SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 13-3778552
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
38 East 63rd Street, New York, NY 10021
(Address of principal executive offices) (Zip Code)
</TABLE>
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 May 10, 1996: 800 shares of
class A common stock; 200 shares of class B common stock and 130.4 shares of
class C common stock.
Page 1 of 37 pages
Exhibit index on page: 35
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
FIRST QUARTER 1996 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
March 31, 1996 (unaudited) and December 31, 1995.......................................3
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995.............................................4
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995.............................................5
Notes to Consolidated Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................35
Item 2. Changes in Securities.................................................................35
Item 3. Defaults Upon Senior Securities.......................................................35
Item 4. Submission of Matters to a Vote of Security Holders...................................35
Item 5. Other Information.....................................................................35
Item 6. Exhibits and Reports on Form 8-K......................................................35
</TABLE>
Page 2 May 13, 1996 (6:31pm)
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND DECEMBER 31, 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
Assets (Unaudited)
<S> <C> <C>
Cash and amounts due from banks $ 124,159 $ 154,758
Interest-bearing deposits in other banks 62,634 32,778
Short-term investment securities 198,667 125,035
---------- -----------
Cash and cash equivalents 385,460 312,571
Securities available for sale, at fair value 443,859 348,561
Securities held to maturity 3,998 1,455
Mortgage-backed securities available for sale,
at fair value 1,860,869 1,477,514
Mortgage-backed securities held to maturity 1,867,763 1,524,488
Loans held for sale, net 700,854 1,203,412
Loans receivable, net 11,098,314 8,831,018
Covered assets 39,349 39,349
Investment in Federal Home Loan Bank ("FHLB") System 181,569 109,943
Office premises and equipment, net 92,569 93,509
Foreclosed real estate, net 82,219 48,535
Accrued interest receivable 116,743 100,604
Intangible assets 129,105 18,606
Mortgage servicing rights, net 372,095 241,355
Other assets 436,298 295,325
---------- ---------
Total assets $17,811,064 $14,646,245
=========== ===========
Liabilities and Stockholders' Equity
Deposits $ 9,332,392 $10,241,628
Securities sold under agreements to repurchase 2,474,151 969,510
Borrowings 4,502,917 2,392,862
Other liabilities 478,778 279,099
-------- ----------
Total liabilities 16,788,238 13,883,099
----------- -----------
Minority interest 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, 130.4 and 169.5 shares issued and
outstanding at March 31, 1996 and December 31,1995,
respectively -- --
Additional paid-in capital 183,859 223,000
Net unrealized holding gain on securities
available for sale 59,968 63,512
Retained earnings (substantially restricted) 469,622 175,903
---------- ----------
Total stockholders' equity 713,450 462,416
----------- ----------
Total liabilities, minority interest
and stockholders' equity $17,811,064 $14,646,245
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 May 13, 1996 (6:31pm)
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 221,161 $ 194,741
Mortgage-backed securities 64,318 51,863
Covered assets 722 5,254
Loans held for sale 14,575 700
Securities and interest-bearing deposits in other banks 7,400 6,898
--------- ---------
Total interest income 308,176 259,456
--------- ---------
Interest expense:
Deposits 117,513 101,103
Securities sold under agreements to repurchase 30,552 23,941
Borrowings 52,056 54,164
--------- ---------
Total interest expense 200,121 179,208
--------- ---------
Net interest income 108,055 80,248
Provision for loan losses 9,900 6,201
--------- ---------
Net interest income after provision for loan losses 98,155 74,047
--------- ---------
Noninterest income:
Loan servicing fees, net 27,456 12,713
Customer banking fees and service charges 11,803 10,319
Management fees 3,305 2,316
Gain on sale of branches 307,905 --
Gain/(loss) on sales of loans, net 13,692 (186)
(Loss)/gain on sale of assets (4,512) 15
Other income 5,290 5,848
--------- ---------
Total noninterest income 364,939 31,025
--------- ---------
Noninterest expense:
Compensation and employee benefits 60,744 39,378
Occupancy and equipment 13,169 11,573
Loan expense 7,757 913
Savings Association Insurance Fund ("SAIF")
deposit insurance premium 6,036 5,604
Data processing 2,849 2,251
Marketing 2,179 3,964
Foreclosed real estate operations, net (2,570) 875
Amortization of intangible assets 1,729 174
Other 26,328 15,603
--------- ---------
Total noninterest expense 118,221 80,335
--------- ---------
Income before income taxes, extraordinary item
and minority interest 344,873 24,737
Income taxes 29,003 681
--------- ---------
Income before extraordinary item and minority interest 315,870 24,056
Extraordinary item - gain on early extinguishment
of FHLB advances, net -- 1,967
--------- ---------
Net income before minority interest 315,870 26,023
Minority interest 17,292 8,646
--------- ---------
Net income $ 298,578 $ 17,377
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 May 13, 1996 (6:31pm)
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 298,578 $ 17,377
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of intangible assets 1,729 174
Accretion of premiums and discounts, net (3,377) (1,113)
Amortization of mortgage servicing rights 20,361 4,416
Provision for loan losses 9,900 6,201
Loss (gain) on sales of assets 4,512 (15)
Gain on sale of branches (307,905) --
(Gain) loss on sale of loans, net (13,692) 186
Gain on sales of foreclosed real estate, net (2,797) (348)
Extraordinary gain on early extinguishment
of FHLB advances, net -- (1,967)
Depreciation and amortization 2,787 2,067
FHLB stock dividend (1,426) (2,459)
Capitalization of originated mortgage
servicing rights and excess servicing
fees receivable (17,798) --
Purchases and originations of loans held for sale (1,036,680) (56,056)
Proceeds from the sale of loans held for sale 1,518,703 42,613
(Increase) decrease in other assets (68,227) 44,458
Decrease (increase) in accrued interest receivable 6,688 (6,790)
Increase in other liabilities 43,693 33,712
Increase in minority interest 8,646 --
----------- -----------
Total adjustments 165,117 65,079
----------- -----------
Net cash flows provided by
operating activities 463,695 82,456
----------- -----------
</TABLE>
Page 5 May 13, 1996 (6:31pm)
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by investing activities:
Acquisitions:
SFFed Acquisition (83,184) --
Mortgage loan servicing operations (48,305) (172,953)
Purchase of securities available for sale (180,082) --
Proceeds from maturities of securities
available for sale 81,744 --
Purchases of securities held to maturity -- (67,250)
Proceeds from maturities of securities
held to maturity 1,250 71,500
Purchases of mortgage-backed securities
available for sale (94,858) --
Principal payments on mortgage-backed
securities available for sale 160,344 --
Purchases of mortgage-backed securities
held to maturity -- (19,825)
Principal payments on mortgage-backed
securities held to maturity 131,593 65,143
Proceeds from sales of loans receivable 34,498 48,895
Net decrease in loans receivable 377,765 34,392
Decrease in covered assets -- 62,860
Purchases of FHLB stock, net of redemptions (38,211) 7,161
Purchases of office premises and equipment (17,157) (6,903)
Proceeds from disposal of office premises
and equipment 3,941 3,661
Proceeds from sales of foreclosed real estate 36,222 17,250
Purchase of mortgage servicing rights (9,481) --
----------- -----------
Net cash flows provided by investing
activities 356,079 43,931
----------- -----------
Cash flows from financing activities:
Branch Sales (3,797,547) --
Net increase in deposits 544,462 839,800
Proceeds from additional borrowings 3,654,048 815,000
Principal payments on borrowings (1,790,788) (1,112,239)
Redemption of class C common stock (39,141) --
Dividends on class C common stock (4,859) (12,061)
Net increase (decrease) in securities
sold under agreements to repurchase 686,940 (658,041)
----------- -----------
Net cash flows used in financing activities (746,885) (127,541)
Net change in cash and cash equivalents 72,889 (1,154)
Cash and cash equivalents at beginning of period 312,571 188,783
----------- -----------
Cash and cash equivalents at end of period $ 385,460 $ 187,629
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 May 13, 1996 (6:31pm)
<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 months ended March 31, 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 month
period in the prior year have been reclassified to conform with the current
period's presentation.
