<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
----------------------------- ------------------
Commission File Number: 33-82654
--------------------------------------------------------
First Nationwide Holdings Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3778552
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
135 Main Street, San Francisco, CA 94105 94105
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-0100
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
35 East 62nd Street, New York, NY 10021 (212)572-8500
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
-- --
The number of shares outstanding of registrant's classes of $1.00 par
value common stock, as of the close of business on August 8, 1997: 800 shares
of class A common stock; and 200 shares of class B common stock.
Page 1 of 43 pages
Exhibit index on page: 42
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
SECOND QUARTER 1997 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
June 30, 1997 (unaudited) and December 31, 1996............................................3
Unaudited Consolidated Statements of Operations
Six months ended June 30, 1997 and 1996....................................................4
Unaudited Consolidated Statements of Operations
Three Months ended June 30, 1997 and 1996..................................................5
Unaudited Consolidated Statement of Stockholders' Equity
Six Months ended June 30, 1997............................................................6
Unaudited Consolidated Statements of Cash Flows
Six Months ended June 30, 1997 and 1996....................................................7
Notes to Unaudited Consolidated Financial Statements.......................................9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................41
Item 2. Changes in Securities.....................................................................41
Item 3. Defaults Upon Senior Securities...........................................................41
Item 4. Submission of Matters to a Vote of Security Holders.......................................42
Item 5. Other Information.........................................................................42
Item 6. Exhibits and Reports on Form 8-K..........................................................42
</TABLE>
Page 2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND DECEMBER 31, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
Assets (unaudited)
<S> <C> <C>
Cash and amounts due from banks $ 317,707 $ 135,534
Interest-bearing deposits in other banks 50,734 20,619
Short-term investment securities 73,645 113,716
----------- -----------
Cash and cash equivalents 442,086 269,869
Securities available for sale, at fair value 947,995 542,019
Securities held to maturity 58,047 4,272
Mortgage-backed securities available for sale, at fair value 4,950,496 1,598,652
Mortgage-backed securities held to maturity 1,485,195 1,621,662
Loans held for sale, net 858,587 825,316
Loans receivable, net 19,476,094 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System 399,794 220,962
Office premises and equipment, net 155,877 100,164
Foreclosed real estate, net 73,128 51,987
Accrued interest receivable 192,005 106,034
Intangible assets (net of accumulated amortization of $35,736 in 1997
and $11,141 in 1996) 698,023 140,564
Mortgage servicing rights 547,020 423,692
Other assets 641,025 500,392
----------- -----------
Total assets $30,925,372 $16,618,168
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
Deposits $16,657,905 $ 8,501,883
Securities sold under agreements to repurchase 2,384,130 1,583,387
Borrowings 9,219,013 4,902,696
Other liabilities 809,431 401,609
----------- -----------
Total liabilities 29,070,479 15,389,575
----------- -----------
Commitments and contingencies -- --
Minority interest 986,458 309,376
Stockholders' equity:
Floating rate cumulative perpetual preferred stock, $1.00 par value,
liquidation value of $15,000 per share, 24,000 shares authorized,
5,925.6 shares and 10,052.8 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 88,884 150,792
Class A common stock, $1.00 par value, 800 shares authorized,
issued and outstanding 1 1
Class B common stock, $1.00 par value, 200 shares authorized,
issued and outstanding -- --
Additional paid-in capital 30,471 47,752
Net unrealized holding gain on securities available for sale 53,019 46,219
Retained earnings (substantially restricted) 696,060 674,453
----------- -----------
Total stockholders' equity 868,435 919,217
----------- -----------
Total liabilities, minority interest and stockholders' equity $30,925,372 $16,618,168
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 779,663 $446,397
Mortgage-backed securities available for sale 134,432 59,662
Mortgage-backed securities held to maturity 58,869 70,760
Covered assets -- 1,413
Loans held for sale 37,627 32,348
Securities available for sale 25,278 14,674
Securities held to maturity 929 117
Interest-bearing deposits in other banks 3,790 905
---------- --------
Total interest income 1,040,588 626,276
---------- --------
Interest expense:
Deposits 374,787 222,656
Securities sold under agreements to repurchase 72,786 62,310
Borrowings 258,483 123,270
---------- --------
Total interest expense 706,056 408,236
---------- --------
Net interest income 334,532 218,040
Provision for loan losses 39,900 19,800
---------- --------
Net interest income after provision for loan losses 294,632 198,240
---------- --------
Noninterest income:
Loan servicing fees, net 75,055 60,765
Customer banking fees and service charges 46,676 23,806
Management fees 4,089 5,710
Gain on sale of loans, net 11,358 13,670
(Loss) gain on sale of assets, net (214) 38,458
Gain on sales of branches 1,069 363,250
Dividends on FHLB stock 11,975 4,691
Other income 11,279 9,241
---------- --------
Total noninterest income 161,287 519,591
---------- --------
Noninterest expense:
Compensation and employee benefits 127,502 110,866
Occupancy and equipment 40,844 25,578
Savings Association Insurance Fund ("SAIF")
deposit insurance premium 5,450 11,584
Loan expense 33,966 14,012
Marketing 7,684 4,812
Professional fees 22,755 9,465
Data processing 6,182 5,825
Foreclosed real estate operations, net (857) (4,910)
Amortization of intangible assets 24,595 4,204
Other 56,354 40,856
---------- --------
Total noninterest expense 324,475 222,292
---------- --------
Income before income taxes and minority interest 131,444 495,539
Income tax expense (benefit) 21,891 (81,351)
---------- --------
Income before minority interest 109,553 576,890
Minority interest 42,993 25,938
---------- --------
Net income 66,560 550,952
Preferred stock dividends 8,243 --
---------- --------
Net income available to common stockholders $ 58,317 $550,952
========== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $389,020 $225,236
Mortgage-backed securities available for sale 73,427 29,924
Mortgage-backed securities held to maturity 28,929 36,180
