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 June 30, 1996
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: 33-82654
First Nationwide Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3778552
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
38 East 63rd Street, New York, NY 10021
(Address of principal executive offices) (Zip Code)
212-572-8500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 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 August 13, 1996: 800
shares of class A common stock; and 200 shares of class B common stock.
Page 1 of 48 pages
Exhibit index on page: 47
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
SECOND QUARTER 1996 REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
June 30, 1996 (unaudited) and December 31, 1995................3
Unaudited Consolidated Statements of Operations
Six Months Ended June 30, 1996 and 1995........................4
Unaudited Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995......................5
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995........................6
Notes to Consolidated Financial Statements.....................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................46
Item 2. Changes in Securities.........................................47
Item 3. Defaults Upon Senior Securities...............................47
Item 4. Submission of Matters to a Vote of Security Holders...........47
Item 5. Other Information.............................................47
Item 6. Exhibits and Reports on Form 8-K..............................47
Page 2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 and DECEMBER 31, 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
Assets (Unaudited)
------
<S> <C> <C>
Cash and amounts due from banks $ 122,835 $ 154,758
Interest-bearing deposits in other banks 3,405 32,778
Short-term investment securities 101,453 125,035
------- -------
Cash and cash equivalents 227,693 312,571
Securities available for sale, at fair value 500,019 348,561
Securities held to maturity 4,277 1,455
Mortgage-backed securities available for sale,
at fair value 1,713,474 1,477,514
Mortgage-backed securities held to maturity 1,796,520 1,524,488
Loans held for sale, net 806,865 1,203,412
Loans receivable, net 11,055,878 8,831,018
Covered assets 39,349 39,349
Investment in Federal Home Loan Bank ("FHLB") System 207,132 109,943
Office premises and equipment, net 90,203 93,509
Foreclosed real estate, net 76,446 48,535
Accrued interest receivable 117,403 100,604
Intangible assets 146,160 18,606
Mortgage servicing rights 381,670 241,355
Other assets 533,322 295,325
----------- -----------
Total assets $17,696,411 $14,646,245
=========== ===========
Liabilities, Minority Interest and
Stockholders' Equity
Deposits $ 9,035,219 $10,241,628
Securities sold under agreements to repurchase 2,185,699 969,510
Borrowings 4,936,469 2,392,862
Other liabilities 464,408 279,099
---------- ----------
Total liabilities 16,621,795 13,883,099
---------- ----------
Minority interest-preferred stock of First
Nationwide Bank 309,376 300,730
Stockholders' equity:
Class A common stock, $1.00 par value, 800 shares
authorized, 800 shares issued and outstanding 1 1
Class B common stock, $1.00 par value, 200 shares
authorized, 200 shares issued and outstanding -- --
Class C common stock, $1.00 par value, 250 shares
authorized, 0 and 169.5 shares issued and
outstanding at June 30, 1996 and December 31,
1995, respectively -- --
Additional paid-in capital 53,503 223,000
Net unrealized holding gain on securities
available for sale 23,887 63,512
Retained earnings (substantially restricted) 687,849 175,903
---------- ----------
Total stockholders' equity 765,240 462,416
---------- ----------
Total liabilities, minority interest and
stockholders' equity $17,696,411 $14,646,245
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans receivable $446,397 $397,486
Mortgage-backed securities 130,422 104,631
Covered assets 1,413 8,825
Loans held for sale 32,348 2,417
Securities and interest-bearing deposits in other banks 15,696 14,224
-------- --------
Total interest income 626,276 527,583
-------- --------
Interest expense:
Deposits 222,656 212,776
Securities sold under agreements to repurchase 62,310 47,985
Borrowings 123,270 103,684
-------- --------
Total interest expense 408,236 364,445
-------- --------
Net interest income 218,040 163,138
Provision for loan losses 19,800 12,000
-------- --------
Net interest income after provision for loan losses 198,240 151,138
-------- --------
Noninterest income:
Loan servicing fees, net 60,765 31,285
Customer banking fees and service charges 23,806 22,187
Management fees 5,710 7,651
Gain on sales of branches 363,250 --
Gain on sales of loans, net 13,670 120
Gain/(loss) on sales of assets 38,458 (27)
Other income 13,932 8,404
-------- --------
Total noninterest income 519,591 69,620
-------- --------
Noninterest expense:
Compensation and employee benefits 110,866 81,775
Occupancy and equipment 25,578 28,464
Loan expense 14,012 3,964
Savings Association Insurance Fund ("SAIF")
deposit insurance premium 11,584 10,611
Data processing 5,825 5,083
Marketing 4,812 7,871
Foreclosed real estate operations, net (4,910) 659
Amortization of intangible assets 4,204 285
Other 50,321 34,143
-------- --------
Total noninterest expense 222,292 172,855
-------- --------
Income before income taxes, extraordinary item and
minority interest 495,539 47,903
Income tax expense (benefit) (81,351) 3,424
-------- --------
Income before extraordinary item and minority interest 576,890 44,479
Extraordinary item - gain on early extinguishment of
FHLB advances, net -- 1,967
-------- --------
Net income before minority interest 576,890 46,446
Minority interest - First Nationwide Bank preferred
stock dividends 25,938 17,292
-------- --------
Net income $550,952 $ 29,154
======== ========
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
(in thousands)
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans receivable $225,236 $202,745
Mortgage-backed securities 66,104 52,768
Covered assets 691 3,571
Loans held for sale 17,773 1,717
Securities and interest-bearing deposits in other banks 8,296 7,326
-------- --------
Total interest income 318,100 268,127
-------- --------
Interest expense:
Deposits 105,143 111,673
Securities sold under agreements to repurchase 31,758 24,044
Borrowings 71,619 49,520
-------- --------
Total interest expense 208,520 185,237
-------- --------
Net interest income 109,580 82,890
Provision for loan losses 9,900 5,799
-------- --------
Net interest income after provision for loan losses 99,680 77,091
-------- --------
Noninterest income:
Loan servicing fees, net 33,309 18,572
Customer banking fees and service charges 12,003 11,868
Management fees 2,405 5,335
Gain on sales of branches 55,345 --
(Loss)/gain on sales of loans, net (22) 306
Gain/(loss) on sales of assets 42,970 (42)
Other income 8,642 2,556
-------- --------
Total noninterest income 154,652 38,595
-------- --------
Noninterest expense:
Compensation and employee benefits 50,122 42,397
Occupancy and equipment 12,409 16,891
Loan expense 6,255 3,051
SAIF deposit insurance premium 5,548 5,007
Data processing 2,976 2,832
Marketing 2,633 3,907
Foreclosed real estate operations, net (2,340) (216)
Amortization of intangible assets 2,475 111
Other 23,588 18,540
-------- --------
Total noninterest expense 103,666 92,520
-------- --------
Income before income taxes and minority interest 150,666 23,166
Income tax expense (benefit) (110,354) 2,743
-------- --------
Net income before minority interest 261,020 20,423
Minority interest - First Nationwide Bank preferred
stock dividends 8,646 8,646
-------- --------
Net income $252,374 $ 11,777
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 550,952 $ 29,154
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Amortization of intangible assets 4,204 285
Accretion of premiums and discounts, net (7,564) (3,478)
Amortization of mortgage servicing rights 42,086 11,680
Provision for loan losses 19,800 12,000
(Gain) loss on sales of assets (38,458) 27
Gain on sales of branches (363,250) --
(Gain) loss on sales of loans, net (13,670) 952
Gain on sales of foreclosed real estate, net (6,870) (1,076)
Extraordinary gain on early extinguishment
of FHLB advances, net -- (1,967)
Depreciation and amortization 415 4,619
FHLB stock dividend (3,582) (3,954)
Capitalization of originated mortgage
servicing rights and excess servicing
fees receivable (36,484) (1,072)
Purchases and originations of loans held for sale (2,435,973) (206,689)
Proceeds from the sales of loans held for sale 2,866,484 106,611
(Increase) decrease in other assets (156,391) 62,257
Decrease (increase) in accrued interest receivable 9,574 (8,906)
Increase in other liabilities 17,860 21,619
Increase in minority interest 8,646 --
-------- --------
Total adjustments (93,173) (7,092)
-------- --------
Net cash flows provided by(used in)
operating activities 457,779 (22,062)
-------- --------
</TABLE>
Page 6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
SFFed Acquisition (83,184) --
Home Federal Acquisition 79,044 --
Mortgage loan servicing operations (48,305) (176,272)
Purchases of securities available for sale (255,003) (184,857)
Proceeds from maturities of securities
available for sale 114,269 221,580
Purchases of securities held to maturity (9,303) --
Proceeds from maturities of securities
held to maturity 1,250 --
Purchases of mortgage-backed securities
available for sale (94,858) (19,825)
Principal payments on mortgage-backed
securities available for sale 304,357 210,974
Principal payments on mortgage-backed
securities held to maturity 213,305 --
Proceeds from sales of loans receivable 54,765 106,410
Net decrease (increase) in loans receivable 836,831 (196,181)
Decrease in covered assets -- 61,050
Purchases of FHLB stock, net of redemptions (55,359) 7,161
Purchases of office premises and equipment (23,035) (7,426)
Proceeds from disposal of office premises
and equipment 8,393 5,432
Proceeds from sales of foreclosed real estate 89,374 33,298
Purchases of mortgage servicing rights (20,337) (297)
---------- -----------
Net cash flows provided by investing
activities 1,112,204 61,047
---------- -----------
Cash flows from financing activities:
Branch Sales (4,585,022) --
Net increase in deposits 470,623 749,826
Proceeds from additional borrowings 5,506,664 1,974,249
Principal payments on borrowings (3,238,041) (2,849,645)
Net increase in securities
sold under agreements to repurchase 399,419 125,495
Redemption of class C common stock (169,497) (33,187)
Dividends (39,007) (17,848)
---------- -----------
Net cash flows used in financing activities (1,654,861) (51,110)
Net change in cash and cash equivalents (84,878) 31,999
Cash and cash equivalents at beginning of period 312,571 188,783
---------- -----------
Cash and cash equivalents at end of period $ 227,693 $ 220,782
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain amounts for the three and six
month periods in the prior year have been reclassified to conform with the
current period's presentation.
The accompanying consolidated financial statements include the accounts
of First Nationwide Holdings Inc. ("FN Holdings" or the "Company"), First
Nationwide Bank, A Federal Savings Bank ("First Nationwide" or "Bank"), whose
common stock is wholly owned by the Company, and the Bank's wholly owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. The 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, 1995, as amended. All terms used
but not defined elsewhere herein have meanings ascribed to them in the
Company's Annual Report on Form 10-K, as amended.
Earnings per share data is not presented due to the limited ownership of
the Company. FN Holdings is a holding company whose only significant asset is
all of the common stock of the Bank, and therefore all activities for the
consolidated entity are carried out by the Bank and its operating
subsidiaries.
(2) Acquisitions and Sales
On February 28, 1995, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")),
acquired a 1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the "Maryland
Acquisition").