The accompanying consolidated financial statements include the accounts
of First Nationwide 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 not subject to the Assistance Agreement. 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. All terms used but not defined elsewhere herein have
meanings ascribed to them in the Company's Annual Report on Form 10-K.
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 consummated the purchase of four retail branches
located in Sonoma County, California with associated deposit accounts of
approximately $144 million from Citizens Federal Bank, a Federal Savings Bank
Page 7 May 13, 1996 (6:31pm)
<PAGE>
(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 "Lomas 1996 Purchase" and, together with
the LMUSA 1995 Purchase, the "LMUSA Purchases"). The initial installment of
$49.8 million was paid with existing cash.
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:
<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 9,694 928,511 1-5
Loans receivable, net 2,715,758 (23,031) 2,692,727 2-18
Office premises and equipment 20,581 (9,058) 11,523 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 (48,202) (6,625) (54,827) 1-5
---------- -------- ---------
198,752 (46,452) 152,300
---------- --------
Purchase price 264,245
Excess cost over fair value ---------
of net assets acquired $ 111,945
=========
</TABLE>
Page 8 May 13, 1996 (6:31pm)
<PAGE>
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 an aggregate 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.
The SFFed Acquisition 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.
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 ("Assets") in the states of Ohio, New York, New Jersey and Michigan
(collectively, the "Branch Sale Agreements") at prices which represent an
average premium of 7.82% of the deposits sold. During the first quarter of
1996, the Branch Sale Agreements for the states of Ohio, New York and New
Jersey were consummated in a series of transactions, as follows (the "Branch
Sales"):
<TABLE>
<CAPTION>
Sale Carrying Value at
Consummation Number of Respective Sale Date 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 $ 32,967
Ohio 1/19/96 28 1,392,561 20,480 130,664
New York 2/23/96 3 270,046 1,838 17,054
New York 3/15/96 5 615,572 8,083 48,975
New Jersey 3/22/96 4 501,262 6,396 36,934
New York 3/22/96 11 637,045 9,465 41,311
---------- ------- --------
$3,832,962 $52,259 $307,905
========== ======= ========
</TABLE>
The Branch Sales were funded with existing cash, short-term FHLB advances
of $1.7 billion with a weighted average rate of 5.46%, 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 $1.2
billion with a weighted average rate of 5.46%.
Page 9 May 13, 1996 (6:31pm)
<PAGE>
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 each period presented (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
<S> <C> <C>
Net interest income $112,059 $91,092
Net income 19,282 40,140
======= ======
</TABLE>
The gains recognized related to the Branch Sales are excluded from the
above table. 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.
(3) Cash, Cash Equivalents, and Statement of Cash Flows
FN Holdings uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the three months ended March 31, 1996
and 1995 was $188.3 million and $162.1 million, respectively.
During the three months ended March 31, 1996, noncash activity consisted
of transfers from loans receivable to foreclosed real estate of $31.2 million,
and the transfers of certain consumer loans from loans held for sale to loans
receivable (at lower of cost or market) totalling $26.8 million.
During the three months ended March 31, 1995, noncash activity consisted
of the transfer of $15.0 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 C common stock during the three months
ended March 31, 1996 totalled $4.9 million. In addition, 39.1 shares of the
Company's class C common stock were redeemed during the first quarter of 1996,
resulting in a capital distribution totalling $39.1 million. Dividends on the
Company's class C common stock during the three months ended March 31, 1995
totalled $12.1 million.
(6) Newly Issued Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board 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
Page 10 May 13, 1996 (6:31pm)
<PAGE>
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.
Page 11 May 13, 1996 (6:31pm)
<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 quarter of 1996, the Bank has 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. During the first quarter of 1996, the
Bank closed the sales of all retail branches and deposits in the states of
Ohio, New York and New Jersey with associated deposit accounts totalling $3.8
billion, resulting in pre-tax gains totalling $308 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 SFFed Acquisition.
NET INCOME
FN Holdings reported net income for the three months ended March 31, 1996
of $298.6 million compared with net income of $17.4 million for the
corresponding period in 1995. Net income for the three months ended March 31,
1996 includes $283.3 million in after tax gains on sales of branches. Net
income for the three months ended March 31, 1995 includes $2.0 million in
extraordinary gains, net of income taxes, from the early extinguishment of
FHLB advances. No such extraordinary gains have been recognized in 1996.