Covered assets -- 691
Loans held for sale 20,374 17,773
Securities available for sale 14,307 7,921
Securities held to maturity 858 113
Interest-bearing deposits in other banks 922 262
--------- ---------
Total interest income 527,837 318,100
--------- ---------
Interest expense:
Deposits 187,767 105,143
Securities sold under agreements to repurchase 38,403 31,758
Borrowings 134,895 71,619
--------- ---------
Total interest expense 361,065 208,520
--------- ---------
Net interest income 166,772 109,580
Provision for loan losses 19,950 9,900
--------- ---------
Net interest income after provision for loan losses 146,822 99,680
--------- ---------
Noninterest income:
Loan servicing fees, net 35,339 33,309
Customer banking fees and service charges 24,159 12,003
Management fees 2,194 2,405
Gain (loss) on sale of loans, net 8,489 (22)
(Loss) gain on sale of assets, net (236) 42,970
Gain on sales of branches 1,069 55,345
Dividends on FHLB stock 6,013 2,785
Other income 5,421 5,857
--------- ---------
Total noninterest income 82,448 154,652
--------- ---------
Noninterest expense:
Compensation and employee benefits 63,022 50,122
Occupancy and equipment 20,162 12,409
Savings Association Insurance Fund ("SAIF")
deposit insurance premium 2,797 5,548
Loan expense 26,142 6,255
Marketing 3,616 2,633
Professional fees 13,395 7,017
Data processing 3,247 2,976
Foreclosed real estate operations, net (1,862) (2,340)
Amortization of intangible assets 12,489 2,475
Other 28,181 16,571
--------- ---------
Total noninterest expense 171,189 103,666
--------- ---------
Income before income taxes and minority interest 58,081 150,666
Income tax expense (benefit) 10,237 (110,354)
--------- ---------
Income before minority interest 47,844 261,020
Minority interest 23,144 8,646
--------- ---------
Net income 24,700 252,374
Preferred stock dividends 3,720 --
--------- ---------
Net income available to common stockholders $ 20,980 $252,374
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Net unrealized
Additional holding gains on Total
Preferred Common paid-in securities Retained stockholders'
stock stock capital available for sale earnings equity
--------- ------ ---------- ------------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $150,792 $ 1 $47,752 $46,219 $674,453 $919,217
Net income -- -- -- -- 66,560 66,560
Merger of FN Escrow 35,983 -- -- -- (1,163) 34,820
Redemption of FN Holdings/FN Escrow
Preferred Stock (35,983) -- -- -- -- (35,983)
Issuance costs of FN Holdings Preferred
Stock -- -- (550) -- -- (550)
Issuance costs on REIT Preferred Stock -- -- (17,551) -- -- (17,551)
Redemption of FN Holdings Preferred
Stock (63,320) -- 820 -- -- (62,500)
Change in net unrealized holding gains on
securities available for sale -- -- -- 6,800 -- 6,800
Stock dividends 1,412 -- -- -- (1,412) --
Cash dividends on common stock -- -- -- -- (35,547) (35,547)
Cash dividends on preferred stock -- -- -- -- (6,831) (6,831)
-------- --- ------- ------- -------- --------
Balance at June 30, 1997 $ 88,884 $ 1 $30,471 $53,019 $696,060 $868,435
======== === ======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 66,560 $ 550,952
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 24,595 4,204
Accretion of purchase accounting premiums
and discounts, net (9,882) (7,564)
Amortization of mortgage servicing rights 51,070 42,086
Provision for loan losses 39,900 19,800
Loss (gain) on sales of assets, net 214 (38,458)
Gain on sale of branches (1,069) (363,250)
Gain on sales of foreclosed real estate, net (7,191) (6,882)
Loss on sale of loans, net 51,816 22,814
Depreciation and amortization of office premises
and equipment 7,603 (274)
Amortization of deferred debt issuance costs 2,495 689
FHLB stock dividend (11,975) (4,691)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable (63,174) (36,484)
Purchases and originations of loans held for sale (3,024,959) (2,435,973)
Proceeds from the sale of loans held for sale 2,962,052 2,830,000
Decrease (increase) in other assets 109,155 (156,391)
(Increase) decrease in accrued interest receivable (15,004) 9,574
Increase in other liabilities 1,973 17,860
Minority interest 42,993 8,646
--------- ---------
Total adjustments 160,612 (94,294)
--------- ---------
Net cash provided by operating activities $ 227,172 $ 456,658
--------- ---------
(Continued)
</TABLE>
Page 7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition $ (161,196) $ --
SFFed Acquisition -- (83,184)
Home Federal Acquisition -- 79,044
Mortgage loan servicing rights and operations (7,728) (48,305)
Purchases of securities available for sale (607,845) (255,003)
Proceeds from maturities of securities available for sale 204,888 114,269
Purchases of securities held to maturity (58,149) (9,303)
Proceeds from maturities of securities held to maturity 4,374 1,250
Purchases of mortgage-backed securities available for sale (1,743,072) (94,858)
Principal payments on mortgage-backed securities available for sale 345,823 304,357
Proceeds from sales of mortgage-backed securities available for sale 22,184 --
Principal payments on mortgage-backed securities held to maturity 136,207 213,305
Proceeds from sales of loans 7,905 54,765
Net decrease in loans receivable 622,849 836,831
Purchases of FHLB stock, net -- (54,250)
Purchases of office premises and equipment (24,264) (23,035)
Proceeds from disposal of office premises and equipment 1,828 8,393
Proceeds from sales of foreclosed real estate 88,847 89,386
Purchases of mortgage servicing rights (21,230) (20,337)
---------- -----------
Net cash flows (used in) provided by investing activities (1,188,579) 1,113,325
---------- -----------
Cash flows from financing activities:
Branch Sales (21,683) (4,585,022)
Net (decrease) increase in deposits (810,276) 470,623
Proceeds from additional borrowings 9,147,953 5,506,664
Principal payments on borrowings (8,598,582) (3,238,041)
Net increase in securities sold under agreements to repurchase 500,856 399,419
Issuance of REIT Preferred Stock, net 482,449 --
Redemption of class C common stock -- (169,497)
Dividends on class C common stock -- (39,007)
Redemption of FN Holdings Preferred Stock (62,500) --
Proceeds from FN Escrow Merger 603,313 --
Redemption of FN Holdings/FN Escrow Preferred Stock (17,250) --
Dividends on common stock (35,547) --
Dividends on preferred stock (6,831) --
Dividends paid to minority stockholders, net of taxes (47,728) --
Issuance costs of FN Holdings Preferred Stock (550) --
---------- -----------
Net cash flows provided by (used in) financing activities 1,133,624 (1,654,861)
---------- -----------
Net change in cash and cash equivalents 172,217 (84,878)
Cash and cash equivalents at beginning of period 269,869 312,571
---------- -----------
Cash and cash equivalents at end of period $ 442,086 $ 227,693
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain amounts for the three and six
month periods in the prior year have been reclassified to conform with the
current period's presentation.