In April 1995, the Bank acquired approximately $13 million in deposits
located in Tiburon, California from East-West Federal Bank, a federal savings
bank (the "Tiburon Purchase"). In August 1995, the Bank acquired three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT Purchase"). On
December 8, 1995, the Bank acquired four retail branches located in Sonoma
County, California with associated deposit accounts of approximately $144
million from Citizens Federal Bank, a Federal Savings Bank (the "Sonoma
Purchase" and, collectively with the Tiburon Purchase and the ITT Purchase,
the "Branch Purchases").
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA") a loan servicing portfolio of approximately $11.1 billion (including
a sub-servicing portfolio of $3.1 billion), $2.9 billion of mortgage servicing
rights ("MSRs"), which are rights to service mortgages held by others, which
MSRs are owned by third parties who have contracted with FNMC to monitor the
performance and consolidate the reporting of various other servicers (a
"master servicing portfolio") and other assets (the "LMUSA 1995 Purchase"). On
January 31, 1996, FNMC purchased LMUSA's remaining $14.1 billion loan
servicing portfolio (including a sub-servicing portfolio of $2.4 billion), a
master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real
estate, $46.8 million in net other servicing receivables, $2.6 million in
mortgage loans, and $6.2 million in net other assets (including $1.4 million
in cash and cash equivalents) for a purchase price of approximately $160.0
million payable in installments (the "LMUSA 1996 Purchase" and, together with
the LMUSA 1995 Purchase, the "LMUSA Purchases").
On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed") and
its wholly owned subsidiary, San Francisco Federal Savings and Loan
Association ("San Francisco Federal"), which, as of December 31, 1995, had
approximately $4.0 billion in assets and approximately $2.7 billion in
deposits (the "SFFed Acquisition"). The following is a summary of the assets
acquired and liabilities assumed in connection with the SFFed Acquisition at
February 1, 1996:
Page 8
<PAGE>
<TABLE>
<CAPTION>
Estimated
SFFed Bank Remaining
Carrying Fair Value Carrying Lives
Value Adjustments Value (in years)
----- ----------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities 918,817 11,007 929,824 1-5
Loans receivable, net 2,715,758 (23,245) 2,692,513 2-18
Office premises and equipment 20,581 (10,877) 9,704 3-10
Investment in FHLB System 31,989 -- 31,989 --
Foreclosed real estate, net 30,018 -- 30,018 --
Accrued interest receivable 22,740 -- 22,740 --
Mortgage servicing rights 2,238 13,762 16,000 2-4
Other assets 44,938 (7,773) 37,165 2-5
Deposits (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under
agreements to repurchase (815,291) (3,640) (818,931) --
Borrowings (227,203) (8,831) (236,034) 1-17
Other liabilities (50,805) (5,650) (56,455) 1-5
---------- --------- ---------
$ 196,149 $(46,197) 149,952
========== ========
Purchase price 264,245
-------
Excess cost over fair value
of net assets acquired $ 114,293
=========
</TABLE>
The purchase price for the acquisition was financed with existing cash of
the Bank and other borrowings, some of which were repaid with the proceeds
from the sale on February 23, 1996 of approximately $298 million in carrying
value of consumer loans. In connection with the SFFed Acquisition, FN Holdings
issued $140 million of 9-1/8% Senior Subordinated Notes Due 2003 (the "Senior
Sub Notes") and contributed the net proceeds thereof of $133 million to the
Bank as additional paid-in capital, which augmented the Bank's regulatory
capital to maintain its "well- capitalized" status after the SFFed
Acquisition.
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco, which, as of March 31,
1996, had approximately $717 million in assets and $626 million in liabilities
and operated 15 branches in the Northern California area (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million funded with existing cash.
The following is a summary of the assets acquired and liabilities assumed in
the Home Federal Acquisition at June 1, 1996:
<PAGE>
<TABLE>
<CAPTION>
Estimated
HFFC Bank Remaining
Carrying Fair Value Carrying Lives
Value Adjustments Value (in years)
----- ----------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities 4,053 (57) 3,996 1-5
Loans receivable, net 538,722 3,983 542,705 2-18
Office premises and equipment 4,202 (1,560) 2,642 3-10
Investment in FHLB System 6,259 -- 6,259
Foreclosed real estate, net 2,421 (72) 2,349 --
Accrued interest receivable 3,594 -- 3,594 --
Mortgage servicing rights 817 1,657 2,474 2-4
Other assets 10,016 (185) 9,831 2-5
Deposits (632,399) (1,875) (634,274) 1-5
Borrowings (30,000) 241 (29,759) 1-17
Other liabilities (3,602) (3,443) (7,045) 1-5
------ ------ -------
$ 50,950 $ (1,311) 49,639
======== =======
Purchase price 67,823
------
Excess cost over fair value
of net assets acquired $ 18,184
========
</TABLE>
Page 9
<PAGE>
The 1996 Acquisitions and the LMUSA 1996 Purchase were accounted for as
purchases and, accordingly, their respective purchase prices were allocated to
the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates
of purchase, the results of operations related to such assets and liabilities
have been included in the Company's consolidated statements of operations.
Page 10
<PAGE>
From September through December of 1995, First Nationwide entered into
contracts for the sale of its retail deposits ("Deposits") and the related
retail banking assets comprised of cash on hand, loans on deposits, and
facilities (collectively, "Assets") in the states of Ohio, New York, New
Jersey and Michigan (collectively, the "Branch Sale Agreements") at gross
prices which represent an average premium of 7.96% of the deposits sold.
During the first half of 1996, all of the Branch Sale Agreements were
consummated in a series of transactions, as follows (the "Branch Sales"):
<TABLE>
<CAPTION>
Carrying Value at
Sale Respective Sale Date
Consummation Number of --------------------------- Pre-tax
Branch Location Date Branches Deposits Assets Gain
- --------------- ---- -------- -------- ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
New York 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio 1/19/96 28 1,392,561 20,480 130,664
New York 2/23/96 3 270,046 1,838 17,027
New York 3/15/96 5 615,572 8,083 48,933
New Jersey 3/22/96 4 501,262 6,396 35,938
New York 3/22/96 11 637,045 9,465 41,286
Michigan 6/28/96 21 799,226 15,060 56,411
------- ------ ------
$4,632,188 $67,319 $363,250
========== ======= ========
</TABLE>
The Branch Sales were funded with short-term FHLB advances of $2.0
billion with a weighted average rate of 5.47%, long-term FHLB advances of $.6
billion with a weighted average rate of 5.41% maturing from April 1997 through
March 1998 and securities sold under agreements to repurchase of $1.5 billion
with a weighted average rate of 5.45%, supplemented by cash from operations,
principally the maturity of and principal payments on securities.
The following pro forma financial information combines the historical
results of the Company as if the SFFed Acquisition, LMUSA Purchases, Branch
Sales and the issuance of the Senior Sub Notes had occurred as of the
beginning of the first period presented (in thousands):
Six months ended June 30,
-------------------------
1996 1995
---- ----
Net interest income $221,100 $182,184
Net income 218,638 80,369
======= ======
The gains recognized related to the Branch Sales are excluded from the
above table. The pro forma information does not include the effect of the Home
Federal Acquisition or the Branch Purchases 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 SFFed Acquisition, LMUSA
Purchases, Branch Sales and the issuance of the Senior Sub Notes had been
consummated in the past nor do they project the results of operations in any
future period.
Page 11
<PAGE>
(3) 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 six months ended June 30, 1996 and
1995 was $398.6 million and $334.6 million, respectively.
During the six months ended June 30, 1996, noncash activity consisted of
transfers from loans receivable to foreclosed real estate of $72.2 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.
During the six months ended June 30, 1995, noncash activity consisted of
the transfer of $36.0 million from loans receivable to foreclosed real estate.
(4) Issuance of Senior Sub Notes
On January 31, 1996, the Company issued $140 million of its Senior Sub
Notes. The net proceeds of this offering, totalling $133 million, were
contributed to the Bank as additional paid-in capital.
(5) Stockholders' Equity
Dividends on the Company's class A, B and C common stock during the six
months ended June 30, 1996 totalled $24.3 million, $6.1 million, and $8.6
million, respectively. In addition, the remaining 169.5 shares of the class C
common stock was redeemed during the period, resulting in a capital
distribution totalling $169.5 million. Dividends on the Company's class C
common stock during the six months ended June 30, 1995 totalled $17.8 million.
(6) Gains on Sales of Assets
On June 28, 1996, First Nationwide completed the sale of 2,000,000 shares
of its stock of Affiliated Computer Services, Inc. ("ACS") and entered into an
agreement to purchase the FDIC's interest in the remaining shares of ACS owned
by the Bank. A pre-tax gain of $40.4 million resulted from this transaction.
(7) Subsequent Events
On July 27, 1996, FN Holdings entered into an agreement to acquire 100%
of the outstanding stock of Cal Fed Bancorp Inc. ("Cal Fed") for approximately
$1.2 billion (the "Cal Fed Acquisition"). Cal Fed Bancorp Inc., a savings and
loan holding company, owns 100% of the common stock of California Federal
Bank, A Federal Savings Bank, which at March 31, 1996, had total assets of
approximately $14.3 billion and deposits of $9.5 billion operating 124
branches in California and Nevada. The acquisition is subject to Cal Fed
shareholder and regulatory approval and is expected to close in the first
quarter of 1997.
(8) Newly Issued Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS No. 121"). SFAS No. 121 provides guidance for the recognition and
measurement of impairment of long- lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 effective January 1, 1996. Such adoption had no material
impact on the Company's consolidated financial statements.
On June 28, 1996, 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
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<PAGE>
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.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet analyzed SFAS No. 125 and is unable to
determine the effect, if any, implementation may have on the Company's
consolidated financial statements.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The principal business of FN Holdings, through First Nationwide, consists
of operating retail deposit branches and originating and/or purchasing
residential real estate loans and, to a lesser extent, certain consumer loans,
for investment. First Nationwide actively manages its commercial real estate
loan portfolio and is also active in mortgage banking, loan servicing and
securities brokerage. Revenues are derived primarily from interest charged on
loans, interest received on securities and mortgage-backed securities, gains
on sales of loans, 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, communications, deposit insurance assessments, data processing
and other general and administrative expenses.
During the first half of 1996, the Bank made significant progress in the
implementation of its strategies to concentrate its retail banking operations
in California and increase its mortgage banking operations. On February 1,
1996, the Bank consummated the SFFed Acquisition involving assets totalling
$4.0 billion and retail deposits totalling $2.7 billion. On January 31, 1996,
FNMC consummated the acquisition of a $14.1 billion loan servicing portfolio
in the LMUSA 1996 Purchase. On June 3, 1996, the Bank consummated the Home
Federal Acquisition involving assets totalling $.7 billion and retail deposits
totalling $.6 billion. During the first half of 1996, the Bank closed the
sales of all retail branches in the states of Ohio, New York, New Jersey and
Michigan with associated deposit accounts totalling $4.6 billion, resulting in
pre-tax gains totalling $363.3 million.
