=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K/A
---------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
38 EAST 63RD STREET,
NEW YORK, NEW YORK 10021 (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-572-8500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: N/A
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on March 20, 1996: N/A.
The number of shares outstanding of each of the registrant's classes of
$1.00 par value common stock, as of the close of business on March 20, 1996;
800 shares of class A common stock; 200 shares of class B common stock and
169.5 shares of class C common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None
=============================================================================
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Item 1. Business ..................................................................... 1
General ..................................................................... 1
Lending Activities .......................................................... 6
Non-performing Assets ....................................................... 13
Investment Activities ....................................................... 17
Sources of Funds ............................................................ 21
Other Activities ............................................................ 28
Dividend Policy ............................................................. 32
Employees ................................................................... 32
Competition ................................................................. 32
Regulation .................................................................. 33
Regulation of FN Holdings ................................................... 33
Regulation of the Bank ...................................................... 34
Taxation .................................................................... 41
Item 2. Properties ................................................................... 42
Item 3. Legal Proceedings ............................................................ 43
Item 4. Submission of Matters to a Vote of Security Holders .......................... 43
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ... 44
Item 6. Selected Financial Data ...................................................... 45
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................. 47
General ..................................................................... 47
Results of Operations ....................................................... 51
Provision for Federal and State Income Taxes ................................ 58
Taxation of the Bank ........................................................ 59
Tax Effects of Dividend Payments by the Bank ................................ 60
Provision for Loan Losses ................................................... 60
Asset and Liability Management .............................................. 61
Liquidity ................................................................... 63
Impact of Inflation and Changing Prices ..................................... 67
Non-performing Assets ....................................................... 67
Capital Resources ........................................................... 71
Item 8. Financial Statements and Supplementary Data .................................. 74
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures ................................................................. 74
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 75
Item 11. Executive Compensation ....................................................... 78
Item 12. Security Ownership of Certain Beneficial Owners and Management .............. 80
Item 13. Certain Relationships and Related Transactions ............................... 81
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K ............ 85
Index to Financial Statements .............................................................. F-1
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Nationwide Holdings Inc. ("FN Holdings" or the "Company") is a
holding company chartered under the laws of the State of Delaware, whose only
significant asset is all of the common stock of First Nationwide Bank, A
Federal Savings Bank ("First Nationwide" or "Bank"). As such, FN Holdings'
principal business operations are conducted by the Bank and its subsidiaries.
FN Holdings is 80% owned indirectly by MacAndrews & Forbes Holdings, Inc.
("MacAndrews Holdings"), a corporation wholly owned through Mafco Holdings
Inc. ("Mafco Holdings" and together with MacAndrews Holdings, "MacAndrews &
Forbes") by Ronald O. Perelman, and is 20% owned by Hunter's Glen/Ford, Ltd.
("Hunter's Glen"), a Texas limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the Bank.
The Company's operations are significantly influenced by general economic
conditions in the markets and geographic areas in which the Bank conducts its
business, the monetary and fiscal policies of the federal government and the
regulatory policies of certain governmental agencies. Deposit balances and
the cost of borrowings are influenced by interest rates on competing
investments and general market interest rates. The Company's loan volume and
yields are also impacted by market interest rates on loans, the supply of and
demand for housing, and the availability of funds.
The Bank's principal business consists of operating retail deposit
branches and originating and/or purchasing one to four family real estate
loans and, to a lesser extent, certain consumer loans. First Nationwide
actively manages its commercial real estate loan portfolio acquired through
acquisitions and is also active in mortgage banking and loan servicing. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings.
Revenues are derived from interest charged on loans, interest and
dividends received on securities and mortgage-backed securities, fees
received in connection with loan servicing, securities brokerage and other
customer service transactions, and asset management fees. Expenses primarily
consist of interest on customer deposit accounts, interest on short-term and
long-term borrowings, general and administrative expenses consisting of
compensation and benefits, data processing, occupancy and equipment,
communications, deposit insurance assessments, advertising and marketing,
professional fees and other general and administrative expenses.
First Nationwide, formerly First Madison Bank, FSB ("First Madison") and
successor to First Gibraltar Bank, FSB ("First Gibraltar"), was organized and
chartered as a Federal stock savings bank in December 1988 under the Home
Owners' Loan Act ("HOLA") to acquire substantially all of the assets and to
assume deposit, secured and certain other liabilities of five insolvent Texas
savings and loan associations ("Texas Closed Banks") from the Federal Savings
and Loan Insurance Corporation ("FSLIC"), as receiver. On August 9, 1989, the
FSLIC was abolished and its obligations and rights were assumed by the FSLIC
Resolution Fund; hereafter, the FSLIC or its successor FSLIC Resolution Fund
will be referred to as the "FSLIC/RF."
The Bank is regulated by the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation ("FDIC"), which, through the Savings
Association Insurance Fund ("SAIF"), insures the deposit accounts of First
Nationwide. The Bank is also a member of the Federal Home Loan Bank System
("FHLBS"). As of December 31, 1995, First Nationwide had assets totalling
approximately $14.6 billion, deposits totalling approximately $10.2 billion,
and operated retail branch offices at 160 locations in seven states. As
indicated in the following paragraphs, the Bank has entered into agreements
to sell 79 retail branch offices in four states to third parties and
agreements to purchase additional thrift institutions in California.
The Texas Closed Banks were purchased effective December 28, 1988 pursuant
to five substantially similar acquisition agreements and an assistance
agreement ("Assistance Agreement") among the
1
<PAGE>
FSLIC/RF, First Gibraltar, First Gibraltar Holdings Inc. ("First Gibraltar
Holdings"), an indirect parent of the Bank, and MacAndrews Holdings. Assets
subject to the Assistance Agreement are known as "Covered Assets." The
Assistance Agreement generally provides for guaranteed yield amounts to be
paid on the book value of the Covered Assets, and pays First Nationwide for
90% of the losses incurred upon disposition of the Covered Assets ("Capital
Loss Provision"). The remaining 10% not reimbursed, net of 10% of all asset
recoveries and certain agreed-upon Covered Asset disposition fees ("Shared
Gain"), is known as the "FSLIC/RF Reimbursement." In January 1992, certain
provisions of the Assistance Agreement were renegotiated and amended or
modified. In connection with such modification, the Bank accrued the present
value of the FSLIC/RF Reimbursement over the life of the Assistance
Agreement, resulting in a $60 million charge to operations in 1992.
On February 1, 1993, First Gibraltar sold to Bank of America Texas, N.A.
and BankAmerica Corporation (collectively, "BankAmerica") certain assets,
liabilities and substantially all of the branch operations of First Gibraltar
located in Texas consisting of approximately $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A gain
of $141 million was recorded in connection with this sale. In anticipation of
the BAC Sale, management sold long-term interest-earning assets, primarily
loans and mortgage-backed securities, based on BankAmerica's intention to
acquire primarily shorter-term assets. As a result, the Bank recognized gains
on the sale of interest-earning assets totalling $203 million during the year
ended December 31, 1992. Subsequent to the BAC Sale, First Gibraltar changed
its name to First Madison Bank, FSB.
From August 1991 through March 31, 1993, First Nationwide Holdings
conducted most of its mortgage banking operations through First Gibraltar
Mortgage Holdings Inc. ("FGMH"). Effective July 1, 1992, FGMH acquired all of
the outstanding stock of the mortgage banking company, Troy and Nichols, Inc.
of Monroe, Louisiana, with a servicing portfolio of 129,000 loans totalling
approximately $5.9 billion. This transaction was accounted for under the
purchase method of accounting. On March 31, 1993, the stock of FGMH was
distributed by First Nationwide Bank to its then immediate parent. FGMH was
subsequently sold during 1993 for a gain of approximately $95 million.
Following the BAC Sale, and through September 1994, the Bank's principal
business was the funding of the Covered Assets and the performance of its
obligations under the Assistance Agreement. Subsequent to the BAC Sale, the
Bank also managed four retail branches in Texas and supplemented its retail
deposit base with wholesale funds from Brokered Deposits (as defined herein)
and FHLB advances. In June 1995, the FDIC, as manager for the FSLIC/RF,
exercised its right under the Assistance Agreement to purchase substantially
all of the remaining Covered Assets as of June 1, 1995 at the fair market
value of such assets and further purchased additional assets from the
remaining Covered Asset portfolio in September 1995 (the "FDIC Purchase").
Any losses sustained by the Bank as a result of the FDIC Purchase have been
reimbursed under the Capital Loss Coverage provision of the Assistance
Agreement except for $39 million which the FDIC has elected to treat as a
Covered Asset at December 31, 1995. Proceeds from this transaction were
reinvested in the normal course of business.
On April 14, 1994, the Bank entered into the Asset Purchase Agreement (the
"Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FN"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, the Bank acquired substantially all of the assets and
certain of the liabilities (the "FNB Acquired Business") of Old FN (the "FN
Acquisition") for $726.5 million. Effective on October 1, 1994, the Bank
changed its name from "First Madison Bank, FSB" to "First Nationwide Bank, A
Federal Savings Bank." On October 7, 1994, the Bank sold the FNB Acquired
Business' branch network in Illinois, with approximately $1.2 billion in
deposits, to Household Bank, f.s.b. (the "Illinois Sale").
The Bank financed the FN Acquisition and paid related fees and expenses
with: (i) a capital contribution by FN Holdings funded with the net proceeds
of (a) the issuance of FN Holdings' 12 1/4 % Senior Notes Due 2001 (the
"Senior Notes"), (b) the issuance of its class C common stock to First
Nationwide (Parent) Holdings Inc. ("Holdings"), an indirect subsidiary of
MacAndrews Holdings, (ii) the
2
<PAGE>
net proceeds from the issuance of 11 1/2 % noncumulative Perpetual Preferred
Stock of the Bank ("Preferred Stock") and (iii) existing cash and proceeds
from securities sold under agreements to repurchase. See "Certain
Relationships and Related Transactions."
In connection with the FN Acquisition, management of the Bank developed a
strategy to enhance the value of the Bank. The key elements of the strategy
include streamlining the Bank's operations to be competitive, including
concentrating on opportunities in the California market and enhancing the
activities that produce fee income, particularly mortgage banking and asset
management. Since October 1994, as a part of this strategy, the Bank has
consummated or entered into contracts for several acquisitions and has
divested certain operations.
In December 1994, the Bank's wholly owned mortgage bank operating
subsidiary, First Nationwide Mortgage Corporation ("FNMC"), entered into a
series of agreements with the Resolution Trust Corporation as conservator for
Standard Federal Savings Association and subsidiaries of Frederick, Maryland
("StanFed"), to acquire certain of StanFed's mortgage servicing assets and
assume certain of StanFed's mortgage servicing liabilities for approximately
$178 million (the "Maryland Acquisition"). As a result of the Maryland
Acquisition, FNMC acquired a 1-4 unit residential mortgage loan servicing
portfolio of approximately $11.4 billion (including $1.8 billion of mortgage
servicing rights ("MSRs"), which are rights to service mortgages held by
others, that are owned by third parties who have subcontracted to FNMC the
servicing function (a "sub-servicing portfolio")) and certain other assets
and liabilities. The transaction was consummated on February 28, 1995. In
connection with the Maryland Acquisition, FNMC has moved its mortgage
servicing operations to Maryland from its former location in Sacramento,
California. Costs totalling $5.7 million associated with such consolidation
are included in noninterest expense in FN Holdings' consolidated statement of
operations for the year ended December 31, 1995. In April 1995, the Bank
closed substantially all of its retail mortgage loan production offices.
Costs associated with such closures of approximately $2.1 million are
included in noninterest expense in FN Holdings' consolidated statement of
operations for the year ended December 31, 1995.
In April 1995, First Nationwide 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 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"). The weighted average deposit
premium paid in connection with the Branch Purchases was 3.78%.
On February 1, 1996, the Bank acquired (the "SFFed Acquisition") pursuant
to an Agreement and Plan of Merger dated August 27, 1995, (the "Merger
Agreement") with SFFed Corp. ("SFFed"), a savings and loan holding company,
SFFed and its wholly owned federal savings association, San Francisco Federal
Savings and Loan Association ("San Francisco Federal") for approximately $264
million. San Francisco Federal, headquartered in San Francisco, California,
operated 35 branches in the Northern California area. San Francisco Federal's
primary business consisted of operating retail deposit branches and
originating and/or purchasing residential real estate loans, and to a lesser
extent, certain consumer loans. At December 31, 1995, San Francisco Federal
had approximately $4.0 billion in assets and approximately $2.7 billion in
deposits.
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA"), a subsidiary of Lomas Financial Corporation ("LFC"), a loan
servicing portfolio of approximately $11.1 billion (including a sub-servicing
portfolio of $3.1 billion), $2.9 billion of MSRs that 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") andother assets, principally existing loans and loan production
operations of LMUSA, for $100 million, payable in installments, and the
assumption of certain indebtedness secured by the acquired loan portfolio
(the "LMUSA 1995 Purchase").
On January 31, 1996, FNMC consummated an agreement to purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a sub-servicing
portfolio of $2.4 billion), a master servicing
3
<PAGE>
portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $45.3
million in net other servicing receivables, $5.8 million in mortgage loans,
and $6.2 million in net other assets for a purchase price of approximately
$160.8 million payable in installments (the "LMUSA 1996 Purchase"). The
initial installment of $49.8 million was paid with existing cash.
On December 19, 1995, the Bank entered into a merger agreement with Home
Federal Financial Corporation ("HFFC"), pursuant to which the Bank will
acquire (the "Home Federal Acquisition") HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal") for approximately $70.6
million. At December 31, 1995, HFFC had approximately $718 million in assets
and $625 million in deposits and operated 15 branches in the Northern
California area. The Home Federal Acquisition is subject to approval by
HFFC's shareholders and regulatory approval by the OTS, and is presently
anticipated to close in the second quarter of 1996.
From September through December of 1995, the Bank entered into contracts
for the sale of its retail branches in the states of Ohio (the "Ohio Branch
Sale"), New York and New Jersey (the "Northeast Branch Sale") and Michigan
((the "Michigan Branch Sale") and, together with the Ohio Branch Sale and the
Northeast Branch Sale, the "Branch Sales"). The Ohio Branch Sale was
consummated on January 19, 1996. The Northeast Branch Sale, comprised of 32
branches, is expected to be consummated during the first quarter of 1996 (of
which, as of March 18, 1996, 15 branches have been sold). The Michigan Branch
Sale is expected to be consummated during the second quarter of 1996. The
SFFed Acquisition, the Home Federal Acquisition and the Branch Sales will
contribute to the restructuring of the Bank's retail branch network
consistent with its strategy of strengthening its West Coast presence. In
addition, by consolidating many of the operating functions of the Bank and
San Francisco Federal, management believes that it can achieve economies of
scale and cost savings.
4
<PAGE>
The following chart sets forth in simplified form the ownership structure
of FN Holdings and the Bank.
-----------------------------------------------------
| Ronald O. Perelman |
-----------------------------------------------------
100%
-----------------------------------------------------
| Mafco Holdings Inc. |
| ("Mafco Holdings") |
-----------------------------------------------------
100%
-----------------------------------------------------
| MacAndrews & Forbes Holdings Inc. |
| ("MacAndrews Holdings") |
-----------------------------------------------------
100%
-----------------------------------------------------
| Trans Network Insurance Services Inc. |
| ("TNIS") |
|(formerly "First Gibraltar (Parent) Holdings Inc.")|
-----------------------------------------------------
100%
-----------------------------------------------------
| First Gibraltar Holdings Inc. |
| ("First Gibraltar Holdings") |
-----------------------------------------------------
100%
-----------------------------------------------------
| First Nationwide (Parent) Holdings Inc. |
| ("Holdings") |
-----------------------------------------------------
80%*
- --------------------
| Hunter's Glen/ |
| Ford, Ltd. |
| ("Hunter's Glen")|
- --------------------
20%*
-----------------------------------------------------
| FIRST NATIONWIDE HOLDINGS INC. |
| ("FN HOLDINGS") |
-----------------------------------------------------
100%
-----------------------------------------------------
| First Nationwide Bank, A Federal Savings Bank |
| ("First Nationwide" or the "Bank") |
-----------------------------------------------------
100% of preferred stock
- -------------------
| Holders of the |
| Preferred Stock |
- -------------------
- ------------
* Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the
Bank, owns 100% of the class B common stock of FN Holdings, representing
20% of its voting common stock, and Holdings owns 100% of the class A
common stock of FN Holdings, representing 80% of its voting common
stock, and 100% of the class C common stock of the Company.
5
<PAGE>
LENDING ACTIVITIES
During the period between the BAC Sale and the FN Acquisition, the Bank's
lending activity was limited. Loan originations focused on second lien home
improvement lending, with a limited number of residential mortgage loans
made. In addition, the Bank made loans to address special community housing
needs through its Community Reinvestment Act ("CRA") program.
Since the FN Acquisition, the Bank's principal lending activity is the
origination of adjustable and fixed rate mortgage loans secured by
residential properties. To a lesser extent, First Nationwide also originates
consumer loans consisting principally of adjustable rate home equity lines of
credit. The current commercial lending activity of First Nationwide is
limited to restructuring and refinancing of existing portfolio loans, and
multi-family loans originated under its affordable housing program. First
Nationwide also participates in a number of other affordable housing program
and initiatives.
The Bank's residential loan origination activities are conducted by FNMC.
Throughout this document, references to the Bank and its residential loan
origination or servicing activities relate to functions performed by FNMC. In
April 1995, FNMC concluded that the costs of operating retail offices
outweighed the benefits and, accordingly, closed substantially all of its
retail mortgage production offices. Residential loans continue to be
originated through FNMC's wholesale origination offices (wherein loans are
acquired from independent loan brokers) and the Bank's retail branches. FNMC
originates adjustable rate mortgage ("ARM") loans on single-family
residential properties which in the case of ARMs originated prior to
September 30, 1995, have generally been held for investment, and fixed rate
loans, which are generally held for sale to the secondary mortgage market.
Subsequent to September 30, 1995, however, substantially all of the ARMs
originated were sold in the secondary market in anticipation of the SFFed
Acquisition. On October 2, 1995, FNMC acquired the correspondent loan
purchase operation of LMUSA as well as contracts to administer various
housing bond and other private mortgage lending programs.
First Nationwide generates consumer loan applications at its retail
branches. In addition, the Bank conducts direct-mail solicitations,
principally of its existing customers, for both secured and, to a much lesser
extent, unsecured revolving loans. All consumer loan processing, servicing
and collection operations are centralized at a facility in Oak Brook,
Illinois.
6
<PAGE>
The following table reflects, for the periods indicated, the net change in
the total principal balances of loans receivable outstanding, excluding loans
held for sale, for the Company and its subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Real estate loans originated:
Loans to purchase existing property ................. 959 $ 419 $ 27
Loans for construction, including loans in process .. -- -- 2
------- ------- -------
Total real estate loans originated ................. 959 419 29
Other loans originated ............................... 224 61 26
Loans purchased ...................................... 751 11,753 2
------- ------- -------
Total loans originated and purchased ............... 1,934 12,233 57
Loans sold, securitized, repaid and foreclosed:
Loans sold (1) ...................................... (380) (155) (300)
Loans securitized ................................... (376) (1,339) --
Loan repayments and payoffs ......................... (1,922) (387) (539)
Loan foreclosures ................................... (93) (25) (32)
------- ------- -------
Total loans sold, securitized repaid and foreclosed (2,771) (1,906) (871)
Other changes in loans receivable .................... (308) (40) (51)
------- ------- -------
Net increase/(decrease) in loans receivable (2) ..... $(1,145) $10,287 $ (865)
======= ======= =======
</TABLE>
- ------------
(1) Includes loans sold pursuant to the Put Agreement (as defined herein)
totalling $199.5 million and $104.2 million in 1995 and 1994,
respectively.
(2) Excludes allowance for loan losses, purchase accounting adjustments,
unearned discounts and loan fees, and loans in process.
Interest Rates, Terms and Fees
First Nationwide offers a variety of ARM products with the objectives of
(i) matching, as closely as possible, the interest rate sensitivity of its
assets with the interest rate sensitivity of its interest-bearing liabilities
and (ii) maintaining a relatively stable net interest margin in varied
interest rate environments. In response to consumer demand, and in order to
diversify its loan portfolio and help to control its future interest rate
risk, First Nationwide's loan portfolio includes several ARM products which
vary as to (i) the frequency and amount of periodic interest rate changes and
(ii) the minimum and maximum rate applied to a particular loan. ARMs have the
advantage of reducing an institution's sensitivity to interest rate
fluctuations. However, they also present certain risks not associated with
traditional fixed rate mortgages, such as adjustments in interest rates which
could cause payment increases that some borrowers might be unable to service.
First Nationwide attempts to mitigate the credit risks associated with
mortgage lending activities by the use of strict underwriting standards.
Substantially all residential loans originated are underwritten to conform
with standards adopted by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National
Mortgage Association ("GNMA"), or other secondary market investors.
Accordingly, First Nationwide's underwriting standards include loan-to-value
("LTV") ratios and maximum loan amounts for both fixed rate loans and ARMs
that closely mirror secondary market requirements. Generally, where these
standards differ, specific compensating factors are required. With respect to
ARMs, First Nationwide underwrites the borrower's ability to pay at the
maximum second year payment rate, consistent with secondary market
requirements.
In addition to the interest earned on its loans, First Nationwide charges
fees for loan originations, loan prepayments and modifications, late
payments, changes of property ownership and other similar services. The
amount of this fee income varies with the volume of loan originations,
prepayments, the general economic conditions affecting the portfolio and
other competitive factors affecting the mortgage market.
7
<PAGE>
Generally, late charges are assessed when payments are delinquent. On
loans secured by residential properties, these charges are generally limited
to 4% to 6% of the overdue payment of principal and interest and cannot be
imposed until the payment is more than 15 days late, in accordance with the
contractual terms of the loans and regulatory requirements in effect when the
loans were made.
Composition of Loan Portfolio
The composition of the Company's loan portfolio, excluding loans held for
sale and loans subject to the Assistance Agreement, is set forth in the
following table, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate loans: ............
1-4 unit residential ......... $5,423 $5,612 $19 $ 40 $1,891
5+ unit residential .......... 1,854 2,178 -- -- --
Commercial real estate ...... 1,716 2,015 10 138 96
Land ......................... 9 15 -- -- --
Construction ................. -- 8 -- -- --
------ ------ ------ ------ ------
Total real estate loans .... 9,002 9,828 29 178 1,987
Equity-line and consumer loans 171 492 5 631 866
Commercial loans .............. 2 1 -- 90 136
------ ------ ------ ------ ------
Total loans receivable ..... 9,175 10,321 34 899 2,989
------ ------ ------ ------ ------
Less: .........................
Unearned discounts and loan
fees ........................ (19) -- 3 55 376
Loans in process ............. -- -- -- 52 49
Allowance for loan losses ... 210 203 2 14 23
Purchase accounting ..........
adjustments, net ............ 153 151 -- 1 --
------ ------ ------ ------ ------
Loans receivable, net ...... $8,831 $9,967 $29 $777 $2,541
====== ====== ====== ====== ======
</TABLE>
The following table presents the Company's real estate loan portfolio
(excluding loans held for sale and loans subject to the Assistance
Agreement), by collateral type, by interest rate type and by state
concentration at December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL REAL
----------------- ----------------- ----------------- ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
----- -------- ----- -------- ----- -------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ....... $2,729 $238 $ 798 $ 91 $1,128 $141 $5,125 56.93%
New York ......... 404 73 215 115 48 40 895 9.94
Illinois ......... 160 76 41 7 40 18 342 3.80
Florida .......... 102 46 39 33 31 12 263 2.92
Ohio ............. 93 83 28 8 32 3 247 2.74
New Jersey ....... 115 28 62 9 8 4 226 2.51
Hawaii ........... 198 19 -- 1 4 -- 222 2.47
Washington ....... 78 8 52 8 25 1 172 1.91
Colorado ......... 97 53 1 4 -- -- 155 1.72
Texas ............ 75 48 2 18 1 5 149 1.66
Other states (1) 517 183 242 80 151 33 1,206 13.40
------- ----- ------ ----- ------ ----- ------ ------
Total ............ $4,568 $855 $1,480 $374 $1,468 $257 $9,002 100.00%
======= ===== ====== ===== ====== ===== ====== ======
</TABLE>
- ------------
(1) Real estate loans involving property located in 39 states, Puerto Rico
and the District of Columbia; not more than 1.5% of the total amount of
such loans are located in any one state.
8
<PAGE>
The following table summarizes the Company's loan portfolio not subject to
the Assistance Agreement, excluding loans held for sale, at December 31,
1995, based upon various contractually scheduled principal payments allocated
to the indicated maturity categories. This table does not reflect expected
prepayments.
<TABLE>
<CAPTION>
OVER ONE BUT
DUE WITHIN WITHIN FIVE OVER FIVE
ONE YEAR YEARS YEARS TOTAL
-------- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential
Fixed rate .................. $ 9 $ 57 $ 789 $ 855
Variable rate ............... 4 25 4,539 4,568
5+ unit residential
Fixed rate .................. 25 129 220 374
Variable rate ............... 97 515 868 1,480
Commercial and other
Fixed rate .................. 21 81 155 257
Variable rate ............... 121 473 874 1,468
------ ------ ------ ------
Total ..................... 277 1,280 7,445 9,002
Commercial and consumer loans:
Fixed rate .................. 19 10 5 34
Variable rate ............... 40 4 95 139
------ ------ ------ ------
Total ...................... 59 14 100 173
------ ------ ------ ------
Total loans receivable ..... $ 336 $1,294 $7,545 $9,175
====== ====== ====== ======
</TABLE>
Residential Lending
First Nationwide currently offers three primary residential ARM programs
and a variety of fixed rate programs with maturities ranging from 15 to 30
years. Adjustable rate programs include loans which: (i) provide for monthly
interest rate adjustments, after the third or sixth month from inception of
the loan, based on the Federal Home Loan Bank ("FHLB") 11th District Cost of
Funds, (ii) provide for annual rate adjustments based upon the weekly average
yield on U. S. Treasury Securities adjusted to a constant maturity of one
year or (iii) provide for semi-annual rate adjustments based on the weekly
average of the secondary market rates on six-month negotiable certificates of
deposit. Some ARMs offer an option to convert to a fixed rate after the first
year through the fifth year of the loan term. A variety of features are
incorporated into ARM loans to protect borrowers from unlimited adjustments
in interest rates and payments. All ARMs have lifetime caps which limit the
amount of rate increases over the life of the loan. ARMs whose rates adjust
annually have rate caps which limit the amount that rates can change to two
percentage points per year. Loans which adjust monthly based upon the FHLB
11th District Cost of Funds limit payment changes to no more than 7.5% of the
payment amount per year. This may lead to monthly payments which are less
than the amount necessary to amortize the loan to maturity at the interest
rate in effect for any particular month. In the event that the monthly
payment is not sufficient to pay interest accruing on the loan during the
month, this deficiency is added to the loan's principal balance (i.e.,
negative amortization). The total outstanding principal balance for a
particular loan is not allowed to exceed 110% of the original loan amount as
a result of negative amortization. If the loan reaches 110% of the original
loan amount, the loan payment is recalculated to the payment sufficient to
repay the unpaid principal balance in full at the maturity date. As of
December 31, 1995, the Bank's capitalized interest relative to such
residential loans was less than $1.8 million. This amount represents
approximately .16% of the approximately $1.1 billion of residential ARMs that
have the potential to experience negative amortization. First Nationwide also
originates 15 and 30 year fully amortizing fixed rate residential loans under
a variety of fixed rate programs, primarily for resale in the secondary
mortgage market. When loans are sold, FNMC normally retains the servicing of
the loan. See "--Mortgage Banking Operations" for a further discussion of
these activities.
9
GE>
Multi-family, Commercial and Other Real Estate Lending
While First Nationwide currently originates multi-family, commercial and
other real estate loans only as they relate to affordable housing programs,
the Bank's loan portfolio includes loans secured by multi-family residential,
commercial, industrial and unimproved real property. Such loans are
principally acquired through acquisitions. The Bank's variable rate
multi-family and commercial real estate loans have a maximum amortized loan
term of 30 years with some loans having balloon payments due in one to
fifteen years. ARMs primarily adjust with the FHLB 11th District Cost of
Funds or the six-month Treasury Bill indices with a monthly or semi-annual
rate adjustment. The terms and characteristics of the ARMs originated for
multi-family and commercial real estate lending purposes are similar to those
for residential lending. As such, many of the same risks and protections
related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real
estate loans is allowed to increase the outstanding principal balance to 110%
of the original loan amount. If the loan reaches 110% of the original loan
amount, all future interest rate increases will increase the monthly payment
to amortize the loan over the remaining life of the loan. At December 31,
1995, the Bank's capitalized interest relative to such loans was
approximately $1 million, which represents approximately .12% of the $878
million of multi-family and commercial real estate loans that have the
potential to experience negative amortization.
Real estate loans secured by multi-family and commercial property
represent a significant portion of the Bank's portfolio. Management
periodically reviews the multi-family and commercial real estate loan
portfolio. At December 31, 1995 and 1994, the multi-family and commercial
real estate loan portfolio totalled $3.6 billion and $4.2 billion,
respectively. Included in the multi-family and commercial real estate loan
portfolio at December 31, 1995 are $131 million of loans with credit
enhancement wherein the lead participant subordinated its minority interest
in a pool of loans to the Bank's interest in the corresponding pool of loans.
No loans are subject to be repurchased by the seller in the event such loans
become 90 days delinquent.
The Company's potential for loss on the multi-family and commercial loan
portfolio of the Bank acquired from Old FN and, to a lesser extent, the
residential mortgage loan portfolio acquired from Old FN, is mitigated to the
extent of the remaining balance under the Non-Performing Asset Sale Agreement
(the "Put Agreement") entered into by the Bank with Granite Management and
Disposition, Inc. ("Granite"), an affiliate of Old FN, in connection with the
FN Acquisition. Pursuant to the Put Agreement, First Nationwide has the
right, at its option and on a quarterly basis, to require Granite to purchase
up to $500 million of certain assets, primarily multi-family and commercial
real estate loans and residential mortgage loans with an original principal
balance greater than $250,000 ("Putable Assets") which are primarily
non-performing. At expiration, the Bank, at its discretion, can put to
Granite any loan which is a Putable Asset not previously passed in the put
process regardless of the loan's performing characteristics. The Put
Agreement will expire upon the earlier of (i) November 30, 1996 or (ii) such
time as the aggregate purchase price of assets which have been put to Granite
equals $500 million, including assets put to Granite by Old FN from January 1
through October 1, 1994. The purchase price for put loans represents the
outstanding principal balance, up to ninety days accrued interest and certain
other expenses. At December 31, 1995, $387.6 million had been put to Granite
by First Nationwide, leaving a remaining balance available to be put of
$112.4 million.
In addition to managing its own asset portfolio, the Bank and its wholly
owned subsidiary, FGB Realty Advisors, Inc., managed non-performing loan
(principally multi-family and commercial real estate) and asset portfolios
totalling $1.3 billion and $1.6 billion, respectively, for investors.
Revenues related to such activities are reflected as management fees in the
accompanying statements of operations. Certain of this servicing was acquired
from Old FN, which had sold loans with certain recourse provisions. The
recourse liability was assumed by the Bank in the FN Acquisition and at
December 31, 1995, the balance of multi-family and commercial real estate
loans sold with recourse totalled $181.3 million.
10
<PAGE>
Consumer Lending
First Nationwide's consumer loan originations are primarily concentrated
in home equity lending. At December 31, 1995, the home equity portfolio
totalled $399 million, or 80.3%, of the total consumer loan portfolio of $497
million. At December 31, 1995, consumer loans with a carrying value of $326
million (recorded at lower of aggregate amortized cost or market value) are
held for sale. On February 23, 1996, approximately $298 million of such loans
were sold. At December 31, 1994, the home equity portfolio totalled $409
million, or 83.1% of the total consumer loan portfolio of $492 million. The
portfolio is geographically dispersed and correlates closely to retail
deposit branch distribution.
The Bank offers an adjustable, prime interest rate-based home equity line
of credit on owner- occupied residential properties. In determining the
amount of credit to be extended, all loans secured by the collateral
properties are aggregated and compared to the appraised value of the
properties. First Nationwide's policy is to extend credit up to a maximum
combined LTV ratio of 80%.
Other consumer loan products include fixed rate home equity installment
loans; adjustable prime rate-based home equity loans, which while secured,
are based on repayment ability and credit history; auto and boat loans;
unsecured lines of credit; overdraft protection; and loans secured by
certificates of deposit.
Loans Held for Sale
The carrying value of the Bank's loans held for sale portfolio consisted
of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- ------
(IN MILLIONS)
<S> <C> <C>
Single-family residential mortgage loans ... $ 877 $ 26
Consumer loans, primarily home equity loans 326 --
------ ------
$1,203 $26
====== ======
</TABLE>
Loans held for sale are carried at the lower of cost or market value. The
significant increase in single family residential mortgage loans held for
sale is attributed to the higher loan production volumes in 1995 compared to
1994. In addition, substantially all ARMs originated subsequent to September
30, 1995 were sold or held for sale in the secondary market in anticipation
of the SFFed Acquisition. Prior to that time, most ARMs originated were held
by the Bank for investment. The consumer loans held for sale generally
represent loans in states where the Bank has contracted to sell the retail
deposits.
Origination of Residential Loans
First Nationwide originates residential loans principally through the
efforts of wholesale origination offices, where loans are purchased from
independent loan brokers and, to a lesser extent, staff loan agents. To
promote continuity of customer service, help meet credit needs and to
increase opportunities to sell customer deposit and other financial services
offered by First Nationwide and its subsidiaries, loan inquiries from retail
branch customers and "walk-in" applicants are encouraged. These inquiries are
initially processed by retail branch office personnel, with support provided
by regional lending offices. The residential loan agents are compensated
principally on a commission basis. Closed mortgage loans are also acquired by
FNMC through a correspondent lending organization acquired from LMUSA in
October 1995.
The majority of real estate loans originated by First Nationwide have LTV
ratios of 80% or less in accordance with its underwriting criteria. First
Nationwide has originated loans with LTV ratios of up to 95%, with the
portion of the loan exceeding 80% guaranteed by private mortgage insurance,
the premiums of which are paid monthly by the borrower. Certain exceptions to
this guideline have been made for low and moderate income borrowers. However,
the amount of loans subject to such exceptions is not significant in terms of
the Bank's total loan originations. The value of the property offered as
security for a mortgage loan is determined by a professionally qualified
appraiser approved by First Nationwide, who may or may not be an employee of
First Nationwide. As further security for its loan, First Nationwide requires
title insurance and fire and casualty insurance on all loans secured by liens
on real property. The
11
<PAGE>
Bank also requires flood insurance on any loan secured by real property if
the property lies within a U.S. Housing and Urban Development Department
("HUD") designated flood hazard area. First Nationwide does not originate
loans secured by properties located in HUD-designated flood hazard areas in
communities that do not participate in the National Flood Insurance Program.
Mortgage Banking Operations
Mortgage banking operations are an integral part of the business
activities of First Nationwide since the FN Acquisition. FNMC was
incorporated in June 1994 as a wholly-owned operating subsidiary of the Bank.
In the FN Acquisition, the Bank acquired certain of Old FN's residential
mortgage operations, which were transferred to FNMC in exchange for a
combination of debt and equity held by the Bank.
FNMC has significantly expanded its mortgage banking operations and
enhanced its efficiency. In February 1995, the Bank purchased a larger and
more efficient mortgage loan servicing facility located in Frederick,
Maryland as part of the Maryland Acquisition. Subsequently, all of FNMC's
mortgage servicing has been consolidated in Frederick, Maryland, and the
Sacramento, California servicing facility has been closed. During the fourth
quarter of 1995, FNMC acquired additional mortgage servicing in the LMUSA
1995 Purchase. FNMC consummated the purchase of additional mortgage servicing
rights from LMUSA on January 31, 1996 in the LMUSA 1996 Purchase.
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, First Nationwide originates fixed rate
residential loans for sale in the secondary mortgage market. ARMs originated
prior to September 30, 1995 have generally been held by the Bank for
investment. Subsequent to September 30, 1995, however, substantially all of
the ARMs originated were sold or held for sale in the secondary market in
anticipation of the SFFed Acquisition. First Nationwide employs forward sale
hedging techniques to minimize the interest rate and pricing risks associated
with the origination and sale of fixed rate loans.
At the time of origination, management identifies residential loans that
are expected to be sold in the foreseeable future. At December 31, 1995,
management had identified $877.4 million of single-family residential real
estate loans as held for sale. These loans have been classified as assets
held for sale in the consolidated statement of financial condition at
December 31, 1995 and are recorded at the lower of aggregate amortized cost
or market value. At December 31, 1995, First Nationwide had forward
commitments to sell loans totalling $572 million. In addition, $235.2 million
of the loans held for sale were funded under pre-existing purchase
commitments to various housing bond programs and the California Public
Employees Retirement System.
The servicing portfolio of FNMC (including loans serviced for the Bank)
approximates $33.6 billion and 571,000 loans as of December 31, 1995.
Further, the LMUSA 1996 Purchase increased the loan servicing portfolio by
approximately $14.1 billion and 268,000 loans. Substantially all of FNMC's
loans are serviced in a 220,000 square-foot facility in Frederick, Maryland.
Since the FN Acquisition, First Nationwide has sold fixed rate and
adjustable rate whole loans secured by residential properties to FNMA, FHLMC,
and private investors. Mortgage loan sales totalled $1.4 billion and $47
million in 1995 and 1994, respectively.
Old FN occasionally sold loans under recourse provisions; such liability
was assumed by the Bank in the FN Acquisition. As of December 31, 1995, the
balance of single-family residential loans sold with certain recourse
provisions was $151.9 million.
The Bank, through FNMC, has generally retained the right to service the
loans it has sold. FNMC collects from the borrower payments of principal and
interest and, after retaining a servicing fee, remits the balance to the
investors.
In accounting for its mortgage loan sales prior to April 1, 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 Bank's book
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
12
<PAGE>
reflects the discounted present value of any difference between the interest
rate received from the borrower and the interest rate passed through to the
purchaser of the loan, less a "normal servicing fee" (dependent upon loan
type), which is retained as compensation for future servicing costs. The
amount of excess servicing recognized in any particular loan sale depends
significantly upon three factors upon which estimates or assumptions must be
employed: (i) the estimated life of the loans, (ii) the discount rate used in
calculating discounted present value, and (iii) the "normal servicing fee."
The excess servicing asset is amortized as an offset to servicing fee
income using the interest method adjusted for actual prepayment experience
over the estimated remaining servicing lives of the loans sold. First
Nationwide monitors the prepayments on the loans serviced for investors and
reduces the balance of the asset if the actual prepayments are in excess of
the estimated prepayment trends used to record the original asset. First
Nationwide's assumptions relative to prepayment speed, discount and servicing
fee rates are revised periodically to reflect current market conditions and
regulatory requirements.
Effective April 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
amendment to Statement No. 65" ("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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General --
Accounting Changes" for a description of SFAS No. 122.
At December 31, 1995, FNMC owned rights to service approximately $27.1
billion of whole loans, participation interests and mortgage-backed
securities for others. These loans had an average balance of $52,791, a
weighted average coupon rate of 8.58%, a weighted average maturity of 262
months and a service fee spread of .49%. The greater than 30 day delinquency
rate on these loans at December 31, 1995 was 3.82%. First Nationwide
subserviced for others approximately $3.3 billion of whole loans,
participation interests and mortgage-backed securities. These loans had an
average balance of $60,709, a weighted average coupon rate of 8.36% and a
weighted average remaining maturity of 286 months. The servicing fee
collected on these loans is passed through to the primary servicer with First
Nationwide retaining a flat subservice fee that is netted out of the monthly
remittance. Although First Nationwide has no risk for loans subserviced, the
greater than 30 day delinquency rate on these loans is 7.46%. For the year
ended December 31, 1995, gross revenue for such servicing activities totalled
$93.8 million.
In connection with the LMUSA 1995 Purchase, FNMC purchased the stock of
Lomas Mortgage Services Inc., which is a 33% owner of Lomas Mortgage
Partnership LP ("LMP") and its managing general partner. LMP owns the
mortgage servicing rights to approximately $3.1 billion of loans serviced for
FNMA, GNMA, FHLMC and private investors. LMP's investment in such servicing
rights and its other assets are partially funded by independent bank lines of
credit totalling approximately $27 million. LMP has no employees or physical
operations but discharges its obligations under its servicing contracts under
a subservicing contract with FNMC.
NON-PERFORMING ASSETS
The Company's exposure to losses relative to certain assets acquired in
the FN Acquisition that become non-performing or otherwise problematic prior
to November 30, 1996 is mitigated to the extent that the Bank is able to put
such loans to Granite under the Put Agreement. See "-- Other Activities --
the Put Agreement."
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly
reports of troubled asset classification to the OTS. Assets must be
classified as "pass," "special mention," "substandard," "doubtful" or "loss."
An asset is generally designated as "special mention" if potential weaknesses
are identified that, if left uncorrected, would result in deterioration of
the repayment prospects for the asset. An asset, or a portion thereof, is
generally classified as "substandard" if it possesses a well-defined weakness
which could jeopardize the timely liquidation of the asset or realization of
the collateral at the asset's book value. Thus, these assets are
characterized by the possibility that the institution will sustain some loss
if the deficiencies are not
13
<PAGE>
corrected. An asset, or portion thereof, is classified as "doubtful" if
identified weaknesses make collectibility or liquidation in full highly
questionable and improbable. An asset, or a portion thereof, that is
considered to be uncollectible is classified "loss." It should be noted that
First Nationwide does not maintain assets in a loss classification category;
rather, the carrying value of all troubled assets is reduced by any amount
considered to be uncollectible. The appropriate OTS Regional Director has the
authority to approve, disapprove or modify any asset classification or any
amount established as an allowance pursuant to such classification. Savings
institutions must maintain adequate general valuation allowances in
accordance with generally accepted accounting principles and federal
regulations for assets classified as "substandard" or "doubtful" and either
immediately write off assets classified as "loss" or establish specific
valuation allowances equal to the amounts classified as "loss."
First Nationwide has a comprehensive process for classifying assets not
subject to the Assistance Agreement. Asset reviews are performed on a
periodic basis, and are prioritized according to an asset's risk
characteristics, such as loan size, collateral type and/or location, and
potential and actual loan performance problems. The objective of the review
process is to identify significant trends and determine the levels of loss
exposure to First Nationwide that would require increases to specific and
general valuation allowances.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are
cured promptly; however, foreclosure proceedings, and in some cases workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which First Nationwide originates loans, the value of the
underlying collateral property is usually the principal source of recovery
available to satisfy the loan balance.
In general, loans are placed on nonaccrual status after being
contractually delinquent for more than 90 days. When a loan is placed on
nonaccrual status, all interest accrued but not received is reversed, unless
the loan is eligible to be put under the Put Agreement, in which case 90 days
of interest remains accrued. First Nationwide may modify or restructure a
loan as a result of a borrower's inability to service the obligation under
the original terms of the loan agreement. Management believes that losses
currently arising out of loans on nonaccrual status and loans contractually
past due 91 days or more acquired from Old FN are eliminated to the extent
such loans are sold under the Put Agreement.
14
<PAGE>
The following table indicates the carrying value of the Bank's loans,
excluding loans subject to the Assistance Agreement, which have been placed
on nonaccrual status, as well as the carrying value of foreclosed real
estate, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: .......................
Real estate: ...........................
1-4 unit residential .................. $ 136 $ 133 $ 2 $ 7 $ 52
5+ unit residential ................... 23 24 9 -- --
Commercial and other .................. 9 11 -- -- --
Land .................................. -- 7 -- -- --
Construction .......................... -- 2 -- -- --
------ ------ ------ ------ ------
Total real estate ................... 168 177 11 7 52
Equity-line and consumer ............... 3 4 -- 4 2
------ ------ ------ ------ ------
Total nonaccrual loans .............. 171 181 11 11 54
Foreclosed real estate, net ............. 49 37 -- -- --
------ ------ ------ ------ ------
Total non-performing assets ........ $ 220(a) $ 218 $ 11 $ 11 $ 54
====== ====== ====== ====== ======
Non-performing loans as a percentage of
total loans ............................ 1.71% 1.81% 37.61%(b) 1.42% 2.12%
====== ====== ====== ====== ======
Non-performing assets as a percentage of
the Bank's total assets ................ 1.50% 1.49% .98% .12% .53%
====== ====== ====== ====== ======
</TABLE>
- ------------
(a) Of the $220 million in total non-performing assets, approximately $13.5
million were eligible to be sold to Granite pursuant to the Put
Agreement at December 31, 1995.