The accompanying consolidated financial statements include the accounts
of First Nationwide Holdings Inc. ("FN Holdings" or the "Company"), California
Federal Bank, A Federal Savings Bank ("California Federal" or "Bank"),
formerly First Nationwide Bank, A Federal Savings Bank ("First Nationwide"),
and the Bank's wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. These
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. All terms used but not defined elsewhere
herein have meanings ascribed to them in the Company's Annual Report on Form
10-K.
Minority interest represents amounts attributable to the preferred stock
of the Bank and the preferred stock of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank.
Earnings per share data is not presented due to the limited ownership of
the Company. FN Holdings is a holding company whose only significant asset is
all of the common stock of the Bank, and therefore all activities for the
consolidated entity are carried out by the Bank and its operating
subsidiaries.
(2) Acquisitions
On January 3, 1997, FN Holdings acquired 100% of the outstanding common
stock of Cal Fed Bancorp Inc. ("Cal Fed Bancorp") and California Federal Bank,
A Federal Savings Bank ("Cal Fed"), pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") dated July 27, 1996, among FN Holdings, Cal
Fed Bancorp and Cal Fed. The aggregate consideration paid under the Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
litigation interests (the "Cal Fed Acquisition"). In connection with the Cal
Fed Acquisition, Cal Fed Bancorp was liquidated and First Nationwide was
merged with and into Cal Fed. Effective on January 3, 1997, First Nationwide
changed its name to California Federal Bank, A Federal Savings Bank.
In connection with the Cal Fed Acquisition, FN Holdings made a capital
contribution to the Bank on January 3, 1997 of approximately $685 million.
Page 9
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<TABLE>
<CAPTION>
Estimated
Cal Fed Bank Remaining
Carrying Fair Value Carrying Lives
Value Adjustments Value (in years)
-------- ----------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,027,491 $ -- $ 1,027,491 --
Securities 6,013 12 6,025 1
Mortgage-backed securities 1,963,869 1,387 1,965,256 6-9
Loans receivable, net 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net 58,900 (17,765) 41,135 3-10
Investment in FHLB System 166,786 -- 166,786 --
Foreclosed real estate, net 18,482 (16) 18,466 --
Accrued interest receivable 71,868 -- 71,868 --
Mortgage servicing rights 4,759 39,738 44,497 2-7
Other assets 87,096 142,634 229,730 2-5
Deposits (8,985,630) (9,699) (8,995,329) 1-8
Borrowings (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities (198,454) (188,892) (387,346) 1-10
Preferred stock (172,500) -- (172,500) --
------------- --------- -----------
$ 664,846 $ (59,510) 605,336
============= ==========
Purchase price 1,188,687
Excess cost over fair value -----------
of net assets acquired $ 583,351 15
===========
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities
assumed in the transaction based on estimates of fair value at the date of
purchase. Since the date of purchase, the results of operations related to
such assets and liabilities have been included in the Company's 1997
consolidated statements of operations.
Effective May 31, 1997, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")) acquired
a residential mortgage loan servicing portfolio of approximately $3.2 billion
from WMC Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million,
of which $7.7 million was paid by June 30, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Mortgage Banking
Operations."
The following pro forma financial information combines the historical
results of the Company as if the Cal Fed Acquisition and the issuances of the
REIT Preferred Stock (as defined herein) and the 10-5/8% Notes (as defined
herein) had occurred as of the beginning of the first period presented (in
thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Net interest income $ 336,071 $ 382,670
Net income 64,677 229,477
========= ==========
</TABLE>
Page 10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The gains recognized related to the Branch Sales, net of related taxes,
and certain sales of branches by Cal Fed are excluded from the above table.
The pro forma information does not include the effect of the Home Federal
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser
Purchase, the Branch Sales or the issuance of the Senior Subordinated Notes
(as defined herein) because such effect is not material. The pro forma results
are not necessarily indicative of the results which would have actually been
obtained if the Cal Fed Acquisition and the issuances of the REIT Preferred
Stock and the 10-5/8% Notes had been consummated in the past nor do they
project the results of operations in any future period.
(3) FN Escrow Merger
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In
connection therewith, FN Holdings acquired the net proceeds from the issuance
of FN Escrow's $575 million of senior subordinated notes due 2003 (the
"10-5/8% Notes") and assumed FN Escrow's obligations under the 10-5/8% Notes
and indenture. Deferred issuance costs associated with the 10-5/8% Notes of
$19 million were included in FN Escrow's other assets and are being amortized
over the term of the 10-5/8% Notes.
Concurrent with the issuance of the 10-5/8% Notes, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance
Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a
stated liquidation value of $10,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as
the FN Escrow Preferred Stock. Immediately after issuance, FN Holdings
redeemed the FN Holdings/FN Escrow Preferred Stock at a redemption price of
$36.8 million, representing its stated liquidation value and accrued and
unpaid dividends to January 3, 1997. At the same time, a $19 million loan
receivable from an affiliate of FN Holdings was forgiven.
(4) Cash, Cash Equivalents, and Statement of Cash Flows
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the six months ended June 30, 1997 and
1996 was $677.3 million and $398.6 million, respectively.
During the six months ended June 30, 1997, noncash activity consisted of
transfers of $86.8 million from loans receivable and $1.2 million from loans
held for sale (at lower of cost or market) to foreclosed real estate, the
retirement of preferred stock of $.8 million, the issuance of additional
preferred stock through preferred stock dividends of $1.4 million and the
forgiveness of a $19 million loan from an affiliate of FN Holdings in exchange
for the redemption of FN Holdings/FN Escrow Preferred Stock.
During the six months ended June 30, 1996, noncash activity consisted of
transfers from loans receivable to foreclosed real estate of $72.2 million,
and the transfers of certain consumer loans from loans held for sale to loans
receivable (at lower of cost or market) totalling $26.8 million.
Page 11
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(5) Minority Interest
REIT Preferred Stock
In November 1996, the Bank formed First Nationwide Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT") for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Preferred Capital Corp. entered into a subservicing agreement with FNMC
pursuant to which FNMC services Preferred Capital Corp.'s mortgage assets.
Effective January 6, 1997, Preferred Capital Corp. changed its name to
California Federal Preferred Capital Corporation.
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
its 9-1/8% noncumulative exchangeable preferred stock (the "REIT Preferred
Stock"), raising $500 million. The REIT Preferred Stock has a stated
liquidation value of $25 per share, plus declared and unpaid dividends, if
any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends have been declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year.
As long as Preferred Capital Corp. qualifies as a REIT, distributions on the
REIT Preferred Stock will be a dividends paid deduction by Preferred Capital
Corp.