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 consolidated
financial statements for information regarding the Branch Purchases, LMUSA
Purchases, Branch Sales, and the 1996 Acquisitions.
NET INCOME
FN Holdings reported net income for the six months ended June 30, 1996 of
$551 million compared with net income of $29 million for the corresponding
period in 1995 which includes $363.3 million in pre-tax gains on sales of
branches, $40.4 million in pre-tax gains from the sale of ACS stock, and the
recognition of a $125 million deferred tax benefit. Net income for the three
months ended June 30, 1996 was $252 million compared to $12 million for the
similar period in 1995 and includes $55 million in pre-tax gains on sales of
branches, as well as the gain from the sale of ACS stock and the recognition
of the deferred tax benefit.
Net interest income was $110 million and $218 million, respectively, for
the three and six months ended June 30, 1996, compared with $83 million and
$163 million in the same periods in 1995. The increases in 1996 over 1995 are
primarily due to the increased volumes of interest-bearing assets and
liabilities acquired in the 1996 Acquisitions and a 39 basis point increase in
the net interest margin between the two periods, offset by the increased
interest expense from the Senior Sub Notes.
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<PAGE>
FINANCIAL CONDITION
During the six months ended June 30, 1996, consolidated total assets
increased $3.1 billion, to $17.7 billion, from December 31, 1995, due to the
assets acquired in the 1996 Acquisitions and the LMUSA 1996 Purchase. During
the same period, consolidated total liabilities increased $2.7 billion,
primarily due to additional liabilities assumed in the 1996 Acquisitions and
the issuance of the Senior Sub Notes, offset partially by a decrease in
deposits related to the Branch Sales. Within total liabilities, there has been
a $3.8 billion increase in borrowings and securities sold under agreements to
repurchase, offset by a $1.2 billion decrease in deposits related to the net
impact of Branch Sales and 1996 Acquisitions.
During the six months ended June 30, 1996, stockholders' equity increased
by $302.8 million. The increase in stockholders' equity is the net result of
$551 million in net income for the period, offset by $39.0 million in class A,
B and C common stock dividends, $169.5 million in capital distributions for
the complete redemption of all of the Company's class C common stock during
the six months ended June 30, 1996 and a decrease in the net unrealized gain
on securities available for sale of $39.6 million. The decrease in the net
unrealized gain on securities available for sale is primarily due to the sale
of a portion of First Nationwide's ACS 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 $236 million at June 30, 1996
compared with $220 million at December 31, 1995. Approximately $74.9 million,
or 32%, of the total non-performing assets at June 30, 1996 were acquired in
the 1996 Acquisitions. Total non-performing assets as a percentage of total
assets decreased to 1.33% at June 30, 1996, from 1.50% of total assets at
December 31, 1995.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
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 and
includes the impact of the SFFed Acquisition and the Home Federal Acquisition
from their respective acquisition dates of February 1, 1996 and June 1, 1996.
Page 15
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1996
-----------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) $ 521 $ 16 6.14%
Mortgage-backed securities
available for sale (5) 1,753 60 6.85
Mortgage-backed securities
held to maturity (5) 1,839 71 7.72
Loans held for sale, net 876 32 7.31
Loans receivable, net 11,073 446 8.06
Covered assets (3) 39 1 7.14
------- ---- ----
Total interest-earning assets 16,100 626 7.78%
---- ----
Noninterest-earning assets 1,127
-----
Total assets $17,227
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,949 223 4.50%
Securities sold under
agreements to repurchase 2,225 62 5.59
Borrowings (4) 3,792 123 6.51
------- ---- ----
Total interest-bearing
liabilities 15,966 408 5.13
--- ----
Noninterest-bearing liabilities 305
Minority interest 309
Stockholders' equity 647
---
Total liabilities, minority
interest and stockholders'
equity $17,227
=======
Net interest income $218
====
Interest rate spread 2.65%
====
Net interest margin 2.69%
====
Average equity to average assets 3.76%
====
</TABLE>
Page 16
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1995
-----------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
Interest-earning assets (1):
Securities (2)(5) $ 421 $ 14 6.76%
Mortgage-backed securities
available for sale (5) -- -- --
Mortgage-backed securities
held to maturity (5) 3,059 105 6.86
Loans held for sale, net 54 2 8.97
Loans receivable, net 10,118 397 7.85
Covered assets (3) 283 9 6.29
------ ----- ----
Total interest-earning
assets 13,935 527 7.57%
--- ----
Noninterest-earning assets 728
---
Total assets $14,663
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,806 $ 213 4.38%
Securities sold under
agreements to repurchase 1,433 48 6.75
Borrowings (4) 2,505 103 8.35
----- --- ----
Total interest-bearing
liabilities 13,744 364 5.35
--- ----
Noninterest-bearing liabilities 271
Minority interest 301
Stockholders' equity 347
---
Total liabilities, minority
interest and stockholders'
equity $14,663
=======
Net interest income $163
====
Interest rate spread 2.22%
====
Net interest margin 2.30%
====
Average equity to average assets 2.37%
====
</TABLE>
- ------------------------
(1) Nonaccruing assets are included in the average balances for the
periods indicated.
(2) Includes interest-bearing deposits in other banks and securities
purchased under agreements to resell.
(3) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(4) Interest and Average Rate include the impact of interest rate swaps.
(5) Prior to December 29, 1995, all U.S. government agency and mortgage-
backed securities were classified in the held to maturity category. On
December 29, 1995, the Company reclassified $1.5 billion and $231.8
million, respectively, of securities and mortgage-backed securities
from the held-to-maturity category to the available-for-sale
category. The information presented in the "securities" line for
1996 includes securities held to maturity of $4 million and related
interest of less than $.01 million with the remainder representing
securities available for sale. Average balances presented for 1996
represent the original amortized cost of the securities without the
effect of unrealized gains and losses recorded as a result of the
available for sale classification.
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar
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<PAGE>
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>
Six months ended June 30, 1996 vs. 1995
Increase (Decrease) Due to
------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities $ 3 $ (1) $ 2
Mortgage-backed securities
available for sale 60 0 60
Mortgage-backed securities
held to maturity (50) 16 (34)
Loans held for sale, net 30 0 30
Loans receivable, net 38 11 49
Covered assets (9) 1 (8)
-- - --
Total 72 27 99
-- -- --
INTEREST EXPENSE:
Deposits 3 7 10
Securities sold under
agreements to repurchase 20 (6) 14
Borrowings 34 (14) 20
-- --- --
Total 57 (13) 44
-- --- --
Change in net interest income $15 $40 $55
=== === ===
</TABLE>
The volume variances in total interest income and total interest expense
from the six months ended June 30, 1995 to the corresponding period in 1996
are largely due to the additional $4.2 billion in interest-earning assets
acquired, $4.4 billion in interest-bearing liabilities assumed in the 1996
Acquisitions and the issuance of the $140 million Senior Sub Notes. The
overall volume change in net interest income is positive due to the 1996
Acquisitions and Branch Sales. The positive total rate variance of $40 million
is attributed to increasing rates on adjustable-rate assets as such assets
repriced to their fully-indexed yields, and the decrease in overall market
rates on interest-bearing liabilities between the two periods, offset slightly
by the impact of the additional wholesale borrowings used to finance the
Branch Sales and the issuance of the Senior Sub Notes. During the first six
months of 1996, deposits totalling $4.6 billion with a weighted average rate
of 4.59% were sold and replaced with $4.1 billion of FHLB advance borrowings
and securities sold under agreements to repurchase with a weighted average
rate of 5.45%.
INTEREST INCOME. Total interest income was $626.3 million for the six
months ended June 30, 1996, an increase of $98.7 million from the six months
ended June 30, 1995. The interest-earning assets acquired in the 1996
Acquisitions resulted in total interest-earning assets for the first six
months of 1996 averaging $16.1 billion, compared to $13.9 billion for the
corresponding period in 1995. In addition, the yield on total interest-earning
assets during the first six months of 1996 increased to 7.78% from the 7.57%
yield on total interest-earning assets for the first six months of 1995.
FN Holdings earned $446.4 million of interest income on loans receivable
for the six months ended June 30, 1996, an increase of $48.9 million from the
six months ended June 30, 1995. The loans acquired in the 1996 Acquisitions
contributed most of the increased interest income in 1996, and resulted in an
increase in the average balance of loans receivable to $11.1 billion from
$10.1 billion for the six months
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<PAGE>
ended June 30, 1995. The weighted average yield on loans receivable increased
to 8.06% for the first six months of 1996 from 7.85% for the same period in
1995 due to upward rate adjustments on adjustable rate residential loans as
such loans repriced to their fully indexed rates, without the effect of teaser
rates or annual interest rate adjustment caps.
FN Holdings earned $32.3 million of interest income on loans held for
sale for the six months ended June 30, 1996, an increase of $29.9 million from
the six months ended June 30, 1995. The increased income is the net effect of
a higher average volume of loans held for sale due to increased originations
from the operations acquired in the Maryland Acquisition on February 28, 1995
and the LMUSA Purchases, partially offset by a decrease in the weighted
average rate of such loans. The average balance of loans held for sale was
$876 million for the six months ended June 30, 1996, an increase of $822
million over the same period in 1995. The weighted average yield on loans held
for sale decreased to 7.31% for the first six months of 1996 from 8.97% during
the first six months of 1995 due to generally decreasing market rates during
the period and the portfolio in 1996 consisting of a higher percentage of
comparatively lower-rate adjustable rate loans compared to a higher fixed rate
portfolio in 1995.
Interest income on all mortgage-backed securities, including the
available for sale portfolio and mortgage-backed securities held to maturity,
was $130.4 million for the six months ended June 30, 1996, an increase of
$25.8 million from the six months ended June 30, 1995. The average portfolio
balances increased $.5 billion, to $3.6 billion, during the six months ended
June 30, 1996 compared to $3.1 billion during the six months ended June 30,
1995. The weighted average yield on all mortgage-backed securities increased
to 7.29% for the first six months of 1996 from 6.86% for the corresponding
period in 1995, primarily due to the upward rate adjustments of adjustable
rate mortgage-backed securities as the loans underlying such securities
repriced to their fully indexed rates, without the effect of teaser rates or
annual interest rate adjustment caps.
The interest income from Covered Assets declined $7.4 million, to $1.4
million, for the six months ended June 30, 1996 compared to the six months
ended June 30, 1995. This decline is due to a reduction in the average volume
of Covered Assets due to sales, repayments and other dispositions of Covered
Assets, including the purchase of substantially all such remaining assets
during the second quarter of 1995 by the Federal Deposit Insurance Corporation
(the "FDIC Purchase"). The decline in income due to the lower volume is
partially offset by an increase in the effective rate earned on such Covered
Assets, which was 7.14% for the six months ended June 30, 1996 compared to
6.29% for the same period in 1995. The higher rate is due to the net effect of
the increase in the Texas Cost of Funds ("TCOF") between the two periods,
reflecting the lagging nature of TCOF over general fluctuations in market
interest rates, partially offset by the reduction in the applicable margin
over TCOF prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks
was $15.7 million for the six months ended June 30, 1996, an increase of $1.5
million from the six months ended June 30, 1995. The average portfolio
balances during the six months ended June 30, 1996 and 1995 increased to $521
million from $421 million, respectively, primarily due to assets acquired in
the SFFed Acquisition. The weighted average yield on these assets decreased to
6.14% for the first six months of 1996 from 6.76% for the first six months of
1995, primarily due to an overall decline in market interest rates.