(b) The significant increase in the percentage of non-performing loans to
total loans at December 31, 1993 from December 31, 1992 reflects the
decrease in loans receivable from $899 million at December 31, 1992 to
$34 million at December 31, 1993. The level of the total non-performing
assets over that time period remained relatively constant.
Interest income of $6.1 million was received and recognized for nonaccrual
loans during 1995, instead of $15.3 million which would have been recognized
had the loans performed in accordance with their original terms. FN Holdings
has had no loans contractually past due 90 days or more on accrual status in
the past five years.
The following table indicates loans classified as troubled debt
restructurings, net of purchase accounting adjustments, and excluding loans
subject to the Assistance Agreement, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate: ................
1-4 unit residential ....... $ 8 $ 19 $-- $-- $--
5+ unit residential ........ 147 204 -- -- --
Commercial and other ....... 79 110 -- -- --
------ ------ ------ ------ ------
Total restructured loans $234 $333 $-- $-- $--
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1995, interest income of $22 million was
recognized on restructured loans instead of the $33 million which would have
been recognized had the loans been performing in accordance with their
original terms. There were no non-real estate restructured loans in any of
the past five years.
15
<PAGE>
Allowance for Loan Losses
FN Holdings charges current earnings with a provision for estimated credit
losses on loans receivable to bring the total allowance to a level deemed
appropriate by management. The provision considers both specifically
identified problem loans and credit risks not specifically identified in the
loan portfolio. The allowance for loan losses is based on such factors as the
financial condition of the borrowers, the fair value of the loan collateral,
recourse to guarantors, the estimated net cost of holding and maintaining
properties and collateral prior to the anticipated date of sale, analysis of
delinquency trends, geographic and collateral-type concentrations, past loss
experience, regulatory policies, and other factors related to the
collectibility of the Company's loan portfolio.
The following table summarizes activity in the allowance for loan losses
during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ......... $203 $ 2 $ 15 $ 24 $ 15
Purchases -- FN Acquisition ........... -- 202 -- -- --
Provision for loan losses ............. 37 6 1 16 18
Charge-offs: ..........................
1-4 unit residential ................. (28) (4) -- (11) (6)
Commercial real estate (a) ........... -- (4) -- -- --
Consumer and other ................... (5) (1) (1 (7) (5)
Commercial ........................... -- -- (1 (1) --
------ ------ ------ ------ ------
Total charge offs .................. (33) (9) (2) (19) (11)
------ ------ ------ ------ ------
Recoveries ............................ 3 2 1 2 2
------ ------ ------ ------ ------
Net charge-offs ...................... (30) (7) (1) (17) (9)
------
Allowance for losses assigned to loans
sold ................................. -- -- (13) (8) --
------ ------ ------ ------ ------
Balance at end of period ............... $210 $203 $ 2 $ 15 $ 24
====== ====== ====== ====== ======
</TABLE>
- ------------
(a) Lack of activity for the year ended December 31, 1995 is principally
due to the existence of the Put Agreement.
The following table sets forth the allocation of the allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Specific reserves:
Real estate loans -- 1-4 unit
residential ..................... $ 1 $ 4 $-- $ 2 $ 1
General reserves:
Real estate loans:
1-4 unit residential ........... 115 105 2 13 23
5+ unit residential ............ 44 44 -- -- --
Commercial real estate ......... 41 41 -- -- --
------ ------ ------ ------ ------
Total real estate loans ....... 200 190 2 13 23
Equity-line and consumer loans .. 9 9 -- -- --
------ ------ ------ ------ ------
Total general reserves ........ 209 199 2 13 23
------ ------ ------ ------ ------
Total allowance for loan losses $210 $203 $ 2 $ 15 $ 24
====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
The table below provides ratios of net charge-offs on loans during the
period indicated to average outstanding loan balances for the years
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential .......... .47% 0.06% 1.26% 1.13% 0.38%
Commercial real estate -- 0.10 0.19 0.01 --
Consumer and other ............. 1.00 0.23 0.24 0.94 0.57
Commercial ..................... -- -- 1.29 1.06
</TABLE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General -- Accounting Changes" for a discussion of
SFAS No. 114 (as defined therein) and the Bank's impaired loans as of
December 31, 1995.
INVESTMENT ACTIVITIES
The Bank is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. The
Bank is also permitted to invest in certain other types of securities.
Securities balances (including cash equivalent securities) exceeding minimum
federal requirements are subject to change over time based on the Bank's
asset/liability funding needs and interest rate risk management objectives.
First Nationwide's liquidity levels take into consideration anticipated
future cash flows and all available sources of credit. Liquidity is
maintained at levels appropriate to assure future flexibility in meeting
anticipated funding needs including deposit withdrawal requests, loan funding
commitments, and other investment or restructuring requirements.
During 1993 to 1995 the OTS required members of the FHLBS to maintain
eligible liquid assets as defined by federal regulations in an amount equal
to or greater than 5% of average deposits and borrowings due within one year.
Under applicable law, this liquidity requirement may be changed from time to
time by the OTS to any amount within the range of 4% to 10%, and the OTS has
the authority to prescribe liquidity requirements for different classes of
savings institutions, which classes may be determined in accordance with
criteria selected by the OTS. First Nationwide was in compliance with this
regulation throughout 1995.
Cash Equivalents
The Company invests in federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits in other banks from time
to time to help meet the Bank's liquidity requirements and as temporary
holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), which specifies the accounting and reporting for all investments in
debt securities and for investments in equity securities that have readily
determinable fair values, effective with financial statements for fiscal
years beginning after December 15, 1993. Under SFAS No. 115, securities held
to maturity are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. All other securities are classified as available
for sale and carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity until realized.
Realized gains or losses on available for sale securities are computed on a
specific identification basis.
FN Holdings adopted SFAS No. 115 effective January 1, 1994; however, there
was no material impact on the consolidated financial statements as a result
of its adoption.
17
<PAGE>
The Financial Accounting Standards Board ("FASB") issued a Special Report
in November 1995, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" (the "Special
Report"). The Special Report provided all entities an opportunity to reassess
their ability and intent to hold securities to maturity and allowed a
one-time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale, and recorded an
increase of $22.5 million in stockholders' equity for the net unrealized gain
on such securities.
The following summarizes the amortized cost and estimated fair value of
the Company's securities available for sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 34,000 $ 80,068 $ -- $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ............................... 14,018 906 -- 906 14,924
FNMA ............................... 294,070 5,643 -- 5,643 299,713
FHLMC .............................. 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations 345,699 793 (4,678) (3,885) 341,814
U.S. government and agency
obligations ........................ 231,794 2,768 (69) 2,699 234,493
---------- ---------- ---------- ---------- ----------
Total ............................. $1,720,974 $109,849 $(4,748) 105,101 $1,826,075
========== ========== ========== ========== ==========
FDIC portion of unrealized gain on
marketable equity securities ...... (34,534)
Estimated tax effect ................ (7,055)
----------
Net unrealized holding gain in
stockholders' equity ............. $ 63,512
==========
DECEMBER 31, 1994
------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
---------- ---------- ---------- ---------- ----------
Marketable equity securities ....... $ 34,000 $ 11,000 $ -- $ 11,000 $ 45,000
========== ========== ========== ========== ==========
</TABLE>
At December 31, 1995, mortgage-backed securities available for sale
included securities totalling $63.4 million which resulted from the
securitization of certain qualifying mortgage loans from First Nationwide's
loan portfolio. There were no such securities classified as available for
sale at December 31, 1994 or 1993.
At December 31, 1995, mortgage-backed securities available for sale
included $979.0 million of variable-rate securities. No variable-rate
securities were classified as available for sale at December 31, 1994 or
1993.
Marketable equity securities available for sale represents approximately
25% of the outstanding common stock of Affiliated Computer Services ("ACS"),
representing 5% of the voting power, with an original cost basis of $34
million. At December 31, 1995, ACS stock closed at $37.50 per share on the
NASDAQ National Market, resulting in a total value of $114.1 million for the
ACS shares held by the Bank. Pursuant to the terms of a settlement agreement
dated June 17, 1991 between the Bank, ACS, and the Federal Deposit Insurance
Corporation ("FDIC"), the FDIC is entitled to share in a defined portion
18
<PAGE>
of the proceeds from the sale of the stock, which, at December 31, 1995 and
1994, approximated $34.5 million and $0, respectively, and which is recorded
in other liabilities. Accordingly, the net unrealized gain on the ACS stock,
net of income taxes, reported as a separate component of stockholders' equity
at December 31, 1995 is $41.0 million. The ACS stock represents the only
security classified as available for sale at December 31, 1994.
FN Holdings maintains a significant portfolio of mortgage-backed
securities as a means of investing in housing-related mortgage instruments
without the costs associated with originating mortgage loans for portfolio
retention and the credit risk of default which arises in holding a portfolio
of loans to maturity. By investing in mortgage-backed securities, management
seeks to achieve a positive spread over the cost of funds used to purchase
these securities. Mortgage-backed securities available for sale are carried
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity. Premiums and
discounts on the purchase of mortgage-backed securities are amortized or
accreted as a yield adjustment over the life of the securities using the
interest method, with the amortization or accretion effect of prepayment
being adjusted based on revised estimates of future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage- backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
collateralized mortgage obligations ("CMOs")) are weighted at no more than
20% for risk-based capital purposes, compared to a weight of 50% to 100% for
residential loans. See "Regulation -- Regulation of the Bank."
The following is a summary of privately issued CMOs with aggregate
carrying values in excess of 10% of stockholders' equity at December 31, 1995
(in millions):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CARRYING VALUE MARKET VALUE
-------------- ------------
<S> <C> <C>
Residential Funding Mortgage Securities $ 77 $ 77
Solomon Brothers Mortgage Securities ... 56 56
------ ------
$133 $133
====== ======
</TABLE>
FN Holdings held privately issued CMOs with an aggregate carrying value of
$274 million at December 31, 1995.
At December 31, 1995, the mortgage-backed securities acquired by FN
Holdings have the highest credit rating from one or more of the national
securities rating agencies. Such credit rating, however, may be subject to
revision or withdrawal at any time by such rating agencies. The
mortgage-backed securities which FN Holdings purchases and maintains in its
portfolio include certain CMOs. A CMO is a special type of pay-through debt
obligation in which the stream of principal and interest payments on the
underlying mortgages or mortgage-backed securities is used to create classes
with different maturities and, in some cases, amortization schedules and a
residual class of the CMO security being sold, with each such class
possessing different risk characteristics. The residual interest sold
represents any residual cash flows which result from the excess of the
monthly receipts generated by principal and interest payments on the
underlying mortgage collateral and any reinvestment earnings thereon, less
the cash payments to the CMO holders and any administrative expenses. As a
matter of policy, due to the risk associated with residual interests, the
Company does not invest in the residual interests of CMOs.
Securities Held to Maturity
As previously discussed, substantially all of the Company's securities
classified as held to maturity were reclassified to available for sale at
December 29, 1995.
The following summarizes the amortized cost and estimated fair value of
the Company's securities held to maturity at the dates indicated:
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U. S. government and agency
obligations .................. $-- $-- $410 $407 $15 $15
Municipal and other securities 1 1 2 2 -- --
----- ----- ----- ----- ----- -----
Total ....................... $ 1 $ 1 $412 $409 $15 $15
===== ===== ===== ===== ===== =====
</TABLE>
The weighted average stated interest rate on securities held to maturity
was 8.25%, 5.79% and 3.66% at December 31, 1995, 1994 and 1993, respectively.
Securities held to maturity at December 31, 1995 mature within one year.
Mortgage-backed Securities Held to Maturity
As previously discussed, substantially all of the Company's
mortgage-backed securities, except for mortgage-backed securities resulting
from the securitization of certain of the Bank's loans, were reclassified
from the held-to-maturity portfolio to the available-for-sale portfolio on
December 29, 1995.
A summary of the Company's mortgage-backed securities held to maturity at
the dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
GNMA ...... $ -- $ -- $ 16 $ 16 $ -- $ --
FNMA ...... 533 548 1,078 1,060 -- --
FHLMC ..... 988 1,016 1,660 1,647 -- --
CMOs ...... -- -- 397 370 341 340
Other ..... 3 3 3 3 -- --
------ ------ ------ ------ ------ ------
Total ... $1,524 $1,567 $3,154 $3,096 $341 $340
====== ====== ====== ====== ====== ======
</TABLE>
The weighted average stated interest rate on mortgage-backed securities
held to maturity was 7.46%, 6.30% and 6.75% at December 31, 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994, mortgage-backed securities
held to maturity included securities totalling $1.5 billion and $1.4 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from First Nationwide's loan portfolio. There were no such
securities held at December 31, 1993. At December 31, 1995 and 1994, these
securities include $1.5 billion and $1.3 billion, respectively, which have
been securitized with FNMA and FHLMC with full recourse to the Bank. At
December 31, 1995 and 1994, respectively, the Company had $1.5 billion and
$2.5 billion of variable rate mortgage-backed securities held to maturity. No
variable rate securities were held at December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993, FN Holdings
recognized no gains on sales of mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a
decline other than a temporary decline in value. Anything other than
temporary declines in value are charged to income in the periods in which the
declines are determined. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
20
<PAGE>
The following table summarizes the Company's mortgage-backed securities
held-to-maturity portfolio and the related weighted average coupon rate at
December 31, 1995, based upon contractual scheduled maturities allocated to
the appropriate maturity categories. This table does not reflect the
scheduled amortization or any anticipated prepayment of the underlying loans
collateralizing such securities in the portfolio.
<TABLE>
<CAPTION>
OVER ZERO BUT OVER THREE OVER FIVE OVER TEN BUT
WITHIN THREE WAC BUT WITHIN WAC BUT WITHIN WAC WITHIN FIFTEEN WAC OVER FIFTEEN WAC
YEARS (1) FIVE YEARS (1) TEN YEARS (1) YEARS (1) YEARS (1) TOTAL
------------- --- ---------- --- ---------- --- -------------- --- ------------ --- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA .... $-- --% $-- --% $-- --% $-- --% $ 988 7.20% $ 988
FHLMC ... -- -- -- -- -- -- -- -- 533 7.93 533
Other ... -- -- -- -- -- -- 1 10.00 2 8.14 3
------ ------ ------ ------ ------ ------
$-- $-- $-- $ 1 $1,523 $1,524
====== ====== ====== ====== ====== ======
</TABLE>
- ------------
(1) Weighted average coupon rate.
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances
from the FHLBs of Dallas and San Francisco, and sales, maturities and
principal repayments on loans and mortgage-backed securities have been the
major sources of funds for use in the Bank's lending and investment
activities and other general business purposes. The management of First
Nationwide closely monitors rates and terms of competing sources of funds on
a daily basis and utilizes the source which is most cost-effective. The
availability of funds from sales of loans and securities is influenced by the
levels of general interest rates and other market conditions. For additional
information regarding the Company's sources of funds, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Statements of Cash Flows set forth in the
Company's Consolidated Financial Statements.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest
rates and money market conditions, and may fluctuate widely. Borrowings may
be used to compensate for reductions in normal sources of funds such as
customer deposits.
21
<PAGE>
Deposits
First Nationwide offers a variety of deposit accounts designed to attract
both short-term and long-term deposits. There are no rate limitations on any
type of deposit account presently offered by First Nationwide. The ability of
the Bank to retain and attract new deposits is dependent upon the variety and
effectiveness of its customer account products, customer service and
convenience, and prevailing market conditions. The following table shows the
distribution of deposits by type of account at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
-------- ------------ -------- ------------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts .............. $ 664 6.5% $ 685 7.5% $ 3 0.7%
Demand deposits:
Interest-bearing .............. 684 6.7 667 7.3 5 1.2
Noninterest-bearing ........... 697 6.8 352 3.8 4 0.9
Money market deposit accounts . 1,443 14.2 1,927 21.1 48 11.2
-------- -------- -------- -------- -------- --------
Total transaction accounts ... 3,488 34.2 3,631 39.7 60 14.0
Term accounts ................... 6,696 65.8 5,519 60.3 370 86.0
-------- -------- -------- -------- -------- --------
10,184 100.0% 9,150 100.0% 430 100.0%
======== ======== ========
Accrued interest payable ........ 51 26 2
Purchase accounting adjustments,
net ............................ 7 21 --
-------- -------- --------
Total ......................... $10,242 $9,197 $432
======== ======== ========
</TABLE>
Deposit balances averaged $9.9 billion and $2.6 billion during 1995 and
1994, respectively, with average stated interest rates of 4.67% and 3.86%,
respectively. The weighted average stated interest rates on deposits at
December 31, 1995 and 1994 were 4.67% and 4.19%, respectively. Deposit
balances averaged $2.6 billion and $1.2 billion during 1994 and 1993,
respectively, with average interest rates of 3.86% and 4.64%, respectively.
The weighted average stated interest rates on deposits at December 31, 1994
and 1993 were 4.19% and 4.41%, respectively.
The following table presents the average balance and weighted average rate
paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ............ $ 666 2.20% $ 179 2.14% $ 192 2.67%
Demand deposits:
Interest-bearing ............. 699 1.00 184 .97 42 2.02
Noninterest-bearing .......... 583 -- 93 -- 11 --
Money market deposit accounts 1,581 3.22 547 2.98 32 2.79
Term accounts ................. 6,398 6.10 1,611 4.91 918 5.24
------- ------- ------- ------- ------- -------
Total ....................... $9,927 4.67% $2,614 3.86% $1,195 4.64%
======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
The following table sets forth the scheduled maturities of term accounts
by stated interest rate at December 31, 1995.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less ........ $ 3 $ -- $ -- $ -- $ 3
3.01 -- 4.00% ........ 104 9 -- -- 113
4.01 -- 5.00% ........ 311 16 27 13 367
5.01 -- 6.00% ........ 2,442 405 52 155 3,054
6.01 -- 7.00% ........ 1,336 361 35 212 1,944
7.01 -- 8.00% ........ 528 239 37 132 936
8.01 -- 9.00% ........ 71 40 5 7 123
9.01 -- 10.00% ....... 134 2 2 11 149
10.01 -- 11.00% ...... -- -- -- 4 4
11.01 -- 12.00% ...... -- -- -- 1 1
12.01 -- 13.00% ...... -- -- -- 2 2
------ ------ ------ ------ ------
Total term accounts $4,929 $1,072 $158 $537 $6,696
====== ====== ====== ====== ======
</TABLE>
The following table sets forth remaining maturities for term deposits in
amounts of $100,000 or more at December 31, 1995 (in millions):
<TABLE>
<CAPTION>
<S> <C>
3 months or less ................................ $168
Over 3 months but within 6 months ............... 141
Over 6 months but within 12 months .............. 201
Over 12 months .................................. 180
------
$690
======
</TABLE>
At December 31, 1995, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger was $690 million, compared with $523 million at
December 31, 1994. Deposits held by foreign investors totalled $63 million
and $58 million at December 31, 1995 and 1994, respectively. No such deposits
were held at December 31, 1993.
First Nationwide's deposit accounts are held primarily by individuals
residing in the vicinity of its retail branch offices located throughout the
country. The Bank has emphasized, and will continue to emphasize, a retail
branch network for attracting deposits. Key market areas, particularly the
West Coast region, will continue to be targeted for expansion of retail
deposits and the cross-selling of additional consumer products.
When cost-effective relative to other sources of funding, First Nationwide
issues certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base.
While these funds are generally more costly than traditional passbook and
money market deposits and more volatile as a source of funds because of the
sensitivity to the rates offered, they supplement retail customer deposits in
raising funds for financing and liquidity purposes. At December 31, 1995,
First Nationwide had $965 million of Brokered Deposits outstanding,
representing 9.47% of total deposits.
23
<PAGE>
The following table presents the scheduled maturity of Brokered Deposits
and all other retail term deposits at December 31, 1995.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ -------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Brokered Deposits ... $ 523 $ 368 $ 5 $ 69 $ 965
Retail term deposits 4,406 704 153 468 5,731
------ ------ ------ ------ ------
Total term deposits $4,929 $1,072 $158 $537 $6,696
====== ====== ====== ====== ======
</TABLE>
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California, in the Tiburon Purchase. In August
1995, First Nationwide acquired three retail branches and associated deposit
accounts totalling approximately $356 million located in Orange County,
California, in the ITT Purchase. On December 8, 1995, First Nationwide
acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million in the Sonoma
Purchase.
In connection with the Branch Sales and the SFFed and Home Federal
Acquisitions, total deposits sold will exceed deposits to be acquired,
resulting in a reduction in deposits. The average interest rate on deposits
is expected to increase slightly because the deposit base to be acquired in
the SFFed Acquisition has a lower percentage of transaction accounts relative
to term deposit accounts.
Borrowings
The Company and the Bank utilize various borrowings as alternative sources
of funds for their business needs. These sources have included securities
sold under agreements to repurchase, FHLB advances and subordinated
debentures. The Bank will rely primarily on FHLB advances and securities sold
under agreements to repurchase to replace funding from deposits sold in the
Branch Sales.
24
<PAGE>
Short-term Borrowings
The following table sets forth for each category of borrowings due within
one year: (i) for the periods presented, the average amount outstanding, the
maximum amount outstanding at any month end and the average interest rate
paid, and (ii) at period end, the amount outstanding and average interest
rate paid. Amounts and rates reflected in the table exclude accrued interest
payable and purchase accounting adjustments.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding ........................ $ 862 $ 434 $ 369
Maximum amount outstanding at any month end during
the period ........................................ 1,487 1,909 441
Balance outstanding at end of period ............... 1,487 1,049 441
Average interest rate during the period ............ 7.19% 6.56% 4.26%
Average interest rate at end of period ............. 6.12% 7.34% 4.54%
Securities sold under agreements to repurchase:
Average balance outstanding ........................ 1,351 499 21
Maximum amount outstanding at any month end during
the period ........................................ 1,965 1,880 139
Balance outstanding at end of period ............... 698 1,880 119
Average interest rate during the period ............ 6.53% 3.78% 3.83%
Average interest rate at end of period ............. 6.06% 6.51% 3.45%
Real estate notes payable and revolving warehouse
line:
Average balance outstanding ........................ -- -- 3
Maximum amount outstanding at any month end during
the period ........................................ -- -- 6
Balance outstanding at end of period ............... -- -- --
Average interest rate during the period ............ -- -- 12.50%
Average interest rate at end of the period ........ -- -- --
</TABLE>
At December 31, 1995, the Bank had additional secured borrowing capacity
of $5.1 billion with the FHLB or other sources. These collateralized funding
sources may also be used to satisfy other funding requirements.
Securities Sold Under Agreements to Repurchase
First Nationwide enters into reverse repurchase agreements whereby it
sells marketable U. S. government and mortgage-backed securities and CMOs
with a commitment to repurchase the securities at a specified price and on a
specified date. These agreements are recorded as financings, and the
obligation to repurchase assets sold is reflected as a liability on the
consolidated statement of financial condition. The dollar amount of assets
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the dealers who arranged the
transactions. The counterparty to the repurchase agreement may have loaned
the securities to other parties in the normal course of their operations;
however, all agreements require that the identical securities be resold to
First Nationwide at the maturity of the agreements. In order to reduce
possible risks associated with these borrowing transactions, the reverse
repurchase agreements are generally entered into with national investment
banking firms and major commercial banks which are primary dealers in these
securities.
During 1995, the Bank has reduced the level of funds borrowed under
reverse repurchase agreements from $1.9 billion at December 31, 1994 to $1.0
billion at December 31, 1995 to take advantage of favorable rates offered on
short-term FHLB advances throughout the year and to assume additional
deposits in the Branch Purchases.
25
<PAGE>
FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A thrift institution may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A thrift is required to hold a minimum
amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
During 1995, the Bank prepaid $250 million in FHLB advances, resulting in
a $2 million extraordinary gain on the early extinguishment of debt, net of
tax. During 1994, First Nationwide prepaid $95.2 million in FHLB advances
resulting in an extraordinary gain on the early extinguishment of debt, net
of tax, of approximately $1.4 million.
Interest Rate Swap Agreements
First Nationwide has used interest rate swap agreements to adjust its
interest rate risk exposure on fixed rate FHLB advances. Interest rate swap
agreements in a notional principal amount of $1.15 billion existed at
December 31, 1995. The notional amount does not represent amounts exchanged
by the parties and thus, is not a measure of First Nationwide's exposure. The
Bank pays the variable rate and receives the fixed rate based on LIBOR under
these agreements. The differential between these two amounts may change
significantly in the future due to fluctuations in market interest rates.
In order to reduce possible counterparty nonperformance risk, First
Nationwide has entered into interest rate swap agreements only with national
investment banking firms and the FHLB of San Francisco.
Senior Notes
In connection with the FN Acquisition, the Company issued $200 million of
Senior Notes, including $5.5 million to certain directors and officers of the
Bank. Deferred issuance costs of $9.6 million associated with the issuance of
the Senior Notes were recorded in other assets in the Company's consolidated
statement of financial condition and are being amortized over the term of the
Senior Notes.
The Senior Notes are redeemable at the option of the Company, in whole or
in part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued and unpaid interest to the date of redemption,
and thereafter at 100% plus accrued and unpaid interest to the date of
redemption. Because the Company is a holding company, the notes are
effectively subordinated to all existing and future liabilities, including
deposits and other borrowings of the Bank, and to the Preferred Stock. The
terms and conditions of the indenture for the Senior Notes (the "Senior Notes
Indenture") impose restrictions that affect, among other things, the ability
of FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity."
Senior Subordinated Notes
On January 31, 1996, FN Holdings issued $140 million of 9 1/8 % senior
subordinated notes due in 2003 ("Senior Sub Notes"). The net proceeds of this
debt issuance, totalling $133 million, were contributed to the Bank on
February 1, 1996 to ensure that the Bank retained its "well capitalized"
status upon consummation of the SFFed Acquisition and the LMUSA 1996
Acquisition.
The Senior Sub Notes are redeemable at the option of FN Holdings, in whole
or in part, during the 12-month period beginning January 1, 2001, at a
redemption price of 104.5625%, plus accrued interest to the date of
redemption, and thereafter at 100% plus accrued interest. The Senior Sub
Notes are
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<PAGE>
subordinated to all existing and future liabilities, including the Senior
Notes, and are effectively subordinated to deposits and other borrowings of
the Bank, and to the Preferred Stock. The terms and conditions of the
indenture agreement for the Senior Sub Notes (the "Senior Sub Notes
Indenture") impose restrictions that affect, among other things, the ability
of FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets, and make certain investments.
Subordinated Debentures
As part of the FN Acquisition, First Nationwide assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1,
2006 (the "Old FNB Debentures"). At December 31, 1995, $92.1 million was
outstanding on the subordinated debentures.
Events of Default under the indenture governing the Old FNB Debentures
(the "Old FNB Indenture") include, among other things: (i) a default in the
payment of interest when due and such default continues for 30 days, (ii) a
default in the payment of any principal when due, (iii) the failure to comply
with covenants in the Old FNB Indenture, provided that the trustee or holders
of at least 25% in principal amount of the outstanding Old FNB Debentures
notify the Bank of the default and the Bank does not cure the default within
60 days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other
legal custodian for the Bank and (vi) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or
annulled within 60 days after the date on which written notice of such
failure has been given by the trustee to the Bank or by holders of at least
25% in principal amount of the outstanding Old FNB Debentures to the Bank and
the trustee.
SFFed Notes
As part of the SFFed Acquisition, the Bank assumed the SFFed Notes, which
bear interest at 11.20% per annum and mature on September 1, 2004. In
connection with the assumption of the SFFed Notes, the Bank and all of the
holders of the SFFed Notes entered into an agreement amending certain
provisions of the note purchase pursuant to which the SFFed Notes were sold
(as amended, the "Note Purchase Agreement"). At December 31, 1995, the
aggregate principal amount of the SFFed Notes outstanding was $50 million.
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any
failure to make any payment of interest when due and such payment is not made
within 15 days after the date such payment was due; (iii) failure to comply
with certain covenants in the Note Purchase Agreement, provided that such
failure continues for more than 60 days; (iv) failure to deliver to holders a
notice of default, notice of event of default, or notice of claimed default
as provided in the Note Purchase Agreement; (v) failure to comply with any
provisions of the Note Purchase Agreement, provided that such failure
continues for more than 60 days after notice is delivered to SFFed; (vi) a
default under other indebtedness provided that the aggregate amount of all
obligations in respect of such indebtedness exceeds $15 million; (vii) one or
more final, non-appealable judgements outstanding against SFFed or its
subsidiaries for the payment of money aggregating in excess of $15 million,
any one of which has been outstanding for 45 days and shall not have been
discharged in full or stayed; (viii) any warranty, representation or other
statement contained in the Note Purchase Agreement by SFFed or any of its
subsidiaries being false or misleading in any material respect when made; or
(ix) certain events of bankruptcy, insolvency or reorganization of SFFed or
its subsidiaries.
Consummation of the SFFed Acquisition constituted a "Change of Control"
under the Note Purchase Agreement. Accordingly, holders of the SFFed Notes
have the right to compel First Nationwide to redeem the SFFed Notes held by
any such holder at a redemption price of 100% of the principal amount
thereof.
Bank Preferred Stock
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
Preferred Stock. The Preferred Stock has a stated liquidation value of $100
per share, plus declared and unpaid dividends, if any. Cash dividends are
noncumulative and are payable at an annual rate of 11 1/2 % per share if,
when and as declared by the Board of Directors of the Bank.
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<PAGE>
The Preferred Stock ranks prior to the common stock of the Bank and to all
other classes and series of equity securities subsequently issued, other than
any class or series expressly designated as being on a parity with or senior
to the Preferred Stock as to dividends and liquidating distributions.
The terms of the Preferred Stock provide that the Bank may not declare or
pay any dividends or other distributions (other than in shares of common
stock of the Bank or other classes of equity securities of the Bank ranking
junior to the Preferred Stock (collectively, "Junior Stock")) with respect to
any Junior Stock or redeem or otherwise acquire, or set apart funds for the
redemption of any Junior Stock (including the common stock held by FN
Holdings), through a sinking fund or otherwise, unless and until: (i) the
Bank has paid full dividends on the Preferred Stock for the four most recent
dividend periods, or funds have been paid over to the dividend disbursing
agent of the Bank for payment of such dividends, and (ii) the Bank has
declared a cash dividend on the Preferred Stock at the annual dividend rate
for the current dividend period, and sufficient funds have been paid over to
the dividend disbursing agent of the Bank for the payment of a cash dividend
for such current dividend period.
The Preferred Stock has no voting rights, except as required by law or in
certain limited circumstances.
Except in the event of a change of control, the Preferred Stock is not
redeemable prior to September 1, 1999. The Preferred Stock is redeemable
solely at the option of the Bank or its successor or any acquiring or
resulting entity with respect to the Bank (including by any parent or
subsidiary of the Bank, any such successor, or any such acquiring or
resulting entity), as applicable, at any time on and after September 1, 1999,
in whole or in part, at $105.75 per share on or after September 1, 1999 and
prior to September 1, 2000, and at prices decreasing annually thereafter to
the stated liquidation value of $100 per share on or after September 1, 2004,
plus declared and unpaid dividends, if any, without interest. Upon a change
of control, the Preferred Stock is redeemable on or prior to September 1,
1999 at the option of the Bank or its successor or any acquiring or resulting
entity with respect to the Bank (including by any parent or subsidiary of the
Bank, any such successor, or any such acquiring or resulting entity), as
applicable, in whole, but not in part, at a price per share equal to: (i)
$100, plus (ii) an amount equal to declared and unpaid dividends, if any, to
the date fixed for redemption, without interest, and without duplication, an
additional amount equal to the amount of dividends that would be payable on
the Preferred Stock in respect of the period from the first day of the
dividend period in which the date fixed for redemption occurs to the date
fixed for redemption (assuming all such dividends were to be declared), plus
(iii) a specified make whole premium.
OTHER ACTIVITIES
The Put Agreement
In connection with FN Acquisition, Granite and the Bank entered into the
Put Agreement. Pursuant to the Put Agreement, the Bank has the right, on a
quarterly basis (the "Put Option"), to require Granite to purchase certain
commercial real estate loans, commercial real estate loans serviced by others
and residential mortgage loans with an original principal balance greater
than $250,000, and to take certain actions to protect the Bank from losses
with respect to certain Letters of Credit ("LOC") transactions, in each case,
only if such asset was purchased by the Bank from Old FN pursuant to the
Asset Purchase Agreement. The Put Option will expire upon the earlier of: (i)
November 30, 1996, or (ii) such time as the sum of (x) the total amount paid
by Granite to the Bank in connection with all purchases or other payments
made by Granite pursuant to the Put Agreement and (y) the aggregate purchase
price paid by Granite to Old FN in connection with purchases made prior to
the closing date ("Closing Date") pursuant to the Mortgage Loan Sale
Agreement dated as of November 30, 1993 (the "Mortgage Loan Sale Agreement"),
between Granite and Old FN, less the total amount paid by the Bank to Granite
in connection with purchases made by the Bank through exercise of certain
buyback rights, equals $500 million (the "Maximum Amount"). The Bank may not
require Granite to purchase more than $100 million of residential mortgage
loans. Granite's obligations under the Put Agreement are guaranteed by Ford
Motor.
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<PAGE>
The Put Option is generally triggered in the event that any of the assets
subject to the Put Agreement become non-performing assets (i.e., payments of
interest or principal become 90 days or more contractually past due) at any
time prior to the expiration of the Put Option.
The purchase price to be paid by Granite for each mortgage loan purchased
pursuant to the Put Agreement is the sum of: (i) the outstanding principal
balance of the loan, (ii) any accrued but unpaid interest on the loan shown
on the Bank's books (not to exceed 90 days accrued but unpaid interest),
(iii) amounts owed to the Bank for real property taxes, insurance premiums
and similar charges and (iv) reasonable amounts (including reasonable
attorneys' fees and protective advances) expended by the Bank in protecting
its security interest or enforcing its rights with respect to such loan. The
amount to be paid by Granite to the Bank with respect to each non-performing
LOC for which the Bank requires such payment will be the amount of any
protective advances (the "Advances") made by the Bank in connection with such
LOC (but in no event shall the Advances include an amount greater than 90
days accrued but unpaid interest). In addition, with respect to any such LOC
which has been included in the FNMA Pool (as defined in the Put Agreement),
Granite must, if so requested by the Bank, take all necessary or appropriate
steps to cause such LOC to be removed from the FNMA Pool and thereafter
Granite will bear all economic risk associated with such LOC (or, if all
required consents for such removal can not be obtained, Granite must take
such actions as are necessary to place the Bank in the same economic position
as it would have been in had the LOC been so removed). With respect to
certain other non-performing LOCs (including LOCs that were originally part
of the FNMA Pool but were required by FNMA to be removed from such pool prior
to the time such LOCs became non-performing), Granite must, if requested by
the Bank, post substitute collateral for the benefit of the Bank, in the form
of cash or cash equivalents with a value not less than the face amount of the
LOC, or in any other form deemed reasonably acceptable by the Bank, in the
place of any existing LOC collateral. The total amount charged against the
Maximum Amount with respect to any LOC will be the amount of Advances
reimbursed by Granite, together with (x) in the case of LOCs removed from the
FNMA Pool, to the extent not included as part of the reimbursed Advances, the
amounts set forth in clauses (i)-(iv) of the first sentence of this paragraph
with respect to the mortgage loan underlying the LOC, or (y) in the case of
LOCs for which a substitution of collateral must be made, the face amount of
the LOC. At all times after any such removal or substitution, the Bank shall
remit to Granite one-half of all fees received by the Bank with respect to
such LOC.
If the Bank declines on any quarterly put date to sell an eligible
non-performing mortgage loan or to demand the removal or substitution of
collateral, as appropriate, in connection with an eligible LOC, its right to
put such asset or demand such removal or substitution, as the case may be,
shall be extinguished, except that put rights with respect to: (i) jumbo
residential loans, the Bank's interest in certain commercial mortgage loans
serviced by others and certain other loans formerly owned by FNMA will be
extended for one additional quarter, and (ii) loans which have matured as of
the Closing Date for which monthly principal and interest payments are being
made as of the Closing Date will be extended until the end of the second
quarter following the Closing Date. In the event that, as of November 30,
1996, Granite has not been required to purchase $500 million of
non-performing assets, the Bank may require Granite to purchase any Putable
Assets of the Bank, other than assets which previously became non-performing
and which the Bank did not require Granite to purchase, up to the Maximum
Amount.
The Assistance Agreement
Under the terms of the Assistance Agreement, the FSLIC's successor, the
FSLIC/RF, provides capital loss coverage and a guaranteed yield on the
Covered Assets, as well as indemnification in connection with certain claims.
In 1995, the FSLIC/RF purchased substantially all of the remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Under
the terms of the Capital Loss Coverage (as defined herein) provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. There was no material impact on the
consolidated financial statements as a result of the FDIC Purchase.
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<PAGE>
The Bank's Covered Assets at the dates indicated are summarized by type as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Loans ....................................... $-- $210
Investments in and advances to subsidiaries -- 7
Real estate owned ........................... -- 129
Other ....................................... 39 4
------ ------
Total Covered Assets ....................... 39 350
FSLIC rebate reserve ........................ -- (38)
------ ------
Covered Assets, net ........................ $39 $312
====== ======
</TABLE>
At December 31, 1995, the Covered Asset balance of $39 million represents
amounts which remain unpaid by the FDIC for the Bank's second quarter 1995
billing. The FDIC has elected to treat this amount as a Covered Asset,
earning Guaranteed Yield (as defined herein), until payment is made by the
FDIC to the Bank.
The tax exempt assistance received by First Nationwide from the FSLIC/RF
included the following provisions:
Guaranteed Yield. The guaranteed yield for a Covered Asset for any
quarter is the product of the Covered Asset's average book value for such
quarter and a yield which is based on the Texas Cost of Funds ("TCOF"),
the annualized quarterly average cost of funds for Texas-based,
SAIF-insured savings institutions as reported by the OTS plus a specified
basis point spread ("Guaranteed Yield"). At December 31, 1995, the TCOF
was 5.63% and the applicable spread was 190 basis points, resulting in a
Guaranteed Yield of 7.53%.
Capital Loss Coverage. The FSLIC/RF mitigated First Nationwide's
exposure to capital losses on Covered Assets by providing for the
reimbursement of capital losses resulting from the liquidation of Covered
Assets at less than their book value ("Capital Loss Coverage").
Covered Asset Recovery. When the liquidation of a Covered Asset
results in a recovery in excess of the asset's original book value, the
Assistance Agreement requires that 90% of such recovery be remitted to the
FSLIC/RF, or offset against payments due to First Nationwide from the
FSLIC/RF ("Covered Asset Recovery").
Shared Gain. First Nationwide is entitled to a disposition fee
("Shared Gain") on any Covered Asset liquidated prior to the termination
of coverage for net proceeds in excess of 50% of its original book value.
Indemnification. The Assistance Agreement provides for indemnification
of losses suffered on specific assets acquired by First Nationwide that
are not Covered Assets under the Assistance Agreement. Items payable to
First Nationwide consist primarily of indemnification of amounts paid in
settlement of certain litigation and reimbursement of specific types of
legal costs and expenses.
FSLIC/RF Reimbursement. First Nationwide agreed to make a payment to
the FSLIC/RF over the ten-year term of the Assistance Agreement in lieu of
a tax-sharing agreement. Such tax benefit payment is implemented on a
current basis, without regard to the actual amount or timing of any such
tax benefits received, through a credit to the FSLIC/RF of 10% of the
gross assistance the FSLIC/RF pays to First Nationwide. This amount, net
of 10% of all Covered Asset Recoveries and Shared Gains, is known as the
"FSLIC/RF Reimbursement." In addition, the FSLIC/RF is entitled to a 10%
share of tax benefits attributable to the use of net operating loss
carryovers of the Texas Closed Banks in reducing the regular tax liability
of the affiliated group of which First Nationwide is a member. The sharing
of tax benefits attributable to the use of these net operating loss
carryovers, however, occurs only when the net operating loss carryovers
are actually used.
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<PAGE>
Coverage Period. The FSLIC/RF assistance with respect to the Covered
Assets on First Nationwide's books at December 31, 1995 will expire from
coverage on December 27, 1998, unless the parties mutually agree to
terminate the Assistance Agreement at an earlier date.
Settlement of Amounts Due. After each calendar quarter, the FSLIC/RF
is required to pay to First Nationwide the net amount of all payments due
under the terms of the Assistance Agreement. The FSLIC/RF has the option
either to pay in cash or to treat as a Covered Asset (for purposes of
determining the Guaranteed Yield on all Covered Assets) the amount due to
First Nationwide.
In connection with a modification to the Assistance Agreement in January
1992, First Nationwide was paid $45 million. Of such $45 million payment, $41
million, the amount net of certain claims, was included in the Bank's income.
Also, in connection with the modification, First Nationwide accrued the
present value of the estimated liability at December 31, 1992 to the FSLIC/RF
for the FSLIC/RF Reimbursement over the life of the Assistance Agreement,
resulting in a $60 million charge to operations in 1992. This liability was
fully utilized in 1995 as a result of the FDIC Purchase.
FNMA Letters of Credit
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FN. The agreement
requires that First Nationwide pledge to FNMA collateral in the form of
certain eligible securities which are held by a third party trustee. The
collateral requirement varies based on the balance of the bonds outstanding,
losses incurred (if any), as well as other factors. At December 31, 1995,
First Nationwide had pledged as collateral certain securities available for
sale and short-term investment securities with a carrying value of $98.6
million.
FGB Realty Advisors, Inc.
FGB Realty Advisors, Inc. ("FGB Realty"), a wholly owned subsidiary of
First Nationwide, provides asset management, disposition and advisory
services to institutional owners of real estate. FGB Realty has performed
asset management and disposition services for a variety of properties which
range in product type from single family homes to complex mixed use
developments. Since its formation in 1991, FGB Realty has become one of the
largest full service asset management and disposition firms in the United
States, having managed portfolios in excess of $7.5 billion. Fee revenues
from unaffiliated parties were $14.0 million, $14.1 million and $8 million
for the years ended December 31, 1995, 1994 and 1993, respectively. These
revenues are included in management fees in the Company's respective
consolidated statements of operations. At December 31, 1995 and 1994,
respectively, the Bank and its wholly owned subsidiary, FGB Realty Advisors,
Inc., managed principally non-performing loan and asset portfolios totalling
$1.3 billion and $1.6 billion, respectively, for investors.
At December 31, 1995, FGB Realty was responsible for the asset management
and disposition of over 4,500 assets, representing $862 million in commercial
and residential real estate loans and properties located in markets
throughout the nation. FGB Realty has full service offices in Dallas, New
York, Tulsa, Phoenix, San Francisco, and Los Angeles.
FN Investment Center
FN Investment Center ("FNIC"), an indirect wholly owned subsidiary of
First Nationwide which was acquired as part of the FN Acquisition, offers
securities and insurance products to both existing and prospective customers
of the Bank. FNIC is subject to the guidelines established by the OTS for
broker-dealer subsidiaries of savings associations, and is a member of the
National Association of Securities Dealers. In addition, FNIC is registered
as a broker-dealer with the Securities and Exchange Commission and the
Securities Investor Protection Corporation. FNIC receives commission revenue
for acting as a broker-dealer on behalf of its customers, but FNIC does not
maintain customer accounts or take possession of customer securities.
Commission revenues of $8.5 million and $2.0 million for the years ended
December 31, 1995 and 1994, respectively, are included in fees and service
charges in the Company's respective consolidated statements of operations.
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<PAGE>
DIVIDEND POLICY
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors: (i) the quality and stability of the
Bank's net income, (ii) the availability of liquid assets to make dividend
payments, (iii) the level of earnings retention as it impacts the Bank's
capital needs and projected growth and funding levels, both internal and
external, and (iv) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would: (i) cause the capital level of the Bank to be reduced below
fully phased-in levels, or (ii), together with any other dividends declared
during the same calendar year, exceed 100% of the net income to date for that
calendar year plus 50% of the Bank's surplus capital (that is, in excess of
fully phased-in requirements) at the beginning of that calendar year, so long
as the Bank is a Tier 1 association.