Page 12 May 13, 1996 (6:31pm)
<PAGE>
Net interest income before provision for loan losses was $108.0 million
for the three months ended March 31, 1996, compared with $80.2 million in the
same period in 1995, an increase of $27.8 million, primarily due to the
increased volumes of interest-bearing assets and liabilities acquired in the
SFFed Acquisition and a 45 basis point increase in the net interest margin
between the two periods, offset by the increased interest expense from the
Senior Sub Notes.
FINANCIAL CONDITION
During the three months ended March 31, 1996, consolidated total assets
increased $3.2 billion, to $17.8 billion, from December 31, 1995, due to the
assets acquired in the SFFed Acquisition and the LMUSA 1996 Purchase. During
the same period, consolidated total liabilities increased $2.9 billion,
primarily due to additional liabilities assumed in the SFFed Acquisition and
the issuance of the Senior Sub Notes. Within total liabilities, there has been
a $3.6 billion increase in borrowings and securities sold under agreements to
repurchase, offset by the decrease in deposits related to the $3.8 billion
sold in the Branch Sales.
During the three months ended March 31, 1996, stockholders' equity
increased by $251.0 million. The increase in stockholders' equity is the net
result of $298.6 million in net income for the period, offset by $44 million
in redemption of and dividends on the Company's class C common stock and a
decrease in the net unrealized gain on securities available for sale of $3.5
million.
FN Holdings' non-performing assets, consisting of nonaccrual loans, net
of purchase accounting adjustments and specific allowance for loan losses, and
foreclosed real estate, net, increased to $302 million at March 31, 1996
compared with $220 million at December 31, 1995. Approximately $75 million, or
25% of the total non-performing assets at March 31, 1996 were acquired in the
SFFed Acquisition. Total non-performing assets as a percentage of total assets
increased to 1.70% at March 31, 1996, from 1.50% of total assets at December
31, 1995.
RESULTS OF OPERATIONS
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 on the financial position and the
results of operations from the acquisition date of February 1, 1996 through
March 31, 1996.
Page 13 May 13, 1996 (6:31pm)
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
Average Average
Balance Interest Rate
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) $ 501 $ 7 5.59%
Mortgage-backed securities
available for sale (5) 1,728 30 6.95
Mortgage-backed securities to
be held to maturity 1,621 34 8.39
Loans held for sale 860 15 6.97
Loans receivable, net 11,013 221 8.04
Covered Assets (3) 39 1 7.36
------- ---- ----
Total interest-earning
assets 15,762 308 7.82
---- ----
Noninterest-earning assets 1,117
-------
Total assets $16,879
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $10,373 117 4.52%
Securities sold under
agreements to repurchase 2,167 31 5.74
Borrowings (4) 3,188 52 6.54
------- ---- ----
Total interest-bearing
liabilities 15,728 200 5.10
---- ----
Noninterest-bearing liabilities 387
Minority interest 301
Stockholders' equity 463
Total liabilities and -------
stockholders' equity $16,879
=======
Net interest income $108
====
Interest rate spread 2.72%
====
Net interest margin 2.73%
====
Average equity to average assets 2.74%
====
</TABLE>
Page 14 May 13, 1996 (6:31pm)
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31, 1995
Average Average
Balance Interest Rate
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) $ 417 $ 7 6.71%
Mortgage-backed securities
available for sale (5) -- -- --
Mortgage-backed securities to
be held to maturity 3,109 52 6.69
Loans held for sale 36 1 7.77
Loans receivable, net 10,088 194 7.69
Covered Assets (3) 318 5 6.70
------- ---- ----
Total interest-earning
assets 13,968 259 7.42%
---- ----
Noninterest-earning assets 652
-------
Total assets $14,620
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,663 101 4.24%
Securities sold under
agreements to repurchase 1,461 24 6.55
Borrowings (4) 2,628 54 8.24
------- ---- ----
Total interest-bearing
liabilities 13,752 179 5.22
---- ----
Noninterest-bearing liabilities 206
Minority interest 301
Stockholders' equity 361
Total liabilities and -------
stockholders' equity $14,620
=======
Net interest income $ 80
====
Interest rate spread 2.20%
====
Net interest margin 2.28%
====
Average equity to average assets 2.47%
====
</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 27, 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,
Page 15 May 13, 1996 (6:31pm)
<PAGE>
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 FN Holdings during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of the Company's interest-earning
assets and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average outstanding balances
multiplied by the prior period's rate) and (ii) changes in rate (changes in
average interest rate multiplied by the prior period's volume). Changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended March 31, 1996 vs. 1995
Increase (Decrease) Due to
Volume Rate Net
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities $-- $-- $--
Mortgage-backed securities
available for sale 30 -- 30
Mortgage-backed securities
to be held to maturity (38) 20 (18)
Loans held for sale 14 -- 14
Loans receivable, net 18 9 27
Covered assets, net (5) 1 (4)
---- ---- ----
Total 19 30 49
---- ---- ----
INTEREST EXPENSE:
Deposits 8 8 16
Securities sold under
agreements to repurchase 9 (2) 7
Borrowings 10 (12) (2)
---- ---- ----
Total 27 (6) 21
---- ---- ----
Change in net interest income $ (8) $ 36 $ 28
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
from the three months ended March 31, 1995 to the corresponding period in 1996
are largely due to the additional $3.6 billion in interest-earning assets
acquired and $3.7 billion in interest-bearing liabilities assumed in the SFFed
Acquisition. The overall volume change in net interest income is negative due
to the shift from deposits to comparatively higher priced borrowings as a
result
Page 16 May 13, 1996 (6:31pm)
<PAGE>
of the Branch Sales. The positive total rate variance of $36 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. During the first quarter of 1996, deposits totalling $3.8
billion with a weighted average rate of 4.70% were sold and replaced with $3.5
billion of FHLB advance borrowings and securities sold under agreements to
repurchase with a weighted average rate of 5.45%.
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
INTEREST INCOME. Total interest income was $308.2 million for the three
months ended March 31, 1996, an increase of $48.7 million from the three
months ended March 31, 1995. The interest-earning assets acquired in the SFFed
Acquisition resulted in total interest-earning assets for the first three
months of 1996 averaging $15.8 billion, compared to $14.0 billion for the
corresponding period in 1995. In addition, the yield on total interest-earning
assets during the first three months of 1996 increased to 7.82% from the 7.42%
yield on total interest-earning assets for the first three months of 1995.