INTEREST EXPENSE. Total interest expense was $408.2 million for the six
months ended June 30, 1996, an increase of $43.8 million from the six months
ended June 30, 1995. The increase is the result of additional interest-bearing
liabilities assumed in the 1996 Acquisitions, the issuance of the Senior Sub
Notes, and incrementally higher rates paid on the additional borrowings
incurred to replace the retail deposits sold in the Branch Sales.
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<PAGE>
Interest expense on customer deposits, including brokered deposits, was
$222.7 million for the six months ended June 30, 1996, an increase of $9.9
million from the six months ended June 30, 1995. The average balance of
customer deposits outstanding increased from $9.8 billion to $9.9 billion for
the six months ended June 30, 1995 and 1996, respectively. The deposits of
approximately $3.8 billion acquired in the 1996 Acquisitions and the Branch
Purchases increased the average balance from period to period by $2.9 billion
while the $4.6 billion in deposits sold in the Branch Sales decreased the
average balance from period to period by $2.8 billion due to the timing of
such acquisitions and sales. The overall weighted average cost of deposits
increased from 4.38% for the first six months of 1995 to 4.50% for the first
six months of 1996, due principally to the effect of the deposits sold in the
Branch Sales having a weighted average rate of approximately 4.59% and the
deposits assumed in the 1996 Acquisitions having a weighted average rate of
5.08%, as well as slight increases in the market rates of interest paid for
brokered deposits, partially offset by the impact of higher average balances
of lower rate custodial transaction accounts related to the additional loan
servicing acquired in the Maryland Acquisition and the LMUSA Purchases.
Interest expense on securities sold under agreements to repurchase
totalled $62.3 million for the six months ended June 30, 1996, an increase of
$14.3 million from the six months ended June 30, 1995. The average balance of
such borrowings for the six months ended June 30, 1996 and 1995 was $2.2
billion and $1.4 billion, respectively. The increase is attributed to $.8
billion of such liabilities acquired in the 1996 Acquisitions together with
$1.5 billion in additional short-term borrowings to fund the Branch Sales
during 1996, offset by maturities and payoffs that were refinanced with
deposits acquired from the Home Federal Acquisition and FHLB advances. The
weighted average interest rate on these instruments decreased to 5.59% during
the first six months of 1996 from 6.75% for the first six months of 1995,
primarily due to the impact of decreases in overall market interest rates for
such borrowings.
Interest expense on borrowings totalled $123.3 million for the six months
ended June 30, 1996, an increase of $19.6 million from the six months ended
June 30, 1995. The increase is attributed to the net effect of a volume
increase for borrowings assumed in the 1996 Acquisitions, the issuance of the
Senior Sub 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 largely due to the shorter weighted average maturity of the
borrowings at June 30, 1996 compared to June 30, 1995. The average balance
outstanding for the six months ended June 30, 1996 and 1995 was $3.8 billion
and $2.5 billion, respectively. The weighted average interest rate on these
instruments decreased to 6.51% during the first six months of 1996 from 8.35%
for the first six months of 1995, primarily due to the impact of decreases in
overall market interest rates and the shorter average maturity of the
portfolio.
NET INTEREST INCOME. Net interest income was $218.0 million for the six
months ended June 30, 1996, an increase of $54.9 million from the six months
ended June 30, 1995. The interest rate spread increased to 2.65% for the six
months ended June 30, 1996 from 2.22% for the six months ended June 30, 1995.
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 $519.6 million for the six months
ended June 30, 1996, an increase of $450.0 million from the six months ended
June 30, 1995. Gains on sales of branches account for $363.3 million of the
increase and gain from the sale of ACS stock accounts for $40.4 million of the
increase.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $60.8 million for the six months ended June 30, 1996, compared to $31.3
million for the six months ended June 30, 1995. This increase is due to the
addition of the mortgage servicing portfolios acquired in the Maryland
Acquisition, the LMUSA Purchases and the 1996 Acquisitions, as well as
servicing rights originated through the increased origination capacity
provided by these acquisitions. The single-
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<PAGE>
family residential loan servicing portfolio, excluding loans serviced for
the Bank, increased from $7.4 billion at January 1, 1995 to $27.0 billion
at January 1, 1996 and to $44.9 billion at June 30, 1996. During the
first six months of 1996, First Nationwide sold $2.6 billion in
single-family mortgage loans originated for sale as part of its ongoing
mortgage banking operations compared to $106.6 million of such sales for
the corresponding period in 1995.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $23.8 million for the six months ended June 30, 1996,
compared to $22.2 million for the six months ended June 30, 1995. The increase
is attributed to increased revenues from the retail banking operations
acquired in the Branch Purchases and the 1996 Acquisitions, offset by the
impact of the Branch Sales, the bulk of which occurred late in the first
quarter of 1996.
Management fees totalled $5.7 million for the six months ended June 30,
1996, compared to $7.7 million for the six months ended June 30, 1995. The
decrease is attributed principally to the reduced number of assets under
management from expiration of contracts with the Resolution Trust Corporation.
Gain on sales of branches was $363.3 million for the six months ended
June 30, 1996. See note 2 to the accompanying financial statements for
additional information regarding the Branch Sales.
Gain on sales of loans was $13.7 million for the six months ended June
30, 1996, compared to a gain of $.1 million for the six months ended June 30,
1995. The increase 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 experienced increased gains on sales of single-family
mortgage loans due to the adoption of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment to
Statement No. 65" ("SFAS No. 122"), which was adopted April 1, 1995. See
"--Mortgage Banking Operations."
Gain on sales of assets was $38.5 million for the six months ended June
30, 1996. The gain is primarily the result of a $40.4 million gain from the
sale of ACS stock partially offset by a writedown recorded on certain
collateralized mortgage obligations ("CMOs") in the mortgage-backed securities
available for sale portfolio determined to have a permanent impairment in
value.
Other noninterest income was $13.9 million for the six months ended June
30, 1996, an increase of $5.5 million from the six months ended June 30, 1995.
The increase is partially attributed to $2.3 million of interest accrued on a
receivable related to the favorable outcome of an arbitration hearing and an
increase of $1.6 million in dividends on FHLB stock related to an increase in
the volume of such stock owned by the Bank.
NONINTEREST EXPENSE. Total noninterest expense was $222.3 million for the
six months ended June 30, 1996, an increase of $49.4 million from the six
months ended June 30, 1995, principally due to increased compensation, loan
expense, deposit insurance premiums, data processing and other noninterest
expenses, primarily related to the growth of the Company through the various
acquisitions in 1995 and the first half of 1996 and the timing of the Branch
Sales.
Total compensation and employee benefits expense was $110.9 million for
the six months ended June 30, 1996, an increase of $29.1 million from the six
months ended June 30, 1995, primarily attributable to $30.5 million of
accruals related to a management incentive plan. The number of full time
employees increased by 373 to 3,651 for the six months ended June 30, 1996,
compared to the six months ended June 30, 1995. This increase is primarily due
to the net impact of employee additions in the mortgage banking operations
related to the servicing portfolios acquired in the LMUSA Purchases and 1996
Acquisitions, partially offset by a net reduction in retail banking employees
due to the Branch Sales and the Bank's cost reduction program. The six months
ended June 30, 1995 includes accruals for termination
Page 21
<PAGE>
benefits of $6.6 million related to the cost reduction plan and the relocation
of loan servicing operations to Frederick, Maryland from Sacramento,
California.
Occupancy and equipment expense was $25.6 million for the six months
ended June 30, 1996, a decrease of $2.9 million from the six months ended June
30, 1995, attributed primarily to the decreased occupancy expenses related to
the net effect of operations sold in the Branch Sales, partially offset by
increased expenses due to the Maryland Acquisition and 1996 Acquisitions.
Loan expense was $14.0 million for the six months ended June 30, 1996, an
increase of $10.0 million from the six months ended June 30, 1995. The
increase relates to increased expenses associated with the higher volume of
loans serviced due to the LMUSA Purchases and the Maryland Acquisition. Such
expenses include subservicing fees paid on acquired servicing portfolios prior
to conversion to FNMC's systems and increased pass-through interest expense
for loan payoffs in serviced loan pools.
SAIF deposit insurance premiums increased $1.0 million, to $11.6 million,
for the six months ended June 30, 1996. The increase is due to the higher
average balance of SAIF assessable deposits outstanding in the first half of
1996 compared to 1995 due largely to the net effect of the Branch Purchases,
the 1996 Acquisitions and the Branch Sales.
Data processing expense was $5.8 million for the six months ended June
30, 1996, an increase of $.7 million from the six months ended June 30, 1995,
also attributed to the 1996 Acquisitions and increased expenses associated
with the higher volume of loans serviced in connection with the LMUSA
Purchases and the Maryland Acquisition.
Marketing expense was $4.8 million for the six months ended June 30,
1996, a decrease of $3.1 million from the six months ended June 30, 1995, due
to reduced nationwide marketing efforts as a result of the Branch Sales.
Foreclosed real estate operations, including gains on sales, resulted in
a net gain of $4.9 million for the six months ended June 30, 1996 compared to
a net loss of $.7 million for the same period in 1995. The change is
attributed to a higher volume of sales at comparatively higher prices to
carrying values.
Amortization of intangible assets increased to $4.2 million for the six
months ended June 30, 1996 from $.3 million for the corresponding period in
1995, primarily due to the amortization of the $132.5 million additiona1
excess cost over fair value of net assets acquired recorded in connection with
the 1996 Acquisitions.
Other noninterest expense was $50.3 million for the six months ended June
30, 1996, an increase of $16.2 million from the six months ended June 30,
1995, principally due to increased telecommunications, postage, office
supplies, insurance, OTS assessments, travel and professional fees expenses,
all of which are attributed primarily to the increased loan servicing activity
as a result of the Maryland Acquisition and the LMUSA Purchases. In addition,
a $3.5 million accrual was recorded in 1996 related to sales tax audits. The
six months ended June 30, 1995 includes the reversal of $3.6 million of excess
reserves related to the Assistance Agreement.
