing rights at March 31, 1997
were $4.0 million and $(8.4) million, respectively.
The following is a summary of activity in mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the three months ended March 31, 1997 (in thousands):
MSRs MSR Hedge Total
---- --------- -----
Balance at December 31, 1996 $420,187 $3,505 $423,692
Additions - Cal Fed Acquisition 45,101 -- 45,101
Originated servicing 25,893 -- 25,893
Additions - other 5,735 -- 5,735
Premium on interest rate floor contracts, net -- 4,694 4,694
Net receivable under principal-only swap
agreements 1,267 -- 1,267
Amortization (23,604) (681) (24,285)
Impairment -- -- --
-------- ------ --------
Balance at March 31, 1997 $474,579 $7,518 $482,097
======== ====== ========
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 March
31, 1997 and December 31, 1996, no allowance for impairment of the mortgage
servicing rights was necessary.
Page 28
<PAGE>
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.
At March 31, 1997, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.87%, 5.87% and 11.69%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
March 31, 1997:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank at March 31, 1997 $2,278 $2,278 $2,278
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities
available for sale, net (21) (21) (21)
Non-qualifying loan-servicing rights (48) (48) (48)
Non-allowable capital:
REIT Preferred Stock in excess of 25%
of Tier 1 capital (68) (68) (68)
Intangible assets (705) (705) (705)
Goodwill Litigation Asset (100) (100) (100)
Investment in subsidiaries (45) (45) (45)
Excess deferred tax asset (63) (63) (63)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 102
General loan loss reserves -- -- 218
Assets required to be deducted:
Equity investments required to be deducted -- -- (27)
Land loans with more than 80% LTV ratio -- -- (3)
------ ------ -------
Regulatory capital of the Bank 1,728 1,728 2,018
Minimum regulatory capital requirement 441 883 1,381
Fully capitalized items -- -- 2
------ ------ -------
Excess above minimum capital requirement $1,287 $ 845 $ 635
====== ====== =======
Regulatory capital of the Bank 5.87% 5.87% 11.69%
Minimum regulatory capital requirement 1.50 3.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.37% 2.87% 3.69%
==== ==== =====
</TABLE>
Page 29
<PAGE>
The amount of adjusted total assets used for the tangible and core
capital ratios is $29.4 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $17.3 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.
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 March
31, 1997, the Bank's capital levels were sufficient for it to be considered
"well capitalized":
Core Risk-based
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.87% 10.01% 11.69%
Well capitalized ratio 5.00 6.00 10.00
---- ------ -----
Excess above well capitalized ratio 0.87% 4.01% 1.69%
==== ====== ======
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 March 31, 1997, $63 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 March 31, 1997.
Page 30
<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 briefs filed on December
30, 1996 and February 27, 1997. In addition, the government filed a
cross-motion for partial summary judgment as to certain liability issues on
December 30, 1996. The Bank's reply brief in support of its motion for partial
summary judgment and in opposition to the federal government's cross motion
for partial summary judgment was filed on March 31, 1997. A hearing on the
Bank's motion for partial summary judgment on liability is currently scheduled
for August 7, 1997. 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 mid 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 March 31, 1997.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Page 31
<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:
During the quarter ended March 31, 1997, the Company made one filing
on Form 8-K:
1. Filing dated January 15, 1997, reporting on Item 2, "Acquisition
or Disposition of Assets" and Item 7, "Financial Statements, Pro
Forma Financial Statements and Exhibits." This filing reported
that FN Holdings consummated the Cal Fed Acquisition and First
Nationwide Bank, A Federal Savings Bank merged with and into
California Federal Bank, A Federal Savings Bank. This filing
included the following financial statements:
Pro Forma Condensed Combined Statement of Financial Condition
at September 30, 1996. Notes to Pro Forma Condensed
Combined Statement of Financial Condition.
Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1996. Notes to Pro Forma
Condensed Combined Statement of Operations for the nine
months ended September 30, 1996.
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1995. Notes to Pro Forma
Condensed Combined Statement of Operations for the year
ended December 31, 1995.
Page 32
<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)
May 14, 1997
Page 33
<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 three months ended
March 31, 1997.
</LEGEND>
<CIK> 0001013229
<NAME> FIRST NATIONWIDE (PARENT) HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 334,047
<INT-BEARING-DEPOSITS> 56,384
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,901,787
<INVESTMENTS-CARRYING> 1,552,585
<INVESTMENTS-MARKET> 1,552,585
<LOANS> 20,833,143<F1>
<ALLOWANCE> 400,419
<TOTAL-ASSETS> 30,430,629
<DEPOSITS> 17,017,961
<SHORT-TERM> 8,042,004
<LIABILITIES-OTHER> 697,779
<LONG-TERM> 3,261,677
0
0<F2><F3><F4><F5>
<COMMON> 1
<OTHER-SE> 152,622
<TOTAL-LIABILITIES-AND-EQUITY> 30,430,629
<INTEREST-LOAN> 407,896
<INTEREST-INVEST> 104,855
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 512,751
<INTEREST-DEPOSIT> 187,020
<INTEREST-EXPENSE> 359,395
<INTEREST-INCOME-NET> 153,356
<LOAN-LOSSES> 19,950
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 153,724
<INCOME-PRETAX> 58,521
<INCOME-PRE-EXTRAORDINARY> 48,327
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,488
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.56
<LOANS-NON> 262,730
<LOANS-PAST> 0
<LOANS-TROUBLED> 118,132
<LOANS-PROBLEM> 79,279
<ALLOWANCE-OPEN> 246,556
<CHARGE-OFFS> 10,773
<RECOVERIES> 866
<ALLOWANCE-CLOSE> 400,419
<ALLOWANCE-DOMESTIC> 9,542
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 390,877
<FN>
<F1> Loans includes Loans held for sale of $1,101,886
<F2> Preferred excludes $486,336 in Minority interest for the
preferred stock of California Federal Bank
<F3> Preferred excludes $152,283 in Minority interest for the class B
common stock of FN Holdings Inc.
<F4> Preferred excludes $119,966 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
</FN>
</TABLE>