The Bank expects that a substantial portion of any net earnings generated
by it, including net earnings generated as a result of sales of assets or
deposits, that are not needed in its operations or to expand its business
will, subject to regulatory limitations, be distributed to FN Holdings, its
parent company.
FN Holdings will be required, subject to certain limitations, (i) to
distribute in the form of dividends its net earnings to Holdings, to the
maximum extent permitted under applicable law and the various debt
instruments of FN Holdings, or (ii) to directly or indirectly loan all such
excess net earnings to affiliates of FN Holdings. Accordingly, the Bank
expects that any such excess net earnings would not be available to the Bank.
See "Market for the Registrant's Common Equity and Related Stockholder
Matters" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EMPLOYEES
At December 31, 1995, First Nationwide and its subsidiaries had
approximately 3,600 employees, consistent with the number of employees at
December 31, 1994. Although the number of employees has remained
substantially the same between the two years, 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 and
the transfer of the mortgage servicing operations to Maryland. None of First
Nationwide's employees are represented by any collective bargaining group and
management considers its relations with its employees to be good. First
Nationwide maintains a comprehensive employee benefits program providing,
among other benefits, health and welfare benefits, long and short-term
disability insurance, and life insurance. Additionally, First Nationwide
offers employees a defined contribution investment plan which is a qualified
plan under Section 401(a) of the Internal Revenue Code.
The Bank has undertaken a project to identify opportunities for reducing
operating costs and enhancing the efficiency of its operations. Management
has identified certain employees whose positions will be eliminated over the
next twelve months. These positions span all areas and business units of the
Bank. An initial liability for termination benefits totalling $4 million was
established in connection with this plan, and is included in the Company's
consolidated statement of operations for the year ended December 31, 1995.
COMPETITION
First Nationwide experiences significant competition in both attracting
and retaining deposits and in originating real estate and consumer loans.
First Nationwide competes with other thrift institutions, commercial
banks, insurance companies, credit unions, thrift and loan associations,
money market mutual funds and brokerage firms in attracting and retaining
deposits. Competition for deposits from large commercial banks is
particularly strong. Many of the nation's thrift institutions and many large
commercial banks have a significant number of branch offices in the areas in
which First Nationwide operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies,
32
<PAGE>
insurance companies, consumer finance companies, pension funds and commercial
finance companies. The primary factors in competing for loans are the quality
and extent of service to borrowers and brokers, economic factors such as
interest rates, interest rate caps, rate adjustment provisions, loan
maturities, LTV ratios, loan fees, and the amount of time it takes to process
a loan from receipt of the loan application to date of funding. First
Nationwide's future performance will depend on its ability to originate a
sufficient volume of mortgage loans in its local market areas and through its
wholesale network and, if it is unable to originate a sufficient volume of
mortgage loans, to purchase a sufficient quantity of high-quality
mortgage-backed securities with adequate yields.
REGULATION
General
FN Holdings is a savings and loan holding company within the meaning of
the HOLA and, as such, is registered with the OTS and is subject to
comprehensive OTS regulation. The Bank is a federally chartered and insured
stock savings bank subject to extensive regulation and supervision by the
OTS, as the primary federal regulator of savings associations, and the FDIC,
as the administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings
and loan holding companies. The following description of statutory and
regulatory provisions and proposals, which is not intended to be a complete
description of these provisions or their effects on FN Holdings or the Bank,
is qualified in its entirety by reference to the particular statutory or
regulatory provisions or proposals.
REGULATION OF FN HOLDINGS
Holding Company Acquisitions
The Company is a registered savings and loan holding company. The HOLA and
OTS regulations generally prohibit a savings and loan holding company,
without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among other
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition
is approved by the OTS.
Holding Company Activities
FN Holdings currently operates as a unitary savings and loan holding
company. Generally, there are limited restrictions on the activities of a
unitary savings and loan holding company and its non-savings association
subsidiaries. If FN Holdings ceases to be a unitary savings and loan holding
company, the activities of FN Holdings and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and
23B of the Federal Reserve Act. Affiliates of a savings association include,
among other entities, the savings association's holding company and companies
that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with
33
<PAGE>
affiliates to an amount equal to 10% of the association's capital and
surplus, in the case of covered transactions with any one affiliate, and to
an amount equal to 20% of such capital and surplus, in the case of covered
transactions with all affiliates. In addition, a savings association and its
subsidiaries may engage in covered transactions and certain other
transactions only on terms and under circumstances that are substantially the
same, or at least as favorable to the savings association or its subsidiary,
as those prevailing at the time for comparable transactions with
nonaffiliated companies. A "covered transaction" is defined to include a loan
or extension of credit to an affiliate; a purchase of investment securities
issued by an affiliate; a purchase of assets from an affiliate, with certain
exceptions; the acceptance of securities issued by an affiliate as collateral
for a loan or extension of credit to any party; or the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the OTS or the Board of Governors of
the Federal Reserve System (the "FRB") decides to treat such subsidiaries as
affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
REGULATION OF THE BANK
Regulatory System
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition. The most
recently completed OTS examination of the Bank was concluded in January 1995.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts
are insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
The Bank is a member of the FHLBS. Among other benefits, FHLB membership
provides the Bank with a central credit facility. The Bank is required to own
capital stock in the FHLB in an amount equal to the greater of: (i) 1% of its
aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
calendar year, (ii) .3% of total assets, or (iii) 5% of its FHLB advances.
Liquid Assets
Under OTS regulations, for each calendar month, a savings bank is required
to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings (its liquidity base) during the preceding
calendar month. This liquidity requirement, which is currently at 5.0%, may
be changed from time to time by the OTS to any amount between 4.0% to 10.0%,
depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily
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balance of short-term liquid assets equal to not less than 1.0% of the
average daily balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar month. The Bank maintains liquid
assets in compliance with these regulations.
Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy three minimum
capital standards: a "risk-based capital" requirement, a "core capital"
requirement and a "tangible capital" requirement. Savings banks must meet all
these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to
maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of
core capital. Under the leverage requirement, a savings bank is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See "--
Prompt Corrective Action."). A savings bank is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure must deduct an interest rate risk ("IRR") component
in calculating its total capital for purposes of determining whether it meets
its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest
rate risk component to be deducted from total capital is equal to one-half of
the difference between an institution's measured exposure and "normal" IRR
exposure (which is defined as 2%), multiplied by the estimated economic value
of the institution's assets. Based on internal measures of interest rate risk
at December 31, 1995, the Bank would not be required to deduct an IRR
component in calculating total risk-based capital.
The Bank's total capital to risk-based assets ratio was 11.34%, its core
capital to risk-based assets ratio was 9.14%, its leverage capital ratio was
5.84% and its tangible capital ratio was 5.84% at December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources." In connection with the acquisition of the
Texas Closed Banks, the Bank was granted a forbearance from several
regulations for up to ten years from December 28, 1988. Generally, the
forbearance is from regulatory action against violations that might otherwise
arise from the nature of the government assisted acquisition of the Texas
Closed Banks, such as limitations on investment in service corporations,
investing in forward commitments, equity risk investments, loans to one
borrower, investments in buildings and qualified thrift lender status.
Although certain forbearances may have been affected bythe passage of
subsequent legislation, management believes that the forbearance granted in
this case remains in full force and effect. The Bank does not rely on the
forbearance for purposes of complying with its regulatory capital
requirements.
Under regulations of the OTS, the following factors may cause the OTS to
require a particular savings association to maintain higher capital than
otherwise would be required under the capital regulations: (i) concentration
of credit risk, (ii) certain risks arising from non-traditional activities,
and (iii) management failure to adequately monitor and control risks
presented by concentrations of credit and non-traditional activities.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is
required to
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<PAGE>
submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that
it will not, without the approval of its appropriate OTS Regional Director,
grow beyond net interest credited or make capital distributions. If a savings
bank's capital plan is not approved, the bank will become subject to
additional growth and other restrictions. In addition, the OTS, through a
capital directive or otherwise, may restrict the ability of a savings bank
not in compliance with the capital requirements to pay dividends and
compensation, and may require such a bank to take one or more of certain
corrective actions, including, without limitation: (i) increasing its capital
to specified levels, (ii) reducing the rate of interest that may be paid on
savings accounts, (iii) limiting receipt of deposits to those made to
existing accounts, (iv) ceasing issuance of new accounts of any or all
classes or categories except in exchange for existing accounts, (v) ceasing
or limiting the purchase of loans or the making of other specified
investments, and (vi) limiting operational expenditures to specified levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound
practices or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under
the regulation, the ratio of total capital to risk-weighted assets, core
capital to risk-weighted assets and the leverage ratio are used to determine
an institution's capital classification. At December 31, 1995, the Bank met
the capital requirements of a "well capitalized" institution under applicable
OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept Brokered Deposits only with a waiver from the FDIC,
while undercapitalized institutions may not accept, renew or roll-over
Brokered Deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic
review of the institution's efforts to restore its capital, (ii) a
requirement that the institution submit a capital restoration plan acceptable
to the appropriate federal banking agency and implement that plan, and that
each company having control of the institution guarantee compliance with the
capital restoration plan in an amount not exceeding the lesser of 5% of the
institution's total assets at the time it received notice of being
undercapitalized, or the amount necessary to bring the institution into
compliance with applicable capital standards at the time it fails to comply
with the plan, and (iii) a limitation on the institution's ability to make
any acquisition, open any new branch offices, or engage in any new line of
business without the prior approval of the appropriate federal banking agency
for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of
the institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity
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<PAGE>
deemed to pose excessive risk to the institution, (vii) prohibiting capital
distributions by bank holding companies without prior approval by the FRB,
(viii) requiring the institution to divest certain subsidiaries, or requiring
the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action
that the agency believes would better carry out the purposes of the prompt
corrective action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor
of certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth
quarter after the institution initially became critically undercapitalized,
unless the institution's federal bank regulatory agency, with the concurrence
of the FDIC, makes certain positive determinations with respect to the
institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the
debt instrument, to the extent otherwise permitted by law. In addition,
critically undercapitalized institutions may be prohibited from engaging in a
number of activities, including entering into certain transactions or paying
interest above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well-capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable
to significantly undercapitalized institutions.
Conservatorship/Receivership
In addition to the grounds discussed under "-- Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a
conservator or receiver for a savings association if any one or more of a
number of circumstances exist, including, without limitation, the following:
(i) the institution's assets are less than its obligations to creditors and
others, (ii) a substantial dissipation of assets or earnings due to any
violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely
to incur, losses that will deplete all or substantially all of its capital,
and there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the
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institution's condition, or otherwise seriously prejudice the interests of
the institution's depositors or the federal deposit insurance fund, (ix) the
institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted
capital restoration plan, (x) the institution is critically undercapitalized
or otherwise has substantially insufficient capital, or (xi) the institution
is found guilty of certain criminal offenses related to money laundering.
Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly controlled
depository institution or any assistance provided by the FDIC to a commonly
controlled institution in danger of default. A depository institution is
required to pay the amount of such liability upon receipt of written notice
from the FDIC unless such written notice is received more than two years from
the date the FDIC incurred the loss. Liability for the losses of commonly
controlled institutions can lead to the failure of all depository
institutions in a holding company structure if the remaining institutions are
unable to pay the liability assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default"
of a depository institution occurs when there is an official determination
pursuant to which a conservator, receiver or other legal custodian is
appointed for the institution; and a depository institution is deemed to be
"in danger of default" where its federal or state supervisory agency
determines that the institution is not likely to be able to meet the demands
of its depositors or pay its obligations in the normal course of business and
there is no reasonable prospect that it will be able to do so, or determines
that the institution has incurred or is likely to incur losses that will
deplete substantially all of its capital and there is no reasonable prospect
that the institution's capital can be replenished without federal assistance.
First Nationwide is not currently under common control with any other
depository institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including
authority to bring various enforcement actions against a savings association
and any of its "institution-affiliated parties" (a term defined to include,
among other persons, directors, officers, employees controlling stockholders,
agents and shareholders who participate in the conduct of the affairs of the
institution). This enforcement authority includes, without limitation: (i)
the ability to terminate a savings association's deposit insurance, (ii)
institute cease-and-desist proceedings, (iii) bring suspension, removal,
prohibition and criminal proceedings against institution-affiliated parties,
and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth
of the institution; and rescind agreements and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying
dividends, OTS regulations limit certain "capital distributions" by
OTS-regulated savings associations. Capital distributions are defined to
include, in part, dividends and payments for stock repurchases and cash-out
mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has
not been notified by the OTS that it is in need of more than normal
supervision (a "Tier 1 association") may, after prior notice to but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the
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<PAGE>
beginning of the calendar year, or (ii) 75% of its net income over the most
recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a
"Tier 2 association") is authorized, after prior notice to the OTS but
without OTS approval, to make capital distributions in an amount up to 75% of
its net income over the most recent four-quarter period, taking into account
all prior distributions during the same period. Any distribution in excess of
this amount must be approved in advance by the OTS. A savings association
that does not meet its current regulatory capital requirements (a "Tier 3
association") cannot make any capital distribution without prior approval
from the OTS, unless the capital distribution is consistent with the terms of
a capital plan approved by the OTS.
At December 31, 1995, First Nationwide qualifies as a Tier 1 association
for purposes of the capital distribution rule. The OTS may prohibit a
proposed capital distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or unsound
practice. The requirements of the capital distribution regulation supersede
less stringent capital distribution restrictions in earlier agreements or
conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation.
Under the proposed regulation, an institution that would remain at least
adequately capitalized after making a capital distribution, and that was
owned by a holding company, would be required to provide notice to the OTS
prior to making a capital distribution. "Troubled" associations and
undercapitalized associations would be allowed to make capital distributions
only by filing an application and receiving OTS approval, and such
applications would be approved under certain limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their "portfolio assets" (defined as total assets minus goodwill,
intangibles, property used to conduct business, and liquid assets up to 20%
of assets) in certain "qualified thrift investments" (which consist primarily
of loans and other investments related to residential real estate and certain
other assets). A savings association that fails the qualified thrift lender
test is subject to substantial restrictions on activities and to other
significant penalties. At December 31, 1995, approximately 90.34% of First
Nationwide's portfolio assets were qualified thrift investments.
FDIC Assessments
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the
SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits
are currently subject to premiums of between 23 and 31 cents per $100 of
deposits, depending upon the institution's capital position and other
supervisory factors. The rate applicable to the Bank is currently 23 cents
per $100 of deposits.
The FDIC recently amended its assessment regulations to lower the deposit
premiums for some banking institutions which are members of the Bank
Insurance Fund (the "BIF") of the FDIC. Under the FDIC's risk-based insurance
system, BIF-assessed deposits are currently subject to premiums of between 0
to 27 cents per $100 of deposits as a result of these amendments. In reducing
these BIF rates, the FDIC did not change the rates applicable to
SAIF-assessable deposits.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF has been passed by Congress. The President has vetoed
this budget reconciliation bill. Such veto, however, was based on issues
unrelated to the provisions dealing with the capitalization of the SAIF. The
legislation included provisions for a special assessment, as determined by
the FDIC, on SAIF-assessable deposits of insured depository institutions in
an amount adequate to cause the SAIF to achieve a specified designated
reserve ratio. Under the proposed legislation, the assessment would have been
due January 1, 1996. The FDIC has publicly estimated that the amount of the
special assessment needed to recapitalize the SAIF ranges between 85 to 90
basis points.
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The proposed legislation provides that the assessment would be applied to
SAIF deposits held as of March 31, 1995. The SAIF-assessable deposits of the
Bank as of this date, adjusted for the Branch Sales, the Branch Purchases,
the SFFed Acquisition and the Home Federal Acquisition, totalled
approximately $8.9 billion. If the assessment is made at a rate within the
estimated range of 85 to 90 basis points, 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 a after-tax basis). It is expected
that in the event that the SAIF is recapitalized pursuant to this
legislation, the assessment rates applicable to SAIF-assessable deposits will
be reduced substantially from the Bank's current rate of 23 cents. The
proposed legislation includes additional provisions that, among other things,
would require BIF member institutions to share pro rata in the obligations of
SAIF members for certain obligations issued by the Financing Corporation, a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. FN Holdings is unable to predict whether this, or
similar legislation will be enacted.
Congress is considering other legislative proposals to merge the SAIF and
the BIF and to convert federal savings associations to national bank
charters. Such legislation, if enacted, could have a material effect on the
operations of the Bank and FN Holdings.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from acquiring
or retaining any corporate debt security that, at the time of acquisition, is
not rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization. First Nationwide does
not own any non-investment grade debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under CRA and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal
Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending
Laws") prohibit lenders from discriminating in their lending practices on the
basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of the CRA could, at a minimum, result
in regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
New Safety and Soundness Guidelines
The OTS and the other federal banking agencies have established guidelines
for safety and soundness, addressing operational and managerial, as well as
compensation matters for insured financial institutions. Institutions failing
to meet these standards are required to submit compliance plans to their
appropriate federal regulators. The OTS and the other agencies have also
issued for comment proposed guidelines regarding asset quality and earnings
standards for insured institutions.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual
may acquire control of a savings association if the OTS objects. Any company
that acquires control of a savings association becomes a savings and loan
holding company subject to extensive registration, examination and regulation
by the OTS. Conclusive control exists, among other ways, when an acquiring
party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner
the election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than ten percent of any class of a savings association or
savings and loan holding company's voting stock (or 25% of any class of
stock) and, in either case, any of certain additional control factors exist.
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TAXATION
Thrift institutions are generally subject to federal income taxation in
the same manner as other corporations. Under Section 593 of the Internal
Revenue Code of 1986, as amended (the "Code"), thrift institutions which meet
certain definitional tests and other conditions are allowed a bad debt
reserve deduction computed as a percentage of taxable income or
alternatively, may utilize its own bad debt loss experience to compute
additions to its bad debt reserves (the "experience method"). Accordingly,
qualifying thrift institutions may be subject to a lower effective federal
income tax rate than is otherwise generally applicable to corporations. In
1995, 1994 and 1993, the marginal federal tax rate of First Nationwide was
35%. First Nationwide is utilizing the experience method to compute its 1995
additions to its bad debt reserve.
In addition to the regular corporate income tax, corporations, including
qualifying thrift institutions, are subject to an alternative minimum tax
("AMT"). This 20% tax is computed on adjusted taxable income increased for
applicable tax preference items. The alternative minimum tax is applicable if
it exceeds the regular tax liability. Income earned from FSLIC/RF assistance
payments is generally considered a tax preference item subject to AMT.
Alternative minimum taxes paid by the Bank are based on the provisions of its
tax sharing agreements with FN Holdings and Mafco Holdings. These payments
are reflected as deferred tax assets in the statements of financial condition
to the extent they are available to reduce future taxes payable.
Although the Code and the tax codes of the various states in which the
Bank operates are generally similar, differences do exist in the
determination of taxable income in these states. These differences, which in
some states include no special percentage of taxable income method of
computing the bad debt reserve and no operating loss carryforward provisions,
can cause taxable income, at the state level, to be significantly different
from taxable income at the federal level. In certain states, the Bank is also
subject to taxes assessed on amounts other than taxable income, which may
include assets, deposits or net worth. All of such taxes are deductible for
federal income tax purposes.
Under a Code provision designed to aid regulatory oversight agencies in
accomplishing supervisory mergers of financially troubled institutions,
substantially all money or property received in connection with federally
assisted acquisitions consummated on or before December 31, 1988 is excluded
from taxable income. For the years ended December 31, 1995, 1994 and 1993,
the portions of the FSLIC/RF assistance payments attributable to such
acquisitions which have been excluded from taxable income were $5 million, $9
million and $37 million, respectively.
In 1995, Congress passed a tax bill that, if it had been enacted, would
have repealed Section 593 of the Code. The President vetoed this tax bill,
however, for reasons unrelated to those provisions dealing with the repeal of
Section 593 of the Code. In addition, the President subsequently proposed tax
legislation that also included a provision repealing Section 593 of the Code
which was substantially similar to the tax legislation passed by Congress. If
tax legislation is ultimately enacted that includes the repeal of Section 593
of the Code, the reserve method of accounting for bad debts would no longer
be available to the Bank. Rather, the Bank generally would be required to
take its bad debts into account using the specific charge-off method.
Pursuant to the specific charge-off method, the Bank would be entitled to
take its bad debts into account in the taxable year during which such debts
become wholly or partially worthless. The repeal of Section 593 of the Code
also may require a domestic building and loan association, such as the Bank,
to recapture a certain portion of its bad debt reserve into income under
certain circumstances, and, accordingly, could cause the Bank to make
payments to FN Holdings under the Tax Sharing Agreement. As a result, FN
Holdings may be required to make payments to Mafco Holdings under the Tax
Sharing Agreement if FN Holdings has insufficient expenses and losses to
offset such income. As of December 31, 1995, the Bank had tax bad debt
reserves totalling $187 million, all of which had been provided for in
deferred tax liabilities. The Bank does not expect to generate substantial
amounts of federal taxable income (after taking into account its net
operating loss carryovers) from any recapture of the Bank's bad debt reserve.
Accordingly, the repeal of the reserve method of accounting for bad debts, if
enacted, would not be expected to have a material adverse effect on the Bank.
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For further information concerning federal and state taxes on income, see
Notes 3 and 27 of the Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company neither owns nor leases any properties directly. The executive
offices of First Nationwide are located at 14651 Dallas Parkway, Suite 200,
Dallas, Texas 75240, and its telephone number is (214) 770-3700. First
Nationwide leases approximately 41,000 square feet of space in the building
in which its executive offices are located under a lease expiring in 1996.
Such lease was renewed in March 1996 to extend to 1999. First Nationwide
maintains additional office space at 135 Main Street, San Francisco,
California, 94105, consisting of approximately 99,000 square feet. First
Nationwide leases the building in which its additional office space is
located under a ten-year lease expiring in 2001. In addition, the Bank leases
approximately 288,000 square feet in a multiple-building administrative
facility in West Sacramento, California under a ten-year lease expiring in
2001. In connection with the move of FNMC's servicing operation to Maryland,
one and a half of these four Sacramento buildings, containing approximately
108,000 square feet, were vacated. Management is currently screening
potential sub- lessees. At December 31, 1995, First Nationwide operated a
total of 160 retail branches and maintained one vacant branch facility which
was consolidated as a result of the Sonoma Purchase. Of those, 83 are owned
and 78 are leased. Some of these retail branches are multi-purpose
facilities, housing loan production and administrative facilities as well. In
addition to the branch locations, at December 31, 1995, there were 27
separate loan production offices, all of which were leased and eight of which
were vacant, and 14 separate administrative facilities (two owned and 12
leased). The administrative facilities include a 220,000 square foot building
owned in Frederick, Maryland, which houses FNMC's mortgage servicing
operation. A state-by-state breakdown of all retail branches, administrative
offices, and loan production offices at December 31, 1995 is shown in the
following table:
<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
--------------------- --------------------- ---------------------
OWNED LEASED OWNED LEASED OWNED LEASED
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona ......... 0 0 0 1 0 2
California ...... 17 38 0 3 0 11
Florida ......... 6 18 0 1 0 2
Georgia ......... 0 0 0 0 0 1
Illinois ........ 0 0 0 2 0 2
Maryland ........ 0 0 1 0 0 1
Michigan * ...... 18 3 0 1 0 1
Minnesota ....... 0 0 0 0 0 1
Montana ......... 0 0 0 1 0 0
New Jersey * ... 3 1 0 0 0 0
New York * ...... 18 8 0 1 0 0
Ohio * .......... 18 10 1 0 0 0
Oklahoma ........ 0 0 0 1 0 0
Oregon .......... 0 0 0 0 0 1
Pennsylvania ... 0 0 0 0 0 1
Texas ........... 3 0 0 1 0 2
Washington ...... 0 0 0 0 0 2
----- ----- ----- ----- ----- -----
Total ......... 83 78 2 12 0 27
===== ===== ===== ===== ===== =====
</TABLE>
- ------------
* Certain properties in these states are under contract to be sold as of
December 31, 1995 as part of the Branch Sales.
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2
million and are included in noninterest expense in the
42
<PAGE>
Company's 1995 consolidated statement of operations. On a continuing basis,
First Nationwide evaluates the adequacy of its office premises. As a result,
surplus office facilities may be sold or subleased to maintain cost-effective
operations and minimize vacant facilities. The 27 loan production offices at
December 31, 1995 include eight offices housing operations acquired in the
LMUSA 1995 Purchase, eleven offices housing wholesale lending operations, and
eight vacant facilities. Of the eight vacant loan production offices, one has
been subleased and management is currently screening tenants for the
remaining seven.
ITEM 3. LEGAL PROCEEDINGS
The Asset Purchase Agreement provides that the purchase price thereunder
will be increased or decreased by, among other items, the increase or
decrease, as the case may be, from January 1, 1994 to September 30, 1994, in
the net book value of the purchased assets acquired from Old FN (the
"Purchased Assets") and the liabilities assumed from Old FN (the "Assumed
Liabilities") as such net book value is reflected on the books and records of
Old FN in accordance with GAAP (as defined in the Asset Purchase Agreement)
consistently applied with the previous accounting practices of Old FN. 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 FN. First Nationwide prepared a
closing date balance sheet and a statement of the change in net book value of
the Purchased Assets and Assumed Liabilities from January 1, 1994 to
September 30, 1994 ("Closing Adjustment Documents"). The parties mutually
agreed upon all but two of the issues raised as a result of the Closing
Adjustment Documents.
The more significant of the two issues in dispute arises from Old FN's
change in net book value from January 1, 1994, to the close of business on
September 30, 1994. In arriving at the cash purchase price, Old FN 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 believes that the exclusion of the amortization of
intangible assets and goodwill from the closing net book value is contrary to
the express provisions of the Asset Purchase Agreement. As a result, First
Nationwide does not believe that the addition by Old FN 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 FN in
state district court in Dallas, Texas regarding this matter. On October 16,
1995, the court in this matter granted Old FN's motion to compel arbitration
and stayed First Nationwide's court action. The arbitration hearing was held
from April 22, 1996 to April 25, 1996. The arbitrator ordered post-hearing
briefs to be filed on May 15, 1996. Although management of First Nationwide
believes that it will prevail on this issue, in the event that First
Nationwide does not so prevail, the result would not be material to the
consolidated financial statements of the Company.
The other remaining issue in dispute arising out of the Closing Adjustment
Documents relates to an outstanding receivable account, which the Bank
maintains was overstated by approximately $4 million by Old FN at September
30, 1994. Resolution of this issue remains outstanding. Although management
of the Bank believes that it will prevail on this issue, in the event that it
does not do so, the result would not be material to the consolidated
financial statements of the Company.
First Nationwide is involved in legal proceedings incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of
any outstanding legal proceedings, the management of First Nationwide
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 First Nationwide.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
43
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Ronald O. Perelman, Chairman of the Board, Chief Executive Officer and a
Director of the Company, 35 East 62nd Street, New York, New York 10021,
through MacAndrews Holdings, beneficially owns 100% of the class A common
stock of FN Holdings, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common stock) and
100% of the class C common stock of FN Holdings. Hunter's Glen, a limited
partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a Director of First Nationwide, 200 Crescent Court,
Suite 1350, Dallas, Texas 75201, owns 100% of the class B common stock of FN
Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock).
FN Holdings is an 80% owned indirect subsidiary of MacAndrews & Forbes. As
a result, MacAndrews & Forbes is able to direct and control the policies of
the Company and its subsidiaries, including mergers, sales of assets and
similar transactions.
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, Inc., MacAndrews &
Forbes is engaged in the cosmetics and skin care, fragrance and personal care
products business. MacAndrews & Forbes owns 83% of The Coleman Company, Inc.
("Coleman"), which is engaged in the manufacture and marketing of
recreational outdoor products, portable generators, power-washing equipment,
spas and hot tubs, and 65% of Meridian Sports Incorporated ("Meridian
Sports"), a manufacturer and marketer of specialized boats and water sports
equipment. Marvel Entertainment Group, Inc. ("Marvel"), a youth entertainment
company, is 80% owned by MacAndrews & Forbes. MacAndrews & Forbes also is
engaged in the television broadcast and programming production business
through its approximate 35% ownership of New World Communications Group
Incorporated ("New World"), and, through its 86% ownership of Mafco
Consolidated Group Inc. ("Mafco Consolidated"), in the processing of licorice
and other flavors, and in the manufacture and distribution of cigars and pipe
tobacco. MacAndrews & Forbes is also in the financial services business
through First Nationwide. The principal executive offices of MacAndrews &
Forbes are located at 35 East 62nd Street, New York, New York 10021.
Dividends
During 1995, dividends on the Bank's common stock totalled $111.9 million.
No dividends were paid in 1994 on the Bank's common stock. During 1993,
dividends and distributions on the Bank's common stock totalled $379.5
million. Such dividends and distributions included certain assets of the
Bank, including the stock of FGMH.
On August 1, 1990, the OTS final rule (the "Capital Distribution Rule" or
the "rule") relating to dividends and other capital distributions by savings
institutions became effective. The rule provides for three tiers of savings
institutions: (i) Tier 1 institutions, institutions that have capital ("total
capital" as calculated under the OTS capital regulation) equal to or greater
than their fully phased-in capital requirement (the requirement applicable at
December 31, 1995) prior to, and on a pro forma basis after giving effect to,
a proposed capital distribution, (ii) Tier 2 institutions, institutions that
have capital equal to or greater than their minimum capital requirement but
less than their fully phased-in capital requirement prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution, and
(iii) Tier 3 institutions, institutions that do not meet their minimum
capital requirement either before or after giving effect to a proposed
capital distribution.
At December 31, 1995 First Nationwide qualifies as a Tier 1 institution.
Tier 1 institutions may make capital distributions, after prior notice to the
OTS but without OTS approval, of up to 100% of their net income to date
during the calendar year plus the amount that would reduce by one half their
surplus capital ratio (the percentage by which an institution's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirement to its assets) at the beginning of the calendar year. Tier 1
institutions may make capital distributions in excess of the foregoing limits
if the OTS does not object after receiving
44
<PAGE>
notice thereof. Tier 2 institutions are authorized, after prior notice to the
OTS but without approval by the OTS, to make distributions up to 75% of their
net income over the most recent four-quarter period, taking into account all
prior distributions during the same period. Tier 2 institutions may, through
a written approval process, obtain approval to make distributions in excess
of these amounts. Tier 3 institutions are not authorized to make any capital
distribution unless they receive prior written OTS approval or, in the case
of an institution operating in compliance with an approved capital plan, the
capital distribution is consistent with the institution's capital plan.
ITEM 6. SELECTED FINANCIAL DATA
The data presented below represents selected financial data relative to FN
Holdings for, and as of the end of, each of the years in the five-year period
ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994(1) 1993(2) 1992(3) 1991
---------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income ......................... $1,075,845 $293,139 $ 95,264 $659,201 $990,596
Interest expense ........................ 734,815 199,845 74,728 450,240 663,016
Net interest income ..................... 341,030 93,294 20,536 208,961 327,580
Provision for loan losses ............... 37,000 6,226 1,402 16,193 17,698
Noninterest income ...................... 150,973 41,158 190,876 384,336 128,366
Noninterest expense ..................... 332,553 96,298 63,392 361,549 464,624
Income (loss) before taxes,
extraordinary item and minority
interest ............................... 122,450 31,928 146,618 215,555 (26,376)
Income tax (benefit) expense (4) ....... (57,185) 2,558 2,500 -- --
Income (loss) before extraordinary item
and minority interest .................. 179,635 29,370 144,118 215,555 (26,376)
Extraordinary item: gain on early
extinguishments of FHLB advances, net . 1,967 1,376 -- -- --
Net income (loss) before minority
interest ............................... 181,602 30,746 144,118 215,555 (26,376)
Minority interest-First Nationwide Bank
preferred stock dividends .............. 34,584 -- -- -- --
Net income (loss) ....................... 147,018 30,746 144,118 215,555 (26,376)
SELECTED PERFORMANCE RATIOS
Return (loss) on average assets (5) .... 1.00% .69% 7.84% 2.52% (0.25)%
Return (loss) on average common equity
(6) .................................... 39.33 16.05 69.41 58.89 (6.64)
Average equity to average assets (7) ... 2.54 3.90 11.31 5.73 4.95
Yield on interest-earning assets (8) ... 7.71 6.85 5.42 8.32 9.99
Cost of interest-bearing liabilities (9) 5.35 4.83 4.70 5.73 6.78
Net interest margin (10) ................ 2.44 2.18 1.14 2.63 3.30
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND MINORITY INTEREST--
FIRST NATIONWIDE BANK
PREFERRED STOCK DIVIDENDS (11)
Excluding interest on deposits (12) .... 1.27x 1.32x 9.59x 10.74x --
Including interest on deposits (12) .... 1.11 1.16 3.02 1.46 --
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1994(1) 1993(2) 1992(3) 1991
----------- ----------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (14) . $ 1,826,075 $ 45,000 $ -- $ -- $ --
Securities held to maturity (13)(14) 1,455 411,859 15,118 2,034,842 90,416
Mortgage-backed securities held to
maturity ........................... 1,524,488 3,153,812 341,224 77,622 1,771,168
Loans receivable, net ............... 8,831,018 9,966,886 29,244 777,265 2,541,600
Covered assets, net ................. 39,349 311,603 592,593 839,538 1,398,906
Total assets ........................ 14,646,245 14,683,559 1,125,222 8,961,473 10,178,061
Deposits ............................ 10,241,628 9,196,656 431,788 7,809,478 9,148,901
Securities sold under agreements to
repurchase ......................... 969,510 1,883,490 119,144 30,647 305,000
Borrowings .......................... 2,392,862 2,808,979 440,792 597,564 192,117
Total liabilities ................... 13,883,099 14,029,957 1,012,328 8,488,697 9,761,664
Minority interest -- preferred stock
of First Nationwide Bank ........... 300,730 300,730 -- -- --
Stockholders' equity ................ 462,416 352,872 112,894 472,776 416,397
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital .................... 5.84% 5.50% 9.50% 4.59% 3.37%
Core capital ........................ 5.84 5.50 9.50 5.13 3.88
Risk-based capital: .................
Core capital ....................... 9.14 8.86 67.71 15.67 12.39
Total capital ...................... 11.34 11.01 68.97 16.24 13.09
SELECTED OTHER DATA
Number of full service customer
facilities ......................... 160 156 4 162 162
Loans serviced for others (15) ..... $28,170,543 $ 7,475,119 $ 327,449 $10,156,020 $ 4,466,467
Approximate number of employees .... 3,619 3,573 317 3,030 2,693
Non-performing assets as a % of the
Bank's total assets ................ 1.50% 1.49% 0.98% 0.12% 0.53%
</TABLE>
- ------------
(1) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, the Bank acquired assets with fair
values totalling approximately $14.1 billion and liabilities
(including deposit liabilities) with fair values totalling
approximately $13.4 billion from Old FN.
(2) During the first quarter of 1993, FN Holdings sold certain assets,
liabilities, and substantially all of its branch operations located
in Texas, including $829 million of loans and 130 branches with $6.9
billion in deposits in the BAC Sale. A net gain of $141 million was
recorded in connection with this sale.
(3) During the last quarter of 1992, FN Holdings sold certain assets,
liabilities, and branch operations located in Oklahoma, including $3
million of loans and 27 branches with $809 million in deposits (the
"Oklahoma Sale"). The increase in noninterest income in 1992 was
primarily attributable to the gain of $203 million on sales of assets
in anticipation of the BAC Sale, the gain of $19 million on the
Oklahoma Sale, and a gain of $41 million as a result of the
modification of the Assistance Agreement.
(4) Utilization of net operating loss carryovers resulted in no
provisions for income taxes until the FN Acquisition. Income tax
expense of $2.5 million was recorded in the first quarter of 1993
representing AMT expense related to the gain recognized on the BAC
Sale (See footnote 2). Income tax expense recorded in 1994 after the
FN Acquisition represents federal AMT tax reduced, to the extent of
90%, by net operating loss carryovers, and state tax at an assumed
rate of 8%. Income tax benefit in 1995 represents the recording of a
deferred tax benefit of $69 million, offset by federal AMT tax
reduced, to the extent of 90%, by net operating loss carryover and
state tax at an assumed rate of 8%.
46
<PAGE>
(5) Return (loss) on average assets represents net income (loss) as a
percentage of average assets.
(6) Return (loss) on average common equity represents net income (loss)
as a percentage of average common equity.
(7) Average equity to average assets represents average equity divided by
average assets.
(8) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets.
(9) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities.
(10) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(11) Earnings used in computing the ratio of earnings to combined fixed
charges and minority interest--First Nationwide Bank preferred stock
dividends consist of income before taxes, extraordinary item and
minority interest. Fixed charges consist of interest expense on
borrowings, the interest component of lease expense and, where
indicated, interest expense on deposits.
(12) Earnings were insufficient to cover fixed charges in 1991 by $26.4
million excluding interest on deposits, and $26.4 million including
interest on deposits.
(13) Increase in securities held to maturity at December 31, 1992 resulted
from the investment of proceeds on sale of certain long-term
interest-bearing assets, primarily loans and mortgage-backed
securities, in cash, cash equivalents and investment securities in
anticipation of the BAC Sale.
(14) Fluctuation in securities and mortgage-backed securities held to
maturity and securities available for sale from December 31, 1994 to
December 31, 1995 resulted from the reclassification of substantially
all securities and mortgage-backed securities (except for
mortgage-backed securities resulting from the securitization with
recourse of certain of the Bank's loans) from held-to-maturity to
securities available for sale.
(15) Includes loans serviced by FNMC, the Bank, and FGB Realty, excluding
loans serviced for the Bank.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FN Holdings is a holding company whose only significant asset is all of
the common stock of First Nationwide. As such, FN Holdings' principal
business operations are conducted by First Nationwide and its subsidiaries.
First Nationwide's principal business 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 and loan servicing. Revenues are derived primarily from
interest charged on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments, and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and
long-term borrowings, provisions for losses, general and administrative
expenses consisting of compensation and benefits, advertising and marketing,
premises and equipment, communications, deposit insurance assessments, data
processing and other general and administrative expenses.
Impact of Acquisitions and Dispositions
The FN Acquisition was consummated on October 3, 1994, effective
immediately after the close of business on September 30, 1994, and was
recorded using the purchase method of accounting. Accordingly, the
accompanying financial data include the results of operations related to the
approximately $14.1 billion in assets and $13.4 billion in liabilities
acquired in the FN Acquisition. Minority interest increased by $301 million
due to the issuance of the Preferred Stock. In connection with the FN
Acquisition, common stockholders' equity increased by $210 million from the
issuance of the Company's class C common stock to Holdings.
47
<PAGE>
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a loan servicing portfolio of approximately $11.4 billion, including
a subservicing portfolio of $1.8 billion, and certain assets and liabilities
for approximately $178 million. The transaction was accounted for as a
purchase, and the Company's consolidated statements of operations for the
year ended December 31, 1995 include the results of operations of the
acquired mortgage servicing operation for the period from March 1, 1995
through December 31, 1995.
In April 1995, First Nationwide acquired approximately $13 million in
deposits in the Tiburon Purchase. In August 1995, the Bank acquired three
retail branches located in Orange County, California with deposit accounts
totalling approximately $356 million in the ITT Purchase. On December 8,
1995, the Bank acquired four retail branches with deposit accounts of
approximately $144 million in the Sonoma Purchase. The Branch Purchases were
accounted for as purchases, and the results of operations of the acquired
retail deposit operations are included in the Company's consolidated
statement of operations for the year ended December 31, 1995 from the date
each of the transactions was consummated.
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase and acquired
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations for approximately $100 million, payable in installments, and the
assumption of certain indebtedness secured by the acquired loan portfolio
totalling approximately $274 million. The LMUSA 1995 Purchase was accounted
for as a purchase and the Company's consolidated statement of operations for
the year ended December 31, 1995 includes the results of operations of the
acquired mortgage servicing operations for the period from October 3, 1995
through December 31, 1995.
The BAC Sale was effective February 1, 1993 resulting in the sale of $829
million of loans and $6.9 billion in deposits in 130 branches. The
accompanying financial data for 1993 reflect the results of operations in
1993 including these sold assets and liabilities during the first month of
the year. Subsequent to the BAC Sale, First Nationwide managed four retail
branches in Texas and supplemented the retail deposit base with wholesale
funds from Brokered Deposits and FHLB advances.
Prior to and during 1993, most of the mortgage banking operations of First
Nationwide were conducted through FGMH prior to the distribution by the Bank
of the stock of FGMH to its then immediate parent in the first quarter of
1993. Therefore, the accompanying financial data for 1993 reflect the results
of such mortgage banking operations during 1993 prior to the distribution.
Accrued Termination and Facilities Costs
During 1995, FN Holdings recorded $12.7 million in noninterest expense
related to four specific actions. In connection with the Maryland
Acquisition, the former residential loan servicing center in Sacramento,
California was relocated to Maryland, resulting in a charge of $5.7 million
for employee termination and facilities costs, net of expected sublease
income. Additionally, $2.1 million has been provided for employee termination
and facilities costs (net of expected sublease income) related to the closing
of FN Holdings' residential loan production offices. FN Holdings has also
recorded a charge of $4.0 million related to employee termination benefits
for positions which will be eliminated over the next twelve months in
conjunction with the Bank's cost reduction plan. In connection with the
elimination of these positions, the Bank has identified opportunities for
office space consolidation and has established additional liabilities
totalling $.4 million for lease termination payments. Additionally, the Bank
has identified certain of its retail banking facilities which will be closed
and marketed for sale, with the related operations consolidated into other
retail banking facilities acquired in the ITT Purchase. In connection with
such closures and consolidations, a liability totalling $.5 million was
established to record such facilities at fair value.
Accounting Changes
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as
amended by Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income
48
<PAGE>
Recognition and Disclosures" ("SFAS No. 118"), effective January 1, 1995.
Under SFAS No. 114, a loan is impaired when it is "probable" that a creditor
will be unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The measurement of
impairment may be based on: (i) the present value of the expected future cash
flows of the impaired loan discounted at the loan's original effective
interest rate, (ii) the loan's observable market price, or (iii) the fair
value of the loan's collateral. SFAS No. 114 does not apply to large groups
of smaller balance homogeneous loans that are collectively evaluated for
impairment. For the Company, loans collectively reviewed for impairment
include all single family loans and performing multi-family and commercial
real estate loans under $500,000, excluding loans which have entered the
workout process. The adoption of SFAS No. 114, as amended by SFAS No. 118,
had no material impact on the Company's consolidated financial statements as
the Company's existing policy of measuring loan impairment is consistent with
methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Company bases the measurement of collateral-dependent
impaired loans, which represents substantially all of the Company's loan
portfolio, on the fair value of the loan's collateral. The amount, if any, by
which the recorded investment of the loan exceeds the measure of the impaired
loan's value is recognized by recording a valuation allowance.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at December 31, 1995, have not been established, because
most would be eligible to be sold to Granite under the Put Agreement. There
have been no significant multi-family or commercial real estate loans
originated since October 1, 1994.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on non accrual status). The average recorded investment in
impaired loans during the year ended December 31, 1995 was approximately
$125.5 million. For the year ended December 31, 1995, the Company recognized
interest income on these impaired loans of $12.9 million, which included $.2
million of interest income recognized using the cash basis method of income
recognition.
On May 12, 1995, the FASB issued SFAS No. 122. This statement provides
guidance for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold or securitized and servicing rights are retained. The
Company adopted this standard effective April 1, 1995. The result of such
adoption was to capitalize approximately $17 million in mortgage servicing
rights related to loans originated by the Company in 1995.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its fair market
value. To determine the fair value of the servicing rights created since
April 1, 1995, the Company used market prices under comparable servicing
contracts, when available, or alternatively, used a valuation model that
calculates the present value of future net servicing income. In using this
valuation method, the Company incorporated assumptions that market
participants would use in estimating future net servicing income which
included estimates of the cost of servicing, the discount rate, mortgage
escrow earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Originated mortgage servicing rights totalling
$16.8 million were recorded during the year ended December 31, 1995.