PROVISION FOR INCOME TAXES. During the six months ended June 30, 1996 and
1995, the Company recorded income tax benefit of $81.4 million and income tax
expense of $3.4 million, respectively. As of December 31, 1995, the Company
reported a net deferred tax asset of $69.0 million. Based on a historical
earnings trend since the consummation of the FN Acquisition and future
earnings expectations, management changed its judgment about the realizability
of the Company's net deferred tax asset and recognized a deferred tax benefit
of $125.0 million in the second quarter of 1996. In order to recognize the
total net deferred tax asset recorded as of June 30, 1996, the Company must
have future earnings of approximately $685.0 million. Included in tax expense
for the six months ended June 30, 1995 is the reversal of
Page 22
<PAGE>
1993 and 1994 over accruals of Federal taxes totalling $2.2 million. The
Company's effective Federal tax rates were (23)% and (3)% during the six
months ended June 30, 1996 and 1995, respectively, while its statutory Federal
tax rate was 35% during both periods. The difference between the effective and
statutory rates was primarily the result of the utilization of net operating
loss carryforwards for both periods, the reversal of 1993 and 1994 over
accruals for the six months ended June 30, 1995 and the recognition of a
$125.0 million deferred tax benefit in the first half of 1996. The Company's
effective state tax rate was approximately 7% and 10% during the six months
ended June 30, 1996 and 1995, respectively.
EXTRAORDINARY ITEM. During the six months ended June 30, 1995, the
Company recorded a gain of $2.0 million on the early extinguishment of $250
million in FHLB advances, net of income taxes.
NET INCOME. The Company had net income of $550.9 million for the six
months ended June 30, 1996, an increase of $521.7 million from the six months
ended June 30, 1995.
THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995
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 and
includes the impact of the Home Federal Acquisition on the financial position
and the results of operations from the acquisition date of June 1, 1996
through June 30, 1996.
Page 23
<PAGE>
<TABLE>
<CAPTION>
Three months ended
June 30, 1996
---------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) $ 538 $ 8 5.95%
Mortgage-backed securities
available for sale (5) 1,775 31 6.99
Mortgage-backed securities
held to maturity (5) 1,855 35 7.55
Loans held for sale, net 891 18 8.08
Loans receivable, net 11,292 225 7.97
Covered assets (3) 40 1 7.28
------ --- ----
Total interest-earning
assets 16,391 318 7.76
--- ----
Noninterest-earning assets 1,194
-----
Total assets $17,585
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,633 105 4.37%
Securities sold under
agreements to repurchase 2,282 32 5.63
Borrowings (4) 4,455 71 6.48
----- -- ----
Total interest-bearing
liabilities 16,370 208 5.12
------ --- ----
Noninterest-bearing liabilities 167
Minority interest 309
Stockholders' equity 739
---
Total liabilities, minority
interest and stockholders'
equity $17,585
=======
Net interest income $110
====
Interest rate spread 2.64%
====
Net interest margin 2.65%
====
Average equity to average assets 4.20%
====
</TABLE>
Page 23
<PAGE>
<TABLE>
<CAPTION>
Three months ended
June 30, 1995
---------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) $ 424 $ 7 6.90%
Mortgage-backed securities
available for sale (5) -- -- --
Mortgage-backed securities
held to maturity (5) 3,009 53 7.05
Loans held for sale, net 85 2 8.13
Loans receivable, net 10,134 203 8.01
Covered assets (3) 258 3 5.54
-------- --- ----
Total interest-earning
assets 13,910 268 7.71%
Noninterest-earning assets 753 --- ----
--------
Total assets $14,663
=========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,949 112 4.50%
Securities sold under
agreements to repurchase 1,406 24 6.86
Borrowings (4) 2,385 49 8.33
------- --- ----
Total interest-bearing
liabilities 13,740 185 5.41
--- ----
Noninterest-bearing liabilities 278
Minority interest 301
Stockholders' equity 344
--------
Total liabilities, minority
interest and stockholders'
equity $14,663
========
Net interest income $ 83
====
Interest rate spread 2.30%
====
Net interest margin 2.37%
====
Average equity to average assets 2.35%
====
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the
periods indicated.
(2) Includes interest-bearing deposits in other banks and securities
purchased under agreements to resell.
(3) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(4) Interest and Average Rate include the impact of interest rate swaps.
(5) Prior to December 29, 1995, all U.S. government agency and mortgage-
backed securities were classified in the held to maturity category. On
December 29, 1995, the Company reclassified $1.5 billion and $231.8
million, respectively, of securities and mortgage-backed securities
from the held-to-maturity category to the available-for-sale
category. The information presented in the "securities" line for
1996 includes securities held to maturity of $4 million and related
interest of less than $.01 million with the remainder representing
securities available for sale. Average balances presented for 1996
represent the original amortized cost of the securities without the
effect of unrealized gains and losses recorded as a result of the
available for sale classification.
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
Page 25
<PAGE>
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 June 30, 1996 vs. 1995
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities $ 2 $(1) $ 1
Mortgage-backed securities
available for sale 31 0 31
Mortgage-backed securities
held to maturity (22) 4 (18)
Loans held for sale, net 16 0 16
Loans receivable, net 23 (1) 22
Covered assets (4) 2 (2)
----- ---- ----
Total 46 4 50
----- ---- ----
INTEREST EXPENSE:
Deposits (3) (4) (7)
Securities sold under
agreements to repurchase 11 (3) 8
Borrowings 30 (8) 22
----- ---- ----
Total 38 (15) 23
----- ---- ----
Change in net interest income $ 8 $19 $27
===== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
from the three months ended June 30, 1995 to the corresponding period in 1996
are largely due to the additional $4.2 billion in interest-earning assets
acquired, $4.4 billion in interest-bearing liabilities assumed in the 1996
Acquisitions and the issuance of the $140 million Senior Sub Notes. The
overall volume change in net interest income is positive due to the 1996
Acquisitions and Branch Sales. The positive total rate variance of $19 million
is attributed to increasing rates on adjustable-rate assets as such assets
repriced to their fully-indexed yields, and the decrease in overall market
rates on interest-bearing liabilities between the two periods, offset slightly
by the issuance of the Senior Sub Notes and the impact of the additional
wholesale borrowings used to finance the Branch Sales. During the second
quarter of 1996, deposits totalling $.8 billion with a weighted average rate
of 4.30% were sold and replaced with $.5 billion of FHLB advance borrowings
and securities sold under agreements to repurchase with a weighted average
rate of 5.47%.
INTEREST INCOME. Total interest income was $318.1 million for the three
months ended June 30, 1996, an increase of $50.0 million from the three months
ended June 30, 1995. The interest-earning assets acquired in the 1996
Acquisitions resulted in total interest-earning assets for the three months
ended June 30, 1996 averaging $16.4 billion, compared to $13.9 billion for the
corresponding period in 1995. In addition, the yield on total interest-earning
assets during the three months ended June 30, 1996 increased to 7.76% from the
7.71% yield on total interest-earning assets for the three months ended June
30, 1995.
The Company earned $225.2 million of interest income on loans receivable
for the three months ended June 30, 1996, an increase of $22.5 million from
the three months ended June 30, 1995. The loans acquired in the 1996
Acquisitions contributed most of the increased interest income in 1996, and
resulted in an increase in the average balance of loans receivable to $11.3
billion from $10.1 billion for the three months ended June 30, 1995. The
weighted average yield on loans receivable decreased to
Page 26
<PAGE>
7.97% for the second quarter of 1996 from 8.01% for the same period in 1995
due to the impact of decreasing market rates during the period on the
Company's adjustable rate loan portfolio.
The Company earned $17.8 million of interest income on loans held for
sale for the three months ended June 30, 1996, an increase of $16.1 million
from the three months ended June 30, 1995. The increased income is the net
effect of a higher average volume of loans held for sale due to increased
originations from the operations acquired in the LMUSA Purchases, offset by a
decrease in the weighted average rate of such loans. The average balance of
loans held for sale increased to $891 million for the three months ended June
30, 1996 from $85 million for the same period in 1995. The weighted average
yield on loans held for sale decreased to 8.08% for 1996 from 8.13% during the
three months ended June 30, 1995 due to generally decreasing market rates
during the period and the portfolio consisting of a higher percentage of
comparatively lower-rate adjustable rate loans in 1996 compared to a
predominantly fixed rate portfolio in 1995.
Interest income on all mortgage-backed securities, including the
available for sale portfolio and mortgage-backed securities held to maturity,
was $66.1 million for the three months ended June 30, 1996, an increase of
$13.3 million from the three months ended June 30, 1995. The average portfolio
balances increased $.6 billion, to $3.6 billion, during the three months ended
June 30, 1996 compared to $3.0 billion during the three months ended June 30,
1995. The weighted average yield on all mortgage-backed securities increased
to 7.27% for the three months ended June 30, 1996 from 7.05% for the
corresponding period in 1995, primarily due to the upward rate adjustments of
adjustable rate mortgage-backed securities as the loans underlying such
securities repriced to their fully indexed rates, without the effect of teaser
rates or annual interest rate adjustment caps.
The interest income from Covered Assets declined $2.9 million, to $.7
million, for the three months ended June 30, 1996 compared to the three months
ended June 30, 1995. This decline is due to a reduction in the average volume
of Covered Assets due to sales, repayments and other dispositions of Covered
Assets, including the FDIC Purchase. The decline in income due to the lower
volume is partially offset by an increase in the effective rate earned on such
Covered Assets, which was 7.28% for the three months ended June 30, 1996
compared to 5.54% for the same period in 1995. The higher rate is due to the
net effect of the increase in the TCOF between the two periods, reflecting the
lagging nature of TCOF over general fluctuations in market interest rates,
partially offset by the reduction in the applicable margin over TCOF
prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks
was $8.3 million for the three months ended June 30, 1996, an increase of $1.0
million from the three months ended June 30, 1995. The average portfolio
balances during the three months ended June 30, 1996 and 1995 increased to
$538 million from $424 million, respectively, primarily due to the 1996
Acquisitions. The weighted average yield on these assets decreased to 5.95%
for the second quarter of 1996 from 6.90% for the second quarter of 1995,
primarily due to an overall decline in market interest rates.
INTEREST EXPENSE. Total interest expense was $208.5 million for the three
months ended June 30, 1996, an increase of $23.3 million from the three months
ended June 30, 1995. The increase is the net result of additional
interest-bearing liabilities assumed in the 1996 Acquisitions and the issuance
of the Senior Sub Notes, offset by lower rates due to generally decreasing
market rates during the period.
Interest expense on customer deposits, including brokered deposits, was
$105.1 million for the three months ended June 30, 1996, a decrease of $6.5
million from the three months ended June 30, 1995. The average balance of
customer deposits outstanding decreased from $9.9 billion to $9.6 billion for
the three months ended June 30, 1995 and 1996, respectively. The deposits of
approximately $3.8 billion acquired in the 1996 Acquisitions and Branch
Purchases increased the average balance from period to period by $3.4 billion
while the $4.6 billion in deposits sold in the
Page 27
<PAGE>
Branch Sales decreased the average balance from period to period by $3.9
billion due to the timing of such acquisitions and sales. The overall weighted
average cost of deposits decreased from 4.50% for the three months ended June
30, 1995 to 4.37% for the corresponding period in 1996, due principally to the
impact of higher average balances of lower-rate custodial transaction accounts
related to the additional loan servicing acquired in the Maryland Acquisition
and the LMUSA Purchases. During the three months ended June 30, 1996, the
effect of the deposits sold in the Branch Sales with a weighted average rate
of approximately 4.59% was offset by the deposits assumed in the 1996
Acquisitions with a weighted average rate of 5.08%, as well as slight
increases in the market rates of interest paid for brokered deposits.