FN Holdings earned $221.2 million of interest income on loans receivable
for the three months ended March 31, 1996, an increase of $26.4 million from
the three months ended March 31, 1995. The loans acquired in the SFFed
Acquisition contributed most of the increased interest income in 1996, and
resulted in an increase in the average balance of loans receivable to $11.0
billion from $10.1 billion for the three months ended March 31, 1995. The
weighted average yield on loans receivable increased to 8.04% for the first
quarter of 1996 from 7.69% 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 $14.6 million of interest income on loans held for
sale for the three months ended March 31, 1996, an increase of $13.9 million
from the three months ended March 31, 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, offset by a decrease in the
weighted average rate of such loans. The average balance of loans held for
sale increased to $860 million from $36 million for the three months ended
March 31, 1996. The weighted average yield on loans held for sale decreased to
6.97% for 1996 from 7.77% during 1995 due to generally decreasing market rates
during the period.
Interest income on all mortgage-backed securities, including the
available for sale portfolio and mortgage-backed securities held to maturity,
was $64.3 million for the three months ended March 31, 1996, an increase of
$12.4 million from the three months ended March 31, 1995. The average
portfolio balances increased $.2 billion, to $3.3 billion during the three
months ended March 31, 1996 compared to $3.1 billion during the three months
ended March 31, 1995. The weighted average yield on all mortgage-backed
securities increased to 7.64% for the first three months of 1996 from 6.69%
for the corresponding period in 1995, primarily due to the upward rate
adjustments of adjustable rate mortgage-backed securities
Page 17 May 13, 1996 (6:31pm)
<PAGE>
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 $4.5 million, to $.7
million, for the three months ended March 31, 1996 compared to the three
months ended March 31, 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 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
7.36% for the three months ended March 31, 1996 compared to 6.70% 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 $7.4 million for the three months ended March 31, 1996, an increase of $.5
million from the three months ended March 31, 1995. The average portfolio
balances during the three months ended March 31, 1996 and 1995 increased to
$501 million from $417 million, respectively, primarily due to the SFFed
Acquisition. The weighted average yield on these assets decreased to 5.59% for
the first three months of 1996 from 6.71% for the first three months of 1995,
primarily due to an overall decline in market interest rates.
INTEREST EXPENSE. Total interest expense was $200.1 million for the three
months ended March 31, 1996, an increase of $20.9 million from the three
months ended March 31, 1995. The increase is the result of additional
interest-bearing liabilities assumed in the SFFed Acquisition, 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.
Interest expense on customer deposits, including brokered deposits, was
$117.5 million for the three months ended March 31, 1996, an increase of $16.4
million from the three months ended March 31, 1995. The average balance of
customer deposits outstanding increased from $9.7 billion to $10.4 billion for
the three months ended March 31, 1995 and 1996, respectively. The deposits of
approximately $3.2 billion acquired in the SFFed Acquisition and Branch
Purchases increased the average balance from period to period by $2.3 billion
while the $3.8 billion in deposits sold in the Branch Sales decreased the
average balance from period to period by $2.1 billion due to the timing of the
acquisitions and sales. The overall weighted average cost of deposits
increased from 4.24% for the first three months of 1995 to 4.52% for the first
three months of 1996, due principally to the effect of the deposits sold in
the Branch Sales having a weighted average rate of approximately 4.70% and the
deposits assumed in the SFFed Acquisition having a weighted average rate of
5.12%, 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 $30.6 million for the three months ended March 31, 1996, an increase
of $6.6 million from the three months ended March 31, 1995. The average
balance of such
Page 18 May 13, 1996 (6:31pm)
<PAGE>
borrowings for the three months ended March 31, 1996 and 1995 was $2.2 billion
and $1.5 billion, respectively. The increase is attributed to $.8 billion of
such liabilities acquired in the SFFed Acquisition together with $1.2 billion
in additional short-term borrowings to fund the Branch Sales during 1996. The
weighted average interest rate on these instruments decreased to 5.74% during
the first three months of 1996 from 6.55% for the first three months of 1995,
primarily due to the impact of decreases in overall market interest rates for
such borrowings.
Interest expense on borrowings totalled $52.0 million for the three
months ended March 31, 1996, a decrease of $2.1 million from the three months
ended March 31, 1995. The decrease is attributed to the net effect of a volume
increase for borrowings assumed in the SFFed Acquisition, 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 March 31, 1996 compared to March 31, 1995. The average balance
outstanding for the three months ended March 31, 1996 and 1995 was $3.2
billion and $2.6 billion, respectively. The weighted average interest rate on
these instruments decreased to 6.54% during the first three months of 1996
from 8.24% for the first three 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 $108.0 million for the three
months ended March 31, 1996, an increase of $27.8 million from the three
months ended March 31, 1995. The interest rate spread increased to 2.72% for
the three months ended March 31, 1996 from 2.20% for the three months ended
March 31, 1995.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, management fees and gains on sales
of assets and deposits, was $364.9 million for the three months ended March
31, 1996, an increase of $333.9 million from the three months ended March 31,
1995. Gains on sales of branches account for $307.9 million of the increase.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $27.5 million for the three months ended March 31, 1996, compared to
$12.7 million for the three months ended March 31, 1995. This increase is due
to the addition of the mortgage servicing portfolios acquired in the Maryland
Acquisition, the LMUSA Purchases and the SFFed Acquisition, as well as
servicing rights originated through the increased origination capacity
provided by these acquisitions. The single-family residential loan servicing
portfolio, excluding loans serviced for the Bank, increased from $7.4 billion
at January 1, 1995 to $27.0 billion at January 1, 1996 and to $43.2 billion at
March 31, 1996. During the first three months of 1996, the Company sold $1.5
billion in single-family mortgage loans originated for sale as part of its
ongoing mortgage banking operations compared to $42.6 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 $11.8 million for the three months ended March 31, 1996,
compared to $10.3 million for the three months ended March 31, 1995. The
increase is
Page 19 May 13, 1996 (6:31pm)
<PAGE>
attributed to increased revenues from the retail banking operations acquired
in the Branch Purchases and the SFFed Acquisition, offset by the impact of the
Branch Sales, the bulk of which occurred late in the first quarter of 1996.
Management fees totalled $3.3 million for the three months ended March
31, 1996, compared to $2.3 million for the three months ended March 31, 1995.