Also, SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount of the
servicing rights and their current fair value. In determining impairment, the
Company aggregates all mortgage servicing rights including those capitalized
prior to adoption of SFAS No. 122, and stratifies them based on the
predominant risk characteristics of interest
49
<PAGE>
rate, loan type and investor type. A valuation allowance is established for
any excess of amortized book value over the current fair value, by risk
stratification, by a charge to income. Based on this analysis, no allowance
for loss on impairment of loan servicing rights was necessary at December 31,
1995.
Effective January 1, 1994, FN Holdings adopted SFAS No. 115. SFAS No. 115
requires that securities held to maturity be reported at amortized cost.
Securities bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. All other securities
held for investment purposes are classified as available for sale and are
carried at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity, net of
tax. There was no impact on the consolidated financial statements as a result
of such adoption. At December 31, 1994, all U.S. government and agency
securities and mortgage-backed securities were classified in the
held-to-maturity portfolio.
On November 15, 1995, FASB issued the Special Report, which provided all
entities an opportunity to reassess their ability and intent to hold
securities to maturity and allowed a one-time reclassification from
held-to-maturity to available-for-sale without "tainting" the remaining
held-to-maturity securities. On December 29, 1995, the Company reclassified
$1.5 billion and $231.8 million in carrying value of mortgage-backed
securities and U.S. government and agency securities, respectively, from the
respective held-to-maturity categories to securities available for sale,
resulting in a net after-tax increase of $22.5 million in stockholders'
equity. There was no impact on the Bank's regulatory capital as a result of
this reclassification.
In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The Company
adopted SFAS No. 109 effective January 1, 1993. There was no impact on the
consolidated financial statements of the Company as a result of such
adoption.
As of December 31, 1994, First Nationwide recorded a valuation allowance
for 100% of the Bank's net deferred tax asset because at that time it was not
more likely than not that such deferred tax asset would be realized. Based on
a favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgement about the
realizability of the Bank's net deferred tax assets and recognized a deferred
tax benefit of $69 million in the fourth quarter of 1995. Management believes
that the realization of such asset is more likely than not, based upon the
expectation that First Nationwide will generate the necessary amount of
taxable income in future periods.
50
<PAGE>
RESULTS OF OPERATIONS
The year-to-year comparisons as set forth below, including the changes in
magnitude of various items between periods, have been affected by the
acquisitions and dispositions consummated during the periods involved.
The following table sets forth, for the periods and at the dates
indicated, information regarding FN Holdings' 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 FN Holdings.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
--------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1): ......
U.S. government and agency
securities held to maturity (2)
(3) ............................. $ 435 $ 28 6.42%
Mortgage-backed securities held
to maturity (3)(4) ............. 2,985 213 7.14
Loans held for sale ............. 304 24 7.89
Loans receivable, net (4) .......... 10,058 800 7.95
Covered Assets, net (5) ......... 165 11 6.67
--------- --------- -------
Total interest-earning assets .. 13,947 1,076 7.71%
--------- --------- -------
Noninterest-earning assets ......... 751
---------
Total assets ................... $14,698
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits ........................ $ 9,959 447 4.49%
Securities sold under agreements
to repurchase .................. 1,577 105 6.66
Borrowings (6) .................. 2,210 183 8.26
--------- --------- -------
Total interest-bearing
liabilities ..................... 13,746 735 5.35%
--------- --------- -------
Noninterest-bearing liabilities . 277
Minority interest--preferred
stock of First Nationwide Bank . 301
Stockholders' equity ............ 374
---------
Total liabilities and
stockholders' equity .......... $14,698
=========
Net interest income ................. $ 341
=========
Interest rate spread ................ 2.36%
=======
Net interest margin ................. 2.44%
=======
Average equity to average assets ... 2.54%
=======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1994 1993
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1): ......
U.S. government and agency
securities held to maturity (2)
(3) ............................. $ 138 $ 7 4.95% $ 710 $24 3.43%
Mortgage-backed securities held
to maturity (3)(4) ............. 711 43 6.05 120 6 5.04
Loans held for sale ............. 11 1 5.22 -- -- --
Loans receivable, net (4) .......... 2,926 212 7.27 124 16 12.67
Covered Assets, net (5) ......... 491 30 6.11 804 49 6.11
-------- -------- ------- -------- --------- -------
Total interest-earning assets .. 4,277 293 6.85% 1,758 95 5.42%
-------- -------- ------- -------- --------- -------
Noninterest-earning assets ......... 161 81
-------- --------
Total assets ................... $4,438 $1,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits ........................ $2,605 101 3.88% $1,197 55 4.59%
Securities sold under agreements
to repurchase .................. 351 19 5.37 21 1 3.83
Borrowings (6) .................. 1,181 80 6.77 373 19 5.09
-------- -------- ------- -------- --------- -------
Total interest-bearing
liabilities ..................... 4,137 200 4.83% 1,591 75 4.70%
-------- -------- ------- --------- --------- -------
Noninterest-bearing liabilities . 53 40
Minority interest--preferred
stock of First Nationwide Bank . 75
Stockholders' equity ............ 173 208
-------- --------
Total liabilities and
stockholders' equity .......... $4,438 $1,839
======== ========
Net interest income ................. $ 93 $20
======== =========
Interest rate spread ................ 2.02% .72%
======= =========
Net interest margin ................. 2.18% 1.14%
======= =========
Average equity to average assets ... 3.90% 11.31%
======= =========
</TABLE>
- ------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and short-term
investment securities.
(3) Substantially all securities held to maturity (except for
mortgage-backed securities resulting from the securitization with
recourse of certain of the Bank's loans) were reclassified to
securities available for sale on December 29, 1995. The average balance
of such securities for three days is not material and is therefore not
presented.
(4) In late December, 1994, $1.3 billion of single-family loans were
securitized with recourse. The large increase in the average balance of
mortgage-backed securities held to maturity from 1994 to 1995 is due to
such securitized loans.
(5) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(6) Interest and average rate include the impact of interest rate swaps.
51
<PAGE>
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 year's rate) and (ii) changes in
rate (changes in average interest rate multiplied by the prior year's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
------------------------ -------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO
------------------------ -------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities (1) ............... $ 18 $ 3 $ 21 $(38) $21 $(17)
Mortgage-backed securities .. 160 10 170 36 1 37
Loans held for sale .......... 23 0 23 1 0 1
Loans receivable, net ........ 566 22 588 200 (4) 196
Covered assets, net (2) ..... (22) 3 (19) (19) 0 (19)
----- ----- ----- ----- ----- -----
Total .................... 745 38 783 180 18 198
----- ----- ----- ----- ----- -----
INTEREST EXPENSE:
Deposits ..................... 328 18 346 53 (7) 46
Securities sold under
agreements to repurchase ... 80 6 86 18 0 18
Borrowings ................... 82 21 103 53 8 61
----- ----- ----- ----- ----- -----
Total .................... 490 45 535 124 1 125
----- ----- ----- ----- ----- -----
Change in net interest income $255 $(7) $248 $ 56 $17 $ 73
===== ===== ===== ===== ===== =====
</TABLE>
- ------------
(1) Includes interest-bearing deposits in banks and short-term investment
securities.
(2) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
The positive volume variance of $255 million from 1994 to 1995 is largely
due to $13.4 billion in interest-earning assets acquired offset in part by
the $13.3 billion in interest-bearing liabilities assumed in the FN
Acquisition on October 3, 1994, which contributed to net interest income
during the last quarter of 1994 and all of 1995. The negative rate variance
of $7 million is attributed to the interest-bearing liabilities acquired in
the FN Acquisition, which rates reflect the overall increase in market
interest rates from the fourth quarter of 1994 through 1995, and the issuance
of the Senior Notes to finance the FN Acquisition. In an increasing rate
environment, the Company's cost of interest-bearing liabilities reacts more
quickly to changes in rates than the yields on interest-bearing assets, due
to the volume of adjustable rate interest-bearing assets which generally
reprice on an annual or semi-annual basis.
The positive volume variance of $56 million from 1993 to 1994 is largely
due to the FN Acquisition, which resulted in $14 billion in interest-earning
assets contributing to net interest income during the last quarter of 1994.
In addition, the Senior Notes were issued to partially finance the FN
Acquisition. The positive total rate variance of $17 million is also
attributed to the FN Acquisition, as the majority of the interest-earning
assets acquired were variable-rate assets, reflecting the overall increase in
market interest rates from 1993 to 1994.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Net Income. FN Holdings reported net income for 1995 of $147 million
compared with net income of $31 million for 1994. Net income for 1995
includes an income tax benefit of $57 million (largely due to the recognition
of a $69 million deferred tax benefit), and an extraordinary gain from the
early
52
<PAGE>
extinguishment of FHLB advances of $2.0 million, net of tax. Net income for
1994 includes income tax expense totalling $2.6 million and $1.4 million, net
of tax, in extraordinary gain from the early extinguishment of FHLB advances.
FN Holdings reported income before income taxes, extraordinary item and
minority interest of $122 million in 1995 compared with pre-tax income of $32
million in 1994. The increase is generally due to the inclusion in 1995 of
the operations acquired in the FN Acquisition for a full year compared to the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Net interest income was $341 million for the year ended December 31, 1995,
compared with $93 million for 1994, an increase of $248 million. The increase
is generally due to the inclusion in 1995 of the operations acquired in the
FN Acquisition for a full year compared with the inclusion of the operations
acquired in the FN Acquisition for only the fourth quarter of 1994.
Interest Income. Total interest income was $1.1 billion for the year ended
December 31, 1995, an increase of $783 million from the year ended December
31, 1994. The interest-bearing assets acquired in the FN Acquisition resulted
in total interest-earning assets for 1995 averaging $13.9 billion compared to
$4.3 billion. In addition, yields on total interest-earning assets during
1995 increased .86% from the yields on total interest-earning assets during
1994, principally due to changes in overall market interest rates and the
higher yielding assets acquired in the FN Acquisition.
FN Holdings earned $800 million of interest income on loans receivable for
the year ended December 31, 1995, an increase of $588 million from the year
ended December 31, 1994. The loans acquired in the FN Acquisition resulted in
an increase in the average balance of loans receivable to $10.1 billion from
$2.9 billion for the years ended December 31, 1995 and 1994, respectively.
The weighted average yield on loans receivable increased to 7.95% for 1995
from 7.27% for 1994, primarily due to the repricing of the adjustable rate
loans in the portfolio acquired in the FN Acquisition.
FN Holdings earned $24 million of interest income on loans held for sale
for the year ended December 31, 1995, an increase of $23 million from the
year ended December 31, 1994. The additional loan production from the
Maryland Acquisition and the LMUSA 1995 Purchase resulted in an increase in
the average balance of loans held for sale to $304 million from $11 million
for the years ended December 31, 1995 and 1994, respectively. The weighted
average yield on loans held for sale increased to 7.89% for 1995 from 5.22%
during 1994.
Interest income on mortgage-backed securities was $213 million for the
year ended December 31, 1995, an increase of $170 million from the year ended
December 31, 1994. The mortgage-backed securities acquired in the FN
Acquisition, including $1.3 billion of qualifying single-family loans
securitized from the Bank's loan portfolio in late 1994 and an additional $.4
billion securitized in 1995, resulted in the average portfolio balances
increasing from $711 million to $3.0 billion during the years ended December
31, 1994 and 1995, respectively. The weighted average yield on
mortgage-backed securities increased to 7.14% for 1995 from 6.05% for 1994,
primarily due to the addition of higher-yielding securities from the FN
Acquisition, including loan securitizations, and the subsequent upward rate
adjustments of adjustable rate mortgage-backed securities related to an
overall increase in market interest rates.
Interest income from Covered Assets declined $19 million, to $11 million,
for the year ended December 31, 1995. This decline is due to a reduction in
the volume of Covered Assets due to the FDIC Purchase, sales, repayments and
other dispositions, offset in part by an increase in the effective rate
earned on such Covered Assets which was 6.67% for 1995 compared to 6.11% for
1994. The higher rate is due to the net effect of the increase in TCOF
between the two periods due to generally increasing interest rates, offset by
the reduction in the applicable margin over the TCOF prescribed in the
Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks was
$28 million for the year ended December 31, 1995, an increase of $21 million
from the year ended December 31, 1994. The average portfolio balances during
the years ended December 31, 1995 and 1994 increased to $435 million from
$138 million, respectively, due to the securities acquired in the FN
Acquisition being held for an entire year in 1995 versus the fourth quarter
only in 1994. The weighted average yield on these assets increased to 6.42%
for 1995 from 4.95% for 1994, primarily due to the increase in overall market
interest rates.
53
<PAGE>
Interest Expense. Total interest expense was $735 million for the year
ended December 31, 1995, an increase of $535 million from the year ended
December 31, 1994. The increase is generally due to the inclusion for a full
year in 1995 of the additional interest-bearing liabilities from the
operations acquired in the FN Acquisition, the issuance of the Senior Notes
and changes in overall market rates of interest as discussed below.
Interest expense on deposits was $447 million for the year ended December
31, 1995, an increase of $346 million from the year ended December 31, 1994.
The customer deposits of approximately $10 billion acquired in the FN
Acquisition, net of $1.2 billion in deposits sold in the Illinois Sale, and
the $513 million of deposits assumed in the Branch Purchases, resulted in an
increase in the average balance of customer deposits outstanding from $2.6
billion to $10.0 billion for the years ended December 31, 1994 and 1995,
respectively. The overall weighted average cost of customer deposits
increased from 3.88% for 1994 to 4.49% for 1995, due principally to increases
in the overall level of interest rates between the two years.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $288 million for the year ended December 31, 1995, an
increase of $189 million from the year ended December 31, 1994. The timing of
the FN Acquisition and the Illinois Sale, offset in part by the reduction of
borrowings from funds received in connection with the Branch Purchases,
resulted in the average balance outstanding of securities sold under
agreements to repurchase and borrowings for the years ended December 31, 1995
and 1994 increasing to $3.8 billion from $1.5 billion, respectively. The
weighted average interest rate on these instruments increased to 7.60% in
1995 from 6.46% for 1994, primarily due to the impact of increases in overall
market interest rates. The Senior Notes issued in 1994 resulted in an
additional $18 million in interest expense in 1995 compared to 1994.
Net Interest Income. Net interest income before provision for loan losses
was $341 million for the year ended December 31, 1995, an increase of $248
million from the year ended December 31, 1994. The interest rate spread
increased to 2.36% in 1995 from 2.02% in 1994. The increase in net interest
income is generally due to the inclusion in 1995 of the operations acquired
in the FN Acquisition for a full year compared to the inclusion of the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $151
million for the year ended December 31, 1995, an increase of $110 million
from the year ended December 31, 1994. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared to the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994. In addition, additional fee
revenues were generated from operations acquired in the Maryland Acquisition
and the LMUSA 1995 Purchase.
Fees and service charges related to mortgage banking operations, which
consist principally of loan servicing income and borrower fees, were $70
million for the year ended December 31, 1995, compared to $10 million for the
year ended December 31, 1994. This increase is due to the inclusion in 1995
of the mortgage banking operations acquired in the FN Acquisition for an
entire year versus only the fourth quarter in 1994, as well as additional fee
revenues received as a result of the inclusion of the mortgage banking
operations acquired in the Maryland Acquisition and the LMUSA 1995 Purchase.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $48 million for the year ended December 31, 1995 compared to
$11 million for the year ended December 31, 1994. The increase of $37 million
is due to the inclusion in 1995 of the retail banking operations acquired in
the FN Acquisition for an entire year compared to only the fourth quarter of
such operations in 1994, as well as a slight increase in such fees related to
the operations acquired in the Branch Purchases.
Management fees, principally from commercial loan servicing and asset
management services provided for third-party investors, totalled $15 million
for the year ended December 31, 1995, an increase of $2 million over 1994.
This $2 million increase is the net effect of a $3.8 million increase in the
revenues
54
<PAGE>
from the asset servicing agreements entered into with Granite in conjunction
with the FN Acquisition, offset by decreases in disposition and other third
party fees received by FGB Realty, principally due to the expiration of
certain government contracts, totalling $1.8 million.
Other noninterest income was $18 million for the year ended December 31,
1995, an increase of $10.4 million from the year ended December 31, 1994. The
increase is attributed to an increase of $3.4 million in dividends on FHLB
stock, $1.7 million in fees earned on check disbursement products, $1.1
million in early withdrawal penalties on deposits and $4.2 million in
miscellaneous other income. The increases are attributed to the inclusion in
1995 of the operations acquired in the FN Acquisition for a full year
compared to the inclusion of the operations acquired in the FN Acquisition
for only the fourth quarter of 1994.
Noninterest Expense. Total noninterest expense was $333 million for the
year ended December 31, 1995, an increase of $237 million from the year ended
December 31, 1994. All categories of noninterest expense increased, primarily
due to the inclusion in 1995 of expenses related to the operations acquired
in the FN Acquisition for an entire year compared to including such expenses
for only the fourth quarter in 1994. In addition, the year ended December 31,
1995 includes charges totalling $13 million related to accrued termination
and facilities costs for specific cost reduction actions taken by the Bank
during the year.
Total compensation and employee benefits expense was $154 million for the
year ended December 31, 1995, an increase of $105 million from the year ended
December 31, 1994. The increase is primarily due to the inclusion in 1995 of
a full year of such charges related to the operations acquired in the FN
Acquisition compared to only the fourth quarter of such expenses in 1994. In
addition, 1995 includes expenses totalling $7 million related to employee
severance and termination costs for the relocation of the Bank's mortgage
loan servicing operations to Maryland, the closure of the Bank's retail
mortgage loan production offices, and a Bank-wide cost reduction project.
Occupancy and equipment expense was $50 million for the year ended
December 31, 1995, an increase of $38 million from the year ended December
31, 1994. The increase is primarily due to the inclusion in 1995 of a full
year of such charges related to the operations acquired in the FN Acquisition
compared to only the fourth quarter of such expenses in 1994. In addition,
1995 includes expenses totalling $6 million related to space reductions and
lease termination charges for the relocation of the Bank's mortgage loan
servicing operations to Maryland, the closure of the Bank's retail mortgage
loan production offices, a Bank-wide cost reduction project, and retail
branch consolidations due to duplicate facilities resulting from the Branch
Purchases.
Data processing expense increased to $10 million for the year ended
December 31, 1995 from $3 million for the same period in 1994. The increase
is primarily due to the inclusion in 1995 of a full year of such charges
related to the operations acquired in the FN Acquisition compared to only the
fourth quarter of such charges in 1994.
SAIF deposit insurance premiums increased to $22 million in 1995 compared
to $7 million for the year ended December 31, 1994. The increase is primarily
due to the inclusion in 1995 of a full year of such charges related to the
operations acquired in the FN Acquisition compared to only the fourth quarter
of such charges in 1994.
Marketing expense was $11 million for the year ended December 31, 1995, an
increase of $8 million from the year ended December 31, 1994. The increase is
primarily due to the inclusion in 1995 of a full year of such charges related
to the operations acquired in the FN Acquisition compared to only the fourth
quarter of such charges in 1994.
Loan expense was $12 million for the year ended December 31, 1995, an
increase of $11 million from the year ended December 31, 1994. The increase
is due to the inclusion in 1995 of a full year of the mortgage banking
operations acquired in the FN Acquisition compared to only the fourth quarter
in 1994, as well as increased expenses related to operations acquired in the
Maryland Acquisition and the LMUSA 1995 Purchase.
55
<PAGE>
Other noninterest expense was $73 million for the year ended December 31,
1995, an increase of $52 million from the year ended December 31, 1994,
principally due to increased telecommunications, postage, office supplies,
travel and professional fees expenses, all of which are attributed primarily
to the inclusion in 1995 of a full year of the operations acquired in the FN
Acquisition compared to only the fourth quarter in 1994. The Branch
Purchases, Maryland Acquisition, and LMUSA 1995 Purchase also contributed to
increases in these expenses.
Provision for Income Taxes. During the year ended December 31, 1995 and
1994, FN Holdings recorded income tax (benefit) expense of $(57.2) million
and $2.6 million, respectively. The net benefit in 1995 is largely the result
of the recognition of a deferred tax benefit of $69 million. Included in tax
expense for the year ended December 31, 1995 is the reversal of 1993 and 1994
overaccruals of federal taxes totalling $1.7 million. FN Holdings' effective
federal tax rates were (56)% and 0% during the year ended December 31, 1995
and 1994, 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
and, in 1995, the recognition of a deferred tax benefit of $69 million. FN
Holdings' effective state tax rate were 9% and 8% for the years ended
December 31, 1995 and 1994, respectively.
Extraordinary Item. During the year ended December 31, 1995, FN Holdings
had a gain of $2.0 million on the early extinguishment of $250 million in
FHLB advances, net of income taxes. During the year ended December 31, 1994,
FN Holdings had a gain of $1.4 million on the early extinguishment of $95
million in FHLB advances, net of income taxes.
Minority Interest--First Nationwide Bank Preferred Stock
Dividends. Dividends on the Bank Preferred Stock totalling $34.6 million were
declared and paid during the year ended December 31, 1995.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
Net Income. FN Holdings reported net income for 1994 of $31 million
compared with net income of $144 million for 1993. Net income for 1994
includes $1.4 million, net of tax effect, in extraordinary gain from the
early extinguishment of FHLB advances. Net income for 1993 includes a pre-tax
gain of $141 million from the BAC Sale.
FN Holdings reported income before income taxes and extraordinary item of
$32 million in 1994 compared with pre-tax income of $147 million in 1993.
Pre-tax income was reduced by provision for income taxes of $2.6 million and
$2.5 million in 1994 and 1993, respectively.
Net interest income was $93 million for the year ended December 31, 1994,
compared with $20 million for 1993, an increase of $73 million. The
interest-bearing assets and liabilities acquired in the FN Acquisition
contributed $83 million of net interest income in 1994, and the Senior Notes
issued by the Company in 1994 contributed $6 million of interest expense in
1994.
Interest Income. Total interest income was $293 million for the year ended
December 31, 1994, an increase of $198 million from the year ended December
31, 1993. The interest-bearing assets acquired in the FN Acquisition resulted
in total interest-earning assets for 1994 averaging $4.3 billion, compared to
$1.8 billion for 1993 and contributed $245 million of total interest income
in 1994. The assets sold in the BAC Sale contributed $26 million in total
interest income in 1993. In addition, yields on mortgage-backed securities,
securities held to maturity and all interest-earning assets during 1994
increased 1.01%, 1.52% and 1.43%, respectively, from the yields on
mortgage-backed securities, securities held to maturity and all
interest-earning assets during 1993, principally due to increases in overall
market interest rates and the FN Acquisition.
FN Holdings earned $212 million of interest income on loans receivable for
the year ended December 31, 1994, an increase of $196 million from the year
ended December 31, 1993. The loans acquired in the FN Acquisition contributed
$211 million of interest income in 1994, and resulted in an increase in the
average balance of loans receivable to $2.9 billion from $124 million for the
years ended December 31, 1994 and 1993, respectively. The weighted average
yield on real estate loans decreased to 7.27% for 1994 from 12.67% during
1993, primarily due to the absorption of the smaller, but higher-yielding
1993 portfolio balance into the larger, market rate sensitive portfolio
acquired in the FN Acquisition.
56
<PAGE>
Interest income on mortgage-backed securities was $43 million for the year
ended December 31, 1994, an increase of $37 million from the year ended
December 31, 1993. The mortgage-backed securities acquired in the FN
Acquisition contributed $29 million of the increase and resulted in the
average portfolio balances increasing from $120 million to $711 million
during the years ended December 31, 1993 and 1994, respectively. The weighted
average yield on mortgage-backed securities increased to 6.05% for 1994 from
5.04% for 1993, primarily due to the addition of higher-yielding securities
from the FN Acquisition and the subsequent upward rate adjustments of
adjustable rate mortgage-backed securities related to an overall increase in
market interest rates.
The interest income from Covered Assets declined $19 million, to $30
million, for the year ended December 31, 1994. This decline is due to a
reduction in the volume of Covered Assets due to sales, repayments and other
dispositions net of a slight increase in the effective rate earned on such
Covered Assets. The higher rate is due to the net effect of the increase in
TCOF between the two periods due to generally increasing interest rates,
offset by the reduction in the applicable margin over the TCOF prescribed in
the Assistance Agreement.
Interest income from securities held to maturity and interest-bearing
deposits in other banks was $7 million for the year ended December 31, 1994,
a decrease of $17 million from the year ended December 31, 1993. The average
portfolio balances during the years ended December 31, 1994 and 1993
decreased to $138 million from $710 million, respectively, due to
restructuring of the balance sheet as a result of the FN Acquisition. The
weighted average yield on these assets increased to 4.95% for 1994 from 3.43%
for 1993, primarily due to the increase in market interest rates.
Interest Expense. Total interest expense was $200 million for the year
ended December 31, 1994, an increase of $125 million from the year ended
December 31, 1993. The increase is the result of additional interest-bearing
liabilities from the FN Acquisition, the issuance of the Senior Notes, and
the increase in overall market interest rates.
Interest expense on deposits, including Brokered Deposits, was $101
million for the year ended December 31, 1994, an increase of $46 million from
the year ended December 31, 1993. The deposits of approximately $10 billion
acquired in the FN Acquisition, net of $1.2 billion in deposits sold in the
Illinois Sale, contributed an additional $85 million in interest expense in
1994 and resulted in an increase in the average balance of deposits
outstanding from $1.2 billion to $2.6 billion for the years ended December
31, 1993 and 1994, respectively. The deposit liabilities included in the BAC
Sale contributed $26 million of interest expense in 1993. The overall
weighted average cost of deposits decreased from 4.59% for 1993 to 3.88% for
1994, due principally to the larger volume of lower rate transaction accounts
acquired in the FN Acquisition. The FN Acquisition decreased First
Nationwide's reliance on Brokered Deposits as a source of funds.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $99 million for the year ended December 31, 1994, an
increase of $79 million from the year ended December 31, 1993. Approximately
$55 million of the increase is attributed to liabilities acquired in the FN
Acquisition, with an additional $18 million attributable to the FHLB advances
which replaced the deposits sold in the Illinois Sale. In addition, the
interest expense related to the Senior Notes totalled $6 million in 1994. The
average balance of securities sold under agreements to repurchase and
borrowings outstanding for the years ended December 31, 1994 and 1993 was
$1.5 billion and $394 million, respectively. The weighted average interest
rate on these instruments increased to 6.46% in 1994 from 4.91% for 1993,
primarily due to the impact of increases in overall market interest rates
between December 1993 through the date of the FN Acquisition and continued
increasing rates thereafter through year end 1994, as well as the issuance of
the Senior Notes.
Net Interest Income. Net interest income before provision for loan losses
was $100 million for the year ended December 31, 1994, an increase of $78
million from the year ended December 31, 1993. The interest rate spread
increased to 2.02% in 1994 from .72% in 1993.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $41 million
for the year ended December 31, 1994, a decrease
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of $150 million from the year ended December 31, 1993. Noninterest income in
1993 included gains of $165 million from the sales of branches and loans
related to the BAC Sale. After adjusting for these gains, other noninterest
income increased $16 million from the year ended December 31, 1993 to
December 31, 1994, which represents the net of $25 million additional income
related to operations acquired in the FN Acquisition, offset by $9 million of
income in 1993 related to the operations included in the BAC Sale.
Fees and service charges related to mortgage banking operations,
principally of loan servicing income and borrower fees, were $10 million for
the year ended December 31, 1994, compared to $9 million for the year ended
December 31, 1993. This increase is due to the addition of the mortgage
banking operations from the FN Acquisition, offset in part by the
distribution of FGMH to First Gibraltar Holdings (the then immediate parent
of the Bank) in the first quarter of 1993. During 1994, FN Holdings sold $47
million in principally fixed rate single-family mortgage loans originated as
part of FN Holdings' ongoing mortgage banking operations.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $11 million for the year ended December 31, 1994 compared to
$3 million for the year ended December 31, 1993. The increase of $8 million
is composed of $11 million in income related to retail banking operations
acquired in the FN Acquisition, offset in part by $3 million received in 1993
related to the retail banking operations sold in the BAC Sale.
Management fees, which were recorded as other noninterest income, totalled
$13 million for the year ended December 31, 1994, an increase of $5 million
over 1993. This increase is due to a $3.5 million increase in disposition and
other fees for assets serviced by FGB Realty and $1.5 million in fees related
to the shared services and asset servicing contracts with Granite entered
into in conjunction with the FN Acquisition.
Noninterest Expense. Total noninterest expense was $96 million for the
year ended December 31, 1994, an increase of $33 million from the year ended
December 31, 1993, principally due to increased compensation, occupancy and
SAIF deposit insurance premiums, primarily related to the FN Acquisition.
Total compensation and employee benefits expense was $49 million for the
year ended December 31, 1994, an increase of $24 million from the year ended
December 31, 1993. This increase of $24 million is composed principally of a
$32 million increase attributable to the FN Acquisition, offset in part by $5
million of the expense in 1993 related primarily to operations sold in the
BAC Sale.
Occupancy and equipment expense was $12 million for the year ended
December 31, 1994, an increase of $7 million from the year ended December 31,
1993. This increase of $7 million is comprised principally of $9 million due
to the FN Acquisition, offset in part by $2 million of the expense
represented by operations sold in the BAC Sale.
Extraordinary Item. First Nationwide had a net gain on the early
extinguishment of FHLB advances of $1.4 million during the year ended
December 31, 1994. Such gain resulted from the prepayment of $95.2 million in
FHLB advances.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years ended December 31, 1995, 1994 and 1993, FN Holdings
recorded income tax (benefit) expense, excluding the tax effects associated
with extraordinary items in 1995 and 1994, of $(57.2) million, $2.6 million,
and $2.5 million, respectively. The Company's effective tax rates were (47)%,
8%, and 2%, in 1995, 1994 and 1993, respectively. The Company's federal
income statutory tax rate was 35% in 1995, 1994, and 1993. The difference
between effective and statutory rates was primarily the result of offsetting
certain deductions and losses with the receipt by the Bank of non-taxable
FSLIC/RF assistance payments and, in 1995, the recognition of a deferred tax
benefit totalling $69 million. The non-taxable portions of the FSLIC/RF
assistance payments decreased to $5 million in 1995 from $9 million in 1994.
During 1995, First Nationwide used the experience method for purposes of
calculating its tax bad debt reserve.
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The Bank, FN Holdings and Mafco Holdings are parties to the Tax Sharing
Agreement effective as of January 1, 1994, pursuant to which (i) the Bank
will pay to FN Holdings amounts equal to the taxes that the Bank would be
required to pay if it were to file a return separately from the affiliated
group of which Mafco Holdings is the common parent (the "Mafco Group") and
(ii) FN Holdings will pay to Mafco Holdings amounts equal to the taxes that
FN Holdings would be required to pay if it were to file a consolidated return
on behalf of itself and the Bank separately from the Mafco Group. The Tax
Sharing Agreement allows the Bank to take into account, in determining its
liability to FN Holdings, any net operating loss carryovers that it would
have been entitled to utilize if it had filed separate returns for each year
since the formation of the Bank. The Tax Sharing Agreement also allows FN
Holdings to take into account, in determining its liability to Mafco
Holdings, any net operating losses that it would have been entitled to
utilize if it had filed a consolidated return on behalf of itself and the
Bank for each year since the formation of the Bank. Accordingly, pursuant to
the Tax Sharing Agreement, the benefits of any net operating losses generated
by the Bank since its formation are retained by the Bank and FN Holdings.
The Bank has generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact
that under applicable federal income tax law, the financial assistance
received by the Bank pursuant to the Assistance Agreement was excluded from
the taxable income of the Bank. In addition to such tax-free financial
assistance, the Bank has been entitled to its normal operating deductions,
including interest expense and certain losses relating to its loan portfolio.
As a result, the Bank generated significant net operating losses for federal
income tax purposes even though its operations were profitable. Furthermore,
under the reorganization provisions of the Code, the Bank succeeded to
certain net operating loss carryovers of the Texas Closed Banks.
At December 31, 1995, if FN Holdings would have filed a consolidated tax
return on behalf of itself (as common parent) and First Nationwide for each
year since the formation of First Nationwide, it would have had approximately
$2.6 billion of regular tax net operating losses and approximately $992
million of AMT net operating losses, both of which could have been utilized
by FN Holdings. If such tax returns had been filed, a portion of such losses
would expire in the year 2002 and thereafter and would fully expire in 2007.
Under applicable tax law, only 90% of a corporation's alternative minimum
taxable income may be offset by carryovers from other years. Thus, 10% of the
alternative minimum taxable income earned by FN Holdings in the current
period will be subject to federal income tax at an effective rate of 20%. For
the year ended December 31, 1995, this resulted in federal income tax
benefit, including the tax effects associated with extraordinary items, of
$68.7 million. Included in federal income tax benefit for the year ended
December 31, 1995 was the recognition of a $69 million deferred tax benefit
in the fourth quarter of 1995 and an adjustment reducing prior years' tax
expense by $1.7 million. It is not anticipated that FN Holdings' liability
for alternative minimum tax under the Tax Sharing Agreement will be
significant. Accordingly, it is expected that under the Tax Sharing
Agreement, the Bank and FN Holdings will be able to eliminate a significant
portion of the amounts that they otherwise would be required to pay to FN
Holdings and Mafco Holdings, respectively, in respect of federal income tax
and, accordingly, it is not expected that the Bank or FN Holdings will record
significant amounts of federal income tax expense as members of the Mafco
Group. Payments made by FN Holdings under the Tax Sharing Agreement with the
Mafco Group during the year ended December 31, 1995 totalled $3.1 million.
There were no such payments in 1994.
TAXATION OF THE BANK
Under current law, the Bank qualifies as domestic building and loan
association for federal income tax purposes. Accordingly, the Bank is
entitled to take its bad debts into account using the reserve method of
accounting under Section 593 of the Code. The Bank determines the amount of
the appropriate addition to its bad debt reserves based on the experience
method of accounting of Section 593(b)(3), which is described in Section
585(b)(2) of the Code, rather than on the percentage of taxable income method
described in Section 593(b)(2) of the Code.
In 1995, Congress passed a tax bill that, if enacted, would have repealed
Section 593 of the Code. The President has vetoed this tax bill. Such veto,
however, was based upon issues unrelated to those provisions dealing with the
repeal of Section 593 of the Code. In addition, the President's proposed tax
legislation
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also includes a provision repealing Section 593 of the Code which was
substantially similar to the tax legislation proposed by Congress. If the tax
legislation is ultimately enacted that includes the repeal of Section 593 of
the Code, the reserve method of accounting for bad debts would not be
available to the Bank. Rather, the Bank generally would be required to take
its bad debts into account using the specific charge-off method. Pursuant to
the specific charge-off method, the Bank would be entitled to take its bad
debts into account in the taxable year during which such debts become wholly
or partially worthless. The repeal of Section 593 of the Code also would
require a domestic building and loan association, such as the Bank, to
recapture a certain portion of its bad debt reserve into income under certain
circumstances and, accordingly, could cause First Nationwide to make payments
to FN Holdings under the Tax Sharing Agreement. As a result, FN Holdings may
be required to make payments to Mafco Holdings under the Tax Sharing
Agreement if FN Holdings has insufficient expenses and losses to offset such
income. As of December 31, 1995, the Bank had tax bad debt reserves totalling
$187 million, all of which had been provided for in deferred tax liabilities.
The Bank does not expect to generate substantial amounts of federal taxable
income (after taking into account its net operating loss carryovers) from any
recapture of the Bank's bad debt reserve. Accordingly, the enactment of the
proposed tax legislation and the repeal of the reserve method of accounting
for bad debts are not expected to have a material adverse effect on the Bank.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to FN Holdings, as the sole owner of the
Bank's common stock, and to holders of the Bank Preferred Stock, in each case
in excess of the Bank's accumulated earnings and profits, as well as any
distributions in dissolution or in redemption or liquidation of stock, may
cause the Bank to recognize a portion of its tax bad debt reserves as income,
and accordingly, could cause the Bank to make payments to FN Holdings under
the Tax Sharing Agreement. As a result, FN Holdings may be required to make
payments to Mafco Holdings under the Tax Sharing Agreement if FN Holdings has
insufficient expenses and losses to offset such income. First Nationwide does
not expect to generate substantial amounts of federal taxable income (after
taking into account its net operating loss carryovers) from any recapture of
its bad debt reserve. Accordingly, the recapture of its bad debt reserve as a
result of distributions to stockholders, or of the redemption of stock, would
not be expected to have a material adverse effect on First Nationwide.
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 $37 million, $6 million and $1 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The allowance for
loan losses is increased by provisions for loan losses and decreased by
charge-offs (net of recoveries). See "--General--Accounting Changes." The
increase in the provision for losses in 1995 over 1994 is due to the
increased loan production activity (primarily single-family residential) and
loans acquired through acquisitions in 1995 compared to 1994.
A significant portion of the Company's loans are secured by real estate
located within California. Accordingly, the ultimate collectibility of those
loans is susceptible to changes in the economic conditions in such region.
Management's periodic evaluation of the adequacy of the allowance is based on
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral, current prospective economic conditions, and
the remaining available balance under the Put Agreement.
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.
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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. A key element of banking is the monitoring and
management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to
influence the net interest spread is referred to as asset and liability
management. The objective of the Company's asset and liability management is
to maximize the net interest yield within the constraints imposed by prudent
lending and investing practices, liquidity needs and capital planning.
FN Holdings, through the Bank, actively pursues investment and funding
strategies to minimize the sensitivity of its earnings to interest rate
fluctuations. 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 which best match interest rate changes in the
loan and investment portfolios. 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 ARM products for its portfolio.
Where possible, the Bank seeks to originate real estate loans that reprice
frequently and that on the whole adjust in accordance with the repricing of
its liabilities. In general, most of the fixed rate real estate loans
originated have been sold in the secondary market and substantially all of
the ARMs originated prior to September 30, 1995 have been retained for the
investment portfolio. Subsequent to September 30, 1995, however, all of the
ARMs originated were sold in the secondary market in anticipation of the
SFFed Acquisition. At December 31, 1995, approximately 83% of the Company's
real estate loan portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest
rates, ARMs could reach a periodic adjustment cap while still at a rate
significantly below their contractual margin over existing market rates.
Since repricing liabilities are typically not subject to such interest rate
adjustment constraints, the Company's net interest margin would most likely
be negatively impacted in this situation. Certain ARMs now offered by First
Nationwide have a fixed monthly payment for a given period, with any changes
as a result of market interest rates reflected in the unpaid principal
balance through negative amortization. From the lender's perspective, these
loans respond most quickly to rate changes because interest accruals
immediately reflect the loans as though they were fully indexed. In general,
the closer the interest rate on a portfolio of ARMs is to the ultimate
contractual margin over market rates, the more sensitive the portfolio yield
is to changes in market interest rates.
As a result of the FN Acquisition, the Bank acquired the rights and
assumed the obligations of Old FN under certain interest rate swap
agreements. Under the terms of these agreements, the Bank pays the variable
rate based on LIBOR and receives fixed rates. During 1995 and 1994, the
Bank's interest margin decreased by $12.9 million and $4.2 million,
respectively, as a result of these interest rate swap agreements, largely due
to the amortization of the premium assigned to these agreements in the FN
Acquisition.
One of the most important sources of a financial institution's net income
is net interest income which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing
liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced
within the same period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds interest rate sensitive liabilities,
while the opposite results in a negative gap. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, and a positive gap would tend to result in an increase in net
interest income, while the opposite would tend to occur in a period of
falling rates.
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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 December
31, 1995. Prepayment rates are assumed in each period on substantially all of
the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In
addition, the interest rate sensitivity of the Company's assets and
liabilities illustrated in the table would vary substantially if different
assumptions were used or if actual experience differed from the assumptions
set forth. FN Holdings' estimated interest rate sensitivity gap at December
31, 1995 is as follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
------------------------------------------
WITHIN 1 OVER 5
YEAR 1-5 YEARS YEARS TOTAL
--------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Securities to be held to maturity and cash (1) (2) $ 159 $ -- $ -- $ 159
Mortgage-backed securities held to maturity (1) .. 1,522 1 2 1,525
Loans and securities held for sale, net (3) ...... 3,029 -- -- 3,029
Loans receivable, net (1)(4) ...................... 7,675 556 639 8,870
Covered Assets, net (5) ........................... 39 -- -- 39
Investment in FHLB ................................ 110 -- -- 110
-------- -------- -------- --------
Total interest-earning assets ................. 12,534 557 641 13,732
Noninterest-earning assets ........................ -- -- 914 914
-------- -------- -------- --------
$12,534 $ 557 $1,555 $14,646
======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits (6) ...................................... $ 8,436 $ 1,759 $ 47 $10,242
Securities sold under agreements to repurchase (1) 719 250 - 969
FHLB advances (1) ................................. 1,712 325 2 2,039
Other borrowings (1) .............................. 57 3 290 350
-------- -------- -------- --------
Total interest-bearing liabilities ............ 10,924 2,337 339 13,600
Noninterest-bearing liabilities ................... -- -- 283 283
Minority interest ................................. -- -- 301 301
Stockholders' equity .............................. -- -- 462 462
-------- -------- -------- --------
$10,924 $ 2,337 $1,385 $14,646
======== ======== ======== ========
Gap before interest rate swap agreements ......... $ 1,610 $(1,780) $ 302 $ 132
Interest rate swap agreements (7) ................. (400) 400 -- 0
Gap adjusted for interest rate swap agreements ... 1,210 (1,380) 302 132
Cumulative gap .................................... 1,210 (170) 132 132
Gap as a percentage of total assets ............... 8.3% (9.4%) 2.1% 1.0%
Cumulative gap as a percentage of total assets ... 8.3% (1.1%) 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 applicable. Prepayments were estimated generally by using the
prepayment rates forecast by various large brokerage firms as of
December 31, 1995. The actual maturity and rate sensitivity of these
assets could vary substantially if future prepayments differ from FN
Holdings' prepayment estimates.
(2) Consists of $32 million of interest-bearing deposits in other banks,
$125 million of short-term investment securities and $2 million of
securities held to maturity.
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(3) As loans held and securities available for sale may be sold within one
year, they are considered to be maturing within one year.
(4) Excludes allowance for loan losses of $210.5 million and nonaccrual
loans of $171.5 million.
(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 in this table.
(6) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
(7) Agreements with a notional amount of $500 million and $250 million
maturing in April and September 1996, respectively, have no impact
within the time periods presented.
At December 31, 1995, interest-earning assets of First Nationwide exceeded
interest-bearing liabilities by approximately $132 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and
pricing, market rates and future management of the balance sheet mix. The
Company utilizes computer modeling, under various interest rate scenarios, to
provide a dynamic view of the effects of the changes in rates, spreads, and
yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly
basis, the Board of Directors of the Bank is apprised of ALCO strategies
adopted and their impact on operations. At least annually, the Board of
Directors of the Bank reviews the Bank's interest rate risk management policy
statements.
On November 15, 1995, the FASB issued the Special Report. On December 29,
1995, FN Holdings reclassified substantially all of its securities and
mortgage-backed securities from held to maturity to available for sale. The
impact on the gap schedule of reclassifying securities from the
held-to-maturity portfolio to the available-for-sale portfolio is to shorten
the maturity and interest rate sensitivity of such assets. See
"--General--Accounting Changes."
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%. First Nationwide's
liquidity ratio was 5.46% and 5.62% at December 31, 1995 and 1994,
respectively.
A major source of the Bank's funding is expected to be the Bank's retail
deposit branch network, which management believes will provide a substantial
portion of 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 Bank also obtains funds from
the repayment and maturities of loans and mortgage-backed securities, and
from the disposition of primarily Covered Assets (including assistance
payments from the FSLIC/RF), 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
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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 FN Acquisition decreased the Bank's reliance on Brokered
Deposits as a source of funds.
The Bank's primary uses of funds are the origination or purchase of loans,
the funding of the Bank's maturing certificates of deposit and demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit
scheduled to mature during the twelve months ending December 31, 1996 total
$4.9 billion. The Bank may renew these certificates, attract new replacement
deposits, replace such funds with other borrowings, or it may elect to shrink
the balance sheet. In addition, at December 31, 1995, the Bank had FHLB
advances and other borrowings of $1.5 billion maturing within twelve months.