Interest expense on securities sold under agreements to repurchase
totalled $31.8 million for the three months ended June 30, 1996, an increase
of $7.7 million from the three months ended June 30, 1995. The average balance
of such borrowings for the three months ended June 30, 1996 and 1995 was $2.3
billion and $1.4 billion, respectively. The increase is attributed to $.8
billion of such liabilities acquired in the 1996 Acquisitions together with
$1.5 billion in additional short-term borrowings to fund the Branch Sales
during 1996 offset by maturities and payoffs that were refinanced with
deposits acquired in the Home Federal Acquisition and FHLB advances. The
weighted average interest rate on these instruments decreased to 5.63% during
the three months ended June 30, 1996 from 6.86% for the corresponding period
in 1995, primarily due to the impact of decreases in overall market interest
rates for such borrowings.
Interest expense on borrowings totalled $71.6 million for the three
months ended June 30, 1996, an increase of $22.1 million from the three months
ended June 30, 1995. The increase is attributed to the net effect of a volume
increase for borrowings assumed in the 1996 Acquisitions, the issuance of the
Senior Sub Notes and additional borrowings to replace the deposits sold in the
Branch Sales, offset by the impact of decreases in the rates paid on such
borrowings largely due to the shorter weighted average maturity of the
borrowings at June 30, 1996 compared to June 30, 1995. The average balance
outstanding for the three months ended June 30, 1996 and 1995 was $4.5 billion
and $2.4 billion, respectively. The weighted average interest rate on these
instruments decreased to 6.48% during the three months ended June 30, 1996
from 8.33% for the corresponding period in 1995, primarily due to the impact
of decreases in overall market interest rates and the shorter average maturity
of the portfolio.
NET INTEREST INCOME. Net interest income was $109.6 million for the three
months ended June 30, 1996, an increase of $26.7 million from the three months
ended June 30, 1995. The interest rate spread increased to 2.64% for the three
months ended June 30, 1996 from 2.30% for the three months ended June 30,
1995.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, management fees and gains on
Branch Sales and on sales of assets, was $154.7 million for the three months
ended June 30, 1996, an increase of $116.1 million from the three months ended
June 30, 1995. Gains on sales of branches account for $55.3 million of the
increase and gain from the sale of ACS stock accounts for $40.4 million of the
increase.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $33.3 million for the three months ended June 30, 1996, compared to $18.6
million for the three months ended June 30, 1995. This increase is due to the
addition of the mortgage servicing portfolios acquired in the LMUSA Purchases
and the 1996 Acquisitions, as well as servicing rights originated through the
increased origination capacity provided by these acquisitions. During the
three months ended June 30, 1996, First Nationwide sold $1.3 billion in
single-family mortgage loans originated for sale as part of its ongoing
mortgage banking operations compared to $64 million of such sales for the
corresponding period in 1995.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $12.0 million for the three months ended June 30, 1996,
compared to $11.9
Page 28
<PAGE>
million for the three months ended June 30, 1995. The increase is attributed
to increased revenues from the retail banking operations acquired in the
Branch Purchases and the 1996 Acquisitions, offset by the impact of the Branch
Sales, the bulk of which occurred late in the first quarter of 1996.
Management fees totalled $2.4 million for the three months ended June 30,
1996, compared to $5.3 million for the three months ended June 30, 1995. The
decrease is attributed principally to the reduced number of assets under
management from the expiration of contracts with the Resolution Trust
Corporation.
Gain on sales of branches was $55.3 million for the three months ended
June 30, 1996. See note 2 to the accompanying financial statements for
additional information regarding the Branch Sales.
Gain on sales of assets was $43.0 million for the three months ended June
30, 1996. The gain is primarily the result of a $40.4 million gain from the
sale of ACS stock.
Other noninterest income was $8.6 million for the three months ended June
30, 1996, an increase of $6.1 million from the three months ended June 30,
1995. The increase is partially attributed to $2.3 million of interest accrued
on a receivable related to the favorable outcome of an arbitration hearing,
and an increase of $1.3 million in dividends on FHLB stock related to the
increase in the volume of such stock owned by the Bank.
NONINTEREST EXPENSE. Total noninterest expense was $103.7 million for the
three months ended June 30, 1996, an increase of $11.1 million from the three
months ended June 30, 1995, principally due to increased compensation, loan
expense, deposit insurance premiums, data processing and other noninterest
expenses, primarily related to the growth of the Bank through the various
acquisitions in 1995 and the first half of 1996 and the timing of the Branch
Sales.
Total compensation and employee benefits expense was $50.1 million for
the three months ended June 30, 1996, an increase of $7.7 million from the
three months ended June 30, 1995. This increase is attributable, in part, to
the net impact of $8.9 million of accruals related to a management incentive
plan. In addition, the increase in full time employees related to the impact
of employee additions in the mortgage banking operations related to the
servicing portfolios acquired in the LMUSA Purchases and 1996 Acquisitions was
partially offset by a net reduction in retail banking employees due to the
Branch Sales. A $4.8 million accrual for termination benefits recorded in June
1995 further offsets these increases.
Occupancy and equipment expense was $12.4 million for the three months
ended June 30, 1996, a decrease of $4.5 million from the three months ended
June 30, 1995, attributed primarily to the decreased occupancy expenses
related to the net effect of operations sold in the Branch Sales, offset by
increased expenses due to the Maryland Acquisition and 1996 Acquisitions.
Loan expense was $6.3 million for the three months ended June 30, 1996,
an increase of $3.2 million from the three months ended June 30, 1995. The
increase relates to increased expenses associated with the higher volume of
loans serviced due to the LMUSA Purchases and the Maryland Acquisition.
SAIF deposit insurance premiums increased $.5 million, to $5.5 million,
for the three months ended June 30, 1996. The increase is due to the higher
average balance of SAIF assessable deposits outstanding in the second quarter
of 1996 compared to 1995 due largely to the net effect of the Branch
Purchases, the 1996 Acquisitions and the Branch Sales.
Data processing expense was $3.0 million for the three months ended June
30, 1996, an increase of $.1 million from the three months ended June 30,
1995.
Page 29
<PAGE>
Marketing expense was $2.6 million for the three months ended June 30,
1996, a decrease of $1.3 million from the three months ended June 30, 1995,
due to reduced nationwide marketing efforts as a result of the Branch Sales.
Foreclosed real estate operations, including gains on sales, resulted in
a net gain of $2.3 million for the three months ended June 30, 1996 compared
to a net gain of $.2 million for the same period in 1995. The change is
attributed to a higher volume of sales at comparatively higher prices to
carrying values.
Amortization of intangible assets increased to $2.5 million for the three
months ended June 30, 1996 from $.1 million for the corresponding period in
1995, primarily due to the impact of the amortization of the additional $132.5
million excess cost over fair value of net assets acquired recorded in
connection with the 1996 Acquisitions.
Other noninterest expense was $23.6 million for the three months ended
June 30, 1996, an increase of $5.1 million from the three months ended June
30, 1995, principally due to increased telecommunications, postage, office
supplies, travel and professional fees expenses, all of which are attributed
primarily to the increased loan servicing activity as a result of the Maryland
Acquisition and the LMUSA Purchases. In addition, the three months ended June
30, 1995 includes the reversal of $3.6 million of excess reserves related to
the Assistance Agreement.
PROVISION FOR INCOME TAXES. During the three months ended June 30, 1996
and 1995 the Company recorded income tax benefit of $110.4 million and income
tax expense of $2.7 million, respectively. As of March 31, 1996, the Company
reported a net deferred tax asset of $69.0 million. Based on a historical
earnings trend since the consummation of the FN Acquisition and future
earnings expectations, management revised its judgment about the realizability
of the Company's net deferred tax asset and recognized a deferred tax benefit
of $125.0 million in the second quarter of 1996. In order to recognize the
total net deferred tax asset recorded as of June 30, 1996, the Company must
have future taxable earnings of approximately $685 million. The Company's
effective Federal tax rates were (81)% and 2% during the three months ended
June 30, 1996 and 1995, respectively, while its statutory Federal tax rate was
35% during both periods. The difference between the effective and statutory
rates was primarily the result of the utilization of net operating loss
carryforwards for both periods and the recognition of a $125.0 million
deferred tax benefit in the first half of 1996. The Company's effective state
tax rate was approximately 8% and 10% during the three months ended June 30,
1996 and 1995, respectively.
NET INCOME. The Company had net income of $252.4 million for the three
months ended June 30, 1996, an increase of $240.6 million from the three
months ended June 30, 1995.
Page 30
<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 $19.8 million and $12.0 million for the six
months ended June 30, 1996 and 1995, 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 for the six
months ended June 30, 1996 and June 30, 1995 is as follows (in thousands):
1996 1995
---- ----
Balance - January 1 $210,484 $202,780
Additions - 1996 Acquisitions 44,793 --
Provision for loan losses 19,800 12,000
Charge-offs (33,792) (13,757)
Recoveries 1,756 1,969
-------- --------
Balance - June 30 $243,041 $202,992
======== ========
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, current and prospective economic
conditions, and the remaining available balance under the Non- Performing
Asset Sale Agreement (the "Put Agreement") between the Bank and Granite
Management and Disposition, Inc. ("Granite"), a subsidiary of Ford Motor
Company.
Charge-offs for the six months ended June 30, 1996 increased over
charge-offs for the same period in 1995 due principally to two factors.
Certain credit losses that would have been realized in the first half of 1995
were avoided through the sale of a large volume of non-performing residential
loans to Granite under the Put Agreement in late-1994 and early-1995. In
addition, during the second quarter of 1996, the Bank sold $38.0 million of
non-performing and poor-performing residential loans. The $6.3 million loss
realized from the sale of these loans was recorded as a charge-off to the
Company's allowance for loan losses during the quarter ended June 30, 1996.
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 further provisions in the future.
Page 31
<PAGE>
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 Company actively pursues investment and funding strategies to
minimize the sensitivity of its earnings to interest rate fluctuations while
maintaining the flexibility required to execute its business strategies. The
Bank 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, First Nationwide has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Bank seeks to purchase assets
or originate real estate loans that reprice frequently and that on the whole
adjust in accordance with the repricing of its liabilities. During the six
months ended June 30, 1996, most of the fixed and variable rate real estate
loans originated were sold in the secondary market to provide funds for the
acquisition and divestiture activity occurring during the period. At June 30,
1996, approximately 89% of First Nationwide's real estate loan portfolio
consisted of ARMs.