Cal Fed Preferred Stock
In connection with the Cal Fed Acquisition, the Bank assumed Cal Fed's
10-5/8% preferred stock with a liquidation value of $172.5 million (the "Cal
Fed Preferred Stock"). Cash dividends on the Cal Fed Preferred Stock are
noncumulative and are payable at an annual rate of 10-5/8% per share if, when,
and as declared by the Board of Directors of the Bank. The Cal Fed Preferred
Stock is generally not redeemable prior to April 1, 1999. The Cal Fed
Preferred Stock is redeemable at the option of California Federal, in whole or
in part, at $105.313 per share on or after April 1, 1999 and prior to April 1,
2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, in the event of a change of control, the Cal
Fed Preferred Stock is redeemable at the option of California Federal or its
successor on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, at $114.50 per share.
(6) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year the
effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12
and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities
lending and similar transactions. SFAS No. 127 provides additional guidance on
the types of transactions for which the effective date of SFAS No. 125 has
been deferred. It also requires that if it is not possible to determine
whether a transaction occurring during calendar-year 1997 is part of a
repurchase agreement, dollar-roll, securities lending, or similar transaction,
then paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The
Company adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997.
Such adoption did not have a material impact on the Company's consolidated
financial statements.
Page 12
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 establishes standards for disclosing information about
an entity's capital structure and applies to all entities. This statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion-1966,
and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the requirements of
those standards. This statement supersedes specific disclosure requirements of
Opinions 10 and 15 and Statement 47 and consolidates them in this statement
for ease of retrieval and for greater visibility to non-public entities. This
statement is effective for financial statements for periods ending after
December 15, 1997. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No.
129 is adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. This
statement has no impact on the financial condition or results of operations of
the Company, but will require changes in the Company's disclosure
requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments
of a Business Enterprise, but retains the requirement to report information
about major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative informative for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will require
changes in the Company's disclosure requirements.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934, including statements regarding the Company's expectations,
intentions, beliefs or strategies regarding the future. Forward-looking
statements include the Company's statements regarding liquidity, provision for
loan losses, capital resources and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "expect," "intend," and other similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. It is important to note that the
Company's actual results could differ materially from those described herein
as anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on February 3, 1997 (File
No. 333-21015) and declared effective on February 26, 1997. The Company
assumes no obligation to update any such forward-looking statement.
OVERVIEW
The principal business of FN Holdings, through California Federal,
consists of (i) operating retail deposit branches, (ii) originating and/or
purchasing residential real estate loans and, to a lesser extent, certain
commercial and consumer loans, for investment, (iii) managing its commercial
real estate loan portfolio and (iv) mortgage banking and loan servicing.
Revenues are derived primarily from interest charged on loans, interest
received on government and agency securities and mortgage-backed securities,
gains on sales of loans and other investments and fees received in connection
with loan servicing, securities brokerage and other customer service
transactions. Expenses primarily consist of interest on customer deposit
accounts, interest on short-term and long-term borrowings, provisions for
losses, general and administrative expenses consisting of compensation and
benefits, advertising and marketing, premises and equipment, loan expenses,
deposit insurance assessments, data processing and other general and
administrative expenses.
Acquisitions and Sales
On January 3, 1997, the Company consummated the Cal Fed Acquisition
involving assets totalling $13.5 billion, retail deposits totalling $9.0
billion, and including 113 branches in California and six in Nevada. On May 9,
1997, the Bank consummated the sale of deposit accounts and related retail
banking assets comprised of cash on hand, loans on deposits and facilities
totalling $21.7 million to Humbolt Bank at a gross price representing a
deposit premium of 4.5% (the "Garberville Branch Sale"), and resulting in a
net gain on sale of $1.1 million.
The period-to-period comparisons set forth below, including the changes
in magnitude of various items between periods, have been affected by the
significant growth of the Bank through acquisitions accounted for as purchases
during the periods involved and the restructuring of the Bank's retail deposit
network in California resulting in the sale of certain non-California deposits
funded with wholesale borrowings. See note 2 to the accompanying unaudited
consolidated financial statements for information regarding the Cal Fed
Acquisition.
Net Income
FN Holdings reported net income for the six months ended June 30, 1997 of
$66.6 million compared with net income of $551.0 million for the corresponding
period in 1996. Net income for the six months ended June 30, 1997 includes a
$19.0 million provision for professional fees and additional unreimbursable
costs related to the foreclosure of single family loans serviced for others,
which are not expected to be recurring. Net income for the six months ended
June 30, 1996 includes $363.3 million in pre-tax gains on sales of branches,
$40.4 million in pre-tax gains from the sale of ACS stock and the recognition
of a $125.0 million deferred tax benefit. On a comparative basis, excluding
non-recurring and expected non-recurring items, net income for the six months
ended June 30, 1997 and 1996 was $85.6 million and $82.8 million,
respectively.
Page 14
<PAGE>
Net income for the three months ended June 30, 1997 was $24.7 million
compared to $252.4 million for the similar period in 1996. Net income for the
three months ended June 30, 1997 includes the provision for professional fees
and additional unreimbursable costs related to the foreclosure of single
family loans serviced for others. Net income for the three months ended June
30, 1996 includes $55.3 million in pre-tax gains on sales of branches, as well
as the gain from the sale of ACS stock and recognition of the deferred tax
benefit. On a comparative basis, excluding non-recurring and expected
non-recurring items, net income for the three months ended June 30, 1997 and
1996 was $42.0 million and $48.1 million, respectively.
Net interest income was $166.8 million and $334.5 million, respectively,
for the three and six months ended June 30, 1997, compared to $109.6 million
and $218.0 million in the same periods in 1996. The increases in 1997 over
1996 are primarily due to the increased volumes of interest-bearing assets and
liabilities acquired in the SFFed and Home Federal Acquisitions (collectively,
the "1996 Acquisitions") and the Cal Fed Acquisition, partially offset by a
decrease in the net interest margin during 1997 compared to 1996 due to assets
from the Cal Fed Acquisition generally having a lower yield than the rest of
the portfolio, the assumption of the 10-5/8% Notes and the issuance of $140
million of 9- 1/8% senior subordinated notes due 2003 (the "Senior
Subordinated Notes") on January 31, 1996.
Financial Condition
During the six months ended June 30, 1997, consolidated total assets
increased $14.3 billion, to $30.9 billion, from December 31, 1996, and total
liabilities increased from $15.4 billion to $29.1 billion, primarily due to
the Cal Fed Acquisition and the assumption of the 10-5/8% Notes.
During the six months ended June 30, 1997, minority interest increased by
$677.1 million. This increase is the result of the issuance of $500 million in
REIT Preferred Stock and the assumption of the Cal Fed Preferred Stock with a
liquidation value of $172.5 million as well as related accrued but unpaid
dividends of $4.6 million.