The increase is due to increased fees received for successful loan
modifications on investor-owned commercial real estate loans in 1996.
Gain on sale of branches was $307.9 million for the three months ended
March 31, 1996. See note 2 to the accompanying financial statements for
additional information regarding the Branch Sales.
Gain on sale of loans was $13.7 million for the three months ended March
31, 1996, compared to a loss of $.2 million for the three months ended March
31, 1995. The increase is attributed in part to a gain of $7.5 million on the
sale of $298 million of consumer loans during the first quarter of 1996. In
addition, the Bank experienced increased gains on sales of single-family
mortgage loans due to the adoption of Statement of Financial Accounting
Standards 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".
Loss on sale of assets was $4.5 million for the three months ended March
31, 1996. The loss is primarily the result of a $4.0 million writedown taken
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 $5.3 million for the three months ended
March 31, 1996, a decrease of $.5 million from the three months ended March
31, 1995. The decrease is attributed to a decrease of $.1 million in fees
earned on check disbursement products, $.1 million in early withdrawal
penalties on deposits, and $.6 million in miscellaneous other income, net of
an increase of $.3 million in dividends on FHLB stock.
NONINTEREST EXPENSE. Total noninterest expense was $118.2 million for the
three months ended March 31, 1996, an increase of $37.9 million from the three
months ended March 31, 1995, principally due to increased compensation,
occupancy, 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 quarter of 1996 and the timing of the
Branch Sales.
Total compensation and employee benefits expense was $60.7 million for
the three months ended March 31, 1996, an increase of $21.4 million from the
three months ended March 31, 1995, primarily attributable to accruals for a
management incentive plan. Although the number of employees has remained
substantially the same, there has been a significant decrease in the number of
employees located in California, offset by additional employees in Maryland as
a result of the Maryland Acquisition, the transfer of the mortgage servicing
operations to Maryland and the LMUSA Purchases.
Page 20 May 13, 1996 (6:31pm)
<PAGE>
Occupancy and equipment expense was $13.2 million for the three months
ended March 31, 1996, an increase of $1.6 million from the three months ended
March 31, 1995, attributed primarily to the increased occupancy expenses
related to the Maryland and SFFed Acquisitions offset by decreased expense due
to the operations sold in the Branch Sales.
Loan expense was $7.8 million for the three months ended March 31, 1996,
an increase of $6.8 million from the three months ended March 31, 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 $.4 million, to $6.0 million,
for the three months ended March 31, 1996. The increase is due to the higher
average balance of deposits outstanding in the first quarter of 1996 compared
to 1995 due largely to the net effect of the Branch Purchases, the SFFed
Acquisition and the Branch Sales.
Data processing expense was $2.8 million for the three months ended March
31, 1996, an increase of $.6 million from the three months ended March 31,
1995, also attributed to the SFFed Acquisition and increased expenses
associated with the higher volume of loans serviced in connection with the
LMUSA Purchases and the Maryland Acquisition.
Marketing expense was $2.2 million for the three months ended March 31,
1996, a decrease of $1.8 million from the three months ended March 31, 1995,
due to reduced marketing efforts nationwide as a result of the Branch Sales.
Foreclosed real estate operations, including gains on sales, resulted in
a net gain of $2.6 million for the three months ended March 31, 1996 compared
to a net loss of $.9 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 $1.7 million for the three
months ended March 31, 1996 from $.2 million for the corresponding period in
1995, primarily due to the amortization of the $112 million excess cost over
fair value of net assets acquired recorded in connection with the SFFed
Acquisition.
Other noninterest expense was $26.3 million for the three months ended
March 31, 1996, an increase of $10.7 million from the three months ended March
31, 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, a $3.0 million accrual was
recorded in 1996 related to sales tax audits.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 1996
and 1995, FN Holdings recorded income tax expense of $29.0 million and $.7
million, respectively. Included in tax expense for the three months ended
March 31, 1995
Page 21 May 13, 1996 (6:31pm)
<PAGE>
is the reversal of 1993 and 1994 overaccruals of federal taxes totalling $2.2
million. The Company's effective federal tax rates were 2% and 0% during the
three months ended March 31, 1996 and 1995, respectively, while its statutory
federal tax rate was 35% during both periods. The difference between effective
and statutory rates was primarily the result of the utilization of net
operating loss carryforwards. The Company's effective state tax rate was
approximately 6% and 8% during the three months ended March 31, 1996 and 1995,
respectively.
EXTRAORDINARY ITEM. During the three months ended March 31, 1995, FN
Holdings recorded a gain of $2.0 million on the early extinguishment of $250
million in FHLB advances, net of income taxes.
NET INCOME. FN Holdings had net income of $298.6 million for the three
months ended March 31, 1996, an increase of $281.2 million from the three
months ended March 31, 1995.
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. FN Holdings 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. FN Holdings established
provisions for loan losses of $9.9 million and $6.2 million for the three
months ended March 31, 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 three months ended
March 31, 1996 and March 31, 1995 is as follows (in thousands):
1996 1995
---- ----
Balance - January 1 $ 210,484 $ 202,780
Purchase - SFFed Acquisition 39,829 --
Provision for loan losses 9,900 6,201
Charge-offs (8,410) (8,156)
Recoveries 599 1,315
--------- ---------
Balance - March 31 $ 252,402 $ 202,140
========= =========
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.
Page 22 May 13, 1996 (6:31pm)
<PAGE>
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.
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.
First Nationwide 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 three
months ended March 31, 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 March 31,
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 three months ended March 31, 1996,
the Company's net interest income decreased by $5.5 million as a result of
these interest rate swap agreements, largely due to 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.
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
Page 23 May 13, 1996 (6:31pm)
<PAGE>
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 March 31,
1996. Prepayment rates are assumed in each period on substantially all of
First Nationwide's loan portfolio based upon expected loan prepayments.