In connection with a 1994 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 six months ended June 30, 1996, 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 20 to the
Company's 1995 consolidated financial statements on Form 10-K, as amended.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the yield earned on
interest-earning assets and the 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 exceed interest
rate sensitive liabilities, while the opposite case 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 June 30,
1996. 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
Page 32
<PAGE>
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 June 30, 1996 is as
follows:
Page 33
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
----------------------------------------------
Within 1-5 Over 5
1 Year Years Years Total
------ ----- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Securities held to maturity,
interest-bearing deposits
in other banks and short-
term investment securities (1)(2) $ 108 $ -- $ -- $ 108
Securities available for sale (4) 500 -- -- 500
Mortgage-backed securities
available for sale 1,713 -- -- 1,713
Mortgage-backed securities held
to maturity (1) 1,792 2 3 1,797
Loans held for sale, net (4) 807 -- -- 807
Loans receivable, net (1)(3) 10,011 697 433 11,141
Covered assets (5) 39 -- -- 39
Investment in FHLB 207 -- -- 207
------- ------- ------- -------
Total interest-earning assets 15,177 699 436 16,312
Noninterest-earning assets -- -- 1,384 1,384
------- ------- ------- -------
$15,177 $699 $1,820 $17,696
======= ======= ======= =======
INTEREST-BEARING LIABILITIES
Deposits (6) $ 7,845 $ 1,156 $ 34 $ 9,035
Securities sold under agreements
to repurchase (1) 1,882 304 -- 2,186
FHLB advances (1) 3,622 672 7 4,301
Other borrowings (1) 140 202 293 635
------- ------- ------- -------
Total interest-bearing liabilities 13,489 2,334 334 16,157
Noninterest-bearing liabilities -- -- 465 465
Minority interest 8 -- 301 309
Stockholders' equity -- -- 765 765
------- ------- ------- -------
$13,497 $2,334 $1,865 $17,696
======= ======= ======= =======
Gap before interest rate swap
agreements 1,688 (1,635) 102 155
Interest rate swap agreements (7) (400) 400 -- --
------- ------- ------- -------
Gap adjusted for interest rate
swap agreements $ 1,288 $(1,235) $ 102 $ 155
======= ======= ======= =======
Cumulative gap $ 1,288 $ 53 $ 155 $ 155
======= ======= ======= =======
Gap as a percentage of total assets 7.3% (7.0)% .6% .9%
======= ======= ======= =======
Cumulative gap as a percentage of
total assets 7.3% .3% .9% .9%
======= ======= ======= =======
</TABLE>
- ------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date,
if applicable, and (c) projected repayments and prepayments of
principal, if applicable. Prepayments were estimated generally by
using the prepayment rates forecast by various large brokerage firms
as of June 30, 1996. 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 $4 million of securities held to maturity, $3 million of
interest-bearing deposits in other banks and $101 million of
short-term investment securities.
(3) Excludes allowance for loan losses of $243 million and nonaccrual loans
of $157 million.
(4) As loans held and securities available for sale may be sold within
one year, they are considered to be maturing within one year.
Page 34
<PAGE>
(5) Covered Assets generally reprice quarterly according to the change in
TCOF, the composite cost of funds for thrift institutions in Texas.
Because TCOF is generally reported on a quarterly basis, the Covered
Assets are included within the one year time frame on this table.
(6) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or of first
repricing date. Money market deposit accounts, demand deposit
accounts and passbook accounts are reflected as maturing within one
year.
(7) Agreements with notional amounts of $250 million maturing in
September 1996 have no impact within the time periods presented.
At June 30, 1996, interest-earning assets of the Company exceeded
interest-bearing liabilities by approximately $155 million. At December 31,
1995, interest-earning assets of the Company exceeded interest-bearing
liabilities by approximately $132 million. The change in the cumulative gap
between the two periods is due principally to the 1996 Acquisitions and the
Branch Sales.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government and other specified securities to
deposits and borrowings due within one year. The OTS has currently established
a minimum liquidity requirement of 5.00%. First Nationwide's liquidity ratio
was 5.06% and 5.46% at June 30, 1996 and December 31, 1995, respectively.
The Company's funds are obtained from the repayment and maturities of
loans and mortgage-backed securities, customer and brokered deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances, and
other secured and unsecured borrowings.
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 First Nationwide 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 June 30, 1997 total $4.8
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 June 30, 1996, FN Holdings had
securities sold under agreements to repurchase, FHLB advances and other
borrowings of $5.1 billion maturing within twelve months. The Company may
elect to pay off such debt or to replace such borrowings with additional FHLB
advances at prevailing rates.
In July 1996, FN Holdings entered into a merger agreement with Cal Fed,
pursuant to which the Bank will acquire Cal Fed and its wholly owned capital
stock savings bank, California Federal Bank, A Federal Savings Bank, which, at
March 31, 1996, had approximately $14.3 billion in assets and $9.5 billion in
deposits and operated 124 branches in California and Nevada. The aggregate
consideration to be paid in connection with the Cal Fed Acquisition is
estimated to be approximately $1.2 billion. FN Holdings and the Bank are
currently reviewing various options for raising capital to fund the Cal Fed
Acquisition. Net cash flow from operations,
Page 35
<PAGE>
together with these additional funding sources, is expected to be adequate to
maintain liquidity above the required levels.
During 1994, First Nationwide 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 $17.3 million were declared and paid during the six
months ended June 30, 1996.
FN Holdings' primary source of cash to pay the interest on and principal
of its $200 million of 12-1/4 Senior Notes due 2001 (the "Senior Notes") and
the Senior Sub Notes is expected to be distributions from the Bank. The annual
interest on the Senior Notes and the Senior Sub 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 and the Senior Sub 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, or under applicable
federal thrift laws.
The Company anticipates that the cash flow from assets as well as other
sources of funds will provide adequate liquidity in the future. In addition to
cash and cash equivalents of $227.7 million at June 30, 1996, First Nationwide
has substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying consolidated statements of cash flows,
the sources of liquidity vary between periods. The primary sources of funds in
the first half of 1996 were sales of loans held for sale, net of originations,
of $430.5 million, repayments of mortgage-backed securities totalling $517.7
million, a net decrease in loans receivable of $836.8 million, and additional
borrowings (including the issuance of the Senior Sub Notes) and securities
sold under agreements to repurchase of $5.9 billion. The primary uses of funds
were the $4.6 billion funding of the Branch Sales, principal payments on
borrowings of $3.2 billion, net cash paid for the 1996 Acquisitions and the
LMUSA 1996 Purchase of $52.4 million and dividends paid and the redemption of
class C common stock totalling $208.5 million.
NON-PERFORMING ASSETS AND IMPAIRED LOANS
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. In determining impairment, FN Holdings considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Company bases the measurement of collateral-dependent impaired
loans on the fair value of their 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 June 30, 1996, the carrying value of loans that are considered to be
impaired totalled $138 million (of which $31.5 million were on non-accrual
status). The average recorded investment in impaired loans during the six
months ended June 30, 1996 was approximately $138.5 million. For the six
months ended June 30, 1996, the Company recognized interest income on those
impaired loans of $7.7 million, which included $.2 million of interest income
recognized using the cash basis method of income recognition.
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.
Page 36
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------------
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $124 $ -- $ 5
5+ unit residential 15 70 66
Commercial and other 17 68 62
Land -- -- --
Construction -- -- --
----- ----- -----
Total real estate 156 138 133
Non-real estate 4 -- --
----- ----- -----
Total loans, net 160 $138 (a) $133 (b)
Foreclosed real estate, net 76 ===== =====
-----
Total non-performing assets $236
=====
(Continued)
</TABLE>
Page 37
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $136 $ -- $ 8
5+ unit residential 23 73 147
Commercial and other 9 52 79
Land -- -- --
Construction -- -- --
----- ----- -----
Total real estate 168 125 234
Non-real estate 3 -- --
----- ----- -----
Total loans 171 $125 (a) $234 (b)
Foreclosed real estate, net 49 ==== =====
-----
Total non-performing assets $220
=====
</TABLE>
- ------------------
(a) Includes loans on nonaccrual status of $31.5 million and $29.6
million at June 30, 1996 and December 31, 1995, respectively,
and loans classified as troubled debt restructurings of $30.9
million and $31.9 million at June 30, 1996 and December 31,
1995, respectively.
(b) Includes nonaccrual loans of $3.6 million and $1.2 million at
June 30, 1996 and December 31, 1995, respectively. At June 30,
1996, $2.9 million of these nonaccrual, troubled debt
restructurings were also considered impaired. The decrease from
$234 million at December 31, 1995 to $133 million at June 30,
1996 is due to loans which have been performing under the
restructured terms for greater than twelve months which then
cease to be reported as "restructured."
There were no accruing loans contractually past due 90 days or more at
June 30, 1996 or December 31, 1995.
FN Holdings' non-performing assets, consisting of nonaccrual loans (net
of specific allowances for loan losses and purchase accounting adjustments)
and foreclosed real estate, net, increased to $236 million at June 30, 1996
from $220 million at December 31, 1995. A significant portion of the increase
is due to non-performing assets acquired in the 1996 Acquisitions, which
totalled $44.4 million of non-performing loans and $30.5 million of foreclosed
real estate at June 30, 1996, which includes $6.6 million of assets acquired
in the LMUSA 1996 Purchase that are covered for loss under the indemnification
provisions of the related contract, provided such real estate is sold prior to
January 31, 1997.
During the six months ended June 30, 1996, $30.5 million of assets were
sold to Granite under the Put Agreement, leaving a remaining available balance
under the Put Agreement of $81.9 million. Of the $236 million in
non-performing assets at June 30, 1996, approximately $10.8 million were
eligible to be sold to Granite pursuant to the Put Agreement.
FN Holdings continuously manages its credit risk by assessing the current
and estimated future performance of the real estate markets in which it
operates. The Company continues to place a high degree of emphasis on the
management of its asset portfolio. The Company has three distinct asset
management functions: performing loan asset management, problem loan asset
management and credit review. Each of the three functions is 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.
Page 38
<PAGE>
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 1996:
<TABLE>
<CAPTION>
Total
Nonaccrual Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- ------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
Northeast (1) $ 37 $15 $ 52 22.38%
California 92 52 144 61.93
Other regions 27 9 36 15.69
---- --- ---- -----
Total $156 $76 $232 100.00%
==== === ==== ======
</TABLE>
- ------------------
(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
loan losses.
At June 30, 1996, the Company's largest non-performing asset was
approximately $3.6 million, and it had approximately eight non-performing
assets over $2 million in size with balances averaging approximately $2.6
million. FN Holdings has approximately 1,437 non-performing assets below $2
million in size, including approximately 1,245 non-performing 1-4 unit
residential assets.