The Bank may elect to pay off such debt or to replace borrowings with
additional FHLB advances or other borrowings at prevailing rates.
The Bank has entered into various contracts in connection with the Branch
Sales and the Home Federal Acquisition. The Bank currently has sufficient
borrowing capacity to fund these transactions. This additional funding may
take the form of additional borrowings under reverse repurchase agreements,
additional advances from the FHLB, or increased cash raised through the
remaining retail deposit network. The Bank expects to finance the Home
Federal Acquisition with existing cash and, if necessary, proceeds from
additional borrowings. 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, First Nationwide issued 3,007,300 shares of the 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 $34.6 million were declared and paid during 1995.
During 1995, the FSLIC/RF purchased substantially all of the remaining
Covered Assets at the fair market value of such assets in the FDIC Purchase.
Any losses sustained by First Nationwide from this directed purchase were
reimbursed under the Capital Loss Coverage provision of the Assistance
Agreement. Proceeds from this transaction were reinvested in the normal
course of business. As a result of the FDIC Purchase, the Bank's reliance on
dispositions of Covered Assets as a source of funds was substantially
eliminated.
In the FN Acquisition, the Bank assumed $92.1 million of Old FN's
Subordinated Debentures which have an annual interest rate of 10% and an
annual interest cost of $9.2 million. In the SFFed Acquisition, First
Nationwide assumed $50 million of the SFFed Notes which have an annual
interest rate of 11.20% and an annual interest cost of $5.6 million.
The Company anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements in the foreseeable future. In addition to
cash and cash equivalents of $312.6 million at December 31, 1995, the Bank
has substantial additional secured borrowing capacity with the FHLB and other
sources.
Net cash used in operating activities for the year ended December 31, 1995
totalled $430 million, an increase of $393 million from the year ended
December 31, 1994. The increase is principally due to the increase in loans
held for sale due to the additional production capacity from the Maryland
Acquisition and the LMUSA 1995 Purchase.
Net cash used in operating activities for the year ended December 31, 1994
totalled $37.2 million, a decrease of $5.3 million from the year ended
December 31, 1993.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included $272
million from the FDIC Purchase and other dispositions of the Covered Assets,
principal payments on mortgage-backed securities totalling $571 million and
proceeds from maturities of
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securities of $344 million. Proceeds from sales of loans receivable,
including loans sold to Granite pursuant to the Put Agreement of $199.5
million, totalled $431 million. Redemptions of FHLB stock provided $26
million, and proceeds from sales of foreclosed real estate provided $71
million. Proceeds from the Branch Purchases provided $501 million. Cash flows
used in investing activities included $215 million for the Maryland
Acquisition and LMUSA 1995 Purchase, purchases of securities of $158 million,
purchases of $20 million in mortgage-backed securities, a net increase in
loans receivable of $86 million, and purchases of office premises and
equipment of $15 million.
Net cash used in investing activities for the year ended December 31, 1994
totalled $1 million, a decrease of $3.6 billion from the year ended December
31, 1993. The decrease was due largely to the purchase of securities
totalling $3.5 billion in early 1993 from proceeds obtained from prior year
sales of loans and mortgage-backed securities in preparation for the BAC
Sale. Funds used in the FN Acquisition totalled $527 million, representing
the purchase price paid at closing of $715 million, less cash and cash
equivalents acquired of $188 million. Other uses included purchases of
securities during 1994 of $158 million, purchases of $64 million in
mortgage-backed securities, and a net $69 million increase in loans
receivable. Funds provided by investing activities included a $280 million
decline in Covered Assets resulting from dispositions, principal payments on
mortgage-backed securities totalling $178 million and proceeds from
maturities of securities of $109 million. Proceeds from sales of loans
receivable, including loans sold to Granite pursuant to the Put Agreement of
$104 million, totalled $155 million. Proceeds from the Illinois Sale provided
$31 million, redemptions of FHLB stock provided $28 million, and proceeds
from sales of foreclosed real estate provided $26 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9 billion
and the net decrease in securities sold under agreements to repurchase
totalled $913 million. Cash flows provided by financing activities included
increases in deposits (other than the Branch Purchases) of $543 million and
additional borrowings of $6.2 billion. Additionally, dividends on and
redemptions of the Company's class C common stock were $29 million and $61
million, respectively.
Net cash provided by financing activities for the year ended December 31,
1994 totalled $183 million. The issuance of the Bank Preferred Stock, class C
common stock and the Senior Notes in connection with the FN Acquisition
provided $289 million, approximately $210 million and approximately $190
million, respectively. These funds were partially offset by an overall net
decrease in borrowings and securities sold under agreements to repurchase of
$232 million. Additionally, deposits decreased $84 million as Brokered
Deposits were allowed to mature.
FN Holdings' primary source of cash to pay the interest on and principal
of the Senior Notes and the Senior Sub Notes is expected to be distributions
from the Bank. The annual interest on the Senior Notes is $24.5 million, and
the annual interest on the Senior Sub Notes is $12.8 million.
The terms of the Preferred Stock provide that the Bank may not declare or
pay any dividends or other distributions (other than in shares of common
stock of the Bank or other Junior Stock) with respect to any Junior Stock or
redeem or set apart funds for the redemption of any Junior Stock (including
the common stock held by FN Holdings) through a sinking fund or otherwise,
unless and until (i) the Bank has paid full dividends on the Preferred Stock
for the four most recent dividend periods or funds have been paid over to the
dividend disbursing agent of the Bank for payment of such dividends, and (ii)
the Bank has declared a cash dividend on the Preferred Stock at the annual
dividend rate for the current dividend period, and sufficient funds have been
paid over to the dividend disbursing agent of the Bank for the payment of a
cash dividend for such current dividend period.
FN Holdings currently anticipates that, in order to pay the principal
amount of the Senior Notes or the Senior Sub Notes upon the occurrence of an
Event of Default, (as defined in the Senior Notes Indenture and the Senior
Sub Notes Indenture, as the case may be) or to redeem or repurchase the
Senior Notes or the Senior Sub Notes upon a Change of Control Call Event (as
defined in the Senior Notes Indenture or the Senior Sub Notes Indenture) or a
Change of Control Put Event (as defined in the Senior Notes Indenture or the
Senior Sub Notes Indenture, respectively) or, in the event that earnings from
the Bank are not sufficient to make distributions to FN Holdings to enable it
to pay the principal amount of
65
<PAGE>
the Senior Notes at maturity, FN Holdings may be required to adopt one or
more alternatives, such as borrowing funds, selling its equity securities or
equity securities or assets of the Bank, or seeking capital contributions or
loans from its affiliates. None of the affiliates of FN Holdings will be
required to make any capital contributions or other payments to FN Holdings
with respect to FN Holdings' obligations on the Senior Notes or the Senior
Sub Notes. There can be no assurance that any of the foregoing actions could
be affected on satisfactory terms, that any of the foregoing actions would
enable FN Holdings to pay the principal amount of the Senior Notes or the
Senior Sub Notes or that any of such actions would be permitted by the terms
of the Senior Notes Indenture or the Senior Sub Notes Indenture or any other
debt instruments of FN Holdings or FN Holdings' subsidiaries then in effect,
by the terms of the Preferred Stock or under federal thrift laws.
FN Holdings expects that a substantial portion of any net earnings
generated by the Bank, including net earnings generated as a result of sales
of assets or deposits, that is not needed in its operations or to expand its
business in the West Coast region, will, subject to regulatory limitations,
be distributed to FN Holdings. Subject to the terms of the Senior Notes
Indenture and Senior Sub Notes Indenture, FN Holdings expects that net
earnings generated by the Bank and distributed to FN Holdings will be
distributed by FN Holdings to Holdings or loaned to MacAndrews & Forbes or
its affiliates. FN Holdings is unconditionally required by its charter or by
contract to apply all dividends and other distributions received by FN
Holdings from the Bank (less an amount necessary to service the Senior Sub
Notes and the Senior Notes) as follows: (i) FN Holdings must dividend to
Holdings the maximum amount permitted under the terms of the Senior Notes
Indenture and Senior Sub Notes Indenture, and (ii) the remainder of all such
dividends and distributions received by FN Holdings must be lent to an
affiliate of FN Holdings on a subordinated basis on terms complying with and
subject to the conditions set forth in the Senior Notes Indenture and Senior
Sub Notes Indenture. Accordingly, FN Holdings expects that any such excess
net earnings would not be available to FN Holdings or the Bank. The Senior
Notes Indenture and Senior Sub Notes Indenture generally limit distributions
(and other Restricted Payments (as defined in the Senior Notes Indenture and
Senior Sub Notes Indenture)) to 75% of the consolidated net income of FN
Holdings and require, among other things, that in order for FN Holdings to
distribute any cash to Holdings or otherwise make any Restricted Payment, the
Bank must be "well capitalized" under applicable OTS regulations and the
Consolidated Common Shareholders' Equity (as defined in the Senior Notes
Indenture and Senior Sub Notes Indenture) of the Bank must be at least the
Minimum Common Equity Amount (as defined in the Senior Notes Indenture and
Senior Sub Notes Indenture). The ability of FN Holdings to loan funds to its
affiliates is subject to the requirement that the Consolidated Common
Shareholders' Equity of the Bank be at least the Minimum Common Equity
Amount, and that the terms of any such loan be in writing and on terms that
would be obtainable in arm's length dealings, and in certain cases, to the
additional requirement that the loan be approved by a majority of
disinterested directors. Subject to such restrictions, such loans may consist
of any and all funds available to FN Holdings whether or not such funds may
be distributed (or otherwise paid as a Restricted Payment) pursuant to the
terms of the Senior Notes Indenture or Senior Sub Notes Indenture. FN
Holdings anticipates that affiliate loans required to be made by FN Holdings
pursuant to its charter will be made pursuant to a revolving credit facility.
See "Certain Relationships and Related Transactions--Loans to Affiliate."
The terms and conditions of the Senior Notes Indenture and Senior Sub
Notes Indenture impose restrictions that affect, among other things, the
ability of FN Holdings to incur debt, pay dividends, engage in a business
other than holding the common stock of the Bank, make acquisitions, create
liens, sell assets and make certain investments. FN Holdings' ability to
comply with the foregoing provisions can be affected by events beyond FN
Holdings' control. The breach of any of these covenants could result in a
default under one or more of the debt instruments of FN Holdings. In the
event of a default under any indebtedness of FN Holdings or FN Holdings'
subsidiaries, the holders of such indebtedness could elect to declare all
amounts outstanding under their respective debt instruments to be due and
payable. Any such declaration under a debt instrument of FN Holdings or FN
Holdings' subsidiaries is likely to result in an event of default under one
or more of the other debt instruments of FN Holdings or FN Holdings'
subsidiaries. If indebtedness of FN Holdings or FN Holdings' subsidiaries
were to be accelerated, there could be no assurance that the assets of FN
Holdings or FN Holdings' subsidiaries, as the case may be,
66
<PAGE>
would be sufficient to repay in full borrowings under all of such debt
instruments, including the Senior Notes and the Senior Sub Notes. See
"Business--Sources of Funds--Subordinated Debentures," "Business--Source of
Funds--Senior Notes" and "Business--Source of Funds--Senior Sub Notes."
IMPACT OF INFLATION AND CHANGING PRICES
The business of FN Holdings and First Nationwide is generally not affected
by inflation in the short run, but may be affected by inflation in the long
run. Prevailing interest rates have a more significant impact on the
Company's performance than does the general level of inflation. While
interest rates may bear some relationship to the general level of inflation
(particularly in the long run), over short periods of time interest rates may
not necessarily move in the same direction or change in the same magnitude as
the general level of inflation.
NON-PERFORMING ASSETS
Pursuant to SFAS No. 114, as amended by SFAS No. 118, effective January 1,
1995, loans collectively reviewed for impairment by the Company include all
single-family loans, and performing multi-family and commercial real estate
loans under $500,000, excluding loans which have entered the workout process.
The adoption of SFAS No. 114, as amended by SFAS No. 118, had no material
impact on the Company's consolidated financial statements as the Company's
existing policy of measuring loan impairment is consistent with methods
prescribed in these standards. See "--General Accounting Changes."
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Company bases the measurement of collateral-dependent
impaired loans, which represents substantially all of the Company's loan
portfolio, on the fair value of the loan's collateral. The amount, if any, by
which the recorded investment of the loan exceeds the measure of the impaired
loan's value is recognized by recording a valuation allowance.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status).
67
<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>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------- ----------------------------------------
NONACCRUAL IMPAIRED RESTRUCTURED NONACCRUAL IMPAIRED RESTRUCTURED
------------ ---------- -------------- ------------ ---------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential ...... $136 $ -- $ 8 $133 $-- $ 19
5+ unit residential ....... 23 73 147 24 -- 204
Commercial and other ...... 9 52 79 11 -- 110
Land ...................... -- -- -- 7 -- --
Construction .............. -- -- -- 2 -- --
------ ------ ------ ------ ------ ------
Total real estate ........ 168 125 234 177 -- 333
Non-real estate ............. 3 -- -- 4 -- --
------ ------ ------ ------ ------ ------
Total loans .............. 171 $125(a) $234(b) 181 $-- $333(b)
====== ====== ====== ======
Foreclosed real estate, net 49 37
------ ------
Total non-performing
assets .................. $220 $218
====== ======
</TABLE>
- ------------
(a) Includes $29.6 million of loans on nonaccrual status and $31.9 million
of loans classified as troubled debt restructurings.
(b) Includes nonaccrual loans of $1.2 million and $10 million at December
31, 1995 and 1994, respectively. At December 31, 1995, $1.1 million of
these nonaccrual, troubled debt restructurings were also considered
impaired under SFAS No. 114.
There were no accruing loans contractually past due 90 days or more at
December 31, 1995 or 1994.
The Company's non-performing assets, consisting of nonaccrual loans, net of
purchase accounting adjustments, and foreclosed real estate, net, increased
slightly to $220 million at December 31, 1995, compared with $218 million at
December 31, 1994. Non-performing assets as a percentage of the Bank's total
assets also increased slightly to 1.50% at December 31, 1995, from 1.49% of
total assets at December 31, 1994. During 1995, $199.5 million of assets were
sold to Granite under the Put Agreement, leaving a remaining available
balance under the Put Agreement of $112.4 million. Of the $220.1 million in
non-performing assets at December 31, 1995, approximately $13.5 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. These three
functions are charged with the responsibility of reducing the risk profile
within the residential, commercial and multi-family asset portfolios by
applying asset management and risk evaluation techniques that are consistent
with the 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 development of
credit policies and performing credit risk analyses for all asset portfolios.
68
<PAGE>
The following table presents non-performing real estate assets by
geographic region of the country as of December 31, 1995:
<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) $ 46 $11 $ 57 26.3%
California ... 75 35 110 50.7
Other regions 47 3 50 23.0
------ ------ ------ ------
Total ....... $168 $49 $217 100.0%
====== ====== ====== ======
</TABLE>
- ------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments.
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates nonaccrual
real estate loans, net of purchase accounting adjustments, by collateral type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL TOTAL
RESIDENTIAL RESIDENTIAL AND OTHER NONACCRUAL
------------------- ------------------- ------------------- REAL ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- ----------------- ---------- ------- ---------- ------- ---------- ------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ....... $ 53 $ 4 $10 $ 1 $ 7 -- $ 75 44.64%
New York ......... 27 2 1 1 -- -- 31 18.45
Ohio ............. 3 2 2 4 -- -- 11 6.55
Hawaii ........... 10 1 -- -- -- -- 11 6.55
New Jersey ....... 7 2 -- -- -- -- 9 5.36
Illinois ......... 2 1 -- 3 1 -- 7 4.17
Florida .......... 2 3 -- -- 1 -- 6 3.57
Pennsylvania ..... 2 -- -- 1 -- -- 3 1.79
Connecticut ...... 2 -- -- -- -- -- 2 1.19
Massachusetts ... 1 1 -- -- -- -- 2 1.19
Other states (1) 8 3 -- -- -- -- 11 6.54
------ ------ ------ ------ ------ ------ ------ ------
Total ........... $117 $19 $13 $10 $ 9 $-- $168 100.00%
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- ------------
(1) There are 27 states, Puerto Rico, and the District of Columbia, of
which no one state had nonaccrual loans in excess of 1% of the total.
At December 31, 1995, First Nationwide's largest non-performing asset was
approximately $6.3 million, and it had approximately nine non-performing
assets over $2 million in size with balances averaging approximately $3.6
million. First Nationwide has approximately 1,750 non-performing assets below
$2 million in size, including approximately 1,600 non-performing 1-4 unit
residential assets.
69
<PAGE>
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments, by collateral
type, interest rate type and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL TOTAL
RESIDENTIAL RESIDENTIAL AND OTHER TROUBLED
------------------- ------------------- ------------------- DEBT % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED RESTRUCTURED TOTAL
- ---------------- ---------- ------- ---------- ------- ---------- ------- -------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ...... $ 1 $ 5 $29 $ 5 $19 $23 $ 82 35.04%
New York ........ -- 1 3 35 -- 22 61 26.07
New Jersey ...... -- -- 16 2 -- -- 18 7.69
Pennsylvania ... -- -- 17 1 -- -- 18 7.69
Florida ......... -- -- 4 1 8 -- 13 5.56
Missouri ........ -- -- 1 3 5 -- 9 3.85
Georgia ......... -- -- -- 6 -- -- 6 2.56
Texas ........... -- -- 2 4 -- -- 6 2.56
Other states (1) -- 1 4 14 1 1 21 8.98
------ ------ ------ ------ ------ ------ ------ ------
Total .......... $ 1 $ 7 $76 $71 $33 $46 $234 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------------
(1) There are 12 states of which no one state had troubled debt
restructured loans in excess of 2% of the total.
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments, by collateral type, interest rate type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER
------------------- ------------------- TOTAL % OF
VARIABLE FIXED VARIABLE FIXED IMPAIRED TOTAL
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California ...... $29 $ 3 $38 $10 $ 80 64.00%
New York ........ 4 12 1 -- 17 13.60
Georgia ......... -- 6 -- -- 6 4.80
Ohio ............ 2 4 -- -- 6 4.80
Arizona ......... 1 3 -- -- 4 3.20
Illinois ........ -- 4 1 -- 5 4.00
Other states (1) 2 3 1 1 7 5.60
------ ------ ------ ------ ------ ------
Total .......... $38 $35 $41 $11 $125 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- ------------
(1) There are 8 states of which no one state had impaired loans in excess
of 1.5% of the total.
70
<PAGE>
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- -------------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance--December 31, 1993 ........... $ 2 $ -- $ -- $ 2
Purchases-FN Acquisition ........... 108 84 10 202
Provision for loan losses .......... 3 3 -- 6
Charge-offs ........................ (4) (4) (1) (9)
Recoveries ......................... 2 -- -- 2
------ ------ ------ ------
Balance--December 31, 1994 ........... 111 83 9 203
Provision for loan losses .......... 31 3 3 37
Charge-offs ........................ (27) (1) (5) (33)
Recoveries ......................... 1 -- 2 3
------ ------ ------ ------
Balance--December 31, 1995 ........... $ 116 $ 85 $ 9 $ 210
====== ====== ====== ======
Ratio of allowance for loan losses to
non-performing loans:
December 31, 1993 ................. 100.0% -- -- 18.2%
====== ====== ====== ======
December 31, 1994 ................. 83.5% 188.6% 225.0% 112.2%
====== ====== ====== ======
December 31, 1995 ................. 85.3% 261.9% 290.0% 122.7%
====== ====== ====== ======
</TABLE>
For additional discussion on the non-performing assets of the Company, see
"Business--Non-performing Assets."
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an institution's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less most intangible assets. An institution's ratio of core capital to
adjusted total assets (the "core capital ratio") must be at least 3%. Core
capital generally is the sum of tangible capital plus certain qualifying
intangibles. Under the risk-based capital requirement, a savings bank must
have total capital (core capital plus supplementary capital) equal to at
least 8% of risk-weighted assets (which includes the credit risk equivalent
of certain off-balance sheet items). Supplementary capital, which may not
exceed 100% of core capital for purposes of the risk-based requirements,
includes, among other things, certain permanent capital instruments such as
qualifying cumulative perpetual preferred stock, as well as some forms of
maturing capital instruments, such as qualifying subordinated debt. These
capital requirements are applicable to the Bank but not to FN Holdings. See
"Regulation--Regulation of the Bank--Regulatory Capital Requirements."
71
<PAGE>
At December 31, 1995, the Bank's total regulatory capital levels exceeded
the minimum regulatory capital requirements, with tangible, core and
risk-based capital ratios of 5.84%, 5.84% and 11.34%, respectively. The
following is a reconciliation of the Bank's stockholders' equity to
regulatory capital as of December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity of the Bank at December 31,
1995 .............................................. $959,885 $959,885 $ 959,885
Unrealized holding gain on securities available for
sale, net ......................................... (63,512) (63,512) (63,512)
Non-qualifying loan-servicing rights ............... (24,136) (24,136) (24,136)
Non-allowable capital:
Intangible assets ................................. (18,606) (18,606) (18,606)
Investment in subsidiaries ........................ (307) (307) (307)
Supplemental capital:
Qualifying subordinated debt debentures .......... -- -- 89,600
General loan loss reserves ........................ -- -- 117,854
Assets required to be deducted:
Land loans with more than 80% LTV ratio .......... -- -- (2,290)
-------- -------- ----------
Regulatory capital of the Bank ..................... 853,324 853,324 1,058,488
Minimum regulatory capital requirement ............. 219,224 438,449 746,938
-------- -------- ----------
Excess above minimum capital requirement .......... $634,100 $414,875 $ 311,550
======== ======== ==========
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO
-------- -------- ----------
Regulatory capital of the Bank ..................... 5.84% 5.84% 11.34%
Minimum regulatory capital requirement ............. 1.50 3.00 8.00
Excess above minimum capital requirement .......... 4.34% 2.84% 3.34%
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $14.6 billion. Risk-weighted assets used for the risk-based capital
ratios amounted to $9.3 billion.
The Bank is also subject to the provisions of FDICIA, which, among other
things, define specific capital categories based on an institution's capital
ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions
categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the
OTS or by the FDIC, including requirements to raise additional capital, sell
assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized" it is generally placed in receivership or
conservatorship within 90 days.
72
<PAGE>
To be considered "well capitalized," a savings institution must generally
have a core capital ratio of at least 5%, a Tier 1 (core capital) risk-based
capital ratio of at least 6%, and a total risk-based capital ratio of at
least 10%. An institution is deemed to be "critically undercapitalized" if it
has a tangible equity ratio of 2% or less. At December 31, 1995, First
Nationwide's core capital, Tier 1 (core capital) risk-based and total
risk-based capital ratios 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 ......... 5.84% 9.14% 11.34%
"Well capitalized" ratio ............... 5.00 6.00 10.00
Excess above "well capitalized" ratio . .84% 3.14% 1.34%
</TABLE>
The Company expects that the Bank will remain a "well capitalized"
institution after consummation of the Branch Sales, the SFFed Acquisition,
the LMUSA 1996 Purchase and the Home Federal Acquisition. In addition, the
net proceeds from the issuance of the Senior Sub Notes of approximately $133
million were contributed as additional paid in capital of the Bank on
February 1, 1996, further strengthening the Bank's regulatory capital ratios.
OTS capital regulations allow a savings bank to include a net deferred tax
asset under SFAS No. 109 in regulatory capital, subject to certain
limitations. To the extent that the realization of a deferred tax asset
depends on a savings bank's future taxable income, such deferred tax asset is
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year or 10 percent of core capital. As of December 31,
1994, the Bank recorded a valuation adjustment for 100% of the Bank's net
deferred tax asset because at that time it was not more likely than not that
such deferred tax asset would be realized.
Based on a favorable earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Bank's net deferred tax assets and recognized
a deferred tax benefit of $69 million in the fourth quarter of 1995. The net
tax benefit of $69 million has been determined based upon the amount of
taxable income that may be realized within one year. This amount does not
exceed 10 percent of core capital and therefore is allowed without limitation
under OTS capital regulations.
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 the 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 December 31, 1995. 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. FN Holdings is unable to predict whether this, or similar legislation
will be enacted.
73
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of FN Holdings at December
31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993
are included in this report at the pages indicated.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report ...................... F-2
Consolidated Statements of Financial Condition ... F-3
Consolidated Statements of Operations ............. F-4
Consolidated Statement of Stockholders' Equity ... F-5
Consolidated Statements of Cash Flows ............. F-6
Notes to Consolidated Financial Statements ....... F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
74
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
FN Holdings
The following table sets forth certain information (ages as of January 1,
1996) concerning the directors and executive officers of FN Holdings. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ ----- --------------------------------------
<S> <C> <C>
Ronald O. Perelman 53 Chairman of the Board, Chief Executive
Officer and Director
P. Richard Frieder 61 Director
Howard Gittis ..... 61 Vice Chairman and Director
Irwin Engelman ... 61 Executive Vice President and Chief
Financial Officer
Barry F. Schwartz 46 Executive Vice President and General
Counsel
Laurence Winoker . 39 Vice President and Controller
</TABLE>
First Nationwide
The following table sets forth certain information (ages as of January 1,
1996), concerning the directors and executive officers of the Bank. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Ronald O. Perelman ....... 53 Director
Gerald J. Ford ........... 51 Chairman of the Board, Chief Executive Officer and
Director
Carl B. Webb ............. 45 President, Chief Operating Officer and Director
Paul M. Bass, Jr. ........ 60 Director
George W. Bramblett, Jr. 55 Director
Bob Bullock .............. 66 Director
Irwin Engelman ........... 61 Director
Howard Gittis ............ 61 Director
Gabrielle K. McDonald ... 53 Director
Robert Setrakian ......... 71 Director
Christie S. Flanagan .... 57 Executive Vice President and General Counsel
Kendall M. Fugate ........ 58 Executive Vice President and Information and
Technology Services Director
Roger L. Gordon .......... 53 Executive Vice President
Richard P. Hodge ......... 40 Executive Vice President and Corporate Tax Director
Walter C. Klein, Jr. .... 52 Executive Vice President; President, FNMC
Lacy G. Newman, Jr. ..... 45 Executive Vice President and Chief Credit Officer
James R. Staff ........... 48 Executive Vice President and Chief Financial Advisor
Richard H. Terzian ....... 58 Executive Vice President and Chief Financial Officer
Peter K. Thomsen ......... 53 Executive Vice President and Retail Banking Director
Michael R. Walker ........ 50 Executive Vice President -- Commercial Real Estate
Scott L. Gesell (a) ..... 37 Senior Vice President, Senior Counsel and Secretary
Renee N. Tucei ........... 39 Senior Vice President and Controller
</TABLE>
- ------------
(a) Mr. Gesell resigned effective March 18, 1996.
75
<PAGE>
Mr. Perelman has been Chairman of the Board of FN Holdings since its
formation in 1994 and a Director of First Nationwide since 1994. Mr. Perelman
has been Chairman of the Board and Chief Executive Officer of MacAndrews &
Forbes for more than the past five years. Mr. Perelman also is Chairman of
the Board of Andrews Group Incorporated ("Andrews Group"), Consolidated Cigar
Corporation ("Consolidated Cigar"), Mafco Consolidated, Mafco Worldwide
Corporation ("Mafco Worldwide"), Marvel, Meridian Sports, New World, New
World Television Incorporated ("New World Television"), Power Control
Technologies Inc. ("PCT") and Toy Biz, Inc. ("Toy Biz") and is the Chairman
of the Executive Committee of the Board of Directors of Revlon, Inc.
("Revlon") and of Revlon Consumer Products Corporation ("Revlon Products").
Mr. Perelman is a Director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, Coleman, Coleman Holdings Inc.,
Coleman Worldwide Corporation ("Coleman Worldwide"), Consolidated Cigar,
Mafco Consolidated, Mafco Worldwide, Marvel, Marvel Holdings Inc. ("Marvel
Holdings"), Marvel (Parent) Holdings Inc., ("Marvel Parent"), Marvel III
Holdings Inc. ("Marvel III"), Meridian Sports, New World, New World
Television, NWCG Holdings Corporation ("NWCG Holdings"), Revlon, Revlon
Products, Revlon Worldwide Corporation ("Revlon Worldwide"), Toy Biz and
First Nationwide.
Mr. Frieder has been a Director of FN Holdings since 1994. He has been
President and Chief Executive Officer of KSD Industries Inc. for the past
twenty-five years. Mr. Frieder also is an attorney admitted to practice in
the State of Pennsylvania.
Mr. Gittis has been Vice Chairman and a Director of FN Holdings and a
Director of First Nationwide since 1994. Mr. Gittis has been Vice Chairman
and Director of MacAndrews & Forbes and various of its affiliates since 1985.
Mr. Gittis is a Director of Andrews Group, Jones Apparel Group, Inc., Loral
Corporation, Revlon, Revlon Worldwide, Revlon Products, Mafco Consolidated,
Mafco Worldwide, Consolidated Cigar, New World, New World Television, NWCG
Holdings, PCT, Revlon, Inc., Revlon Worldwide and Revlon Products.
Mr. Engelman has been Executive Vice President and Chief Financial Officer
of FN Holdings since its formation in 1994, and a Director of First
Nationwide since 1992. He has been Executive Vice President and Chief
Financial Officer of MacAndrews & Forbes and various of its affiliates since
February 1992. He was Executive Vice President and Chief Financial Officer of
GAF Corporation from 1990 to 1991; Director, President and Chief Operating
Officer of Citytrust Bancorp Inc. from 1988 to 1990; Executive Vice President
of the Blackstone Group LP from 1987 to 1988; and Director and Executive Vice
President of General Foods Corporation for more than five years prior to
1987. Mr. Engelman is a Director of New World, New World Television and
Revlon Products.
Mr. Schwartz has been Executive Vice President and General Counsel of FN
Holdings since January 1996. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes since 1992. Mr. Schwartz was Senior Vice
President of MacAndrews & Forbes for more than five years prior to 1992. Mr.
Schwartz is a Director of Mutual Series Fund Inc.
Mr. Winoker has been Vice President and Controller of FN Holdings since
1994. He has been Vice President and Controller of MacAndrews & Forbes and
various of its affiliates since September 1992. Mr. Winoker was Assistant
Vice President and Assistant Controller of MacAndrews & Forbes and various of
its affiliates for more than five years prior to September 1992.
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of First Nationwide since consummation of the FN Acquisition. Mr.
Ford was Chairman of the Board and a Director of First Madison from 1993 to
1994. Mr. Ford previously served as Chairman of the Board, Chief Executive
Officer and a Director of First Gibraltar from 1988 through 1993. Mr. Ford
served as the Chairman of the Board, Chief Executive Officer and a Director
of First United Bank Group, Inc. ("First United Bank Group"), from 1993
through 1994. Mr. Ford is Chairman of the Board and a Director of Millennium
Mortgage Corporation. Mr. Ford is Chairman of the Board and a Director of FGB
Services, Inc. and Madison Realty Advisors, Inc. ("Madison Realty"). Mr. Ford
has also served in the following capacities over the past five years:
Chairman of the Board, Chief Executive Officer and Director, Ford Bank Group,
Inc. ("Ford Bank Group"); and Chairman of the Board, Chief Executive Officer
and Director, United New Mexico Financial Corporation. Mr. Ford is also a
Director of Norwest Corporation and ACS.
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<PAGE>
Mr. Webb has been the President, Chief Operating Officer and a Director of
First Nationwide since the consummation of the FN Acquisition. Mr. Webb
served as President, Chief Executive Officer and Director of First Madison
from 1993 through 1994. Mr. Webb previously served as President, Chief
Operating Officer and a Director of First Gibraltar from 1988 through 1993.
Mr. Webb also serves as a Director of FNMC, a wholly owned subsidiary of
First Nationwide.
Mr. Bass has been a Director of First Nationwide since May, 1993. Mr. Bass
is currently the Vice Chairman and Director of First Southwest Company. Mr.
Bass is a Director and Chairman of the Audit Committee of Keystone
Consolidated Industries, and is a Director of Source Services, Inc. Mr. Bass
has served in the following capacities during the past five years: Director,
Endevco, Inc.; Director, Ford Bank Group; and Chairman of the Board; and
Director, Pizza Inn, Inc.
Mr. Bramblett has been a Director of First Nationwide since May, 1993. Mr.
Bramblett has been associated with the law firm of Haynes & Boone since 1973
and is currently a Partner and a member of the Executive Committee of that
firm. Mr. Bramblett has served in the following capacities during the past
five years: Member of the Texas Higher Education Coordinating Board of the
Texas College and University System of Texas and Trustee of the Baylor
College of Dentistry.
Mr. Bullock has served as a Director of First Nationwide since 1994. Mr.
Bullock has been Lieutenant Governor of the State of Texas since 1990. Mr.
Bullock is Chairman of the Board, Director and President of JFB-RDB, Inc. Mr.
Bullock served as a Director of Ford Bank Group from 1992 to 1993, and as
Director of First United Bank Group from 1992 to 1993. Prior to 1990, Mr.
Bullock served as the State of Texas Comptroller of Public Accounts. Mr.
Bullock has been Of Counsel to the law firm of Scott, Douglass, Luton and
McConnica, L.L.P. since 1992.
Ms. McDonald has served as a Director of First Nationwide since 1990. Ms.
McDonald also served as a Director of FGB-San Antonio in 1992. Ms. McDonald
currently serves as a Judge on the International Criminal Tribunal for the
former Yugoslavia. Ms. McDonald is also currently a Professor of Law at the
Thurgood Marshall School of Law of Texas Southern University. Ms. McDonald
currently serves as a Director of Freeport McMoRan Inc., McMoRan Oil & Gas
Co. and Freeport McMoRan Copper & Gold Inc. Ms. McDonald was Of Counsel to
the Walker & Satterthwaite firm from 1991 to 1993. She was a partner in the
law firm of Matthews & Branscomb from 1988 through 1991. Prior to that time,
Ms. McDonald served as a United States District Court Judge for the Southern
District of Texas.
Mr. Setrakian has been a Director of First Nationwide since November 1994.
Mr. Setrakian previously served as a Director of Old FN for more than 10
years. Mr. Setrakian is presently the Chairman and President of the William
Saroyan Foundation and the Chairman and President of Mid-State Horticultural
Company. He is also a former Chairman and member of the Board of Governors of
the United States Postal Service; former Commissioner of the Federal Maritime
Commission, former Chairman and Chief Executive Officer of the California
Growers Winery, Inc.; and former Chairman and founder of the National Bank of
Agriculture.
Mr. Flanagan has been the Executive Vice President and General Counsel of
First Nationwide since the consummation of the FN Acquisition. He also serves
as a Director of FNMC. Mr. Flanagan has been associated with the law firm of
Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various
capacities, including Managing Partner, and he is currently Of Counsel to
that firm.
Mr. Fugate has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Fugate previously served as
Executive Vice President of Old FN from 1991 to 1994, and held various
executive positions with Citibank, N.A. and Citibank California, FSB from
1982 to 1991.
Mr. Gordon has been an Executive Vice President of First Nationwide since
February 1996. Mr. Gordon previously was associated with SFFed Corp. for more
than the past five years, including most recently as Chairman, President and
Chief Executive Officer.
Mr. Hodge has been an Executive Vice President of First Nationwide since
January 1996 and has been employed by First Nationwide since November 1995.
Mr. Hodge previously was associated with the public accounting firm of KPMG
Peat Marwick LLP and its predecessors since 1981, including most recently as
a tax partner since 1986.
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<PAGE>
Mr. Klein has been an Executive Vice President of First Nationwide and the
President of FNMC since January 1996. He also serves as a Director of FNMC.
Mr. Klein previously was associated with PNC Mortgage Corp. of America and
its predecessor, Sears Mortgage Corporation, since 1986, including most
recently as Chairman and Chief Executive Officer.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
First Nationwide since the consummation of the FN Acquisition. Mr. Newman has
also served as President and a Director of FGB Realty and Madison Realty
since 1992. During 1991, Mr. Newman was a Senior Vice President of J.E.
Robert Companies. He served as a Senior Vice President of Bank of New England
Corporation from 1990 to 1991, and served as the President, Chief Executive
Officer and Director of the Seamen's Bank for Savings from 1989 to 1990.
Mr. Staff has been an Executive Vice President of First Nationwide since
October 17, 1994. He also serves as a Director of FNMC. Mr. Staff previously
was associated with the public accounting firm of KPMG Peat Marwick LLP and
its predecessors since 1979, including most recently as Partner-in-charge of
Financial Services for the Southwest-Dallas area.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of First Nationwide since April 1, 1995. For the five years prior to
that date, Mr. Terzian served as the Chief Financial Officer of Dime Bancorp,
Inc. (The Dime Savings Bank of New York, FSB).
Mr. Thomsen has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Thomsen previously served as
Senior Executive Vice President of Old FN and a Director from 1992 to 1994.
Mr. Thomsen was an Executive Vice President of Old FN from 1991 to 1992. Mr.
Thomsen had been Executive Vice President of Michigan National Corporation
from 1986 to 1991 and a Director from 1989 to 1991, and the President of
Michigan National Bank from 1988 to 1991 and a Director from 1989 to 1991.
Mr. Thomsen was Chairman of Independence One Mortgage Corporation, a
subsidiary of Michigan National Bank, from 1986 to 1990.
Mr. Walker has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Walker served as Senior Vice
President of First Madison from 1993 to 1994. Mr. Walker previously served as
Senior Vice President of First Gibraltar from 1988 to 1993.
Ms. Tucei has been a Senior Vice President and the Controller of First
Nationwide since the consummation of the FN Acquisition. Ms. Tucei previously
served as Senior Vice President and Controller of First Madison from 1993 to
1994. Ms. Tucei was Senior Vice President and Director of Regulatory
Assistance Compliance for First Gibraltar from 1991 to 1993, and served as
Senior Vice President and Manager of Regulatory Assistance Operations for
First Gibraltar from 1989 to 1991.
Compensation of Directors
Directors of FN Holdings who do not receive compensation as officers or
employees of FN Holdings or any of its affiliates receive $25,000 per year
plus an additional $1,000 per meeting. Directors of the Bank who do not
receive compensation as officers and employees of the Bank or any of its
affiliates are paid a fee of $3,500 for each meeting of the Board of
Directors they attend in person, other than telephonic meetings, and each
director who attends, in person (other than telephonic meetings), 67% or more
of the meetings of the Board of Directors during a fiscal year will receive
an additional fee of $9,000. Members of the Audit Committee of the Board of
Directors of the Bank who do not receive compensation as officers or
employees of First Nationwide or any of its affiliates are paid a fee of
$1,500 for each meeting of the Audit Committee they attend, other than
telephonic meetings.
ITEM 11. EXECUTIVE COMPENSATION
FN Holdings is a holding company with no business operations of its own
and, accordingly, engages in its business through the Bank and its
subsidiaries. The officers of FN Holdings receive no compensation for their
services to FN Holdings. Accordingly, the following table sets forth certain
compensation awarded to, earned by or paid to the Chief Executive Officer of
the Company's operating subsidiary, First Nationwide, and the four most
highly paid executive officers of First Nationwide, other than the Chief
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<PAGE>
Executive Officer, who served as executive officers of First Nationwide at
December 31, 1995 for services rendered in all capacities to First Nationwide
and its subsidiaries during the years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ---------------------------------- ------ ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gerald J. Ford (3) ................ 1995 $1,500,000 $ 0 $ 7,644 $49,511
Chairman & Chief Executive
Officer 1994 317,358 0 912 4,500
Carl B. Webb ...................... 1995 900,000 0 274,351 66,707
President & Chief Operating 1994 361,724 0 154,496 9,000
Officer 1993 269,551 80,000 8,493 12,658
Christie S. Flanagan (3) .......... 1995 700,000 20,000 10,892 44,854
Executive Vice President &
General ....................... 1994 116,669 0 0 0
Counsel
Lacy G. Newman, Jr. ............... 1995 475,000 0 178,457 36,166
Executive Vice President & Chief 1994 345,334 0 124,916 9,000
Credit Officer 1993 300,000 77,200 6,289 11,572
James R. Staff (3) ................ 1995 450,000 0 17,348 27,001
Executive Vice President & Chief 1994 65,627 0 0 0
Financial Advisor
</TABLE>
- ------------
(1) Includes: (i) the value of group term life insurance, (ii) amounts paid
under relocation programs for Messrs. Webb and Newman, (iii) the value
of the use of Bank-owned automobiles for Messrs. Webb, Flanagan, Newman
and Staff, (iv) club dues, (v) personal financial planning services
paid by the Bank for Messrs. Ford, Webb, Newman and Staff, and (vi)
security expenses paid by the Bank for Messrs. Newman and Staff.
(2) Includes: (i) the Bank's contributions to the 401(k) plan for Messrs.
Ford, Webb, Flanagan and Newman, (ii) the Bank's contribution to the
Supplemental Employees' Investment Plan, and (iii) premiums on
supplemental life insurance paid by the Bank for Messrs. Ford, Webb and
Flanagan.
(3) Mr. Ford became Chief Executive Officer of the Bank upon the
consummation of the FN Acquisition on October 3, 1994. Messrs. Flanagan
and Staff became Executive Vice Presidents on October 3, and October
17, 1994, respectively.
Certain executive officers of the Bank have entered into employment
agreements with First Nationwide. See "Certain Relationships and Related
Transactions--Executive Employment Agreements." Also, Gerald J. Ford has been
and is presently a party to certain consulting and similar agreements with
certain affiliates of FN Holdings, as more fully described in "Certain
Relationships and Related Transactions--Transactions with Mr. Ford."
Effective October 1, 1995, FN Holdings adopted a management incentive plan
(the "Incentive Plan") with respect to certain executive officers of the Bank
(the "Participants"). Awards under the Incentive Plan are made in the form of
performance units. Each performance unit entitles the Participants to receive
cash and/or stock options ("Bonuses") based on the Participant's vested
interest in a bonus pool. Generally, the Incentive Plan provides for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vest at 20% per year beginning October
1, 1995. The aggregate amount of Bonuses payable under the Incentive Plan is
subject to a cap of $50 million.
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<PAGE>
The following table sets forth information concerning awards made during
1995 to each of the executive officers named in the preceding table under all
long-term incentive plans. There were no long-term incentive plan awards in
1994 or 1993.
LONG-TERM INCENTIVE PLAN AWARDS(1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK-PRICE-BASED PLANS
-------------------------------------------
NUMBER OF PERFORMANCE OR
SHARES, UNITS OTHER PERIOD UNTIL
OR OTHER MATURATION OR THRESHOLD MAXIMUM
NAME RIGHTS PAYOUT(2) ($)(3) TARGET ($)(3) ($)(3)
- --------------------- -------------- ------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Carl B. Webb ......... 500 Ten years $10,127,500 $10,127,500 $25,000,000
Christie S. Flanagan 80 Ten years 1,620,400 1,620,400 4,000,000
Lacy G. Newman, Jr. . 80 Ten years 1,620,400 1,620,400 4,000,000
James R. Staff ....... 80 Ten years 1,620,400 1,620,400 4,000,000
</TABLE>
- ------------
(1) The table above represents awards of performance units pursuant to the
Incentive Plan. Any payout with respect to the performance units would
only be made by FN Holdings. Units vest at 20% per year beginning on
October 1, 1995.
(2) Payouts of cash awards would be made only if earned and only (i) upon
achievement of a target "Excess Value" prior to December 31, 2004, (ii)
upon an occurrence of a change in control of FN Holdings or the Bank,
(iii) upon an occurrence of a public offering of common stock of FN
Holdings or the Bank or (iv) on December 31, 2004. "Excess Value" is a
measure of FN Holdings' performance tied to the aggregate earnings of
FN Holdings and the aggregate distributions made to the shareholders of
FN Holdings.
(3) Generally, the cash payout with respect to a performance unit equals
.0084% of the Excess Value. Upon achievement of the target Excess
Value, the cash payout with respect to each performance unit would be
$20,255. If a payout is triggered otherwise than by achievement of the
target Excess Value, no cash payouts would be made unless the Excess
Value at the time of the event triggering payment exceeds or equals the
amount resulting in a payout of at least $20,255 with respect to each
performance unit. In certain circumstances, in case of a public
offering of common stock of FN Holdings or the Bank, the payout would
be made, in whole or in part, in options to acquire common stock of FN
Holdings or the Bank. The number of shares of stock that would be
subject to such options is not determinable at this time.