The Company's non-performing assets, consisting of nonaccrual loans, net
of purchase accounting adjustments and specific allowances for loan losses,
and foreclosed real estate, net, increased to $313 million at June 30, 1997
compared with $224 million at December 31, 1996. Approximately $93.3 million,
or 29.8%, of the total non-performing assets at June 30, 1997 were acquired in
the Cal Fed Acquisition. Total non-performing assets as a percentage of the
Bank's total assets decreased to 1.01% at June 30, 1997 from 1.37% at December
31, 1996.
Page 15
<PAGE>
RESULTS OF OPERATIONS
Six Months ended June 30, 1997 versus Six Months ended June 30, 1996
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average statements
of financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Six months ended
June 30, 1997
----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits
in banks (2) $ 1,005 $ 30 5.97%
Mortgage-backed securities
available for sale 3,953 134 6.80
Mortgage-backed securities
held to maturity 1,549 59 7.60
Loans held for sale, net 1,011 37 7.44
Loans receivable, net 20,052 780 7.79
Covered assets -- -- --
-------- ------ -----
Total interest-earning assets 27,570 1,040 7.55%
------ ----
Noninterest-earning assets 2,934
--------
Total assets $ 30,504
========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 16,845 375 4.49%
Securities sold under
agreements to repurchase 2,548 73 5.68
Borrowings (3) 8,134 258 6.41
-------- ------ ----
Total interest-bearing liabilities 27,527 706 5.17%
------ ----
Noninterest-bearing liabilities 1,193
Minority interest 894
Stockholders' equity 890
Total liabilities, minority interest and --------
stockholders' equity $ 30,504
Net interest income ======== $334
======
Interest rate spread 2.38%
====
Net interest margin 2.38%
====
Average equity to average assets 2.92%
====
</TABLE>
Page 16
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1996
----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits
in banks (2) $ 521 $ 16 6.14%
Mortgage-backed securities
available for sale 1,753 60 6.85
Mortgage-backed securities
held to maturity 1,839 71 7.72
Loans held for sale, net 876 32 7.31
Loans receivable, net 11,073 446 8.06
Covered assets 39 1 7.14
------- ---- ----
Total interest-earning assets 16,101 626 7.78%
---- ----
Noninterest-earning assets 1,126
-------
Total assets $17,227
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,949 223 4.50%
Securities sold under
agreements to repurchase 2,225 63 5.59
Borrowings (3) 3,792 122 6.51
------- ---- ----
Total interest-bearing liabilities 15,966 408 5.13%
---- ----
Noninterest-bearing liabilities 305
Minority interest 309
Stockholders' equity 647
-------
Total liabilities, minority interest and $17,227
stockholders' equity =======
Net interest income $218
====
Interest rate spread 2.65%
====
Net interest margin 2.69%
====
Average equity to average assets 3.76%
====
</TABLE>
------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 17
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of the Company's interest-earning
assets and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average outstanding balances
multiplied by the prior period's rate) and (ii) changes in rate (changes in
average interest rate multiplied by the prior period's volume). Changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Six months ended June 30, 1997 vs. 1996
Increase (Decrease) Due to
---------------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ 14 $ -- $ 14
Mortgage-backed securities available for sale 74 -- 74
Mortgage-backed securities held to maturity (11) (1) (12)
Loans held for sale 4 1 5
Loans receivable, net 348 (14) 334
Covered assets (1) -- (1)
---- ----- ----
Total $428 $(14) $414
---- ---- ----
INTEREST EXPENSE:
Deposits $153 $ (1) $152
Securities sold under agreements to repurchase 9 1 10
Borrowings 138 (2) 136
---- ---- ----
Total $300 $ (2) $298
---- ---- ----
Change in net interest income $128 $(12) $116
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
from the six months ended June 30, 1997 to the corresponding period in 1996
are largely due to the additional $17.0 billion in interest-earning assets
acquired and $16.9 billion in interest-bearing liabilities assumed in the Cal
Fed Acquisition and the 1996 Acquisitions, as well as the assumption of the
10-5/8% Notes. The negative total rate variance of $12 million is attributed
to assets from the Cal Fed Acquisition generally having a lower yield than the
rest of the portfolio, the assumption of the 10-5/8% Notes, the issuance of
the Senior Subordinated Notes on January 31, 1996 and the impact of the
additional wholesale borrowings used to finance the Branch Sales.
Interest Income. Total interest income was $1.0 billion for the six
months ended June 30, 1997, an increase of $414.3 million from the six months
ended June 30, 1996. The interest-earning assets acquired in the Cal Fed
Acquisition and the 1996 Acquisitions resulted in total interest-earning
assets for the six months of 1997 averaging $27.6 billion, compared to $16.1
billion for the corresponding period in 1996. The yield on total
interest-earning assets during the six months ended June 30, 1997 decreased to
7.55% compared to 7.78% for the six months ended June 30, 1996, primarily due
to assets from the Cal Fed Acquisition generally having a lower yield than the
rest of the portfolio.
FN Holdings earned $779.7 million of interest income on loans receivable
for the six months ended June 30, 1997, an increase of $333.3 million from the
six months ended June 30, 1996. The loans acquired in the Cal Fed Acquisition
and the 1996 Acquisitions contributed most of the additional interest income
in 1997 and resulted in an increase in the average balance of loans receivable
to $20.1 billion for the six months ended June 30, 1997 from $11.1 billion for
the six months ended June 30, 1996. The weighted average yield on loans
receivable decreased to 7.79% for the six months ended June 30, 1997 from
8.06% for the same period in 1996, due primarily to the addition of $10.1
billion in loans from the Cal Fed Acquisition.
Page 18
<PAGE>
FN Holdings earned $37.6 million of interest income on loans held for
sale for the six months ended June 30, 1997, an increase of $5.3 million from
the six months ended June 30, 1996. The average balance of loans held for sale
was $1.0 billion for the six months ended June 30, 1997, an increase of $135
million from the same period in 1996, due to increased originations. The
weighted average yield on loans held for sale increased to 7.44% for the six
months ended June 30, 1997 from 7.31% during the six months ended June 30,
1996 primarily due to an increase in rates on ARM loans, and a higher
percentage of a comparatively higher fixed rate portfolio in 1997 compared to
1996.