Repricing mechanisms on the Bank'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 Bank's liabilities. In
addition, the interest rate sensitivity of First Nationwide's assets and
liabilities illustrated in the table would vary substantially if different
assumptions were used or if actual experience differed from the assumptions
set forth. The Company's estimated interest rate sensitivity gap at March 31,
1996 is as follows:
Page 24 May 13, 1996 (6:31pm)
<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 to be held to maturity
and interest-bearing deposits
in other banks (1)(2) $ 261 $ 4 $ -- $ 265
Securities available for sale (4) 444 -- -- 444
Mortgage-backed securities
available for sale 1,861 -- -- 1,861
Mortgage-backed securities
held to maturity (1) 1,865 1 2 1,868
Loans held for sale, net (4) 701 -- -- 701
Loans receivable, net (1)(3) 9,958 759 413 11,130
Covered Assets, net (5) 39 -- -- 39
Investment in FHLB 181 -- -- 181
-------- -------- -------- --------
Total interest-earning assets 15,310 764 415 16,490
Noninterest-earning assets -- -- 1,322 1,322
-------- -------- -------- --------
$ 15,310 $ 764 $ 1,737 $ 17,811
======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits (6) $ 8,143 $ 1,155 $ 34 $ 9,332
Securities sold under agreements
to repurchase (1) 2,169 305 -- 2,474
FHLB advances (1) 3,002 891 3 3,896
Other borrowings (1) 105 5 497 607
-------- -------- -------- --------
Total interest-bearing liabilities 13,419 2,356 534 16,309
Noninterest-bearing liabilities -- -- 480 480
Minority interest -- -- 309 309
Stockholders' equity -- -- 713 713
-------- -------- -------- --------
$ 13,419 $ 2,356 $ 2,036 $ 17,811
======== ======== ======== ========
Gap before interest rate swap
agreements 1,891 (1,592) (119) 180
Interest rate swap agreements (7) (400) 400 -- --
-------- -------- -------- --------
Gap adjusted for interest rate
swap agreements $ 1,491 $(1,192) $ (119) $ 180
======= ======== ======== ========
Cumulative gap $ 1,491 $ 299 $ 180 $ 180
======= ======== ======== ========
Gap as a percentage of total assets 8.4% (6.7)% (.7)% 1.0%
======== ======== ======== ========
Cumulative gap as a percentage of
total assets 8.4% 1.7% 1.0% 1.0%
======== ======== ======== ========
</TABLE>
- ------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal,
if
Page 25 May 13, 1996 (6:31pm)
<PAGE>
applicable. Prepayments were estimated generally by using the
prepayment rates forecast by various large brokerage firms as of
March 31, 1996. The actual maturity and rate sensitivity of these
assets could vary substantially if future prepayments differ from
First Nationwide's prepayment estimates.
(2) Consists of $4 million of securities held to maturity, $62 million of
interest-bearing deposits in other banks and $199 million of
short-term investment securities.
(3) Excludes loan loss reserves of $252 million and nonaccrual loans of
$220 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.
(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 $500 million and $250 million
maturing in April 1996 and September 1996, respectively, have no
impact within the time periods presented.
At March 31, 1996, interest-earning assets of FN Holdings exceeded
interest-bearing liabilities by approximately $181 million. At December 31,
1995, interest-earning assets of FN Holdings exceeded interest-bearing
liabilities by approximately $132 million. The change in the cumulative gap
between the two periods is due principally to the SFFed Acquisition, the
Branch Sales and the issuance of the Senior Sub Notes.
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 5.0%. First Nationwide's liquidity ratio
was 5.08% and 5.46% at March 31, 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 the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and brokered deposits, loan
sales, securities sold
Page 26 May 13, 1996 (6:31pm)
<PAGE>
under agreements to repurchase, FHLB advances, and other secured and unsecured
borrowings. It is anticipated that FHLB advances and securities sold under
agreements to repurchase will be secondary sources of funding, and management
expects there to be adequate collateral for such funding requirements.
The Company's primary uses of funds are the origination or purchase of
loans, the funding of maturing certificates of deposit, demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit
scheduled to mature during the twelve months ending March 31, 1997 total $4.9
billion. The Company may renew these certificates, attract new replacement
deposits, replace such funds with other borrowings, or it may elect to reduce
the size of the balance sheet. In addition, at March 31, 1996, the Company had
FHLB advances and other borrowings of $2.8 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.
The Bank has entered into contracts to purchase a thrift institution and
to sell the Bank's existing retail deposit network in the state of Michigan,
both of which are expected to close in the second quarter of 1996. On December
19, 1995, the Bank entered into a merger agreement with Home Federal Financial
Corporation ("HFFC"), pursuant to which the Bank will acquire HFFC and its
wholly owned federally chartered savings association subsidiary, Home Federal
Savings and Loan Association of San Francisco, which, at December 31, 1995,
had approximately $718 million in assets and $625 million in deposits and
operated 15 branches in the Northern California area (the "Home Federal
Acquisition"). The aggregate consideration to be paid in connection with the
Home Federal Acquisition is estimated to be approximately $70.6 million. On
December 14, 1995, the Bank entered into an agreement to sell its 21 branch
retail network in Michigan, with deposits of approximately $.8 billion, to
Charter One Bank (the "Michigan Branch Sale"). The Michigan Branch Sale will
generate a 7.18% deposit premium.
The Bank currently has sufficient borrowing capacity to fund both the
Home Federal Acquisition and the Michigan Branch Sale. This additional funding
may take the form of additional borrowings under reverse repurchase
agreements, additional advances from the Federal Home Loan Bank, or increased
cash raised through the remaining retail deposit network. Net cash flow from
operations, together with these additional funding sources, is expected to be
adequate to maintain liquidity above the required levels.
During 1994, the Bank issued 3,007,300 shares of preferred stock
("Preferred Stock"). Cash dividends on the Preferred Stock are noncumulative
and are payable at an annual rate of 11-1/2% if, when, and as declared by the
Board of Directors of the Bank. The payment of dividends by the Bank is
subject to certain federal laws applicable to savings associations. Preferred
Stock dividends totalling $8.6 million were paid during the three months ended
March 31, 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
Page 27 May 13, 1996 (6:31pm)
<PAGE>
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 $386 million at March 31, 1996, the Company 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 quarters. The primary sources of funds
in the first quarter of 1996 were sales of loans held for sale, net of
originations, of $482 million, repayments of mortgage backed securities
totalling $292 million, a net decrease in loans receivable of $378 million,
and additional borrowings and securities sold under agreements to repurchase
of $4.3 billion. The primary uses of funds were the $3.8 billion funding of
the Branch Sales, principal payments on borrowings of $1.8 billion, net cash
paid for the SFFed Acquisition of $83.2 million, net cash paid for the LMUSA
1996 Purchase of $48.3 million and dividends on and redemption of the
Company's class C common stock totalling $44.0 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, the Company 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 March 31, 1996, the carrying value of loans that are considered to be
impaired totalled $152.4 million (of which $40.1 million were on non-accrual
status). The average recorded investment in impaired loans during the three
months ended March 31, 1996 was approximately $144.1 million. For the three
months ended March 31, 1996, the Company recognized interest income on those
impaired loans of $3.6 million, which included $.2 million of interest income
recognized using the cash basis method of income recognition.