Compensation Committee Interlocks and Insider Participation
FN Holdings has no Compensation Committee. The following directors serve
on the Compensation Committee of the Board of First Nationwide: Gerald J.
Ford, Howard Gittis, Paul Bass and George Bramblett. During 1995 and during
the 1994 fiscal year, Mr. Ford was Chairman of the Board of First Nationwide.
In addition, Mr. Ford controls Hunter's Glen, which owns 100% of the class B
common stock of FN Holdings, representing 20% of the voting common stock
(representing approximately 15% of the voting power of its common stock) of
FN Holdings. Mr. Gittis is a director of FN Holdings and of the Bank. See
"Certain Relationships and Related Transactions--Transactions with Mr. Ford."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Ronald O. Perelman, Chairman of the Board, Chief Executive Officer and a
Director of FN Holdings, 35 East 62nd Street, New York, New York 10021,
through MacAndrews & Forbes, beneficially owns 100% of the class A common
stock of FN Holdings representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common stock), and
100% of the class C common stock of FN Holdings. Hunter's Glen, a limited
partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a Director of the Bank, 200 Crescent Court, Suite 1350,
Dallas, Texas 75201, owns 100% of the class B common stock of FN Holdings,
representing 20% of its voting common stock (representing approximately 15%
of the voting power of its common stock). See "Certain Relationships and
Related Transactions."
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with MacAndrews & Forbes
FN Holdings is an 80% owned indirect subsidiary of MacAndrews & Forbes. As
a result, MacAndrews & Forbes is able to direct and control the policies of
FN Holdings and its subsidiaries, including mergers, sales of assets and
similar transactions.
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, Inc., MacAndrews &
Forbes is engaged in the cosmetics and skin care, fragrance and personal care
products business. MacAndrews & Forbes owns 83% of Coleman, which is engaged
in the manufacture and marketing of recreational outdoor products, portable
generators, power-washing equipment, spas and hot tubs, and 65% of Meridian
Sports, a manufacturer and marketer of specialized boats and water sports
equipment. Marvel, a youth entertainment company, is 80% owned by MacAndrews
& Forbes. MacAndrews & Forbes also is engaged in the television broadcast and
programming production business through its approximate 35% ownership of New
World Communications, and through its 86% ownership of Mafco Consolidated, in
the processing of licorice and other flavors, and in the manufacture and
distribution of cigars and pipe tobacco. MacAndrews & Forbes is also in the
financial services business through the Bank. The principal executive offices
of MacAndrews & Forbes are located at 35 East 62nd Street, New York, New York
10021.
FN Holdings and its subsidiaries are insured under policies maintained by
MacAndrews & Forbes, and FN Holdings and its subsidiaries reimburse
MacAndrews & Forbes for the portion of the cost of such policies attriutable
to FN Holdings and its subsidiaries. Management of FN Holdings believes that
such cost is lower than would be incurred were such entities to be separately
insured. In addition, FN Holdings reimburses MacAndrews & Forbes for FN
Holdings' allocable portion of certain costs such as legal, accounting and
other professional fees and other services and related expenses.
Tax Sharing Agreement
For federal income tax purposes, FN Holdings and the Bank are included in
the Mafco Group, and accordingly their federal taxable income and loss will
be included in the consolidated federal income tax return filed by Mafco
Holdings. FN Holdings and the Bank also may be included in certain state and
local tax returns of Mafco Holdings or its subsidiaries. First Nationwide, FN
Holdings and Mafco Holdings are parties to the Tax Sharing Agreement,
effective as of January 1, 1994, pursuant to which: (i) the Bank will pay to
FN Holdings amounts equal to the taxes that the Bank would be required to pay
if it were to file a return separately from the Mafco Group, and (ii) FN
Holdings will pay to Mafco Holdings amounts equal to the taxes that FN
Holdings would be required to pay if it were to file a consolidated return on
behalf of itself and First Nationwide separately from the Mafco Group. The
Tax Sharing Agreement allows the Bank to take into account, in determining
its liability to FN Holdings, any net operating losses that it would have
been entitled to utilize if it had filed separate returns for each year since
the formation of the Bank. The Tax Sharing Agreement also allows FN Holdings
to take into account, in determining its liability to Mafco Holdings, any net
operating losses that it would have been entitled to utilize if it had filed
a consolidated return on behalf of itself and the Bank for each year since
the formation of the Bank.
The Bank has generated significant federal income tax net operating losses
since its formation. This is due, in part, to the fact that under applicable
federal income tax law, the financial assistance received by the Bank
pursuant to the Assistance Agreement was excluded from the taxable income of
the Bank. Since December 1988 when the Bank first received such tax-free
financial assistance, the Bank has been entitled to its normal operating
deductions, including interest expense and certain losses relating to its
loan portfolio. As a result, the Bank generated significant net operating
losses for federal income tax purposes even though its operations were
profitable. Furthermore, under the reorganization provisions of the Code, the
Bank succeeded to certain net operating loss carryovers of the Texas Closed
Banks.
At December 31, 1995, if FN Holdings would have filed a consolidated tax
return on behalf of itself (as common parent) and First Nationwide for each
year since the formation of the Bank, it would have had approximately $2.6
billion of regular net operating losses and approximately $992 million of AMT
net
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<PAGE>
operating losses, both of which could have been utilized by FN Holdings.
These losses are scheduled to expire in the year 2002 and thereafter. It is
expected that under the Tax Sharing Agreement, the Bank and FN Holdings will
be able to eliminate a significant portion of the amounts they otherwise
would be required to pay to FN Holdings and Mafco Holdings, respectively,
and, accordingly, it is not expected that the Bank or FN Holdings will record
a significant amount of income tax expense as members of the Mafco Group.
Under federal tax law, FN Holdings and the Bank will be subject to several
liability with respect to the consolidated federal income tax liabilities of
the Mafco Group for any taxable period during which FN Holdings or First
Nationwide are, as the case may be, a member of such group. Mafco Holdings
has agreed, however, to indemnify FN Holdings and the Bank for any such
federal income tax liability (and certain state and local tax liabilities) of
Mafco Holdings or any of its subsidiaries (other than FN Holdings and the
Bank) that FN Holdings or the Bank is actually required to pay. Therefore,
the Tax Sharing Agreement will not increase the amounts payable by FN
Holdings or the Bank over the amounts that they would have had to pay if they
were not members of the Mafco Group.
LOANS TO AFFILIATE
FN Holdings anticipates that affiliate loans required to be made by the
Company pursuant to its charter will be made pursuant to a revolving credit
facility to be entered into between FN Holdings, as lender, and an affiliate
of FN Holdings, as borrower (the "Borrower"). Each loan under this facility
will mature on or before December 31, 1997. The Borrower's obligations to FN
Holdings under the facility will be subordinated obligations. Each loan will
bear interest at the rate established for such loan when it is made equal to
10.5% over the then prevailing five-year treasury yield. At the end of each
calendar quarter, accrued interest will be added to the unpaid principal
amount of the outstanding loans and thereafter treated as principal. The
facility requires the Borrower to prepay loans outstanding thereunder or to
cause certain other adjustments to be made under certain circumstances.
Certain other affiliates of the Borrower and FN Holdings will guarantee
all obligations of the Borrower under the facility on a subordinated basis.
The loans will be unsecured until certain of the senior obligations of the
Borrower and its affiliates are paid or otherwise cease to exist, at which
time and thereafter the Borrower will be required to pledge assets having an
aggregate value to be determined based on the amount of loans outstanding
from time to time under the facility. The facility will contain various
restrictive covenants which will limit the ability of the Borrower to, among
other things, incur debt, create liens and sell assets. Management believes
that the terms and conditions of the facility are at least as favorable to FN
Holdings as might have been obtained in a similar transaction with an
unaffiliated party. FN Holdings may also make loans to affiliates on other
terms so long as such loans comply with the terms of the Senior Sub Notes
Indenture, the Senior Notes Indenture and FN Holdings' charter.
TRANSACTIONS WITH MR. FORD
Madison Financial, Inc. ("Madison Financial"), a corporation formerly
owned by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer
and a Director of the Bank, was party to a Consulting Agreement (the
"Consulting Agreement"), effective as of February 1, 1993, between Madison
Financial and Trans Network Insurance Services (formerly First Gibraltar
(Parent) Holdings Inc.) ("TNIS") pursuant to which Madison Financial provided
consulting services to TNIS for a term ending on December 31, 1998. The
Consulting Agreement was terminated in July 1994 in connection with the
Exchange Agreement (as defined herein). Certain costs related to the
Consulting Agreement were charged to FN Holdings.
The Bank is an indirect subsidiary of First Gibraltar Holdings. In
connection with the offering of the Senior Notes, First Gibraltar Holdings
incorporated Holdings and a wholly owned subsidiary of Holdings, FN Holdings,
to hold 100% of the common stock of the Bank. First Gibraltar Holdings
contributed all of its shares of capital stock of the Bank to Holdings, which
contributed such shares to FN Holdings in exchange for 1,000 shares of common
stock of FN Holdings. FN Holdings amended its certificate of incorporation to
create 800 shares of class A common stock having one vote per share, 200
shares of class
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B common stock having .75 votes per share and 230.3 shares of nonvoting class
C common stock, and Holdings exchanged its 1,000 shares of common stock for
800 shares of class A common stock. Pursuant to the terms of an Exchange
Agreement entered into between FN Holdings, Mr. Ford and Holdings (the
"Exchange Agreement"), and in connection with the consummation of the FN
Acquisition, Holdings acquired 100% of the class C common stock of FN
Holdings in exchange for $210 million and Mr. Ford acquired 100% of the class
B common stock of FN Holdings in exchange for his 6.25% of the class A common
stock of First Gibraltar Holdings and all of the shares of Madison Financial,
the sole asset of which was the Consulting Agreement. In addition, FN
Holdings also assumed indebtedness of Mr. Ford in the amount of approximately
$11.9 million to TNIS (the "Ford Obligation"), which obligation has been
forgiven by TNIS. As a result of the consummation of the transactions
contemplated by the Exchange Agreement, Mr. Ford owned 100% of the class B
common stock of FN Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its voting common
stock), and Holdings owns 100% of the class A common stock of FN Holdings,
representing 80% of its voting common stock (representing approximately 85%
of the voting power of its voting common stock) and 100% of the class C
common stock of FN Holdings. FN Holdings, Holdings and Mr. Ford have entered
into a stockholders agreement (the "Stockholders Agreement") pursuant to
which, among other things, Mr. Ford and FN Holdings have the right to
transfer their respective shares to certain affiliates. In addition, the
Stockholders Agreement contains other customary provisions regarding
restrictions on transfer and registration rights. On December 29, 1995, Mr.
Ford transferred his shares of class B common stock to Hunter's Glen, which
assumed the obligations under, and will receive the benefits of, the
Stockholders Agreement.
Mr. Ford has entered into a loan agreement with NationsBank of Texas, N.A.
("NationsBank"), whereby NationsBank has loaned Mr. Ford $5 million. Such
loan has a maturity of up to one year and bears interest at a floating
interest rate based on LIBOR. The loan is secured by Mr. Ford's Senior Notes.
The terms of the loan provide that, in the event of default by Mr. Ford under
such loan or in the event of certain rapid and material declines in the value
of the Senior Notes pledged as collateral, NationsBank or any successor or
assignee thereof will have the right to foreclose on the pledged Senior Notes
and sell, or direct Mr. Ford to sell, such Senior Notes, to certain Qualified
Institutional Buyers ("QIBs") (as such term is defined in Rule 144A under the
Securities Act) pursuant to Rule 144A under the Securities Act, pursuant to
Regulation S under the Securities Act, to FN Holdings or pursuant to a shelf
registration statement.
Mr. Ford has entered into an employment agreement with First Nationwide
calling for his continued employment by First Nationwide in his current
executive capacity with an annual base salary of $750,000. The term of this
agreement extends through December 31, 1997, and provides for, among other
things, a life insurance policy on the life of Mr. Ford in an amount equal to
three times his base salary.
Mr. Ford has also entered into a consulting agreement with First
Nationwide Management Corp. ("First Nationwide Management"), an affiliate of
FN Holdings, providing for the payment to him of annual consulting fees of
$750,000 for 1995 and in increasing amounts through 1997, and certain other
related expenses. Pursuant to an arrangement between First Nationwide
Management and FN Holdings, such consulting fees and other related expenses
paid by First Nationwide Management are charged to FN Holdings. Such charges
amounted to approximately $964,000 and $155,000 in 1995 and 1994,
respectively.
Executive Employment Agreements
In addition to the employment agreement between Mr. Ford and the Bank (see
"--Transactions with Mr. Ford"), Messrs. Webb, Flanagan, Staff, Newman and
Hodge have entered into employment agreements with First Nationwide calling
for their continued employment by First Nationwide in their current executive
capacities. All five agreements are substantially similar in their terms
except that Messrs. Webb, Staff and Newman's employment agreements terminate
on January 31, 1998, Mr. Hodge's terminates on December 31, 1998, and Mr.
Flanagan's terminates December 31, 1999 and he has been paid a $20,000 "sign
on" bonus. Additionally, each employment agreement provides for a life
insurance policy on the life of the insured in an amount double the base
salary payable by First Nationwide to such individual. Pursuant to such
employment agreements, the annual base salaries payable by First Nationwide
to Messrs. Webb, Flanagan, Staff, Newman and Hodge are $900,000, $700,000,
$450,000, $475,000, and $250,000 respectively.
83
<PAGE>
Pursuant to an Agreement for Provision of Services between First
Nationwide and First Nationwide Management, dated December 1, 1994 (the
"Services Agreement"), a portion of the salaries payable by First Nationwide
to Messrs. Webb, Flanagan and Staff is charged to First Nationwide Management
so that the annual net base compensation payable by First Nationwide will be
$600,000, $350,000 and $225,000 for Messrs. Webb, Flanagan and Staff,
respectively. All of such fees paid by First Nationwide Management are
charged to FN Holdings for services performed by these executives. The total
amounts of such fees were approximately $945,000 and $214,000 in 1995 and
1994, respectively, including $945,000 and $78,000 in 1995 and 1994,
respectively, received by the Bank pursuant to the Services Agreement, which
fees are included in the amounts allocated by First Nationwide Management to
FN Holdings as described below.
First Nationwide has also entered into an employment agreement with Mr.
Gordon effective as of the consummation of SFFed Acquisition for a term
ending on January 30, 1999. Pursuant to such agreement, the annual base
salary payable to Mr. Gordon is $400,000. Mr. Gordon's agreement also
provides for life insurance in an amount on the life of the insured equal to
$714,000.
Services Agreement
First Nationwide Management allocates certain of its expenditures to FN
Holdings. Such expenditures relate to salaries and benefits payable to
selected Bank employees (including Messrs. Webb, Flanagan and Staff),
aviation and other expenses. Pursuant to this arrangement, approximately
$1,935,000 and $459,000 was allocated by First Nationwide Management to FN
Holdings for the years ended December 31, 1995 and 1994, respectively.
Effective December 1, 1994, the Bank entered into the Services Agreement
with First Nationwide Management whereby selected Bank employees (including
Messrs. Webb, Flanagan, and Staff) provided services for First Nationwide
Management and certain of its subsidiaries. Fees are paid to the Bank under
the Services Agreement at the rate of approximately $86,000 per month based
on actual services provided and approximated $1,092,000 and $86,000 for the
years ended December 31, 1995 and 1994, respectively. These costs are
included in the amounts allocated by First Nationwide Management to FN
Holdings as described in the preceding paragraph.
Effective on June 1, 1995, the Bank entered into an agreement whereby it
provides marketing and other support services to TNIS in connection with the
insurance agency business it purchased from a Bank subsidiary on the same
date. Service charges under this agreement amount to approximately $43,000
per month. Management believes that the terms and conditions of these
arrangements are at least as favorable to the Bank as that which could be
obtained from a similar arrangement with an affiliated party.
Sale of Business to TNIS
Effective on June 1, 1995, FNC Insurance Agency, Inc., a wholly owned
subsidiary of the Bank, sold that portion of its insurance agency business
related to marketing insurance products to the Bank's retail deposit and
consumer loan customers to TNIS for approximately $0.7 million. Management
believes that the terms and conditions of this transaction are at least as
favorable to the Bank and FN Holdings as might have been obtained in a
similar transaction with an unaffiliated party.
Loans to Executive Officers and Directors
Some of the Bank's executive officers, directors, and members of their
immediate families have engaged in loan transactions with First Nationwide.
Such loans were made: (i) in the ordinary course of the Bank's business, (ii)
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions between the Bank and
other persons, and (iii) did not involve more than the normal risk of
collectibility or present other unfavorable features.
84
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(A) 1. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is provided in the
consolidated financial statements or notes thereto.
(B) EXHIBITS
3.1 Third Restated Certificate of Incorporation of First Nationwide
Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-00854), dated February 2, 1996 (the "February 1996 Form S-1").)
3.2 By-laws of the First Nationwide Holdings Inc. as amended.
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(the "FN 1994 Form 10-K").)
4.1 Indenture, dated as of October 1, 1986, between First Nationwide
Bank, A Federal Savings Bank, and Bank of America National Trust
and Savings Association Re: $100,000,000 10% Subordinated
Debentures due 2006. (Incorporated by reference to Exhibit 4.5 to
the FN 1994 Form 10-K.)
4.2 First Supplemental Indenture, dated as of September 30, 1994, among
First Madison Bank, FSB, First Nationwide Bank, A Federal Savings
Bank, and Bank of America National Trust and Savings Association,
supplementing the Indenture, dated as of October 1, 1986, between
First Nationwide Bank, A Federal Savings Bank, and Bank of America
National Trust and Savings Association Re: $100,000,000 10%
Subordinated Debentures due 2006. (Incorporated by reference to
Exhibit 4.6 to the FN 1994 Form 10-K.)
4.3 Indenture, dated as of July 15, 1994, between the Registrant and
The First National Bank of Boston, as trustee relating to the
Registrant's $200 million aggregate principal amount of 12 1/4 %
Senior Notes Due 2001. (Incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-1 (File No.
33-82654) dated October 21, 1994, as amended (the "October 1994
Form S-1").)
4.4 Indenture, dated as of January 31, 1996, between the Registrant and
The Bank of New York, as trustee, relating to the Registrant's 9
1/8 % Senior Subordinated Notes Due 2003. (Incorporated by
reference to Exhibit 4.1 to the February 1996 Form S-1.)
4.5 Note Purchase Agreement, dated as of September 1, 1994, between
SFFed Corp. and each of the purchasers. (Incorporated by reference
to Exhibit 4.5 to the February 1996 Form S-1.)
4.6 First Amendment and Waiver Agreement, dated December 11, 1995,
between SFFed Corp. and each of the purchasers, supplementing the
Note Purchase Agreement, dated as of September 1, 1994, between
SFFed Corp. and each of the purchasers. (Incorporated by reference
to Exhibit 4.6 to the February 1996 Form S-1.)
4.7 Registration Agreement, dated January 23, 1996, by and among the
Registrant, Smith Barney Inc. and Keefe, Bruyette & Woods, Inc.
(Incorporated by reference to Exhibit 4.7 to the February 1996 Form
S-1.)
10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and
among First Madison Bank, FSB, First Nationwide Holdings Inc. and
Mafco Holdings, Inc. (Incorporated by reference to Exhibit 10.10 to
the October 1994 Form S-1.)
85
<PAGE>
10.2 Assistance Agreement, dated as of December 28, 1988, by and among
the Federal Savings and Loan Insurance Corporation, First Madison
Bank, FSB (formerly named First Texas Bank, FSB) and MacAndrews &
Forbes Holdings Inc. (Incorporated by reference to Exhibit 10.2 to
the October 1994 Form S-1.)
10.3 Modification Agreement, dated January 31, 1992, by and among the
Federal Deposit Insurance Corporation, as manager of the FSLIC
Resolution Fund, Resolution Trust Corporation, First Madison Bank,
FSB (formerly named First Gibraltar Bank, FSB), First Gibraltar
Holdings Inc. and MacAndrews & Forbes Holdings Inc. (Incorporated
by reference to Exhibit 10.3 to the October 1994 Form S-1.)
10.4 Asset Purchase Agreement, dated as of April 14, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings
Bank. (Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated October 3, 1994 (the "October 1994
Form 8-K").)
10.5 Amendment No. 1 to the Asset Purchase Agreement, dated as of
September 30, 1994, between First Madison Bank, FSB, and First
Nationwide Bank, A Federal Savings Bank. (Incorporated by reference
to Exhibit 2.3 to the October 1994 Form 8-K.)
10.6 Amendment No. 2 to the Asset Purchase Agreement, dated as of
September 30, 1994, between First Madison Bank, FSB, and First
Nationwide Bank, A Federal Savings Bank. (Incorporated by reference
to Exhibit 2.4 to the October 1994 Form 8-K.)
10.7 Non-Performing Asset Sale Agreement, dated September 30, 1994,
between First Madison Bank, FSB, and Granite Management and
Disposition, Inc. (Incorporated by reference to Exhibit 10.1 to the
October 1994 Form 8-K.)
10.8 Settlement Agreement, dated June 17, 1991, by and among First
Gibraltar Bank, FSB, Affiliated Computer Services, Inc. and the
Federal Deposit Insurance Corporation, in its corporate capacity,
the Federal Deposit Insurance Corporation, as receiver for
Gibraltar Savings Association, and the Federal Deposit Insurance
Corporation, as receiver for First Texas Savings Association.
(Incorporated by reference to Exhibit 10.2 to the October 1994 Form
8-K.)
10.9 Office Lease, dated as of November 15, 1990, between Webb/San
Francisco Ventures, Ltd. and First Nationwide Bank, A Federal
Savings Bank. Confidential treatment has been granted for portions
of this document. (Incorporated by reference to Exhibit 10.6 to the
October 1994 Form S-1.)
10.10 Employment Agreement between First Nationwide Bank, A Federal Savings
Bank, and Gerald J. Ford, dated as of October 1, 1994. (Incorporated
by reference to Exhibit 10.13 to the FN 1994 Form 10.10 10-K.)
10.11 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and Carl B. Webb, II, dated as of February 1, 1995.
(Incorporated by reference to Exhibit 10.14 to the FN 1994 Form
10-K.)
10.12 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and Christie S. Flanagan, dated as of October 1,
1994. (Incorporated by reference to Exhibit 10.15 to the FN 1994
Form 10-K.)
10.13 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and James R. Staff, dated as of February 1, 1995.
(Incorporated by reference to Exhibit 10.16 to the FN 1994 Form
10-K.)
10.14 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and Lacy Newman dated as of February 1, 1995.
(Incorporated by reference to Exhibit 10.15 to the February 1996
Form S-1.)
86
<PAGE>
10.15 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and Roger L. Gordon as of January 30, 1996. (Filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.16 Employment Agreement, dated as of January 1, 1996, between First
Nationwide and Richard P. Hodge. (Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.17 Mortgage Company Asset Sale Agreement by and among Resolution Trust
Corporation as conservator for Standard Federal Savings
Association, America's Mortgage Servicing, Inc., A Mortgage
Company, America's Lending Network, Inc., and Stanfed Financial
Services, Inc.; and First Nationwide Mortgage Corporation dated as
of December 1, 1994. (Incorporated by reference to Exhibit 10.18 to
the FN 1994 Form 10-K.)
10.18 Receivables Sale Agreement by and among Resolution Trust
Corporation as conservator for Standard Federal Savings
Association, America's Mortgage Servicing, Inc., A Mortgage
Company, and America's Lending Network, Inc.; and First Nationwide
Mortgage Corporation, dated as of December 1, 1994. (Incorporated
by reference to Exhibit 10.19 to the FN 1994 Form 10-K.)
10.19 Purchase and Sale Agreement by and between Resolution Trust
Corporation in its corporate capacity and First Nationwide Mortgage
Corporation, dated as of December 1, 1994. (Incorporated by
reference to Exhibit 10.20 to the FN 1994 Form 10-K.)
10.20 Purchase and Sale Agreement by and among Resolution Trust
Corporation as receiver of or conservator for certain associations
and First Nationwide Mortgage Corporation, dated as of December 1,
1994. (Incorporated by reference to Exhibit 10.21 to the FN 1994
Form 10-K.)
10.21 Letter agreement between the Resolution Trust Corporation, as
conservator for Standard Federal Savings Association, et al., and
First Nationwide Mortgage Corporation, dated December 2, 1994,
regarding the Mortgage Company Asset Sale Agreement, Receivable
Sales Agreement, and two Purchase and Sales Agreements among such
parties, as of December 1, 1994. (Incorporated by reference to
Exhibit 10.22 to the FN 1994 Form 10-K.)
10.22 Letter agreement between the Resolution Trust Corporation, as
conservator for Standard Federal Savings Association, et al., and
First Nationwide Mortgage Corporation, dated February 23, 1995,
regarding the Mortgage Company Asset Sale Agreement, Receivable
Sales Agreement, and two Purchase and Sales Agreements among such
parties, as of December 1, 1994. (Incorporated by reference to
Exhibit 10.23 to the FN 1994 Form 10-K.)
10.23 Letter agreement between the Resolution Trust Corporation, as
conservator for Standard Federal Savings Association, et al., and
First Nationwide Mortgage Corporation, dated February 24, 1995,
regarding the Mortgage Company Asset Sale Agreement among such
parties, as of December 1, 1994. (Incorporated by reference to
Exhibit 10.24 to the FN 1994 Form 10-K.)
10.24 Letter agreement between the Resolution Trust Corporation, as
conservator for Standard Federal Savings Association, et al., and
First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset sale Agreement among such
parties, as of December 1, 1994 (power of attorney matters).
(Incorporated by reference to Exhibit 10.25 to the FN 1994 Form
10-K.)
10.25 Letter agreement between the Resolution Trust Corporation, as
conservator for Standard Federal Savings Association, et al., and
First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such
parties, as of December 1, 1994 (amendments to schedules).
(Incorporated by reference to Exhibit 10.26 to the FN 1994 Form
10-K.)
10.26 Agreement for Provision of Services between First Nationwide Bank,
A Federal Savings Bank and First Gibraltar (Parent) Holdings Inc.,
dated as of December 1, 1994. (Incorporated by reference to Exhibit
10.27 to the FN 1994 Form 10-K.)
87
<PAGE>
10.27 Asset Purchase Agreement between Trans Network Insurance Services
Inc. and FNC Insurance Agency, Inc. dated effective June 1, 1995.
(Incorporated by reference to Exhibit 10.24 to the Registrant's
Post-Effective Amendment No. 1 to the 1994 Form S-1 (the "June 1995
Post-Effective Amendment").)
10.28 Trans Network Marketing and Support Services Agreement between
First Nationwide Bank, A Federal Savings Bank, and Trans Network
Insurance Services Inc. dated effective June 1, 1995. (Incorporated
by reference to Exhibit 10.25 to the June 1995 Post-Effective
Amendment.)
10.29 Amendment No. 2 to Lease between First Nationwide Bank, A Federal
Savings Bank, and RNM 135 Main, L.P. dated April 6, 1995.
(Incorporated by reference to Exhibit 10.26 to the June 1995
Post-Effective Amendment.)
10.30 Asset Purchase and Sale Agreement, dated September 22, 1995 by and
between First Nationwide and Fifth Third Bank of Northeastern Ohio.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated January 19, 1996 (the "January
1996 8-K").)
10.31 Letter Amendment, dated December 26, 1995, to Asset Purchase and
Sale Agreement, dated September 22, 1995, by and between First
Nationwide and Fifth Third Bank of Northeastern Ohio. (Incorporated
by reference to Exhibit 10.2 to the January 1996 8-K.)
10.32 Agreement and Plan of Merger, dated August 27, 1995 by and between
First Nationwide Bank, A Federal Savings Bank and SFFed Corp.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated February 1, 1996 (the "February
1996 8-K").)
10.33 Stock Option Agreement, dated August 27, 1995 between First
Nationwide Bank, A Federal Savings Bank and SFFed Corp.
(Incorporated by reference to Exhibit 10.2 to the February 1996
8-K.)
10.34 Exchange Agreement, dated September 26, 1994 by and among Gerald J.
Ford, the Registrant and NationsBank of Texas, NA. (Incorporated by
reference to Exhibit 10.12 to the October 1994 Form S-1.)
10.35 Exchange Agreement, dated October 20, 1994 between Carl B. Webb and
the Registrant. (Incorporated by reference to Exhibit 10.9 to the
February 1996 Form S-1.)
10.36 Stockholders Agreement, dated October 3, 1994 by and among Gerald
J. Ford, the Registrant and First Nationwide (Parent) Holdings Inc.
(Incorporated by reference to Exhibit 10.16 to the October 1994
Form S-1.)
10.37 Assignment from Trans Network Insurance Services Inc. to First
Nationwide Management Corp. of Agreement for Provision of Services.
(Filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.)
10.38 Consulting Agreement between First Nationwide Management Corp. and
Gerald J. Ford dated as of October 1, 1994. (Incorporated by
reference to Exhibit 10.27 to Post Effective Amendment No. 1 to the
June 1995 Post Effective Amendment.)
10.39 First Amendment, dated as of January 1, 1995, by and among First
Nationwide Management Corp., Diamond A-Ford Corporation, Trans
Network Insurance Services, Inc. and Gerald J. Ford, supplementing
the Consulting Agreement between First Nationwide Management Corp.
and Gerald J. Ford dated as of October 1, 1994. (Incorporated by
reference to Exhibit 10.31 to the February 1996 Form S-1.)
10.40 Management Incentive Plan for Certain Employees of First Nationwide
Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit
10.32 to the February 1996 Form S-1.)
10.41 Reimbursement and Expense Allocation Agreement, dated as of January
1, 1996, by and between First Nationwide Management Corp. and the
Registrant. (Incorporated by reference to Exhibit 10.33 to the
February 1996 Form S-1.)
88
<PAGE>
12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Registrant. (Filed with Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.)
21.1 Subsidiaries of the Registrant. (Incorporated by reference to
Exhibit 21.1 to the February 1996 Form S-1.)
24.1 Power of Attorney executed by Ronald O. Perelman. (Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.)
24.2 Power of Attorney executed by P. Richard Frieder. (Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.)
24.3 Power of Attorney executed by Howard Gittis. (Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.)
27.1 Financial Data Schedule
(C) REPORTS ON FORM 8-K
None.
89
<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.
By: /s/ Laurence Winoker
------------------------------
Laurence Winoker
Vice President and
Controller
(Signing on behalf of the
Registrant and as the
Principal Accounting Officer)
May 14, 1996
90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
At December 31, 1995 and 1994 and for the years ended
December 31, 1995, 1994 and 1993:
Independent Auditors' Report ....................... F-2
Consolidated Statements of Financial Condition .... F-3
Consolidated Statements of Operations .............. F-4
Consolidated Statements of Stockholders' Equity ... F-5
Consolidated Statements of Cash Flows .............. F-6
Notes to Consolidated Financial Statements ........ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Nationwide Holdings Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Nationwide Holdings Inc. and subsidiaries (the "Company")
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Nationwide Holdings Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," in 1995, and No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1994 and No. 109, "Accounting for Income
Taxes" in 1993.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 8, 1996
F-2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
(dollars in thousands, except per share data)
RM132
<TABLE>
<CAPTION>
1995 1994
---------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .................................. $ 154,758 $ 149,564
Interest-bearing deposits in other banks ......................... 32,778 39,219
Short-term investment securities ................................. 125,035 --
----------- -------------
Cash and cash equivalents ....................................... 312,571 188,783
Securities available for sale .................................... 1,826,075 45,000
Securities to be held to maturity (fair value $1,455 in 1995
and $409,398 in 1994) ........................................... 1,455 411,859
Mortgage-backed securities to be held to maturity (fair value
$1,567,197 in 1995 and $3,095,994 in 1994) ...................... 1,524,488 3,153,812
Loans held for sale, net ......................................... 1,203,412 26,354
Loans receivable, net ............................................ 8,831,018 9,966,886
Covered assets, net .............................................. 39,349 311,603
Investment in Federal Home Loan Bank System ("FHLB") ............ 109,943 128,557
Office premises and equipment, net ............................... 93,509 76,523
Foreclosed real estate, net ...................................... 48,535 37,369
Accrued interest receivable ...................................... 100,604 87,706
Core deposit and other intangible assets ......................... 18,606 12,217
Mortgage servicing rights ........................................ 241,355 86,840
Other assets ..................................................... 295,325 150,050
----------- -------------
Total assets ................................................... $14,646,245 $14,683,559
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ......................................................... $ 10,241,628 $ 9,196,656
Securities sold under agreements to repurchase ................... 969,510 1,883,490
Borrowings ....................................................... 2,392,862 2,808,979
Other liabilities ................................................ 279,099 140,832
----------- -------------
Total liabilities .............................................. 13,883,099 14,029,957
----------- -------------
Minority interest--preferred stock of First Nationwide Bank ..... 300,730 300,730
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, 169.5 and 230.3 shares issued and outstanding
at December 31, 1995 and 1994, respectively .................... -- --
Additional paid-in capital ...................................... 223,000 283,801
Net unrealized holding gain on securities available for sale ... 63,512 11,000
Retained earnings (substantially restricted) .................... 175,903 58,070
----------- -------------
Total stockholders' equity ..................................... 462,416 352,872
----------- -------------
Total liabilities and stockholders' equity ..................... $14,646,245 $14,683,559
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable ......................................... $ 799,607 $212,553 $ 15,766
Mortgage-backed securities ............................... 212,880 43,015 6,028
Covered assets ........................................... 10,705 29,991 49,128
Loans held for sale ...................................... 24,257 583 --
Securities and interest-bearing deposits in other banks . 28,396 6,997 24,342
--------- ---------- ----------
Total interest income ................................... 1,075,845 293,139 95,264
--------- ---------- ----------
Interest expense:
Deposits ................................................. 447,359 100,957 55,410
Securities sold under agreements to repurchase .......... 104,957 18,863 805
Borrowings ............................................... 182,499 80,025 18,513
--------- ---------- ----------
Total interest expense .................................. 734,815 199,845 74,728
--------- ---------- ----------
Net interest income ..................................... 341,030 93,294 20,536
Provision for loan losses ................................. 37,000 6,226 1,402
--------- ---------- ----------
Net interest income after provision for loan losses .... 304,030 87,068 19,134
--------- ---------- ----------
Noninterest income:
Loan servicing fees, net ................................. 70,265 10,042 8,868
Customer banking fees and service charges ................ 47,493 10,595 2,863
Management fees .......................................... 15,141 13,121 7,855
Gain (loss) on sale of assets ............................ 147 (152) 24,188
Gain on sales of branches ................................ -- -- 140,877
Other income ............................................. 17,927 7,552 6,225
---------- ---------- ----------
Total noninterest income ................................ 150,973 41,158 190,876
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ....................... 154,288 48,846 24,951
Occupancy and equipment .................................. 49,897 12,247 5,343
Data processing .......................................... 9,787 2,888 3,739
Savings Association Insurance Fund deposit insurance
premium ................................................. 22,262 6,813 3,259
Marketing ................................................ 10,810 3,385 166
Loan expense ............................................. 12,431 1,132 388
Foreclosed real estate operations, net ................... (927) (528) (726)
Amortization of core deposit and other intangible assets 1,474 222 468
Other .................................................... 72,531 21,293 25,804
---------- ---------- ----------
Total noninterest expense ............................... 332,553 96,298 63,392
---------- ---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 122,450 31,928 146,618
Income taxes .............................................. (57,185) 2,558 2,500
---------- ---------- ----------
Income before extraordinary item and minority interest ... 179,635 29,370 144,118
Extraordinary item--gain on early extinguishment of FHLB
advances, net ............................................ 1,967 1,376 --
---------- ---------- ----------
Income before minority interest ........................... 181,602 30,746 144,118
Minority interest--First Nationwide Bank preferred stock
dividends ................................................ 34,584 -- --
---------- ---------- ----------
Net income .............................................. $ 147,018 $ 30,746 $144,118
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, 1993 ... $1 -- --
Net income .................... -- -- --
Redemption of preferred stock -- -- --
Dividends and distributions to
stockholders ................. -- -- --
--------- --------- ---------
Balance at December 31, 1993 . 1 -- --
Net income .................... -- -- --
Issuance of class C common
stock ........................ -- -- --
Issuance of the Bank's
preferred stock .............. -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1994 . 1 -- --
Net income .................... -- -- --
Redemption of class C common
stock ........................ -- -- --
Dividends on class C common
stock ........................ -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1995 . $1 -- --
========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN ON TOTAL
PAID-IN SECURITIES AVAILABLE RETAINED STOCKHOLDERS'
CAPITAL FOR SALE EARNINGS EQUITY
------------ -------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ... $ 401,569 -- $ 71,206 $ 472,776
Net income .................... -- -- 144,118 144,118
Redemption of preferred stock (124,500) -- -- (124,500)
Dividends and distributions to
stockholders ................. (191,500) -- (188,000) (379,500)
------------ -------------------- ----------- ---------------
Balance at December 31, 1993 . 85,569 -- 27,324 112,894
Net income .................... -- -- 30,746 30,746
Issuance of class C common
stock ........................ 210,376 -- -- 210,376
Issuance of the Bank's
preferred stock .............. (12,144) -- -- (12,144)
Change in net unrealized
holding gain on securities
available for sale ........... -- $11,000 -- 11,000
------------ -------------------- ----------- ---------------
Balance at December 31, 1994 . 283,801 11,000 58,070 352,872
Net income .................... -- -- 147,018 147,018
Redemption of class C common
stock ........................ (60,801) -- -- (60,801)
Dividends on class C common
stock ........................ -- -- (29,185) (29,185)
Change in net unrealized
holding gain on securities
available for sale ........... -- 52,512 -- 52,512
------------ -------------------- ----------- ---------------
Balance at December 31, 1995 . $ 223,000 $63,512 $ 175,903 $ 462,416
============ ==================== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 147,018 $ 30,746 $ 144,118
Adjustments to reconcile net income to net cash
used in operating activities:
Adjustments related to the BAC Sale:
Write-off of excess cost over fair value of net
assets acquired .................................. -- -- 59,506
Write-off of purchase premiums and discounts for
assets and liabilities sold ...................... -- -- (49,013)
Net premium on liabilities sold ................... -- -- (141,215)
Net premium on assets sold ........................ -- -- (17,363)
Other adjustments ................................. -- -- 7,208
Amortization of core deposit and other intangible
assets ............................................ 1,474 222 468
(Accretion) amortization of premiums and
discounts, net .................................... (5,491) 3,156 1,545
Amortization of mortgage servicing rights ......... 33,892 3,604 2,259
Provision for accrued termination and facilities
costs ............................................. 12,772 -- --
Provision for loan losses .......................... 37,000 6,226 1,402
Loss (gain) on sales of assets ..................... 17,755 158 (24,373)
Gain on sales of foreclosed real estate ............ (3,010) (728) (1,864)
Extraordinary gain on early extinguishment of
FHLB advances ..................................... (1,967) (1,376) --
Depreciation and amortization ...................... 9,650 2,725 2,118
FHLB stock dividend ................................ (6,951) (3,188) (1,433)
Capitalization of originated mortgage servicing
rights and excess servicing fees receivable ...... (17,902) -- --
Purchases and originations of loans held for sale . (1,773,437) (40,284) --
Proceeds from the sale of loans held for sale ..... 1,191,281 47,227 --
Increase in other assets ........................... (75,273) (64,217) (65,242)
(Increase) decrease in accrued interest receivable (9,743) 759 752
Increase (decrease) in other liabilities .......... 12,619 (22,224) 38,640
----------- ------------- -------------
Total adjustments ................................. (577,331) (67,940) (186,605)
----------- ------------- -------------
Net cash flows used in operating activities ...... (430,313) (37,194) (42,487)
----------- ------------- -------------
Cash flows from investing activities:
Acquisitions and divestitures:
Maryland Acquisition and Lomas 1995 Purchase ...... (214,727) -- --
Branch Acquisitions ................................ 501,351 -- --
FN Acquisition ..................................... -- (526,813) --
Illinois Branch Sale ............................... -- 31,263 --
BAC Sale ........................................... -- -- (471,998)
Purchases of securities available for sale ......... -- 5,939 --
Proceeds from sales of securities available for sale -- 5,939 --
Purchases of securities held to maturity ............ (157,962) (152,068) (3,473,977)
F-6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
----------- ------------- -------------
Proceeds from maturities of securities held to
maturity ........................................... $ 344,475 $ 108,754 $ --
Purchases of mortgage-backed securities available
for sale ........................................... -- (5,758) --
Proceeds from sales of mortgage-backed securities
available for sale ................................. -- 5,758 --
Purchases of mortgage-backed securities held to
maturity ........................................... (19,825) (58,125) (454,327)
Principal payments on mortgage-backed securities
held to maturity ................................... 570,607 177,926 159,925
Proceeds from sales of mortgage-backed securities
held to maturity ................................... -- -- 80,205
Proceeds from sales of loans receivable ............. 431,247 154,638 300,156
Net increase in loans receivable .................... (86,193) (69,025) (38,149)
Decrease in covered assets .......................... 272,254 279,930 243,355
Redemptions of FHLB stock, net of purchases ........ 25,565 28,281 --
Purchases of office premises and equipment ......... (15,331) (2,555) (1,251)
Proceeds from the disposal of office premises and
equipment .......................................... 1,667 1,427 --
Proceeds from sales of foreclosed real estate ...... 71,453 25,763 8,182
Purchase of mortgage servicing rights ............... (774) (444) (1,728)
------------- ------------ -------------
Net cash flows (used in) provided by investing
activities ........................................ 1,723,807 (1,048) (3,649,607)
Cash flows from financing activities:
Net increase (decrease) in deposits ................. 542,633 (83,851) (432,464)
Proceeds from additional borrowings ................. 6,151,319 1,472,160 112,100
Principal payments on borrowings .................... (6,860,569) (2,239,248) (138,874)
Net (decrease) increase in securities sold under
agreements to repurchase ........................... (913,103) 534,998 119,144
Issuance of class C common stock .................... -- 210,376 --
Redemption of class C common stock .................. (60,801) -- --
Dividends on class C common stock ................... (29,185) -- --
Minority interest--issuance of First Nationwide
preferred stock .................................... -- 288,586 --
Redemption of preferred stock ....................... -- -- (124,500)
------------- ------------ -------------
Dividends ........................................... -- -- (136,210)
Net cash transferred through dividend of First
Gibraltar Mortgage Holdings ........................ -- -- (4,295)
Net cash flows provided by (used in) financing
activities ........................................ (1,169,706) 183,021 (605,099)
------------ -------------
Net change in cash and cash equivalents .............. 123,788 144,779 (4,297,193)
Cash and cash equivalents at beginning of year ...... 188,783 44,004 4,341,197
------------- ------------ -------------
Cash and cash equivalents at end of year ............. $ 312,571 $ 188,783 $ 44,004
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
First Nationwide Holdings Inc. (the "Company" or "FN Holdings") is a
holding company whose only significant asset is all of the outstanding shares
of common stock of First Nationwide Bank, A Federal Savings Bank, formerly
First Madison Bank, FSB ("First Madison") ("First Nationwide" or "Bank"). The
Company is a subsidiary of First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which is a subsidiary of First Gibraltar Holdings Inc. ("First
Gibraltar Holdings"), an indirect subsidiary of MacAndrews & Forbes Holdings
Inc. ("M&F Holdings").
First Nationwide was organized and chartered as First Gibraltar Bank, FSB
(First Gibraltar), a Federal stock savings bank in December 1988 for the
primary purpose of acquiring substantially all of the assets and assuming
deposit, secured and certain other liabilities of five insolvent Texas
savings and loan associations ("Closed Associations") from the Federal
Savings and Loan Insurance Corporation ("FSLIC"), as receiver. On August 9,
1989, the FSLIC was abolished and its obligations and rights were assumed by
the FSLIC Resolution Fund ("FSLIC/RF").