Interest income on mortgage-backed securities available for sale was
$134.4 million for the six months ended June 30, 1997, an increase of $74.8
million from the six months ended June 30, 1996. The average portfolio
balances increased $2.2 billion, to $4.0 billion, during the six months ended
June 30, 1997 compared to the same period in 1996. The weighted average yield
on these assets decreased from 6.85% for the six months ended June 30, 1996 to
6.80% for the six months ended June 30, 1997. The increase in the volume and
decrease in the weighted average yield is due to the acquisition of $2.0
billion in mortgage-backed securities from Cal Fed and the purchase of $1.7
billion in mortgage-backed securities during the first half of 1997.
Interest income on mortgage-backed securities held to maturity was $58.9
million for the six months ended June 30, 1997, a decrease of $11.9 million
from the six months ended June 30, 1996. The average portfolio balances
decreased $290 million, to $1.5 billion, during the six months ended June 30,
1997 compared to the same period in 1996. The weighted average rate decreased
from 7.72% for the six months ended June 30, 1996 to 7.60% for the six months
ended June 30, 1997, primarily due to the repricing of mortgage loans
underlying the securities.
Interest income from securities and interest-bearing deposits in banks
was $30.0 million for the six months ended June 30, 1997, an increase of $14.3
million from the six months ended June 30, 1996. The average portfolio
balances during the six months ended June 30, 1997 and 1996 increased to $1.0
billion from $521 million, respectively, primarily due to the assets acquired
in the Cal Fed Acquisition and purchases made by the Bank during 1997 to meet
liquidity needs. The weighted average yield on these assets decreased to 5.97%
for the six months ended June 30, 1997 from 6.14% for the six months ended
June 30, 1996, primarily due to a higher mix of lower-rate interest-bearing
deposits acquired in the Cal Fed Acquisition, along with a decline in yields
earned on interest-bearing deposits.
Interest Expense. Total interest expense was $706.1 million for the six
months ended June 30, 1997, an increase of $297.8 million from the six months
ended June 30, 1996. The increase is the result of additional interest-bearing
liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the
assumption of the 10-5/8% Notes, the issuance of the Senior Subordinated Notes
on January 31, 1996 and incrementally higher rates paid on the additional
borrowings used to replace the retail deposits sold in the Branch Sales.
Interest expense on customer deposits, including brokered deposits, was
$374.8 million for the six months ended June 30, 1997, an increase of $152.1
million from the six months ended June 30, 1996. The average balance of
customer deposits outstanding increased from $9.9 billion to $16.8 billion for
the six months ended June 30, 1996 and 1997, respectively. The increase in the
average balance is primarily due to $9.0 billion in deposits assumed in the
Cal Fed Acquisition. The overall weighted average cost of deposits was 4.49%
for the six months ended June 30, 1997 and 4.50% for the six months ended June
30, 1996.
Interest expense on securities sold under agreements to repurchase
totalled $72.8 million for the six months ended June 30, 1997, an increase of
$10.5 million from the six months ended June 30, 1996. The average balance of
such borrowings for the six months ended June 30, 1997 and 1996 was $2.5
billion and $2.2 billion, respectively. The increase in the average balance is
primarily attributed to $1.1 billion of such liabilities assumed in the Cal
Fed Acquisition and the 1996 Acquisitions, partially offset by maturities and
payoffs that were refinanced with FHLB advances and deposits acquired in the
Cal Fed and Home Federal Acquisitions. The weighted average interest rate on
these instruments increased to 5.68% during the six months ended June 30, 1997
from 5.59% for the six months ended June 30, 1996, primarily due to an
increase in rates on new borrowings compared to such borrowings during 1996.
Page 19
<PAGE>
Interest expense on borrowings totalled $258.5 million for the six months
ended June 30, 1997, an increase of $135.2 million from the six months ended
June 30, 1996. The increase is attributed to the net effect of an increase for
borrowings assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the
assumption of the 10-5/8% Notes, the issuance of the Senior Subordinated Notes
and additional borrowings to replace the deposits sold in the Branch Sales,
partially offset by the impact of a slight decrease in the rates paid on such
borrowings. The average balance outstanding for the six months ended June 30,
1997 and 1996 was $8.1 billion and $3.8 billion, respectively. The weighted
average interest rate on these instruments decreased to 6.41% during the six
months ended June 30, 1997 from 6.51% for the six months ended June 30, 1996,
primarily due to the shorter average maturity of the portfolio at June 30, 1997
compared to June 30, 1996, partially offset by the higher rate paid on the
10-5/8% Notes.
Net Interest Income. Net interest income was $334.5 million for the six
months ended June 30, 1997, an increase of $116.5 million from the six months
ended June 30, 1996. The interest rate spread decreased to 2.38% for the six
months ended June 30, 1997 from 2.65% for the six months ended June 30, 1996.
Noninterest Income. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, management fees and gains on the
Branch Sales and on sales of loans, was $161.3 million for the six months
ended June 30, 1997, a decrease of $358.3 million from the six months ended
June 30, 1996. This decrease includes gains on sales of branches of $363.3
million in the six months ended June 30, 1996, compared to a gain of $1.1
million in the first half of 1997.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $75.1 million for the six months ended June 30, 1997, compared to $60.8
million for the six months ended June 30, 1996. This increase is due to the
addition of the mortgage servicing portfolios acquired in the Cal Fed
Acquisition, the 1996 Acquisitions, the LMUSA 1996 Purchase and the
Weyerhaeuser Purchase, as well as servicing rights originated through the
increased origination capacity provided by these acquisitions, partially
offset by portfolio paydowns. The single-family residential loan servicing
portfolio, excluding loans serviced for the Bank, increased from $44.9 billion
at June 30, 1996 to $47.4 billion at June 30, 1997. During the six months
ended June 30, 1997, the Company sold $3.0 billion in single-family mortgage
loans originated for sale as part of its ongoing mortgage banking operations
compared to $2.6 billion of such sales for the corresponding period in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $46.7 million for the six months ended June
30, 1997, compared to $23.8 million for the six months ended June 30, 1996.
The increase is primarily attributed to the impact of increased revenues from
the retail banking operations acquired in the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by the impact of the Branch Sales.
Management fees totalled $4.1 million for the six months ended June 30,
1997, compared to $5.7 million for the six months ended June 30, 1996. The
decrease is attributed principally to the reduced number of assets under
management as a result of an increase in dispositions of assets being managed
and contracts with third parties which have expired.
Gain on sales of loans was $11.4 million for the six months ended June
30, 1997, compared to a gain of $13.7 million for the six months ended June
30, 1996. The decrease is attributed in part to a gain of $7.5 million on the
sale of $298.0 million of consumer loans during the first quarter of 1996,
partially offset by 1997 pay-offs of commercial loans with unamortized
discounts.