Page 28 May 13, 1996 (6:31pm)
<PAGE>
The following table presents the amounts, net of purchase accounting
adjustments, of the Company's nonaccrual loans, foreclosed real estate,
troubled debt restructurings and impaired loans as of the dates indicated.
These categories are not mutually exclusive; certain loans are included in
more than one classification.
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------
Nonaccrual Impaired Restructured
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $171 $ -- $ 60
5+ unit residential 29 86 163
Commercial and other 14 66 118
Land -- -- --
Construction 1 -- 8
---- ---- ----
Total real estate 215 152 349
Non-real estate 5 -- --
---- ---- ---
Total loans 220 $152 (a) $349 (b)
==== ====
Foreclosed real estate, net 82
----
Total non-performing assets $302
====
</TABLE>
<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 $40.1 million and $29.6
million at March 31, 1996 and December 31, 1995, respectively,
and loans classified as troubled debt restructurings of $41.1
million and $31.9 million at March 31, 1996 and December 31,
1995, respectively.
(b) Includes nonaccrual loans of $5.7 million and $1.2 million at
March 31, 1996 and December 31, 1995, respectively. At March 31,
1996, $3.2 million of these nonaccrual, troubled debt
restructurings were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
March 31, 1996 or December 31, 1995.
The Company's non-performing assets, consisting of nonaccrual loans net of
purchase accounting adjustments and foreclosed real estate, net, increased to
$302 million at March 31, 1996 from $220 million at December 31, 1995. A
Page 29 May 13, 1996 (6:31pm)
<PAGE>
significant portion of the increase is due to non-performing assets acquired
in the SFFed Acquisition, which totalled $39 million of non-performing loans
and $36 million of foreclosed real estate at March 31, 1996. In addition, $6
million of single-family foreclosed real estate was acquired in the LMUSA 1996
Purchase and is covered for loss under the indemnification provisions of the
related contract, provided such real estate is sold prior to January 31, 1997.
During the three months ended March 31, 1996, $16.7 million of assets
were sold to Granite under the Put Agreement, leaving a remaining available
balance under the Put Agreement of $95.7 million. Of the $302 million in
non-performing assets at March 31, 1996, approximately $30.1 million were
eligible to be sold to Granite pursuant to the Put Agreement.
FN Holdings, through First Nationwide, continuously manages its credit
risk by assessing the current and estimated future performance of the real
estate markets in which it operates. The Bank continues to place a high degree
of emphasis on the management of its asset portfolio. First Nationwide 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 Bank's
portfolio management strategy and regulatory requirements. In addition to
these asset management functions, First Nationwide has a specialized credit
risk management group that is charged with the development of credit policies
and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of March 31, 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) $ 51 $ 12 $ 63 21.21%
California 118 63 181 60.94
Other regions 46 7 53 17.85
---- ---- ---- ------
Total $215 $ 82 $297 100.00%
==== ==== ==== ======
</TABLE>
- ------------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire,
New Jersey, New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments.
At March 31, 1996, the Bank's largest non-performing asset was
approximately $5.8 million, and it had approximately ten non-performing assets
over $2 million in size with balances averaging approximately $3.3 million.
First Nationwide has approximately 2,150 non-performing assets below $2
million in size, including approximately 1,915 non-performing 1-4 unit
residential assets.
Page 30 May 13, 1996 (6:31pm)
<PAGE>
A summary of the activity in the allowance for loan losses by loan type
is as follows for the three months ended March 31, 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 9 30 1 40
Provision for loan losses 9 -- 1 10
Charge-offs (7) -- (1) (8)
Recoveries -- -- -- --
----- ----- ----- -----
Balance - March 31, 1996 $ 127 $ 115 $ 10 $ 252
===== ===== ===== =====
Ratio of allowance for loan
losses to non-performing loans:
December 31, 1995 85.3% 265.6% 300.0% 122.8%
===== ===== ===== =====
March 31, 1996 74.3% 267.4% 166.7% 114.6%
===== ===== ===== =====
</TABLE>
MORTGAGE BANKING OPERATIONS
The Company, through the Bank and 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 the single-family loan servicing portfolio in the SFFed
Acquisition, other acquisitions and the originated servicing, the
single-family residential loans serviced for others totalled $43.2 billion at
March 31, 1996, an increase of $16.2 billion from December 31, 1995. During
the first quarter of 1996, the Company, through the Bank and FNMC, originated
and sold (generally with servicing retained) single-family residential loans
totalling approximately $1.0 billion and $1.5 billion, respectively. Gross
revenues from mortgage loan servicing activities for the first quarter of 1996
total $47.2 million, an increase of $30.7 million from the quarter ended March
31, 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
quarter ended March 31, 1996 totalled $6.2 million and included amounts
related to the capitalization of originated and excess mortgage servicing
rights of $17.8 million.
Page 31 May 13, 1996 (6:31pm)
<PAGE>
The following is a summary of activity in mortgage servicing rights
purchased ("Purchased"), originated ("Originated") and excess servicing fees
receivable ("Excess") for the three months ended March 31, 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 133,303 16,789 1,009 151,101
Amortization (19,186) (1,099) (76) (20,361)
Impairment -- -- -- --
--------- --------- --------- ---------
Balance at March 31, 1996 $ 337,866 $ 32,060 $ 2,169 $ 372,095
========= ========= ========= =========
</TABLE>
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 March 31, 1996.
CAPITAL RESOURCES
The Financial Institutions Reforms 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.