Acquisition of the Closed Associations was made pursuant to five
substantially similar acquisition agreements and an assistance agreement
("Assistance Agreement") among the FSLIC/RF, First Gibraltar, First Gibraltar
Holdings and M&F Holdings, and became effective on December 28, 1988. Both
First Gibraltar Holdings and M&F Holdings are indirect parents of First
Nationwide. Assets subject to the Assistance Agreement are known as "Covered
Assets." The Assistance Agreement generally provides for guaranteed yield
amounts to be paid on the book value of the Covered Assets, and pays First
Nationwide for 90% of the losses incurred upon disposition of the Covered
Assets ("Capital Loss Provision"). The remaining 10% not reimbursed, net of
10% of all asset recoveries and certain agreed-upon Covered Asset disposition
fees ("Shared Gain"), is known as the "FSLIC/RF Reimbursement". In January
1992, certain provisions of the Assistance Agreement were renegotiated and
amended or modified.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Subsequent to
the BAC Sale, First Gibraltar changed its name to First Madison and its
principal business consisted of funding the Covered Assets and the
performance of its obligations under the Assistance Agreement.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal
Savings Bank ("Old FN"), an indirect subsidiary of Ford Motor Company ("Ford
Motor"). On October 3, 1994, effective immediately after the close of
business on September 30, 1994, First Madison acquired substantially all of
the assets and certain of the liabilities (the "FN Acquired Business") of Old
FN (the "FN Acquisition") for approximately $715 million based on estimates
prepared by Old FN. On March 2, 1995, an additional $11.5 million was paid to
Old FN pursuant to certain settlement provisions of the Asset Purchase
Agreement. Effective on October 1, 1994, First Madison changed its name to
First Nationwide.
Following the FN Acquisition, First Nationwide's principal business
consists of operating retail deposit branches and originating and/or
purchasing one- to four-family real estate mortgage loans and, to a lesser
extent, certain consumer loans. First Nationwide actively manages its
portfolio of commercial real estate loans acquired through acquisitions and
is also active in mortgage banking and loan servicing. These operating
activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans and mortgage-backed
securities, asset sales and retained earnings.
During 1995, the FSLIC/RF exercised its right under the Assistance
Agreement to purchase substantially all of the remaining Covered Assets at
the fair market value of such assets (the "FDIC Purchase"). Under the Capital
Loss Provision, losses sustained by First Nationwide from these actions are
reimbursed by the FSLIC/RF and therefore no gain or loss was recorded on the
sale of these assets to the Federal Deposit Insurance Corporation ("FDIC").
F-8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS
The following represent acquisitions consummated during 1995. In addition,
the Bank has executed various contracts in 1995 for the acquisition of other
thrift institutions and mortgage loan servicing operations, and for the sale
of a significant portion of the retail deposit operations outside California,
as further described in note 34.
FN Acquisition
The FN Acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to assets and liabilities based on estimates of
fair values at October 3, 1994. Since October 3, 1994, the results of
operations of the FN Acquired Business have been included in First
Nationwide's consolidated statements of operations.
The following is a summary of the assets acquired and liabilities assumed
in connection with the FN Acquisition at October 3, 1994 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
OLD FN FAIR VALUE FIRST NATIONWIDE LIVES (IN
CARRYING VALUE ADJUSTMENTS CARRYING VALUE YEARS)
-------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Securities .................................... $ 355,760 $ (3,989) $ 351,771 1 to 5
Mortgage-backed securities .................... 1,615,183 (30,516) 1,584,667 6 to 9
Loans held for sale ........................... 33,527 (72) 33,455 --
Loans receivable, net ......................... 11,395,622 6,651 11,402,273 2 to 18
Investment in FHLB ............................ 111,654 -- 111,654 --
Offices premises and equipment ................ 98,075 (13,166) 84,909 3 to 10
Foreclosed real estate, net ................... 48,188 (4,032) 44,156 --
Accrued interest receivable ................... 86,361 -- 86,361 2 to 7
Cost of mortgage servicing rights, net ....... 50,718 39,282 90,000 2 to 4
Other assets .................................. 82,186 67,304 149,490 2 to 5
Deposits ...................................... (10,047,911) (25,607) (10,073,518) 1 to 5
Securities sold under agreement to repurchase (1,229,296) (416) (1,229,712) --
Borrowings .................................... (2,012,574) 33,765 (1,978,809) 1 to 17
Other liabilities ............................. (106,073) (36,250) (142,323) 1 to 5
-------------- ------------- ----------------
481,420 32,954 514,374
Cash and cash equivalents ..................... 188,109 -- 188,109
-------------- ------------- ----------------
$ 669,529 $ 32,954 702,483
============== ============= ----------------
Purchase price paid at closing ................ 714,922
----------------
Excess cost over fair value of net assets
acquired ..................................... $ 12,439
================
</TABLE>
The amount paid at closing was based on an estimated purchase price
prepared by Old FN. This estimate was subsequently adjusted, and an
additional $11.5 million, plus interest, was paid to Old FN on March 2, 1995.
As a result of this additional amount paid and other revisions to the
original fair value estimates, the excess of cost over fair value of net
assets acquired was reduced to $6.5 million.
The Bank financed the FN Acquisition and paid related fees and expenses
with (i) a capital contribution by FN Holdings, funded with the net proceeds
of (a) the issuance by FN Holdings of its 12 1/4% Senior Notes due 2001
("Senior Notes"), and (b) the issuance of FN Holdings' class C common stock
to Parent Holdings, (ii) the net proceeds from the issuance of 3,007,300
shares of the Bank's 11 1/2% Noncumulative Perpetual Preferred Stock
("Preferred Stock"), and (iii) existing cash and proceeds from securities
sold under agreements to repurchase.
F-9
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 7, 1994, First Nationwide sold the FN Acquired Business'
branch network in Illinois, with approximately $1.2 billion in deposits, to
Household Bank, f.s.b. (the "Illinois Sale"). The Illinois Sale was funded
with approximately $1.2 billion in borrowings and did not result in any gain
or loss. The following is a summary of the Bank's carrying value of the
assets and liabilities of the branch operations in the Illinois Sale date of
sale (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Office premises and equipment ......... $ 10,293
Core deposit intangible (other assets) 89,726
Deposits .............................. (1,218,758)
============
</TABLE>
The following pro forma financial information combines the historical
results of the Company and the Acquired Business as if the FN Acquisition and
the Branch Sale had occurred as of the beginning of each year presented. The
pro forma results are not necessarily indicative of the results which would
have actually been obtained if the FN Acquisition and the Branch Sale had
been consummated in the past nor do they project the results of operations in
any future period (in thousands) (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Net interest income $385,313 $489,204
Net income ......... 77,397 150,946
========== ==========
</TABLE>
Maryland Acquisition
On February 28, 1995, the Bank's wholly owned mortgage bank operating
subsidiary, First Nationwide Mortgage Corporation ("FNMC") acquired the
mortgage servicing operations of the former Standard Federal Savings
Association in Frederick, Maryland for approximately $178 million (the
"Maryland Acquisition"). As a result of this transaction, the Bank acquired
certain assets and liabilities and a loan servicing portfolio of
approximately $11.4 billion (including a subservicing portfolio of $1.8
billion). The transaction was accounted for as a purchase. Accordingly, the
accompanying consolidated statement of operations for the period ended
December 31, 1995 includes the results of the acquired mortgage servicing
operations for the period since March 1, 1995.
Branch Acquisitions
In April 1995, First Nationwide 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 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 Acquisitions"). The aggregate amounts received from
the sellers in the Branch Acquisitions totalled $501 million.
Lomas 1995 Purchase
In September 1995, FNMC entered into an agreement to purchase a portion of
Lomas Mortgage USA, Inc.'s ("LMUSA") loan servicing portfolio of
approximately $11.1 billion (including a sub-servicing portfolio of $3.1
billion), a master servicing portfolio of $2.9 billion and other assets,
principally existing loans, loan production operations and ownership of Lomas
Mortgage Services Inc. from LMUSA, a subsidiary of Lomas Financial
Corporation, for $100 million, payable in installments, and the assumption of
the certain indebtedness relating to the acquired loan portfolio totalling
approximately $274 million (the "Lomas 1995 Purchase"). This transaction
closed on October 2, 1995, and FNMC made the first installment totalling $35
million from existing cash. At December 31, 1995, approximately $64.7 million
F-10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remains payable to LMUSA and bears interest at the average federal funds rate
plus 1%. The transaction was accounted for as a purchase. Accordingly, the
accompanying consolidated financial statements of operations include the
results of the acquired operations since October 2, 1995.
Pro froma financial information for the Maryland and Branch Acquisitions
and the Lomas 1995 Purchase has not been presented because such information
is not considered material to the consolidated financial statements.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the level yield method over the estimated remaining lives of the
respective assets and liabilities. Premiums and discounts relative to
noninterest- earning assets and noninterest-bearing liabilities are amortized
(accreted) to operations using the straight-line method over the estimated
useful lives.
Income before income taxes, extraordinary item and minority interest for
the years ended December 31, 1995 and 1994 included net amortization
(accretion) of premiums (discounts) of $.9 million and $.6 million,
respectively, which resulted from the application of purchase accounting
relative to interest-earning assets and interest-bearing liabilities assumed
in the FN, Maryland and Branch Acquisitions, and the Lomas 1995 Purchase.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FN Holdings conform to generally
accepted accounting principles and general practices within the savings and
loan industry. The following summarizes the more significant of these
policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of FN Holdings, the Bank and the Bank's wholly owned subsidiaries
not subject to the Assistance Agreement. Earnings per share data is not
presented due to the limited ownership of the Company (see note 23). All
significant intercompany accounts and transactions have been eliminated.
Investments in and advances to directly-held subsidiaries at December
28, 1988 are Covered Assets under the provisions of the Assistance
Agreement. Therefore, all significant activity regarding additional
investments and dispositions is subject to FSLIC/RF approval. Because
control over such subsidiaries does not rest solely with First Nationwide
and ownership is temporary in management's view, the assets and
liabilities and results of operations of these entities are not
consolidated in the accompanying consolidated financial statements. The
investments in these subsidiaries, including advances, are recorded as
Covered Assets at their guaranteed values.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks and securities purchased under agreements to
resell with original maturities of three months or less. Savings and loans
are required by the Federal Reserve Bank to maintain noninterest-bearing
cash reserves equal to a percentage of certain deposits. The reserve
balance for First Nationwide at December 31, 1995 was $53.6 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
Government and agency securities and mortgage-backed securities. FN
Holdings adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), which specifies the accounting and reporting for all investments in
debt securities and for
F-11
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments in equity securities that have readily determinable fair
values, effective January 1, 1994. There was no material impact on the
consolidated financial statements as a result of the adoption of SFAS 115
at January 1, 1994. SFAS 115 requires classification of debt and equity
securities, including mortgage-backed securities, into one of three
categories: to be held to maturity, available for sale or trading
securities. Securities expected to be held to maturity represent
securities which management has the positive intent and ability to hold to
maturity and are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are
classified as available for sale and carried at fair value, with
unrealized holding gains and losses, net of tax, reported as a separate
component of stockholders' equity until realized. Should an other than
temporary decline in the fair value of a security classified as held to
maturity or available for sale occur, the carrying value of such security
would be written down to fair value by a charge to operations. Realized
gains or losses on available for sale securities are computed on a
specific identification basis and are accounted for on a trade-date basis.
The Financial Accounting Standards Board ("FASB") issued a Special
Report in November 1995, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report"). The Special Report provided all entities an opportunity
to reassess their ability and intent to hold securities to maturity and
allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion
and $231.8 million in carrying value of mortgage-backed securities and
U.S. government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over
the estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One- to four-family residential mortgage loans originated and intended
for sale in the secondary market and other loans which are expected to be
sold in the near term are carried at the lower of cost or market value as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis. Net unrealized losses
are recognized in a valuation allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan-origination fees
and purchase discounts.
Discounts on one- to four-family residential mortgage loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts on
consumer and other loans are recognized over the lives of the loans using
the interest method.
A significant portion of First Nationwide's real estate loan portfolio
is comprised of adjustable- rate mortgages. The interest rate and payment
terms of these mortgages adjust on a periodic basis in accordance with
various published indices. The majority of these adjustable-rate mortgages
have terms which limit the amount of interest rate adjustment that can
occur each year and over the life of the mortgage. During periods of
limited payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See Note 30
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on
F-12
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Bank's past loan loss experience, delinquency trends, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. As management utilizes
information currently available to make such evaluation, the allowance for
loan losses is subjective and may be adjusted in the future depending on
changes in economic conditions or other factors. Additionally, regulatory
authorities, as an integral part of their regular examination process,
review the Bank's allowance for estimated losses on a periodic basis.
These authorities may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the
time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received. When, in management's judgment, the borrower's ability to make
periodic interest and principal payments returns, the loan is returned to
accrual status.
(f) Impaired Loans
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS no.
114, a loan is impaired when it is "probable" that a creditor will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The measurement
of impairment may be based on (i) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (ii) the observable market price of the impaired
loan, or (iii) the fair value of the collateral of a collateral-dependent
loan. SFAS No. 114 does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. For FN
Holdings, loans collectively reviewed for impairment include all
single-family loans, and performing multi-family and commercial real
estate loans under $500,000, excluding loans which have entered the
workout process. The adoption of SFAS No. 114, as amended by SFAS No. 118,
had no material impact on the Company's consolidated financial statements
as the Company's existing policy of measuring loan impairment was
consistent with methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, FN Holdings considers
large nonhomogeneous 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, which represent substantially all of the
Company's loan portfolio, on the fair value of the loan's collateral. The
amount, if any, by which the recorded investment of the loan exceeds the
measure of the impaired loan's value is recognized by recording a
valuation allowance.
Cash receipts on impaired loans not performing according to
contractual terms are generally used to reduce the carrying value of the
loan, unless the Company believes it will recover the remaining principal
balance of the loan. Impairment losses are included in the allowance for
loan losses through a charge to provision for loan losses. Adjustments to
impairment losses due to changes in the fair value of collateral of
impaired loans are included in provision for loan losses. Upon disposition
of an impaired loan, of principal, if any, is recorded through a
charge-off to the allowance for loan losses.
F-13
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs,
are deferred and amortized to interest income using the interest method
over the contractual term of the loans, adjusted for actual loan
prepayment experience. Unamortized fees on loans sold or paid in full are
recognized as income. Adjustable-rate loans with lower initial interest
rates during the introductory period result in the amortization of a
substantial portion of the net deferred fee during the introductory
period.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan as an adjustment to
yield.
Other loan fees and charges, which represent income from the
prepayment of loans, delinquent payment charges, and miscellaneous loan
services, are recognized as income when collected.
(h) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold
improvements are stated at cost, less accumulated depreciation and
amortization. Premises, equipment and leasehold improvements are
depreciated or amortized on a straight-line basis over the lesser of the
lease term or the estimated useful lives of the various classes of assets.
Maintenance and repairs on premises and equipment are charged to expense
in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at
fair value. In the case of leased premises that are vacated by the Bank, a
liability is established representing the difference between the net
present value of future lease payments and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
(i) Foreclosed Real Estate
Real estate acquired through foreclosures is carried at fair value
less estimated disposal costs at the time of foreclosure. Subsequent to
foreclosure, First Nationwide charges current earnings with a provision
for estimated losses when the carrying value of the collateral property
exceeds its fair value.
(j) Core Deposit and Other Intangible Assets
The core deposit intangible asset is amortized over the estimated
lives of existing deposit relationships. Other intangible assets,
principally excess of cost over fair value of net assets acquired in
business combinations accounted for as a purchase, are amortized on a
straight-line basis over the expected period to be benefited of 15 years.
The Company periodically reviews the operations of the businesses acquired
to determine that income from operations continues to support the
recoverability of its intangible assets and the amortization periods used.
(k) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage
loans and selling those loans with servicing rights retained. Generally,
purchased mortgage servicing rights are capitalized at the cost to acquire
F-14
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the relative fair value of the servicing right to the
fair value of the loan and are recorded at the lower of the capitalized
amount, net of accumulated amortization, or fair value.
The Company records mortgage servicing rights at cost, net of
accumulated amortization. Mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income. The
Company uses a cash flow model to calculate the amortization of mortgage
servicing rights. The amortization of the mortgage servicing rights is
analyzed periodically and is adjusted to reflect changes in prepayment
rates and other estimates.
On May 12, 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment
to Statement No. 65" ("SFAS No. 122"). This statement provides guidance
for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold and servicing rights are retained. The Company
elected to adopt this standard effective April 1, 1995. The result of the
adoption was to capitalize approximately $17 million in mortgage servicing
rights related to loans originated by the Company in 1995.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on its
fair value. To determine the fair value of mortgage servicing rights
created since April 1, 1995, the Company uses market prices for comparable
mortgage servicing contracts, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount and
current fair value of the servicing rights. In determining impairment, the
Company aggregates all mortgage servicing rights and stratifies them based
on the predominant risk characteristics of interest rate, loan type and
investor type. Further, mortgage servicing rights capitalized prior to the
adoption of SFAS No. 122 were stratified by acquisition to measure
impairment. A valuation allowance is established for any excess of
amortized cost over the current fair value, by risk stratification, by
charge to income.
The carrying value of mortgage servicing rights is amortized over the
life of the related loan portfolio. A decline in long-term interest rates
generally results in an acceleration in mortgage loan prepayments. Higher
levels of prepayments would result in an acceleration of the amortization
of mortgage servicing rights, causing a reduction in the Company's
servicing fee income. Management takes the current and projected interest
rate environment into account in estimating the amount of amortization of
mortgage servicing rights included in the accompanying consolidated
statements of operations. However, further declines in long-term interest
rates could cause the level of prepayments to exceed management's
estimates.
(l) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. Effective with the adoption of SFAS No. 122 on
April 1, 1995, the carrying value of mortgage loans sold was reduced by
the cost allocated to the associated mortgage servicing rights. Gains or
losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage
loans sold. Such gains and losses are adjusted by the amount of excess
servicing fees recorded. Excess servicing exists when the servicing fee on
a mortgage loan sold with servicing retained exceeds a "normal" servicing
fee (typically .25% to .375% per annum of
F-15
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the mortgage loan principal amount.) The gain or loss will be adjusted to
provide for the recognition of a normal service fee rate over the
estimated lives of the loans. Deferred origination fees and expenses, net
of commitment fees paid in connection with the sale of the loans, are
recognized at the time of sale in the gain or loss determination.
(m) Servicing Fee Income
Servicing fee income represents the fees earned for servicing mortgage
loans under servicing agreements with the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. Amortization of capitalized excess
servicing is netted against loan servicing fees to reflect a normal
servicing fee. The amortization of mortgage servicing rights is netted
against servicing fee income.
(n) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a
means of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the
hedged liability (FHLB advances). Gains and losses on early termination of
these agreements are included in the carrying amount of the related
liability and amortized over the remaining terms of the liability.
(o) Income Taxes
For Federal income tax purposes, FN Holdings is a member of the Mafco
Holdings Inc. ("Mafco", the indirect parent of FN Holdings) affiliated
group, and accordingly, its Federal taxable income or loss will be
included in the consolidated Federal income tax return filed by Mafco. FN
Holdings may also be included in certain state and local income tax
returns of Mafco or its subsidiaries. FN Holding's tax sharing agreement
with Mafco provides that income taxes will be based on the separate
results of FN Holdings. The agreement generally provides that FN Holdings
will pay to Mafco amounts equal to the taxes that FN Holdings would be
required to pay if it were to file a return separately from the affiliated
group. Furthermore, the agreement provides that FN Holdings shall be
entitled to take into account any net operating loss carryovers
attributable to taxable periods prior to January 1, 1994 in determining
its tax liability. The agreement also provides that Mafco will pay FN
Holdings amounts equal to tax refunds FN Holdings would be entitled to if
it had always filed a separate company tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. FN Holdings adopted SFAS No. 109,
"Accounting for Income Taxes", effective January 1, 1993 for which there
was no cumulative effect of that change in the method of accounting for
income taxes in the accompanying 1993 consolidated statement of
operations. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(p) Extraordinary Gain from Extinguishment of Debt
During 1995, First Nationwide prepaid $250 million on FHLB advances
resulting in an extraordinary gain of approximately $2.0 million, net of
income taxes, on the early extinguishment of debt. During 1994, the Bank
prepaid $95.2 million in FHLB advances resulting in an extraordinary gain
of approximately $1.4 million, net of income taxes, on the early
extinguishment of debt.
F-16
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(q) Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and (iii) the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(r) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(s) Newly Issued Accounting Pronouncements
In March 1995, the 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 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. Although the Company has not yet
adopted SFAS No. 121, management does not expect such adoption to have a
material impact on the Company's consolidated financial statements.
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1995, 1994 and
1993 was $702,254, $184,499 and $84,663, respectively.
During the year ended December 31, 1995, noncash activity consisted of the
reclassification of $1.5 billion and $231.8 million historical carrying value
of mortgage-backed securities and U.S. government and agency securities,
respectively, from the held-to-maturity portfolio to the available-for-sale
portfolio (see note 5). In addition, $326.0 million of consumer loans were
reclassified from loans receivable to loans held for sale, transfers from
loans receivable to foreclosed real estate amounted to $79.6 million, and
$376.3 million was transferred from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans.
During the year ended December 31, 1994, noncash activity consisted of the
transfer of $21.8 million from loans receivable to foreclosed real estate and
the transfer of $1.3 billion from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans. The transfer to foreclosed real
estate was net of a $4 million write-down, which was recorded as a receivable
from the FSLIC/RF (other assets), resulting from the expiration of coverage
of a multi-family residential commercial loan.
During the year ended December 31, 1993, noncash activity consisted of the
transfer of $50,950 from loans receivable to mortgage-backed securities, the
transfer of $7,136 from loans held for sale to loans receivable, and the
transfer of $9,604 from Covered Assets to loans receivable due to a
commercial loan which expired from coverage. As discussed in note 2, the Bank
distributed the common stock of a subsidiary, FGMH, to First Gibraltar
Holdings at its carrying value of $99,781. Net cash and cash equivalents
transferred amounted to $4,295. The Bank also dividended office premises and
equipment totalling $943 and securities totalling $142,566 to First Gibraltar
Holdings. As discussed in note 2, the Bank sold substantially all of its
branch operations to BAT during 1993. The excess of liabilities transferred
over assets was $141,215. Net cash and cash equivalents transferred to BAT
amounted to $471,998.
F-17
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SECURITIES AVAILABLE FOR SALE
At December 31, 1995 and 1994, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities .......... $ 34,000 $ 80,068 $ --
Mortgage-backed securities:
GNMA ................................. 14,018 906 --
FNMA ................................. 294,070 5,643 --
FHLMC ................................ 801,393 19,671 (1)
Collateralized mortgage obligations . 345,699 793 (4,678)
U.S. government and agency obligations 231,794 2,768 (69)
------------ ------------ ------------
Total ............................... $1,720,974 $109,849 $(4,748)
============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities .........
Estimated tax effect ..................
Net unrealized holding gain in
stockholders' equity ...............
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ ------------
<S> <C> <C>
Marketable equity securities .......... $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ................................. 906 14,924
FNMA ................................. 5,643 299,713
FHLMC ................................ 19,670 821,063
Collateralized mortgage obligations . (3,885) 341,814
U.S. government and agency obligations 2,699 234,493
------------ ------------
Total ............................... 105,101 $1,826,075
============ ============
FDIC portion of unrealized gain on
marketable equity securities ......... (34,534)
Estimated tax effect .................. (7,055)
------------
Net unrealized holding gain in
stockholders' equity ............... $ 63,512
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities $34,000 $11,000 $--
============ ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ -----------
<S> <C> <C>
Marketable equity securities $11,000 $45,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------
WEIGHTED
AMORTIZED CARRYING AVERAGE
COST VALUE YIELD
------------ ------------ ----------
<S> <C> <C> <C>
Marketable equity securities ............. $ 34,000 $ 114,068 --
Mortgage-backed securities ............... 1,455,180 1,477,514 7.41%
U.S. government and agency obligations:
Maturing within 1 year .................. 62,054 62,093 5.70
Maturing after 1 year but within 5 years 169,676 172,336 6.98
Maturing after 5 years through 10 years 64 64 7.25
------------ ------------ ----------
Total .................................. $1,720,974 $1,826,075 7.16%
============ ============ ==========
</TABLE>
As discussed more fully in note 3, the FASB issued the Special Report
which provided all entities an opportunity to reassess their ability and
intent to hold securities to maturity and allowed a one-time reclassification
of securities from held-to-maturity to available-for-sale without "training"
the remaining held-to-maturity securities. On December 29, 1995, the Bank
reclassified $1.5 billion and $231.8 million in carrying value of
mortgage-backed securities and U.S. government and agency securities,
respectively, from held to maturity to securities available for sale. This
reclassification resulted in a net after-tax increase in the unrealized gain
account in stockholders' equity of $22.5 million.
Proceeds on sales of mortgage-backed securities available for sale during
1994 totalled $6 million. No realized gain or loss was recognized on such
sales.
At December 31, 1995, mortgage-backed securities available for sale
included securities totalling $63.4 million which resulted from the
securitization of certain qualifing mortgage loans from First Nationwide's
loan portfolio.
F-18
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, mortgage-backed securities available for sale
included $979.0 million of variable-rate securities.
U.S. government and agency obligations and mortgage-backed securities
available for sale of $50 million and $39 million, respectively, were pledged
as collateral for various obligations as further discussed in note 30.
Marketable equity securities available for sale represents approximately
25% of the outstanding common stock of Affiliated Computer Services ("ACS"),
representing 5% of the voting power, with an original cost basis of $34
million. Pursuant to the terms of a settlement agreement dated June 17, 1991
between the Company, ACS, and the FDIC, the FDIC is entitled to share in a
defined portion of the proceeds from the sale of the stock, which, at
December 31, 1995 and 1994, approximated $34.5 million and $0, respectively,
and which is recorded in other liabilities.
(6) SECURITIES TO BE HELD TO MATURITY
At December 31, 1995 and 1994, securities to be held to maturity consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Municipal securities $1,455 $-- $-- $1,455
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. government and agency obligations $410,211 $51 $2,524 $407,738
Municipal securities ................... 1,648 12 -- 1,660
----------- ------------ ------------ ------------
$411,859 $63 $2,524 $409,398
=========== ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
securities with a carrying value of $231.8 million were reclassified from
securities held to maturity to securities available for sale at December 29,
1995.
The weighted average stated interest rates on securities held to maturity
were 8.25% and 5.79% at December 31, 1995 and 1994, respectively.
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held
to maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year .................. $1,250 $1,250 8.25%
Maturing after 1 year but within 5 years 205 205 8.25
----------- ----------- ----------
Total .................................. $1,455 $1,455 8.25%
=========== =========== ==========
</TABLE>
F-19
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) MORTGAGE-BACKED SECURITIES
At December 31, 1995 and 1994, mortgage-backed securities to be held to
maturity consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC .......................... $ 533,208 $15,285 $-- $ 548,493
FNMA ........................... 988,700 27,424 -- 1,016,124
Other mortgage-backed
securities .................... 2,580 -- -- 2,580
------------ ------------ ------------ ------------
$1,524,488 $42,709 $-- $1,567,197
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC .............................. $1,659,912 $4,865 $17,744 $1,647,033
FNMA ............................... 1,078,323 1,234 19,093 1,060,464
GNMA ............................... 15,712 4 203 15,513
Collateralized Mortgage Obligations 396,820 13 26,894 369,939
Other mortgage-backed securities .. 3,045 -- -- 3,045
------------ ------------ ------------ ------------
$3,153,812 $6,116 $63,934 $3,095,994
============ ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
mortgage-backed securities with a carrying value of $1.5 billion were
reclassified from mortgage-backed securities held to maturity to securities
available for sale at December 29, 1995.
The weighted average interest rate on mortgage-backed securities to be
held to maturity were 7.46% and 6.30% at December 31, 1995 and 1994,
respectively.
At December 31, 1995 and 1994, mortgage-backed securities to be held to
maturity included securities totalling $1.5 billion and $1.4 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from First Nationwide's loan portfolio. At December 31, 1995
and 1994, these securities include $1.5 billion and $1.3 billion,
respectively, which have been securitized with FNMA and FHLMC with full
recourse to the Bank. At December 31, 1995 and 1994, mortgage-backed
securities to be held to maturity included $1.5 billion and $2.5 billion,
respectively, of variable-rate securities.
F-20
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LOANS RECEIVABLE, NET
At December 31, 1995 and 1994, loans receivable, net, excluding Covered
Assets, included the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Real estate loans:
1-4 unit residential mortgage .................. $5,423,411 $ 5,612,150
5+ unit residential mortgage ................... 1,854,333 2,177,646
Commercial ..................................... 1,716,121 2,015,808
Construction ................................... -- 7,544
Land ........................................... 8,840 15,270
------------ ------------
9,002,705 9,828,418
Undisbursed loan funds ......................... -- (732)
------------ ------------
Total real estate loans ...................... 9,002,705 9,827,686
------------ ------------
Equity-line loans .............................. 110,830 408,964
Other consumer loans ........................... 60,106 82,996
Commercial loans ............................... 1,913 970
------------ ------------
Total consumer and other loans ............... 172,849 492,930
------------ ------------
Total loans receivable ....................... 9,175,554 10,320,616
Deferred fees and unearned premiums (discounts) 19,423 (255)
Allowance for loan losses ...................... (210,484) (202,780)
Purchase accounting discounts, net ............. (153,475) (150,695)
------------ ------------
Total loans receivable, net .................. $8,831,018 $ 9,966,886
============ ============
</TABLE>
The Bank's lending activities are principally conducted in California, New
York and Florida.
As a result of the FN Acquisition, the Bank assumed obligations for
certain loans sold with recourse. The outstanding balances of loans sold with
recourse at December 31, 1995 totalled $333.2 million. The Bank evaluates the
credit risk of loans sold with recourse and, if necessary, records a
liability (other liabilities) for estimated losses related to these potential
obligations. No loans were sold with recourse during the years ended December
31, 1995, 1994 and 1993.
F-21
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the amount of loans which have been placed
on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential ..... $135,710 $133,439
5+ unit residential ...... 23,253 23,543
Commercial and other ..... 9,280 11,334
Land ...................... 136 6,850
Construction .............. -- 2,036
---------- ----------
Total real estate .... 168,379 177,202
Non-real estate ........... 3,159 4,002
---------- ----------
Total nonaccrual loans $171,538 $181,204
========== ==========
</TABLE>
The following table indicates the carrying value of loans classified as
troubled debt restructurings, net of purchase accounting adjustments, and
excluding Covered Assets, as of December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
1-4 unit residential real estate $ 8,479 $ 19,026
5+ unit residential real estate 146,971 203,742
Commercial and other real estate 79,000 110,123
---------- ---------
Total restructured loans ..... $234,450 $332,891
========== =========
</TABLE>
At December 31, 1995, the Bank's loan portfolio totalling $9.2 billion is
concentrated in California. The financial condition of the Bank is subject to
general economic conditions such as the volatility of interest rates and real
estate market conditions and, in particular, to conditions in the California
residential real estate market. Any downturn in the economy generally, and in
California in particular, could further reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Bank may find it
difficult to maintain its asset quality and may require additional allowances
for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1995 and 1994 (in thousands). There were no loans
classified as troubled debt restructurings in 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Restructured loans $22,098 $33,093 $6,976 $ 8,572
Nonaccrual loans .. 6,136 15,329 544 3,806
------------ ------------- ------------ -------------
$28,234 $48,422 $7,520 $12,378
============ ============= ============ =============
</TABLE>
F-22
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995 and 1994, respectively, the Bank and its wholly
owned subisdiary, FGB Realty Advisors, Inc., managed principally
non-performing loan and asset portfolios totalling 41.3 billion and $1.6
billion, respectively, for investors. Revenues related to such activities are
included in management fees in the accompanying statements of operations.
Activity in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance -- January 1 ........................ $202,780 $ 2,250 $ 14,537
Purchases -- FN Acquisition ................. -- 201,927 --
Provision for loan losses ................... 37,000 6,226 1,402
Allowance for losses assigned to loans sold -- -- (12,918)
Charge-offs ................................. (32,344) (9,676) (1,860)
Recoveries .................................. 3,048 2,053 1,089
---------- ---------- ----------
Balance -- December 31 ...................... $210,484 $202,780 $ 2,250
========== ========== ==========
</TABLE>
(9) IMPAIRED LOANS
The Company's adoption of SFAS No. 114, as amended by SFAS No. 118,
effective January 1, 1995, had no material impact on the Company's
consolidated financial statements as the Company's existing policy of
measuring loan impairment was consistent with methods prescribed in these
standards.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status). The average recorded investment in
impaired loans during the year ended December 31, 1995 was approximately
$125.5 million. For the year ended December 31, 1995, the Company recognized
interest income on those impaired loans of $12.9 million, which included $.2
million of interest income recognized using the cash basis method of income
recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at December 31, 1995, have not been established, because
most would be eligible to be sold to Granite under the Put Agreement (see
note 10). There have been no significant multi-family or commercial real
estate loans originated since October 1, 1994.
(10) PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FN had with Granite
Management and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford
Motor Company, whereby Old FN had the option to sell ("put") to Granite, on a
quarterly basis, up to approximately $500 million of certain assets,
primarily non-performing commercial real estate loans and residential
mortgage loans with an original principal balance greater than $250,000. The
Put Agreement will expire upon the earlier of (i) November 30, 1996; or (ii)
the date on which the aggregate purchase price of assets which have been
"put" to Granite equals $500 million, including assets "put" to Granite by
Old FN through October 3, 1994. The purchase price represents the outstanding
principal balance, accrued interest and certain other expenses. The remaining
balance of the Put Agreement at December 31, 1995 was $112.4 million.
(11) RECEIVABLES FROM THE FSLIC/RF -- COVERED ASSETS
COMPONENTS AND COVERAGE PERIODS
Covered Assets represent guaranteed amounts to be received by First
Nationwide either from the disposition of the underlying assets or from the
FSLIC/RF. During the coverage period, which varies
F-23
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based on the underlying asset, First Nationwide is not subject to any loss
from the disposition of such assets other than the 10% FSLIC/RF
Reimbursement.
During the coverage period, the FSLIC/RF guarantees to First Nationwide an
agreed-upon yield on Covered Assets ("Guaranteed Yield"). The Guaranteed
Yield is based on a spread that began at 2.25% over the Texas cost of funds
(the average cost of funds of all previous FSLIC-insured institutions whose
main offices are located in Texas as most recently reported by the Office of
Thrift Supervision ("TCOF")) declining to 1.50% over the TCOF over the term
of the Assistance Agreement. The TCOF was 5.63%, 4.46% and 4.07% at December
31, 1995, 1994, and 1993, respectively. The spread over the TCOF was 1.90%,
2.00% and 2.05% at December 31, 1995, 1994, and 1993, respectively.
Certain provisions of the Assistance Agreement were amended and/or
modified in January 1992. The Bank recorded a FSLIC/RF rebate reserve in 1992
based on the present value of the FSLIC/RF Reimbursement amount (net of
Shared Gains) to be paid. At December 31, 1994, this reserve was reflected as
a reduction of the related Covered Assets and is evaluated periodically and
adjusted for any change in the expected amounts. The FSLIC/RF Reimbursement
reserve was fully utilized in 1995 as a result of the FDIC Purchase.
In June 1995, the FDIC, as manager of the FSLIC/RF, as successor to the
FSLIC, exercised its rights under the Assistance Agreement to purchase
substantially all of the remaining Covered Assets as of June 1, 1995 at the
fair market value of such assets and further purchased additional assets from
the remaining Covered Asset portfolio in September 1995 as part of the FDIC
Purchase. Under the terms of the Capital Loss Coverage provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. At December 31, 1995, the Covered
Asset balance of $39.3 million represents amounts which remain unpaid by the
FDIC in connection with the FDIC Purchase. The FDIC has elected to treat this
amount as a Covered Asset, earning Guaranteed Yield, until such time as it is
paid to the Bank.
(12) INVESTMENT IN FHLB
The Bank's investment in FHLB stock is carried at cost. The FHLB provides
a central credit facility for member institutions. As a member of the FHLB
system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) .3% of total assets,
or (iii) 5% of its advances (borrowings) from the FHLB. The Bank was in
compliance with this requirement at December 31, 1995 and 1994.
F-24
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net at December 31, 1995 and 1994 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE LIVES
AT DECEMBER 31,
1995 1994 1995
---------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ...................................... $ 17,952 $14,857 --
Buildings and leasehold improvements ..... 46,652 38,240 25
Furniture and equipment ................... 37,697 25,348 10
Capitalized equipment leases .............. -- 819 --
Construction in progress .................. 2,471 2,882 --
---------- --------- -----------------
104,772 82,146
Accumulated depreciation and amortization (11,263) (5,623)
---------- ---------
Total office premises and equipment, net $ 93,509 $76,523
========== =========
</TABLE>
Depreciation and amortization expense of office premises and equipment for
the years ended December 31, 1995, 1994 and 1993 totalled $8.8 million, $2.5
million and $2 million, respectively.
Certain of the office premises and equipment included in the above table
are included in the Branch Sale Agreements, as defined and more fully
described in note 34.
First Nationwide rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2015. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1995, 1994 and 1993
totalled $22.6 million, $4.2 million and $1.1 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1995 and
1994 totalled $2.2 million and $.4 million, respectively. At December 31,
1995, the projected minimum rental commitments, net of sublease agreements,
under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- -------------------
<S> <C>
1996 ............... $12,852
1997 ............... 11,399
1998 ............... 10,488
1999 ............... 8,188
2000 ............... 6,896
2001 and thereafter 11,096
---------
Total ............ $60,919
=========
</TABLE>
During 1995, the Bank established reserves for certain of these rental
expenses as further discussed in note 21.
The above table includes projected minimum rental commitments, net of
sublease agreements, of $2.5 million, $2.2 million, $2.0 million, $1.4
million, $1.1 million, and $5.8 million for the years ended 1996 through
2000, and 2001 and thereafter, respectively, related to facilities included
in the Branch Sale Agreements, as defined and further described in note 34.
F-25
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31, 1995 and 1994 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
1-4 unit residential real estate ... $33,694 $37,396
Multifamily real estate ............. 14,368 --
Commercial real estate .............. 506 --
Less allowance for losses ........... (33) (27)
--------- ---------
Total foreclosed real estate, net $48,535 $37,369
========= =========
</TABLE>
Activity in the allowance for losses on foreclosed real estate for the
years ended December 31, 1995, 1994 and 1993 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Balance -- January 1 . $ 27 $ 223 $ 358
Charge-offs ........... (53) (248) (135)
Recoveries ............ 59 52 --
------ ------- -------
Balance -- December 31 $ 33 $ 27 $ 223
------ ------- -------
</TABLE>
(15) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1995 and 1994 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash and cash equivalents and securities $ 4,387 $ 4,062
Mortgage-backed securities .............. 21,200 19,268
Loans receivable ........................ 75,017 64,376
---------- ---------
Total accrued interest receivable .... $100,604 $87,706
========== =========
</TABLE>
(16) MORTGAGE-SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
purchased ("Purchased"), originated ("Originated"), and excess servicing fees
receivable ("Excess") for the years ended December 31, 1995, 1994 and 1993
(in thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED EXCESS TOTAL
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ............. $ 71,951 -- $ 2,718 $ 74,669
Additions ............................. 1,191 -- 537 1,728
Amortization .......................... (2,123) -- (136) (2,259)
Distribution of stock of FGMH to First
Gibraltar Holdings ................... (71,019) -- (3,119) (74,138)
----------- ------------ --------- ----------
Balance at December 31, 1993 ........... -- -- -- --
Additions from FN Acquisition ......... 90,000 -- -- 90,000
Additions -- other .................... 168 -- 276 444
Amortization .......................... (3,600) -- (4) (3,604)
----------- ------------ --------- ----------
Balance at December 31, 1994 ........... 86,568 -- 272 86,840
Additions from Maryland Acquisition .. 76,369 -- -- 76,369
Additions from Lomas 1995 Purchase ... 93,362 -- -- 93,362
Additions -- other .................... 774 $16,824 1,078 18,676
Amortization .......................... (33,324) (454) (114) (33,892)
----------- ------------ --------- ----------
Balance at December 31, 1995 ........... $223,749 $16,370 $ 1,236 $241,355
=========== ============ ========= ==========
</TABLE>
F-26
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, 1994 and 1993, the outstanding balances of
single-family residential mortgage loan participations, whole loans and
mortgage pass-through securities serviced for other investors by FNMC
totalled $27.1 billion, $7.5 billion and $0.3 billion, respectively. In
addition, the loan servicing portfolio included $3.0 billion of master
servicing at December 31, 1995.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. At December 31, 1995, no allowance for
impairment of the mortgage servicing rights was necessary. The estimated fair
value of the mortgage servicing rights was $307 million and $91 million at
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, servicing advances and other receivables
related to single-family residential mortgage loan servicing, net of
valuation allowances of $6 million and $9 million in 1995 and 1994,
respectively, (included in other assets) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Servicing advances ................ $ 57,359 $16,485
Corporate advances due from banks 73,566 21,111
Other ............................. 35,042 1,729
---------- ---------
$165,967 $39,325
========== =========
</TABLE>
(17) DEPOSITS
A summary of deposits and weighted average contractual interest rates at
December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------------
AVERAGE CARRYING AVERAGE CARRYING
RATE VALUE RATE VALUE
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Passbook accounts .............. 2.17% $ 663,880 2.14% $ 685,049
Demand deposits:
Interest-bearing .............. .98 684,079 1.04 666,957
Noninterest-bearing ........... -- 696,918 -- 351,824
Money market deposit accounts . 3.14 1,443,465 3.11 1,926,851
Term accounts:
3.00% or less ................ 2.82 2,882 2.91 45,055
3.01- 4.00% .................. 3.68 112,564 3.57 1,050,648
4.01- 5.00 ................... 4.65 367,247 4.52 1,596,827
5.01- 6.00 ................... 5.49 3,053,770 5.46 1,113,486
6.01- 7.00 ................... 6.52 1,944,418 6.42 703,933
7.01- 8.00 ................... 7.34 95,780 7.56 371,446
8.01- 9.00 ................... 8.47 123,293 8.45 404,859
9.01- 10.00 .................. 9.29 149,434 9.31 173,694
10.01- 11.00 ................. 10.57 3,696 10.92 49,434
11.01- 12.00 ................. 11.52 788 11.12 8,206
12.01- 13.00 ................. 12.27 1,587 12.27 1,641
.............................. --------- ------------- --------- -----------
.............................. 4.67% 10,183,801 4.19% 9,149,910
Accrued interest payable ..... 50,755 25,848
Purchase accounting
adjustments ................... 7,072 20,898
.............................. ------------- -----------
Total deposits ............... $10,241,628 $9,196,656
.............................. ============= ===========
</TABLE>
F-27
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate amount of jumbo certificates of deposit (term deposits)
with a minimum denomination of $100,000 was approximately $690 million and
$523 million at December 31, 1995 and 1994, respectively. Brokered
certificates of deposit totalling $965 million and $824 million were included
in deposits at December 31, 1995 and 1994, respectively.
A summary of interest expense by deposit category for the years ended
December 31, 1995, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Passbook accounts ................ $ 14,668 $ 3,843 $ 768
Interest bearing demand deposits 6,953 1,809 879
Money market deposit accounts ... 50,847 16,137 5,498
Term accounts .................... 374,891 79,168 48,265
---------- ---------- --------
$447,359 $100,957 $55,410
========== ========== ========
</TABLE>
At December 31, 1995, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 ............... $4,928,828
1997 ............... 1,071,908
1998 ............... 157,438
1999 ............... 180,424
2000 ............... 310,302
2001 and thereafter 46,559
------------
$6,695,459
============
</TABLE>
Certain of these deposits are the subject of the Branch Sale Agreements,
as defined and more fully described in note 34.
(18) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED INTEREST
VALUE (1) MARKET VALUE AMOUNT RATE
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ........ $501,647 $ 511,513 $487,528 5.82%
Maturing 30 days to 90 days ... 236,483 240,152 210,057 6.64
Maturing over 1 year ........... 253,363 254,502 250,000 7.63
---------- ------------ ---------- ----------
Total(ii) .................... 991,493 1,006,167 947,585
Purchase accounting adjustment 554 554 --
Accrued interest payable ...... -- -- 21,925
---------- ------------ ----------
$992,047 $1,006,721 $969,510
========== ============ ==========
</TABLE>
F-28
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
-------------------------- -----------------------
RECORDED INTEREST
VALUE (1) MARKET VALUE AMOUNT RATE
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ..... $ 321,965 $ 319,249 $ 306,659 6.07%
Maturing 30 days to 90 days . 1,231,871 1,226,579 1,168,738 6.22
Maturing 90 days to 1 year .. 438,362 433,454 404,286 7.70
Total (ii) .................... 1,992,198 1,979,282 1,879,683
Purchase accounting adjustment 3,078 3,078 53
Accrued interest payable ..... -- -- 3,754
------------ ------------ -----------
$1,995,276 $1,982,360 $1,883,490
============ ============ ===========
</TABLE>
- ------------
(i) Recorded value includes accrued interest at December 31, 1995 and 1994.