Loss on sales of assets was $.2 million for the six months ended June 30,
1997 compared to a gain of $38.5 million for the six months ended June 30,
1996. The activity in 1996 is primarily the result of a $40.4 million gain
from the sale of ACS stock, partially offset by a permanent impairment in the
mortgage-backed securities available for sale portfolio.
Page 20
<PAGE>
Dividends on FHLB stock were $12.0 million for the six months ended June
30, 1997, an increase of $7.3 million from the six months ended June 30, 1996,
representing an increase in the volume of such stock owned by the Company,
primarily as a result of the Cal Fed Acquisition.
Other noninterest income was $11.3 million for the six months ended June
30, 1997, an increase of $2.0 million from the six months ended June 30, 1996.
The increase is primarily attributed to an increase in disbursement float
interest income and the recognition of a previously deferred gain on the sale
of certain retail operations, partially offset by a favorable outcome of an
arbitration hearing during the second quarter of 1996.
Noninterest Expense. Total noninterest expense was $324.5 million for the
six months ended June 30, 1997, an increase of $102.2 million from the six
months ended June 30, 1996. The increase is principally due to the growth of
the Company through the Cal Fed Acquisition and the 1996 Acquisitions.
Total compensation and employee benefits expense was $127.5 million for
the six months ended June 30, 1997, an increase of $16.6 million from the six
months ended June 30, 1996. The increase in expense is primarily attributed to
1,741 additional employees of the Bank at June 30, 1997 compared to June 30,
1996, as a result of the Cal Fed Acquisition, partially offset by a reduction
in expense from June 30, 1996 to June 30, 1997 of $24.5 million related to a
management incentive plan ("Incentive Plan") between the Company and certain
executive officers of the Bank. FN Holdings has no employees of its own.
Occupancy and equipment expense was $40.8 million for the six months
ended June 30, 1997, an increase of $15.3 million from the six months ended
June 30, 1996, attributed primarily to the Cal Fed Acquisition and the 1996
Acquisitions, partially offset by operations sold in the Branch Sales.
SAIF deposit insurance premiums decreased $6.1 million, to $5.5 million,
for the six months ended June 30, 1997, due to a decrease in the quarterly
assessment rate from 5.75 cents to 1.63 cents per $100 of retail deposits,
partially offset by an increase in the deposit assessment base as a result of
the net impact of the Cal Fed Acquisition, the 1996 Acquisitions and the
Branch Sales.
Loan expense was $34.0 million for the six months ended June 30, 1997, an
increase of $20.0 million from the six months ended June 30, 1996. The
increase includes a $16.1 million provision for additional unreimbursable
costs related to the foreclosure of single family loans serviced for others,
which is not expected to be recurring. The increase is also attributed to
additional expenses associated with the higher volume of loans serviced, and
higher outside appraisal fees, inspection fees and provision for loss on FHA
and VA loans serviced.
Marketing expense was $7.7 million for the six months ended June 30,
1997, an increase of $2.9 million from the six months ended June 30, 1996,
attributed primarily to the Cal Fed Acquisition and the 1996 Acquisitions,
partially offset by reduced nationwide marketing efforts as a result of the
Branch Sales.
Professional fees increased $13.3 million, to $22.8 million, for the six
months ended June 30, 1997 compared to the same period in 1996. This increase
includes additional legal, consulting and audit expenses related to the Cal
Fed Acquisition and the 1996 Acquisitions, as well as $2.9 million in higher
foreclosure outsourcing costs for loans serviced for others.
Foreclosed real estate operations, including gains on sales, resulted in
a net gain of $.9 million for the six months ended June 30, 1997 compared to a
net gain of $4.9 million for the same period in 1996. The change is primarily
attributed to an increase in commercial loan foreclosures due to the
expiration of the Put Agreement and additional writedowns on foreclosed
residential assets as a result of a decline in fair values.
Amortization of intangible assets increased to $24.6 million for the six
months ended June 30, 1997 from $4.2 million for the corresponding period in
1996, primarily due to the amortization of an additional $714.2 million of
intangible assets recorded in connection with the Cal Fed Acquisition and the
1996 Acquisitions.
Page 21
<PAGE>
Other noninterest expense was $56.4 million for the six months ended June
30, 1997, an increase of $15.5 million from the six months ended June 30,
1996, due to an increase in provision for retail branch and subservicing
losses, telecommunications, postage, office supplies, insurance, OTS
assessments and travel expenses, all of which are attributed primarily to the
Cal Fed Acquisition and the 1996 Acquisitions.
Provision for Income Tax. During the six months ended June 30, 1997 and
1996, FN Holdings recorded income tax expense of $21.9 million and income tax
benefit of $81.4 million, respectively. FN Holdings' effective Federal tax rate
was 2% and (23)% during the six months ended June 30, 1997 and 1996,
respectively, while its statutory Federal tax rate was 35% during both periods.
The difference between the effective and statutory rates was primarily the
result of the utilization of net operating loss carryforwards for both periods
and the recognition of a $125.0 million deferred tax benefit in the first half
of 1996. FN Holdings' effective state tax rate increased to 15% from 7% during
the six months ended June 30, 1997 compared to the same period in 1996,
primarily as a result of the Company's increased presence in California where
the state tax rate is generally higher than in other states and nondeductible
goodwill amortization from various acquisitions.
Minority Interest. Dividends on the REIT Preferred Stock totalling $19.1
million were declared and paid during the six months ended June 30, 1997.
Minority interest relative to the REIT Preferred Stock is reflected on the
consolidated statement of operations net of the income tax benefit ($2.4
million) which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes. Dividends on the preferred stock of
the Bank of $26.3 million and $25.9 million were also recorded during the six
months ended June 30, 1997 and 1996, respectively.