Page 32 May 13, 1996 (6:31pm)
<PAGE>
At March 31, 1996, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 6.22%, 6.22% and 12.10%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
March 31, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- -------- ----------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity at March 31, 1996 $ 1,329 $ 1,329 $ 1,329
Unrealized holding gain on securities
available for sale, net (60) (60) (60)
Non-qualifying loan-servicing rights (37) (37) (37)
Non-allowable capital:
Intangible assets (129) (129) (129)
Investment in subsidiaries (8) (8) (8)
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 -- -- (3)
------- ------- -------
Regulatory capital of the Bank 1,095 1,095 1,319
Minimum regulatory capital requirement 264 528 872
------- ------- -------
Excess above minimum capital
requirement $ 831 $ 567 $ 447
======= ======= =======
Regulatory capital of the Bank 6.22% 6.22% 12.10%
Minimum regulatory capital requirement 1.50 3.00 8.00
------- ------- -------
Excess above minimum capital
requirement 4.72% 3.22% 4.10%
======= ======= =======
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios is $17.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $10.9 billion.
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.
Page 33 May 13, 1996 (6:31pm)
<PAGE>
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 March 31, 1996, First Nationwide's capital
levels were sufficient for it to be considered "well capitalized":
<TABLE>
<CAPTION>
Risk-based
Core --------------------
Capital Tier 1 Total Capital
------- ------- -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 6.22% 10.04% 12.10%
Well capitalized ratio 5.00 6.00 10.00
---- ----- -----
Excess above well capitalized ratio 1.22% 4.04% 2.10%
==== ===== =====
</TABLE>
Congress has passed budget reconciliation legislation that, if enacted,
would impose a one-time assessment on all 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 has vetoed this
budget reconciliation bill. Such veto, however, was based on issues unrelated
to the provisions dealing with capitalization of the SAIF. The FDIC, which
would establish the assessment rate, has 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 Branch Purchases, the Michigan Branch Sale and the Home
Federal Acquisition, 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). 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 34 May 13, 1996 (6:31pm)
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed more fully in Item 3, "Legal Proceedings" in the Company's
1995 report on Form 10-K, the Bank is presently involved in an arbitration
process related to the computation of the purchase price in a 1994
acquisition. The arbitration hearing was held from April 22, 1996 to April 25,
1996. The arbitrator ordered post-hearing briefs to be filed by May 15, 1996.
Although management of FN Holdings believes that it will prevail in this
dispute, in the event that FN Holdings does not so prevail, the result would
not be material to the consolidated financial statements of FN Holdings.
FN Holdings is involved in legal proceedings on claims incidental to the
normal conduct of its business. Although it is impossible to predict the
outcome of any outstanding legal proceedings, the management of FN Holdings
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 FN Holdings.
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:
During the quarter ended March 31, 1996, the Company made two
filings on Form 8-K:
1. Filing dated January 31, 1996 reporting on Item 2, "Acquisition
or Disposition of Assets" and Item 7, "Financial Statements, Pro
Forma Financial Information and Exhibits." This filing reported
the sale of all retail deposits in the state of Ohio to a single
purchaser and included the following financial statements:
Page 35 May 13, 1996 (6:31pm)
<PAGE>
Pro Forma Condensed Combined Statement of Financial Condition
at September 30, 1995.
Notes to Pro Forma Condensed Combined Statement of
Financial Condition.
Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1995. Notes to Pro Forma
Condensed Combined Statement of Operations for the nine
months ended September 30, 1995.
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1994.
Notes to Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1994.
FN Acquisition (as defined therein) and notes thereto.
2. Filing dated February 14, 1996 reporting on Item 2, "Acquisition
or Disposition of Assets", Item 5, "Other Events," and Item 7,
"Financial Statements, Pro Forma Financial Information and
Exhibits." This filing reported the SFFed Acquisition and the
consummation of the LMUSA 1996 Purchase and included the
following financial statements:
Pro Forma Condensed Combined Statement of Financial Condition
at September 30, 1995.
Notes to Pro Forma Condensed Combined Statement of
Financial Condition.
Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1995. Notes to Pro Forma
Condensed Combined Statement of Operations for the nine
months ended September 30, 1995.
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1994.
Notes to Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1994.
FN Acquisition (as defined therein) and notes thereto.
Audited Consolidated Financial Statements of SFFed Corp. and
Subsidiary at December 31, 1994 and 1993, and for the years
ended December 31, 1994, 1993 and 1992:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Page 36 May 13, 1996 (6:31pm)
<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 and
Controller
(Signing on behalf of the
Registrant and as the
Principal Accounting Officer)
May 14, 1996
Page 37 May 13, 1996 (6:31pm)
<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>
<CIK> 0000928358
<NAME> First Nationwide Holdings Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-START> Jan-01-1996
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 124,159
<INT-BEARING-DEPOSITS> 12,634
<FED-FUNDS-SOLD> 50,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,304,728
<INVESTMENTS-CARRYING> 1,871,761
<INVESTMENTS-MARKET> 1,871,761
<LOANS> 11,799,168 <F1>
<ALLOWANCE> 252,402
<TOTAL-ASSETS> 17,811,064
<DEPOSITS> 9,332,392
<SHORT-TERM> 5,035,192
<LIABILITIES-OTHER> 478,778
<LONG-TERM> 1,941,876
0
0 <F2>
<COMMON> 1
<OTHER-SE> 713,449
<TOTAL-LIABILITIES-AND-EQUITY> 17,811,064
<INTEREST-LOAN> 235,736
<INTEREST-INVEST> 71,718
<INTEREST-OTHER> 722
<INTEREST-TOTAL> 308,176
<INTEREST-DEPOSIT> 117,513
<INTEREST-EXPENSE> 200,121
<INTEREST-INCOME-NET> 108,055
<LOAN-LOSSES> 9,900
<SECURITIES-GAINS> (4,040)
<EXPENSE-OTHER> 118,221
<INCOME-PRETAX> 344,873
<INCOME-PRE-EXTRAORDINARY> 315,870
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298,578
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.82
<LOANS-NON> 219,550
<LOANS-PAST> 0
<LOANS-TROUBLED> 348,625
<LOANS-PROBLEM> 70,853
<ALLOWANCE-OPEN> 210,484
<CHARGE-OFFS> 8,410
<RECOVERIES> 599
<ALLOWANCE-CLOSE> 252,402
<ALLOWANCE-DOMESTIC> 9,161
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 243,241
<FN>
<F1> "LOANS" includes Loans held for sale of $700,854
<F2> "PREFERRED" excludes $300,730 in Preferred Stock issued by
First Nationwide Bank
</TABLE>