In addition, the recorded value at December 31, 1995 includes
adjustments for the unrealized gain or loss on securities available for
sale pursuant to SFAS No. 115.
(ii) Total mortgage-backed securities collateral at December 31, 1995 and
1994 includes $585 million and $876 million, respectively, in recorded
value of loans securitized with full recourse to the Bank. The market
value of such collateral was $600 million and $876 million at December
31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, these agreements had weighted average
interest rates of 6.48% and 6.51%, respectively. The underlying securities
were delivered to, and are being held by third party securities dealers.
These dealers may have loaned the securities to other parties in the normal
course of their operations, but all agreements require the dealers to resell
to First Nationwide the identical securities at the maturities of the
agreements. Securities sold under agreements to repurchase averaged $1.6
billion and $499 million during 1995 and 1994, respectively, and the maximum
amount outstanding at any month-end during these periods was $2.2 billion and
$1.9 billion, respectively.
(19) BORROWINGS
Borrowings at December 31, 1995 and 1994 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from the FHLB .... $1,789,811 6.68% $2,242,323 7.61%
Variable-rate borrowings from the FHLB . 250,000 6.02 275,000 5.93
Senior Notes ............................ 200,000 12.25 200,000 12.25
Subordinated debentures due October 2006 92,100 10.00 92,100 10.00
Federal funds purchased ................. 55,000 6.00 -- --
Other borrowings ........................ 3,755 7.91 4,416 7.94
Total borrowings ...................... 2,390,666 7.19 2,813,839 7.85
Accrued interest payable ................ 11,555 -- 18,635 --
Purchase accounting adjustments ........ (9,359) -- (23,495) --
------------ --------- ------------ ---------
Total other borrowings ................ $2,392,862 7.19% $2,808,979 7.85%
============ ========= ============ =========
</TABLE>
F-29
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities and weighted average stated interest rates of borrowings at
December 31, 1995, not including accrued interest payable or purchase
accounting adjustments, follow (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
MATURITIES DURING THE YEARS BALANCES MATURING RATES
ENDING DECEMBER 31 ------------------- ------------------------
- --------------------------- FHLB OTHER FHLB OTHER
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1996 ....................... $1,487,166 $ 55,236 6.12% 6.01%
1997 ....................... 240,000 213 8.61 8.10
1998 ....................... 310,000 200 7.34 8.20
1999 ....................... 250 171 7.75 8.19
2000 ....................... -- 121 -- 8.27
2001and thereafter ......... 2,395 294,914 7.71 11.51
------------ ---------- ------- -------
Total .................... $2,039,811 $350,855 6.60% 10.65%
============ ========== ======= =======
</TABLE>
Interest expense on borrowings for the years ended December 31, 1995, 1994
and 1993,are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
FHLB advances .................. $139,051 $71,662 $15,895
Interest rate swap agreements . (15,177) (8,797) --
Subordinated debentures ........ 9,210 2,303 --
Senior Notes ................... 24,500 6,150 --
Federal funds purchased ........ 2,268 438 --
Revolving warehouse line ...... -- -- 1,924
Other .......................... 1,403 332 694
Purchase accounting adjustments 21,244 7,937 --
---------- --------- ---------
Total ........................ $182,499 $80,025 $18,513
========== ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Real estate loans (primarily residential) $1,643,971
Mortgage-backed securities ................ 905,823
FHLB stock ................................ 109,943
------------
Total ................................... $2,659,737
============
</TABLE>
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes, including $5.5 million principal
amount of Senior Notes to certain directors and officers of the Bank. The
notes will mature on May 15, 2001 with interest payable semiannually on May
15 and November 15. Deferred issuance costs associated with the Senior Notes'
issuance totalling $9.6 million were recorded in other assets in the 1994
consolidated statement of financial condition and are being amortized over
the term of the Senior Notes.
The notes are redeemable at the option of the Company, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The notes are subordinated to all
existing and future liabilities, including deposits and other borrowings of
the Bank, and to the Preferred Stock. The terms and conditions of the
Indenture impose restrictions that affect, among other things, the ability of
FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments. The Company was in compliance with
these covenants at December 31, 1995.
F-30
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements outstanding at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS INDEX
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
April 1996 ..... $ 500,000 6.04% 8.19% .26 3 month LIBOR
September 1996 250,000 5.96 4.19 .71 1 month LIBOR
April 1998 ..... 400,000 6.00 8.38 2.26 3 month LIBOR
------------
Total ........ $1,150,000
============
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS INDEX
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
April 1995 ..... $ 500,000 5.06% 7.97% .3 3 month LIBOR
April 1996 ..... 500,000 5.64 8.19 1.3 3 month LIBOR
September 1996 250,000 6.14 4.19 1.8 1 month LIBOR
April 1998 ..... 400,000 5.56 8.38 3.3 3 month LIBOR
------------
Total ........ $1,650,000
============
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives
or makes payments based on the differential between fixed-rate and
variable-rate interest amounts on the notional amount of the agreement. The
notional amounts of these derivatives do not represent amounts exchanged by
the parties and thus, are not a measure of the Bank's exposure through its
use of derivatives. The Bank pays the variable-rate and receives the
fixed-rate under these agreements. The variable interest rates presented in
the table above are based on LIBOR. The current LIBOR rates have been assumed
implicitly, in the aforementioned weighted average receive rate, to remain
constant throughout the term of the respective swaps. Any changes in LIBOR
interest rates would affect the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with highly
rated counterparties.
F-31
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) ACCRUED TERMINATION AND FACILITIES COSTS
During the year ended December 31, 1995, the Bank recognized liabilities
for certain employee severance and termination costs and facilities costs as
a result of: (i) the relocation of the Bank's mortgage loan servicing
operations to Maryland, (ii) the closure of substantially all the Bank's
retail mortgage loan production offices, (iii) a Bank-wide cost reduction
project, and (iv) branch consolidations due to duplicate facilities resulting
from certain Branch Acquisitions. These accruals have been charged to
noninterest expense in the accompanying consolidated statement of operations
for the year ended December 31, 1995 as follows (in thousands):
<TABLE>
<CAPTION>
COMPENSATION &
EMPLOYEE OCCUPANCY &
BENEFITS EQUIPMENT TOTAL
-------------- ------------- --------
<S> <C> <C> <C>
Servicing relocation ........... $1,800 $3,913 $ 5,713
Closing loan production offices 787 1,294 2,081
Cost reduction project ......... 4,000 446 4,446
Branch consolidations .......... -- 532 532
-------------- ------------- --------
Total liability established . 6,587 6,185 12,772
Charges to liability account .. 4,374 2,239 6,613
-------------- ------------- --------
Balance, December 31, 1995 .. $2,213 $3,946 $ 6,159
============== ============= ========
</TABLE>
As a result of the relocation of the servicing operation to Frederick,
Maryland from Sacramento, California, virtually all California-based loan
servicing employees were terminated. Termination benefits totalling
approximately $1.8 million have been charged against the liability
established. In addition, the relocation resulted in the vacancy of
approximately 108,000 square feet of leased office space in Sacramento. A
$3.9 million liability was established in 1995 representing the estimated
present value of future occupancy expenses, offset by estimates of sub-lease
income over the remaining six-year term of the lease. At December 31, 1995
approximately $.9 million had been charged against this liability.
In connection with the Bank's closure of substantially all of its retail
mortgage loan production offices, certain employees were terminated.
Termination benefits totalling approximately $.8 million have been charged
against the liability established. In addition, such closure resulted in the
vacancy of 18 leased offices. The $1.3 million liability established in April
1995 represents the estimated present value of future occupancy expenses,
offset by estimates of sub-lease income over the applicable remaining lease
terms. At December 31, 1995, costs totalling approximately $.8 million had
been charged against the liability.
In connection with a project to identify opportunities for reducing
operating costs and enhancing the efficiency of its operations, management
has identified certain employees whose positions would be eliminated. These
positions span all areas and business units of the Bank. An initial liability
for termination benefits totalling $4 million was established, of which $1.8
million had been charged at December 31, 1995 relating to this plan. In
connection with the elimination of these positions, the Bank has identified
opportunities for office space consolidation and has established additional
liabilities totalling $.4 million for lease termination payments, none of
which had been charged at December 31, 1995.
The Bank has identified certain of its retail banking facilities that will
be closed and marketed for sale, with the related operations consolidated
into other retail banking facilities acquired in the Branch Acquisitions.
Accordingly, a liability of $.5 million was established during the year ended
December 31, 1995 to record such facilities at fair value, which amount had
been charged at December 31, 1995.
(22) MINORITY INTEREST--PREFERRED STOCK OF THE BANK
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
its Preferred Stock with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated
F-32
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liquidation value of $100 per share. Costs related to the Preferred Stock
issuance were deducted from additional paid-in capital. At or after September
1, 1999, the Preferred Stock is redeemable at the option of the Bank, in
whole or in part, at $105.75 per share prior to September 1, 2000, and at
prices which will decrease annually thereafter to the stated liquidation
value of $100 per share on or after September 1, 2004, plus declared but
unpaid dividends. Dividends are payable quarterly at an annual rate of 11.5%
per share when declared by the Bank's Board of Directors.
(23) STOCKHOLDERS' EQUITY
(a) Common Stock
In connection with the FN Acquisition and the offering of the Senior
Notes, First Gibraltar Holdings incorporated Parent Holdings and FN Holdings
to hold 100% of the common stock of First Nationwide Bank. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create
800 shares of class A common stock having one vote per share, 200 shares of
class B common stock having .75 votes per share, and 230.3 shares of
nonvoting class C common stock. Parent Holdings exchanged its 1,000 shares of
common stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued
100% of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings, in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owned 100% of the class B common
stock of FN Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock), and
Parent Holdings owns (i) 100% of the class A common stock of FN Holdings,
representing 80% of its voting common stock (representing approximately 85%
of the voting power of its common stock) and (ii) 100% of the class C common
stock of FN Holdings. The class C common stock is redeemable out of
distributions from the Bank for $230.3 million plus accrued interest to the
date of redemption at a rate equal to the interest rate on the secured term
credit facility. On December 29, 1995, the Bank's Chairman transferred his
shares of class B common stock to a limited partnership controlled by the
Bank's Chairman.
No dividend will be payable on the class A common stock or the class B
common stock of the Company as long as any shares of the class C common stock
remain outstanding. Dividends on the Company's class C common stock during
1995 totalled $29.2 million. In addition, 60.8 shares of the Company's class
C common stock were redeemed during 1995, resulting in a capital distribution
totalling $60.8 million. There were no dividends or distributions on common
stock in 1994. Dividends and distributions on common stock in 1993 totalled
$379.5 million and included certain assets of the Bank, including the stock
of FGMH.
(b) Preferred Stock
Floating rate noncumulative preferred stock of the Bank ("Old Preferred
Stock") was issued by the Bank in December 1989 to First Gibraltar Holdings.
The par value of the Old Preferred Stock was $.01 with 200,000 shares
originally issued and 500,000 shares authorized. The liquidation preference
and stated value was $1,000 per share. During 1990, 75,500 shares were
redeemed at liquidation value. During 1993, the remaining 124,500 shares were
redeemed at liquidation value.
F-33
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Payment of Dividends
The payment of dividends by the Company may be limited by the indenture
agreement for the Senior Notes and is also restricted pursuant to provisions
mandated by the Company's charter. The Federal thrift laws and regulations of
the OTS limit the Bank's ability to pay dividends on its preferred or common
stock. The Bank generally may not pay dividends if, after the payment of the
dividends, it would be deemed "undercapitalized" under the prompt corrective
action standards of the Federal Deposit Insurance Corporation Improvement Act
of 1991. In addition, depending upon the extent to which the Bank meets its
fully phased-in regulatory capital requirements, other limitations will apply
to First Nationwide's payment of dividends. The payment of dividends by the
Bank will also be subject to the Bank's dividend policy, which reflects such
legal and regulatory restrictions.
(24) REGULATORY CAPITAL
As a savings institution which is regulated by the OTS, the Bank is
required to comply with capital requirements of the OTS. These regulations
require savings institutions to maintain minimum regulatory tangible capital
equal to 1.5% of adjusted total assets and minimum core capital equal to 3.0%
of adjusted total assets. Additionally, savings institutions are required to
meet a risk-based total capital requirement of 8.0%. At December 31, 1995,
the Bank's regulatory capital levels exceeded the minimum regulatory capital
requirements.
(25) FINANCIAL ASSISTANCE PROVIDED BY FSLIC/RF
Financial assistance provided pursuant to the Assistance Agreement for the
years ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1995
Yield maintenance on Covered Assets:
Loans and accounts receivable ................ $ 7,572 $ (213) $ 7,359
Investments in and advances to subsidiaries . (63) 283 220
Real estate owned ............................ (1,890) 5,016 3,126
--------- ------------ ------------
$ 5,619 5,086 $10,705
========= ============ ============
FSLIC/RF Reimbursement ........................ --
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ........ $ 5,086
============
FDIC Purchase proceeds, write-downs, losses on
Covered Assets and other claims .............. $236,378
============
</TABLE>
F-34
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1994
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $21,573 $ (5,543) $16,030
Investments in and advances to subsidiaries (473) 1,178 705
Real estate owned .......................... (1,561) 14,817 13,256
--------- ------------ ------------
$19,539 10,452 $29,991
========= ============ ============
FSLIC/RF Reimbursement ...................... (1,060)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $ 9,392
============
Write-downs and losses on Covered Assets and
other claims ............................... $71,220
============
</TABLE>
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1993
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $27,458 $(4,884) $22,574
Investments in and advances to subsidiaries (4,488) 6,029 1,541
Real estate owned .......................... 4,953 19,897 24,850
Other ...................................... 35 128 163
--------- ------------ ------------
$27,958 21,170 $49,128
========= ============ ============
FSLIC/RF Reimbursement ...................... (5,694)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $15,476
============
Write-downs and losses on Covered Assets and
other claims ............................... $28,076
============
</TABLE>
(26) OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1995, 1994 and 1993 (in thousands):
F-35
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Other noninterest income:
Dividends on FHLB stock ............. $ 6,546 $ 3,186 $ 1,438
Disbursement float .................. 2,622 943 149
Other ............................... 8,759 3,423 4,638
--------- --------- --------
$17,927 $ 7,552 $ 6,225
========= ========= ========
Other noninterest expense:
Professional fees ................... $11,802 $ 2,622 $ 5,906
Telephone ........................... 7,652 2,134 737
Insurance and surety bonds .......... 4,005 2,321 2,370
Postage ............................. 6,856 1,535 801
Printing, copying and office
supplies ............................ 6,096 2,057 1,103
Employee travel ..................... 5,244 1,249 449
Other ............................... 30,876 9,375 14,438
--------- --------- --------
$72,531 $21,293 $25,804
========= ========= ========
</TABLE>
(27) INCOME TAXES
Total income tax expense for the years ended December 31, 1995, 1994 and
1993 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and
minority interest ................................ $(57,185) $2,558 $2,500
Extraordinary item ................................ 221 119 --
----------- -------- --------
Net unrealized holding gain on securities
available
for sale ......................................... 7,055 -- --
----------- -------- --------
$(49,909) $2,677 $2,500
=========== ======== ========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993, consists of (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Federal
Current ....... $ 285 $ -- $2,500
Deferred ...... (69,000) -- --
----------- -------- --------
(68,715) -- 2,500
----------- -------- --------
State and local
Current ....... 11,530 -- --
Deferred ...... -- 2,558 --
----------- -------- --------
11,530 2,558 --
----------- -------- --------
$(57,185) $2,558 $2,500
=========== ======== ========
</TABLE>
F-36
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 differs from the amounts computed by
applying the statutory U.S. Federal corporate tax rate of 35% for 1995, 1994
and 1993, to income before income taxes and extraordinary item (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Computed "expected" income tax expense ............. $ 42,858 $11,175 $ 51,316
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income tax
benefit ........................................ 7,495 1,740 --
Tax exempt income ................................ (2,636) (3,493) (5,679)
Amortization of excess cost over fair value of net
assets acquired ................................ -- -- 164
Earnings from nonconsolidated subsidiaries ....... -- -- (11,825)
Loss on sales of real estate owned, net of income
earned ......................................... -- -- (2,193)
Gain on sales of assets and deposits due to
goodwill ....................................... -- -- 19,152
Reduction of net operating losses related to
subsidiary ..................................... -- -- 12,214
Adjustment to prior year's tax expense ........... (1,675) -- --
Adjustment to deferred tax asset ................. 7,644 -- --
Unrealized holding gain on securities available
for sale recognized for tax purposes ........... 15,937 -- --
Other ............................................ (1,747) 306 390
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ................ (125,061) (7,170) (61,039)
----------- --------- ----------
$ (57,185) $ 2,558 $ 2,500
=========== ========= ==========
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income before income taxes and extraordinary item for the
years ended December 31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) .................. $ 56,061 $ 9,728 $ 61,039
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets .... (125,061) (7,170) (61,039)
----------- --------- ----------
$ (69,000) $ 2,558 $ --
=========== ========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............... $920,300 $938,153
Foreclosed real estate ......................... -- 8,209
Loans receivable ............................... 6,868 62,833
Securities ..................................... -- 3,850
Miscellaneous reserves ......................... 11,842 5,538
F-37
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1995 1994
----------- -----------
Accrued liabilities .............................. 12,675 1,354
Deferred interest .............................. 4,552 --
State taxes .................................... 4,243 1,101
Other intangible assets ........................ 47,169 27,498
Alternative minimum tax credit and investment
tax credit carryforwards ...................... 2,932 3,290
Other .......................................... 8,174 4,116
----------- -----------
Total gross deferred tax assets .......... 1,018,755 1,055,942
Less valuation allowance ................. (810,459) (936,242)
----------- -----------
Net deferred tax assets .................. 208,296 119,700
----------- -----------
Deferred tax liabilities:
Change in accounting method .................... 35,043 46,725
Other intangible assets ........................ 41,651 --
Purchase accounting adjustments ................ 56,319 64,684
FHLB stock ..................................... 2,610 3,297
Unrealized gains on securities available for
sale .......................................... 2,503 --
Other .......................................... 3,673 4,994
----------- -----------
Net deferred tax liabilities ............. 141,799 119,700
----------- -----------
Net deferred tax assets and liabilities .. $ 66,497 $ --
=========== ===========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1995 was a decrease of $125.8 million, of which $125.1 million
is attributable to income before income taxes, extraordinary item and
minority interest and $.7 million is attributable to the extraordinary item.
The decrease of $125.1 million attributable to income before income taxes,
extraordinary item and minority interest consists of $69 million relating to
the favorable reassessment, in the fourth quarter of 1995, of future earnings
expectations and $56.1 million relating to the current year. The valuation
allowance for deferred tax assets at January 1, 1994 was approximately $943.8
million. The net change in the total valuation allowance for the year ended
December 31, 1994 was a decrease of $7.6 million.
As of December 31, 1994, FN Holdings recorded a valuation allowance for
100% of the Company's net deferred tax asset because at that time it was not
more likely than not that such deferred tax asset would be realized. Based on
a favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgement about the
realizability of the Company's net deferred tax assets and recognized a
deferred tax benefit of $69 million in the fourth quarter of 1995. Management
believes that the realization of such asset is more likely than not, based
upon the expectation that FN Holdings will generate the necessary amount of
taxable income in future periods.
At December 31, 1995, if FN Holdings had filed a consolidated Federal
income tax return on behalf of itself (as common parent) with its
subsidiaries, it would have had regular and alternative minimum tax net
operating losses for Federal income tax purposes of approximately $2.6
billion and $992 million, respectively, which expire in 2002 through 2007.
(28) EMPLOYEE BENEFIT PLANS
Postretirement Benefits Plan
In connection with the FN Acquisition, the Bank assumed unfunded plans to
provide postretirement medical benefits to certain eligible employees and
their dependents through age 64. In general, early retirement is age 55 with
10 years of service. Retirees participating in the plans pay Consolidated
Omnibus Budget Reduction Act premiums for the period of time they
participate.
F-38
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated cost for postretirement health care benefits has been
accrued on an actuarial net present value basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated statements of financial condition at December 31,
1995 and 1994 (in thousands):
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Retirees ................................... $ -- $ --
Eligible active plan participants .......... 1,177 713
Ineligible active plan participants ....... 1,719 1,164
-------- -------
Accrued postretirement benefit obligation
(other liabilities) ...................... $2,896 $1,877
======== =======
</TABLE>
The projected benefit obligation at December 31, 1995 and 1994 was
determined using a discount rate of 8.00% and 8.75%, respectively. At
December 31, 1995, an increase of 1% in the health care cost trend rate would
cause the accumulated postretirement benefit obligation to increase by $.1
million, and the service and interest costs to increase by less than $.1
million.
Net periodic postretirement benefits cost for the year ended December 31,
1995 and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Service cost--benefits attributable
to service during the current period .............. $340 $ 78
Interest cost on accumulated postretirement benefit
obligation ........................................ 163 37
------ ------
Periodic postretirement benefit cost ............. $503 $115
====== ======
</TABLE>
The initial health care cost trend rate for medical benefits in 1995 was
9.50%, and the average trend rate was 7.32% and the ultimate trend rate was
5.50% which will be reached in seven years. In 1994, the initial health care
cost trend rate for medical and dental benefits were 10% and 8%,
respectively, and the average trend rate used was 7.5%, with an ultimate
trend rate of 6%, to be achieved in ten years.
Investment Plan
In connection with the FN Acquisition, the Bank assumed Old FN's defined
contribution plan. Effective December 31, 1994, the Bank resolved to merge
these plans. The merger was completed in February 1995 upon completion of the
transfer of all funds to the surviving plan. Both plans are qualified plans
under Section 401(a) of the Internal Revenue Code. The plan is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching
contribution was a maximum of 100% of up to the first 3% of employee
deferrals. The annual discretionary employer profit sharing contribution is a
maximum of 3% of eligible compensation. It can be declared at any level in
the range from 0% to 3%. Employees vest immediately in their own deferrals
and any employer profit sharing contributions and vest in employer matching
contributions based on completed years of service. The Bank's contributions
to such plan totalled $2.8 million, $1.5 million, and $.65 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
(29) INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Plan") with certain executive officers of the Bank ("Participants").
Awards under the Plan will be made in the form
F-39
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of performance units. Each performance unit entitles Plan Participants to
receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Plan provides for the payment
of Bonuses, on a quarterly basis, to the Participants upon the occurrence of
certain events. Bonuses vest at 20% per year beginning October 1, 1995 and
are subject to a cap of $50 million.
In accordance with generally accepted accounting principles, Bonuses are
recorded by a charge to compensation and employee benefits and an increase to
other liabilities. During 1995, a liability of $2 million was recorded
relative to the Plan.
(30) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various commitments and
contingent liabilities that are not reflected in the accompanying
consolidated financial statements. Loan commitments have off-balance-sheet
credit risk because only origination fees and accruals for possible losses
are recognized in the consolidated statement of financial condition until the
commitments are fulfilled. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and that, in accordance with
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," collateral or
other security is of no value. The Bank does not anticipate any material loss
as a result of these commitments. The Bank applies the same credit standards
used in the lending process to extending these commitments, and periodically
reassesses the customers' credit worthiness through ongoing credit reviews.
The following is a summary of outstanding firm commitments to originate
and sell loans at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Commitments to originate loans:
Fixed-rate ...................... $325,199 $29,583
Variable-rate ................... 101,355 81,230
Forward commitments to sell loans 572,363 $33,255
========== =========
</TABLE>
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FN. The agreement
requires that First Nationwide pledge to FNMA collateral in the form of
certain eligible securities which are held by a third party trustee. The
collateral requirement varies based on the balance of the bonds outstanding,
losses incurred (if any), as well as other factors. At December 31, 1995,
First Nationwide had pledged as collateral certain securities available for
sale and short-term investment securities with a carrying value of $98.6
million.
At December 31, 1995, mortgage-backed securities available for sale with a
carrying value of $39.0 million were pledged to FNMA associated with sales of
certain securitized multi-family loans.
At December 31, 1994, loans receivable included approximately $2.0 billion
of loans that had the potential to experience negative amortization.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF has been passed by Congress. The legislation includes
provisions for a special assessment, as determined by the FDIC, on
SAIF-assessable deposits of insured depository institutions in an amount
adequate to cause the SAIF to achieve a specified designated reserve ratio.
Under the proposed legislation, the assessment would have been due January 1,
1996. The FDIC has publicly estimated that the amount of the special
assessment needed to recapitalize the SAIF ranges between 85 to 90 basis
points.
F-40
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The legislation provides that the assessment would be applied to SAIF
deposits held as of March 31, 1995. The SAIF-assessable deposits of the Bank
as of this date, adjusted for the deposit acquisitions and sales discussed in
notes 2 and 34, totalled approximately $8.9 billion. If the assessment is
made at a rate within the estimated range of 85 to 90 basis points, after
giving effect to the deposit acquisitions and sales discussed in notes 2 and
34, 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) (unaudited). It is
expected that in the event that the SAIF is capitalized pursuant to this
legislation, the assessment rates applicable to SAIF-assessable deposits will
be reduced substantially from the Bank's current rate of 23 cents. The
proposed legislation includes additional provisions that, among other things,
would require BIF member institutions to share pro rata in the obligations of
SAIF members for certain obligations issued by the Financing Corporation, a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. 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. Congress and the
President are in negotiations that will affect the outcome of the
legislation. The Bank is unable to predict whether such legislation will be
enacted.
First Nationwide is involved in various claims and lawsuits arising from
the December 28, 1988 acquisition of five savings associations located in
Texas. Under the terms of the Assistance Agreement, FSLIC/RF will indemnify
First Nationwide for any amounts incurred in connection with the
satisfaction, settlement or compromise of such previous claims and lawsuits,
including costs and expenses.
First Nationwide is involved in various claims and lawsuits arising from
the December 28, 1988 acquisition of five savings associations located in
Texas. Under the terms of the Assistance Agreement, FSLIC/RF will indemnify
First Nationwide for any amounts incurred in connection with the
satisfaction, settlement or compromise of such previous claims and lawsuits,
including costs and expenses.
With respect to the FN Acquisition, First Nationwide and Old FN disagree
on two components of the purchase price paid for the FN Acquired Business,
which total approximately $28 million. This $28 million is carried in other
assets in the Bank's consolidated statement of financial condition. The more
significant of the two issues in dispute arises from Old FN's change in net
book value from January 1, 1994, to the close of business on September 30,
1994. In arriving at the cash purchase price, Old FN 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 for the period from
January 1, 1994 through September 30, 1994, thereby increasing the estimated
cash purchase price by $24 million. First Nationwide believes that the
exclusion of the amortization of intangible assets and goodwill from the
closing net book value is contrary to the express provisions of the Asset
Purchase Agreement. As a result, First Nationwide does not believe that the
addition by Old FN of $24 million to the cash purchase price was proper under
the terms of the Asset Purchase Agreement. First Nationwide and Old FN
commenced the arbitration in December 1995. Although management of First
Nationwide believes that it will prevail on this issue, in the event that
First Nationwide does not so prevail, the result would not be material to the
consolidated financial statements of First Nationwide.
The other remaining issue in dispute relates to an outstanding receivable
account, which the Bank maintains was overstated by approximately $4 million
by Old FN at September 30, 1994. Resolution of this issue remains
outstanding. Although management of the Bank believes that it will prevail on
this issue, in the event that it does not do so, the result would not be
material to the consolidated financial statements of First Nationwide.
In addition, First Nationwide is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Bank's consolidated financial statements.
F-41
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(31) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1995 and 1994 (in thousands).
Statement of Financial Accounting Standards No. 107, "Disclosures of
Financial Instruments," defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale.
<TABLE>
<CAPTION>
1995 1994
--------------------------- --------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ...................... $ 312,571 $ 312,571 $ 184,982 $ 184,982
Securities available for sale .................. 1,826,075 1,826,075 45,000 45,000
Securities held to maturity .................... 1,455 1,455 411,859 409,398
Mortgage-backed securities held to maturity ... 1,524,488 1,567,197 3,153,812 3,095,994
Loans held for sale ............................ 1,203,412 1,209,302 26,354 26,354
Loans receivable, net .......................... 8,831,018 8,971,983 9,966,886 9,832,003
Covered assets ................................. 39,349 39,349 311,603 311,603
Investment in FHLB ............................. 109,943 109,943 128,557 128,557
Accrued interest receivable .................... 100,604 100,604 87,706 87,706
Financial Liabilities:
Deposits ....................................... 10,241,628 10,283,600 9,196,656 9,140,000
Securities sold under agreements to repurchase 969,510 978,700 1,883,490 1,883,490
Borrowings:
Gross ......................................... 2,409,166 2,464,431 2,853,369 2,828,250
Interest rate swap agreements (1) ............. (16,304) (32,000) (44,390) (27,000)
------------- ------------ ------------ ------------
Total borrowings ............................ $ 2,392,862 $ 2,432,431 $2,808,979 $2,801,250
============= ============ ============ ============
Off-balance-sheet net unrealized gains (losses):
Commitments to originate loans ................. $ 1,691 $ --
Forward commitments to sell loans .............. (2,757) 56
</TABLE>
[FN]
- ------------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated statement of financial position under the indicated captions,
except for off-balance-sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgements
were required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, and interest rates, all of which are subject to
changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial
condition, which are reasonable estimates of fair value due to the relatively
short period to maturity of the instruments.
F-42
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage- backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of
performing commercial and multi-family loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest
rate risk inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Covered Assets: Since the carrying value of Covered Assets is fully
guaranteed by the FSLIC Resolution Fund, fair value of these financial
instruments approximates the carrying value.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For
fixed maturity deposits, the fair value was estimated by discounting expected
cash flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a
discounted cash flow analysis based on interest rates currently offered on
such repurchase agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances and the
Senior Notes, are estimated using discounted cash flow analyses based on
current incremental rates for similar borrowing arrangements. The fair values
of FHLB advances are estimated using a discounted cash flow analysis based on
interest rates currently offered on advances with similar maturities. Fair
values of the Bank's interest rate swap agreements, which effectively hedge
certain of the Bank's FHLB advances, are based on the net present value of
the estimated interest due to the Bank as compared to the estimated interest
due to the counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Bank's
commitments to originate loans is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Fair value of
forward commitments to sell loans are determined using current estimated
replacement costs.
F-43
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(32) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1995 and 1994 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 TOTAL
- ------------------------------------ -------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 277,679 $ 270,583 $ 268,127 $ 259,456 $ 1,075,845
Total interest expense .............. (185,619) (184,751) (185,237) (179,208) (734,815)
-------------- --------------- ----------- ----------- -------------
Net interest income ................ 92,060 85,832 82,890 80,248 341,030
Provision for loan losses ........... (19,000) (6,000) (5,799) (6,201) (37,000)
-------------- --------------- ----------- ----------- -------------
Net interest income after provision
for loan losses ................... 73,060 79,832 77,091 74,047 304,030
Total noninterest income ............ 45,717 35,636 38,595 31,025 150,973
Total noninterest expense ........... (82,725) (76,973) (92,520) (80,335) (332,553)
-------------- --------------- ----------- ----------- -------------
Income before income taxes,
extraordinary item and minority
interest ........................... 36,052 38,495 23,166 24,737 122,450
Income taxes (see Note 27) .......... 64,614 (4,005) (2,743) (681) 57,185
-------------- --------------- ----------- ----------- -------------
Income berfore extraordinary item
and minority interest ............. 100,666 34,490 20,423 24,056 179,635
Extraordinary item .................. -- -- -- 1,967 1,967
-------------- --------------- ----------- ----------- -------------
Income before minority interest ... 100,666 34,490 20,423 26,023 181,602
Minority interest ................... (8,646) (8,646) (8,646) (8,646) (34,584)
-------------- --------------- ----------- ----------- -------------
Net income ......................... $ 92,020 $ 25,844 $ 11,777 $ 17,377 $ 147,018
============== =============== =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994 TOTAL
- ------------------------------------ -------------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 252,220 $12,856 $ 13,307 $ 14,756 $ 293,139
Total interest expense .............. (169,434) (9,385) (10,325) (10,701) (199,845)
-------------- --------------- ---------- ----------- -----------
Net interest income ................ 82,786 3,471 2,982 4,055 93,294
Provision for loan losses ........... (6,226) -- -- -- (6,226)
-------------- --------------- ---------- ----------- -----------
Net interest income after provision
for loan losses ................... 76,560 3,471 2,982 4,055 87,068
Total noninterest income ............ 28,651 4,174 4,634 3,699 41,158
Total noninterest expense ........... (74,401) (7,059) (7,279) (7,559) (96,298)
-------------- --------------- ---------- ----------- -----------
Income before income taxes and
extraordinary item ................ 30,810 586 337 195 31,928
Income taxes ........................ (2,558) -- -- -- (2,558)
-------------- --------------- ---------- ----------- -----------
Income before extraordinary item .. 28,252 586 337 195 29,370
Extraordinary item .................. (119) -- 1,495 -- 1,376
-------------- --------------- ---------- ----------- -----------
Net income ......................... $ 28,133 $ 586 $ 1,832 $ 195 $ 30,746
============== =============== ========== =========== ===========
</TABLE>
F-44
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(33) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed statements of financial condition of
the Company (parent company only) at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 6 $ 3,801
Investment in Bank ......................... 659,155 539,867
Receivable from Bank ....................... -- 3,156
Office premises and equipment, net ........ -- 414
Other assets and deferred charges .......... 8,794 10,191
---------- ----------
Total assets .............................. $667,955 $557,429
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Notes ............................... $200,000 $200,000
Accrued interest payable ................... 3,131 3,131
Payables to affiliates ..................... 304 1,301
Other liabilities .......................... 2,104 125
---------- ----------
Total liabilities ......................... 205,539 204,557
---------- ----------
Total stockholders' equity ................ 462,416 352,872
---------- ----------
Total liabilities and stockholders' equity $667,995 $557,429
========== ==========
</TABLE>
The following represents parent company only condensed statements of
operations for the years ended December 31, 1995, 1994, and 1993 (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Interest income .......................................... $ 341 $ 155 $ --
Dividends received from the Bank ......................... 111,900 -- 136,210
---------- --------- ---------
112,241 155 136,210
Interest expense ......................................... 25,539 6,381 --
Non-interest expense ..................................... 5,819 987 --
---------- --------- ---------
31,358 7,368 --
Income (loss) before equity in undistributed net income
of the Bank ............................................. 80,883 (7,213) 136,210
Equity in undistributed net income of the Bank .......... 99,360 37,326 7,908
---------- --------- ---------
Income before taxes and minority interest ................ 180,243 30,113 144,118
Income tax expense (benefit) ............................. (1,359) (633) --
---------- --------- ---------
Income before minority interest .......................... 181,602 30,746 144,118
Minority interest in earnings of the Bank ................ 34,584 -- --
---------- --------- ---------
Net income .............................................. $147,018 $30,746 $144,118
========== ========= =========
</TABLE>
F-45
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1995, 1994, and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 147,018 $ 30,746 $144,118
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs ....... 764 232 --
Decrease (increase) in receivable from the Bank 3,156 (3,156) --
Decrease (increase) in other assets and
deferred charges .............................. 633 (863) --
Increase (decrease) in payable to affiliates .. (997) 1,301 --
Increase in accrued interest payable ........... -- 3,131
Increase in other liabilities .................. 1,979 125
Equity in undistributed net income of the Bank (99,360) (37,326) (7,908)
----------- ----------- -----------
Total adjustments ............................. (93,825) (36,556) (7,908)
----------- ----------- -----------
Net cash flows provided by (used in) operating
activities ................................... 53,193 (5,810) 136,210
----------- ----------- -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment . -- (414) --
Proceeds from disposal of furniture, fixture and
equipment ...................................... 414 -- --
Capital contributions to the Bank ............... (2,000) (390,791) --
----------- ----------- -----------
Net cash flows used in financing activities ... (1,586) (391,205) 0
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes ......... -- 190,440 --
Proceeds from other borrowings .................. -- 19,029 --
Repayment of other borrowings ................... -- (19,029) --
Issuance of class C common stock ................ -- 210,376 --
Redemption of class C common stock .............. (60,801) -- --
Dividends on class C common stock ............... (29,185) -- (136,210)
Dividends paid to minority shareholders
of the Bank .................................... 34,584 -- --
----------- ----------- -----------
Net cash flow (used in) provided by financial
activities .................................... (55,402) 400,816 (136,210)
Net change in cash and cash equivalents ......... (3,795) 3,801 0
Cash and cash equivalents at beginning of year .. 3,801 -- --
----------- ----------- -----------
Cash and cash equivalents at end of year ........ $ 6 $ 3,801 $ 0
=========== =========== ===========
</TABLE>
F-46
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(34) SUBSEQUENT EVENTS (UNAUDITED)
Lomas 1996 Purchase
On January 31, 1996, FNMC consummated an agreement to purchase 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, $45.3 million in net other servicing
receivables, $5.8 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.8 million payable in
installments (the "Lomas 1996 Purchase"). The initial installment of $49.8
million was paid with existing cash.
SFFed Acquisition
On August 27, 1995 the Bank entered into an Agreement and Plan of Merger
(the "Merger Agreement") with SFFed Corp. ("SFFed"), a savings and loan
holding company, pursuant to which the Bank acquired (the "SFFed
Acquisition") SFFed and its wholly owned federal savings association, San
Francisco Federal Savings and Loan Association ("San Francisco Federal"). San
Francisco Federal operated 35 branches in the Northern California area. At
December 31, 1995, San Francisco Federal had approximately $4.0 billion in
assets and approximately $2.7 billion in deposits.
The SFFed Acquisition was consummated on February 1, 1996. Under the
Merger Agreement, holders of SFFed common stock outstanding at the effective
time of the merger (other than shares for which dissenter's rights were
perfected, shares held by First Nationwide and shares held as treasury stock)
received $32 per share. The holders of options on the common stock of SFFed
received for each share subject to an option the difference between $32 and
the applicable per share option price. The aggregate consideration paid under
the Merger Agreement was approximately $264 million. Following completion of
the SFFed Acquisition, SFFed was liquidated and San Francisco Federal was
merged into First Nationwide. The Bank financed the SFFed Acquisition with
existing cash and other borrowings which may ultimately be replaced by
proceeds from the sale of certain mortgage-backed securities or other assets.
Issuance of Senior Subordinated Notes
On January 31, 1996, FN Holdings issued $140 million of its 9 1/8 % Senior
Subordinated Notes Due 2003. On February 1, 1996, FN Holdings contributed the
net proceeds of such offering totalling $133 million in cash as additional
paid in capital to the Bank to ensure that the Bank retains its
"well-capitalized" status upon consummation of the SFFed Acquisition and
Lomas 1996 Purchase described in the preceding paragraphs.
Pending Acquisition -- Home Federal
On December 19, 1995, the Bank entered into a merger agreement with Home
Federal Financial Corporation ("HFFC"), pursuant to which the Bank will
acquire (the "Home Federal Acquisition") HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"). At December 31, 1995, HFFC had
approximately $718 million in assets and $625 million in deposits and
operated 15 branches in the Northern California area. The aggregate
consideration to be paid in connection with the Home Federal Acquisition is
estimated to approximate $70.6 million. The Home Federal Acquisition is
subject to approval by HFFC's shareholders and regulatory approval by the
Office of Thrift Supervision, and is expected to close in the second quarter
of 1996.
F-47
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Branch Sales
From September through December of 1995, the Bank entered into the
following agreements (the "Branch Sale Agreements") to sell retail deposits
("Deposits") and the related retail banking assets comprised of cash on hand,
loans on deposits and facilities ("Related Assets") in Ohio, New York, New
Jersey and Michigan as follows:
<TABLE>
<CAPTION>
CARRYING VALUE AT DECEMBER
DATE OF NUMBER OF GENERAL 31, 1995
PURCHASER AGREEMENT BRANCHES LOCATION
-----------------------------------------------------------------------------------------------------------------
RELATED
DEPOSITS ASSETS
--------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Northeastern Ohio 9/22/95 28 Ohio $1,414,695 $18,480
North Fork Bank ....................... 9/28/95 10 Long Island, 602,014 8,222
New York
Middletown Savings Bank ............... 9/29/95 8 Upstate New 485,975 5,594
York
Independence Savings Bank ............. 10/11/95 3 Brooklyn, New 330,073 3,308
York
Republic National Bank ................ 10/31/95 3 Manhattan, New 282,580 1,795
York
Midlantic Bank ........................ 11/3/95 4 New Jersey 509,597 5,556
Independence Savings Bank ............. 11/15/95 2 Staten Island, 286,723 3,718
New York
Charter One Bank ...................... 12/14/95 21 Michigan 783,965 12,667
------------ --------------
Total ............................... $4,695,622 $59,340
============ ==============
</TABLE>
The premiums to be paid by the purchasers in these transactions total
approximately $367 million. These sales are subject to regulatory approval
and are expected to close during the first half of 1996.
As of March 8, 1996, the Bank has consummated the sale of 38 branches
pursuant to the Branch Sale Agreements, totalling $2.1 billion and $28.1
million in carrying value of Deposits and Related Assets at their respective
sale dates, respectively. The Bank financed these sales through additional
borrowings from the FHLB and reverse repurchase agreements. Through March 8,
1996, pre-tax gains totalling $180.9 million have been recognized in
connection with these transactions.
Loans to Affiliate
On March 1, 1996, the Company extended a loan to an affiliate in the
amount of $46.8 million.
F-48
<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 F-3
and F-4 of the Company's Form 10-K/A for the year and is qualified in its
entirety by reference to such financial statements.
<CIK> 0000928358
<NAME> First Nationwide Holdings Inc.
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S. Dollars
<PERIOD-START> Jan-01-1995
<EXCHANGE-RATE> 1
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Dec-31-1995
<CASH> 154,758
<INT-BEARING-DEPOSITS> 32,778
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,826,075
<INVESTMENTS-CARRYING> 1,525,943
<INVESTMENTS-MARKET> 1,568,652
<LOANS> 10,034,430 <F1>
<ALLOWANCE> 210,484
<TOTAL-ASSETS> 14,646,245
<DEPOSITS> 10,241,628
<SHORT-TERM> 2,255,304
<LIABILITIES-OTHER> 279,099
<LONG-TERM> 1,107,068
0
0 <F2>
<COMMON> 1
<OTHER-SE> 462,415
<TOTAL-LIABILITIES-AND-EQUITY> 14,646,245
<INTEREST-LOAN> 823,864
<INTEREST-INVEST> 241,276
<INTEREST-OTHER> 10,705
<INTEREST-TOTAL> 1,075,845
<INTEREST-DEPOSIT> 447,359
<INTEREST-EXPENSE> 734,815
<INTEREST-INCOME-NET> 341,030
<LOAN-LOSSES> 37,000
<SECURITIES-GAINS> 1,631
<EXPENSE-OTHER> 332,553
<INCOME-PRETAX> 122,450
<INCOME-PRE-EXTRAORDINARY> 179,635
<EXTRAORDINARY> 1,967
<CHANGES> 0
<NET-INCOME> 147,018
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.71
<LOANS-NON> 171,538
<LOANS-PAST> 0
<LOANS-TROUBLED> 234,450
<LOANS-PROBLEM> 63,835
<ALLOWANCE-OPEN> 202,780
<CHARGE-OFFS> 32,344
<RECOVERIES> 3,048
<ALLOWANCE-CLOSE> 210,484
<ALLOWANCE-DOMESTIC> 1,044
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 209,440
<FN>
<F1> "LOANS" includes $1,203,412 of Loans held for sale
<F2> "PREFERRED" excludes $300,730 in Preferred Stock issued by
First Nationwide Bank
</TABLE>