Page 39
<PAGE>
A summary of the activity in the allowance for loan losses by loan type
is as follows for the six months ended June 30, 1996:
<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, 1995 $116 $ 85 $ 9 $210
Purchases/acquisitions 11 33 1 45
Provision for loan losses 17 1 2 20
Charge-offs (27) (4) (3) (34)
Recoveries 1 -- 1 2
---- ----- ---- -----
Balance - June 30, 1996 $118 $115 $10 $243
==== ==== === ====
Ratio of allowance for loan losses to
non-performing loans:
December 31, 1995 85.3% 265.6% 300.0% 122.8%
=== ==== ==== ===== ===== =====
June 30, 1996 95.2% 359.4% 250.0% 151.9%
==== ===== ===== =====
</TABLE>
MORTGAGE BANKING OPERATIONS
The Company, through FNMC, has significantly expanded and enhanced the
efficiency of 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 1996 Acquisitions, other
acquisitions and the originated servicing, the single-family residential loans
serviced for others totalled $44.9 billion at June 30, 1996, an increase of
$17.9 billion from December 31, 1995. During the first half of 1996, the
Company, through FNMC, originated and sold (generally with servicing retained)
single-family residential loans totalling approximately $2.4 billion and $2.6
billion, respectively. Gross revenues from mortgage loan servicing activities
for the first half of 1996 totalled $101.4 million, an increase of $59.7
million from the six months ended June 30, 1995.
In accounting for its mortgage loan sales prior to April 1995, a gain or
loss was recognized based on the sum of three components: (i) the difference
between the cash proceeds of the loan sales and the carrying value of the
loans; (ii) the "excess servicing", if any; less (iii) provisions for
estimated losses to be incurred from limited recourse obligations, if any.
Excess servicing results in a capitalized asset that is amortized as an offset
to servicing fee income using the interest method over the estimated remaining
lives of the loans sold.
Effective April 1, 1995, the Company adopted SFAS No. 122, which requires
that, when a mortgage loan is sold and servicing rights are retained, a
portion of the cost of originating a mortgage loan be allocated to the
mortgage servicing rights based on its fair market value. This cost of
originating the loan is capitalized and amortized as an offset to servicing
fee income using the interest method over the estimated remaining lives of the
loans sold. The net gains on sales of single-family mortgage loans during the
six months ended June 30, 1996 totalled $6.2 million and included amounts
related to the capitalization of originated and excess mortgage servicing
rights of $36.5 million.
The following is a summary of activity in mortgage servicing rights
purchased ("Purchased"), originated ("Originated") and excess servicing fees
receivable ("Excess") for the six months ended June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
Purchased Originated Excess Total
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $223,749 $16,370 $1,236 $241,355
Additions 145,917 34,691 1,793 182,401
Amortization (41,083) (772) (231) (42,086)
Impairment -- -- -- --
-------- ------- ------ --------
Balance at June 30, 1996 $328,583 $50,289 $2,798 $381,670
======== ======= ====== ========
</TABLE>
Page 40
<PAGE>
Capitalized mortgage servicing rights are amortized over the period of
estimated future net servicing income. No allowance for loss due to impairment
of mortgage servicing rights was necessary at June 30, 1996.
Page 41
<PAGE>
CAPITAL RESOURCES
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
established three capital requirements for all insured institutions: tangible
capital, core capital and risk-based capital. In general, tangible capital is
determined by subtracting most intangible assets from common stockholders'
equity (including retained earnings) and noncumulative perpetual preferred
stock. Core capital generally is the sum of tangible capital plus qualifying
supervisory goodwill and certain other qualifying intangibles. Total capital
generally is core capital plus a limited amount of supplementary capital such
as other forms of qualifying preferred stock and qualifying subordinated debt.
At June 30, 1996, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 6.31%, 6.31% and 12.21%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1996:
<TABLE>
Tangible Core Risk-based
Capital Capital Capital
---------- ------- ------------
(dollars in millions)
<S> <C>
Stockholders' equity of the Bank at
June 30, 1996 $1,441 $1,441 $1,441
Unrealized holding gain on securities
available for sale, net (24) (24) (24)
Non-qualifying loan-servicing rights (38) (38) (38)
Non-allowable capital:
Intangible assets (146) (146) (146)
Investment in subsidiaries (8) (8) (8)
Excess deferred tax assets (125) (125) (125)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 90
General loan loss reserves -- -- 137
Assets required to be deducted:
Land loans with more than
80% LTV ratio -- -- (2)
--------- -------- ------
Rgulatory capital of the Bank 1,100 1,100 1,325
Minimum regulatory capital requirement 262 523 868
--------- -------- ------
Excess above minimum capital
requirement $ 838 $ 577 $ 457
====== ====== ======
Regulatory capital of the Bank 6.31% 6.31% 12.21%
Minimum regulatory capital requirement 1.50 3.00 8.00
--------- -------- ------
Excess above minimum capital
requirement 4.81% 3.31% 4.21%
==== ==== ====
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios is $17.4 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $10.9 billion.
Page 42
<PAGE>
The Bank is also subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 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 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 June 30, 1996, First Nationwide's capital
levels were sufficient for it to be considered "well capitalized":
Risk-based
Core -----------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 6.31% 10.14% 12.21%
Well capitalized ratio 5.00 6.00 10.00
---- ---- -----
Excess above well capitalized ratio 1.31% 4.14% 2.21%
==== ==== ====
In 1995, Congress passed budget reconciliation legislation that, if
enacted, would impose a one-time assessment on SAIF-insured deposits held as
of March 31, 1995, in order to capitalize the SAIF to the required designated
reserve ratio of 1.25% of insured deposits. The President vetoed this budget
reconciliation bill. Such veto, however, was based on issues unrelated to the
provisions dealing with capitalization of the SAIF. In 1995, the FDIC, which
would establish the assessment rate, estimated the rate needed to capitalize
the SAIF to be in the range of 85 cents to 90 cents per $100 of domestic
deposits. If the assessment is enacted into law, and assessed at the rate
estimated by the FDIC, after giving effect to the SFFed Acquisition, the
Branch Sales, the Home Federal Acquisition, and the Branch Purchases, the
effect on the Bank would be a pre-tax charge in the range of $75 to $80
million ($68 to $72 million on an after-tax basis). Such an assessment would
not be expected to cause the Bank to fail to meet the capital requirements of
a "well capitalized" institution based upon the Bank's regulatory capital and
asset levels as of June 30, 1996. Upon the SAIF reaching the required reserve
ratio, management expects that the Bank's SAIF deposit premium assessments
would decrease substantially from the Bank's current rate of 23 cents. The
Bank is unable to predict whether this, or similar, legislation will be
enacted.
Page 43
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FN Holdings and First Nationwide are involved in legal proceedings on
claims incidental to the normal conduct of their 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.
During the second quarter of 1996, the two issues in dispute with respect
to the Bank's 1994 acquisition of substantially all of the assets and
liabilities of First Nationwide Bank, A Federal Savings Bank ("Old FNB"),
pursuant to an asset purchase agreement ("Asset Purchase Agreement") were
resolved.
The Asset Purchase Agreement provided that the purchase price thereunder
would be increased or decreased by, among other items, the increase or
decrease from January 1, 1994 to September 30, 1994, in the net book value of
the purchased assets acquired from Old FNB (the "Purchased Assets") and the
liabilities assumed from Old FNB (the "Assumed Liabilities") as such net book
value was reflected on the books and records of Old FNB in accordance with
GAAP (as defined in the Asset Purchase Agreement) consistently applied with
the previous accounting practices of Old FNB. The purchase price paid at
closing, including that portion based upon the change in net book value from
January 1, 1994 to the close of business on September 30, 1994, was an
estimate provided by Old FNB.
The more significant of the two issues previously in dispute arose from
Old FNB's change in net book value from January 1, 1994, to the close of
business on September 30, 1994. Specifically, in arriving at the cash purchase
price, Old FNB added back to the book value of the Purchased Assets an amount
of approximately $24 million which had been amortized from intangible assets
and goodwill on the closing date, thereby increasing the net book value of the
Purchased Assets and Assumed Liabilities and the estimated cash purchase price
by $24 million. First Nationwide believed that the exclusion of the
amortization of intangible assets and goodwill from the closing net book value
was contrary to the express provisions of the Asset Purchase Agreement. As a
result, First Nationwide did not believe that the addition by Old FNB of $24
million to the cash purchase price was proper under the terms of the Asset
Purchase Agreement. On March 9, 1995, First Nationwide filed suit against Old
FNB in state district court in Dallas, Texas regarding this matter. On October
16, 1995, the court in this matter granted Old FNB's motion to compel
arbitration and stayed First Nationwide's court action. The arbitration
process commenced in December 1995. In June 1996, First Nationwide completely
prevailed in the arbitration, and in July 1996, the $24 million previously in
dispute, plus interest, was remitted to the Bank.
The other issue in dispute related to an outstanding receivable account,
which First Nationwide maintained was overstated by approximately $4 million
by Old FNB at September 30, 1994. In the second quarter of 1996, the parties
mutually agreed upon a settlement relating to this issue. There was no
material impact on the consolidated financial statements of the Company as a
result of this settlement.
Page 44
<PAGE>
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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:
None
(b) Reports on Form 8-K:
None
Page 45
<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 Holdings Inc.
/s/ Laurence Winoker
By Laurence Winoker
Vice President Controller
(Signing on behalf of the
Registrant and as the
Principal Accounting Officer)
August 14, 1996
Page 46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Financial Condition and Operations found on pages 3
and 4 of the Company's Form 10-Q for the year-to-date and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 122,835
<INT-BEARING-DEPOSITS> 3,405
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,213,493
<INVESTMENTS-CARRYING> 1,800,797
<INVESTMENTS-MARKET> 1,800,797
<LOANS> 11,862,743
<ALLOWANCE> 243,041
<TOTAL-ASSETS> 17,696,411
<DEPOSITS> 9,035,219
<SHORT-TERM> 5,133,915
<LIABILITIES-OTHER> 464,408
<LONG-TERM> 1,988,253
0
0
<COMMON> 1
<OTHER-SE> 765,239
<TOTAL-LIABILITIES-AND-EQUITY> 17,696,411
<INTEREST-LOAN> 478,745
<INTEREST-INVEST> 146,118
<INTEREST-OTHER> 1,413
<INTEREST-TOTAL> 626,276
<INTEREST-DEPOSIT> 222,656
<INTEREST-EXPENSE> 408,236
<INTEREST-INCOME-NET> 218,040
<LOAN-LOSSES> 19,800
<SECURITIES-GAINS> 39,013
<EXPENSE-OTHER> 222,292
<INCOME-PRETAX> 495,539
<INCOME-PRE-EXTRAORDINARY> 576,890
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550,952
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.78
<LOANS-NON> 160,099
<LOANS-PAST> 0
<LOANS-TROUBLED> 132,695
<LOANS-PROBLEM> 75,548
<ALLOWANCE-OPEN> 210,484
<CHARGE-OFFS> 33,792
<RECOVERIES> 1,756
<ALLOWANCE-CLOSE> 243,041
<ALLOWANCE-DOMESTIC> 8,529
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 234,512
<FN>
<F1> (LOANS) INCLUDES LOANS HELD FOR SALE OF $806,865.
<F2> (PREFERRED) EXCLUDES $300,730 IN PREFERRED STOCK ISSUED BY
FIRST NATIONWIDE.
</FN>
</TABLE>