Page 22
<PAGE>
Three Months ended June 30, 1997 versus Three Months ended June 30, 1996
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average statements
of financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three months ended
June 30, 1997
----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits
in banks (2) $ 1,060 $ 17 6.45%
Mortgage-backed securities
available for sale 4,354 73 6.74
Mortgage-backed securities
held to maturity 1,522 29 7.60
Loans held for sale, net 1,031 20 7.90
Loans receivable, net 20,047 389 7.77
Covered assets -- -- --
-------- ---- ----
Total interest-earning assets 28,014 528 7.54%
---- ----
Noninterest-earning assets 2,778
--------
Total assets $30,792
========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,845 188 4.47%
Securities sold under
agreements to repurchase 2,638 38 5.76
Borrowings (3) 8,470 135 6.39
-------- ---- ----
Total interest-bearing liabilities 27,953 361 5.18%
---- ----
Noninterest-bearing liabilities 984
Minority interest 980
Stockholders' equity 875
Total liabilities, minority interest and --------
stockholders' equity $30,792
Net interest income ======== $167
====
Interest rate spread 2.36%
====
Net interest margin 2.37%
====
Average equity to average assets 2.84%
====
</TABLE>
Page 23
<PAGE>
<TABLE>
<CAPTION>
Three months ended
June 30, 1996
----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits
in banks (2) $ 538 $ 8 5.95%
Mortgage-backed securities
available for sale 1,775 30 6.99
Mortgage-backed securities
held to maturity 1,855 36 7.55
Loans held for sale, net 891 18 8.08
Loans receivable, net 11,292 225 7.97
Covered assets 40 1 7.28
------- ---- ----
Total interest-earning assets 16,391 318 7.76%
---- ----
Noninterest-earning assets 1,194
-------
Total assets $17,585
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 9,633 105 4.37%
Securities sold under
agreements to repurchase 2,282 32 5.63
Borrowings (3) 4,455 71 6.48
------- ---- ----
Total interest-bearing liabilities 16,370 208 5.12%
---- ----
Noninterest-bearing liabilities 167
Minority interest 309
Stockholders' equity 739
-------
Total liabilities, minority interest
and stockholders' equity $17,585
Net interest income ======= $110
====
Interest rate spread 2.64%
====
Net interest margin 2.65%
====
Average equity to average assets 4.20%
====
</TABLE>
- ------------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 24
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of the Company's interest-earning
assets and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average outstanding balances
multiplied by the prior period's rate) and (ii) changes in rate (changes in
average interest rate multiplied by the prior period's volume). Changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended June 30, 1997 vs. 1996
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ 9 $-- $ 9
Mortgage-backed securities available for sale 44 (1) 43
Mortgage-backed securities held to maturity (7) -- (7)
Loans held for sale 2 -- 2
Loans receivable, net 170 (6) 164
Covered assets (1) -- (1)
---- --- ----
Total $217 $(7) $210
---- --- ----
INTEREST EXPENSE:
Deposits $ 81 $ 2 $ 83
Securities sold under agreements to repurchase 5 1 6
Borrowings 65 (1) 64
---- --- ----
Total $151 $ 2 $153
---- --- ----
Change in net interest income $ 66 $(9) $ 57
==== === ====
</TABLE>
The volume variances in total interest income and total interest expense
from the three months ended June 30, 1997 to the corresponding period in 1996
are largely due to the additional $17.0 billion in interest-earning assets
acquired and $16.9 billion in interest-bearing liabilities assumed in the Cal
Fed Acquisition and the 1996 Acquisitions, as well as the assumption of the
10-5/8% Notes. The negative total rate variance of $9 million is attributed to
assets from the Cal Fed Acquisition generally having a lower yield than the
rest of the portfolio, the assumption of the 10-5/8% Notes and the impact of
the additional wholesale borrowings used to finance the Branch Sales.
Interest Income. Total interest income was $527.8 million for the three
months ended June 30, 1997, an increase of $209.7 million from the three
months ended June 30, 1996. The interest-earning assets acquired in the Cal
Fed Acquisition and the Home Federal Acquisition resulted in total
interest-earning assets for the three months ended June 30, 1997 averaging
$28.0 billion, compared to $16.4 billion for the corresponding period in 1996.
The yield on total interest-earning assets during the three months ended June
30, 1997 decreased to 7.54% compared to 7.76% for the three months ended June
30, 1996, primarily due to assets from the Cal Fed Acquisition generally
having a lower yield than the rest of the portfolio.
FN Holdings earned $389.0 million of interest income on loans receivable
for the three months ended June 30, 1997, an increase of $163.8 million from
the three months ended June 30, 1996. The loans acquired in the Cal Fed
Acquisition and the Home Federal Acquisition contributed most of the
additional interest income in 1997 and resulted in an increase in the average
balance of loans receivable to $20.0 billion for the three months ended June
30, 1997 from $11.3 billion for the three months ended June 30, 1996. The
weighted average yield on loans receivable decreased to 7.77% for the three
months ended June 30, 1997 from 7.97% for the same period in 1996, due
primarily to the addition of $10.1 billion in loans from the Cal Fed
Acquisition.
Page 25
<PAGE>
FN Holdings earned $20.4 million of interest income on loans held for
sale for the three months ended June 30, 1997, an increase of $2.6 million
from the three months ended June 30, 1996. The average balance of loans held
for sale was $1.0 billion for the three months ended June 30, 1997, an
increase of $140 million from the same period in 1996, due to increased
originations. The weighted average yield on loans held for sale decreased to
7.90% for the three months ended June 30, 1997 from 8.08% during the three
months ended June 30, 1996.
Interest income on mortgage-backed securities available for sale was
$73.4 million for the three months ended June 30, 1997, an increase of $43.5
million from the three months ended June 30, 1996. The average portfolio
balances increased $2.6 billion, to $4.4 billion, during the three months
ended June 30, 1997 compared to the same period in 1996. The weighted average
yield on these assets decreased from 6.99% for the three months ended June 30,
1996 to 6.74% for the three months ended June 30, 1997. The increase in the
volume and decrease in the weighted average yield is primarily due to the
acquisition of $2.0 billion in mortgage-backed securities from Cal Fed.
Interest income on mortgage-backed securities held to maturity was $28.9
million for the three months ended June 30, 1997, a decrease of $7.3 million
from the three months ended June 30, 1996. The average portfolio balances
decreased $333 million, to $1.5 billion, during the three months ended June
30, 1997 compared to the same period in 1996. The weighted average rate
increased from 7.55% for the three months ended June 30, 1996 to 7.60% for the
three months ended June 30, 1997, primarily due to upward rate adjustments of
adjustable-rate mortgage-backed securities.
Interest income from securities and interest-bearing deposits in banks
was $16.1 million for the three months ended June 30, 1997, an increase of
$7.8 million from the three months ended June 30, 1996. The average portfolio
balances during the three months ended June 30, 1997 and 1996 increased to
$1.1 billion from $538 million, respectively, primarily due to the assets
acquired in the Cal Fed Acquisition and purchases made by the Bank during 1997
to meet liquidity needs. The weighted average yield on these assets increased
to 6.45% for the three months ended June 30, 1997 from 5.95% for the three
months ended June 30, 1996, primarily due to significant purchases of
higher-yielding investment securities during 1997.
Interest Expense. Total interest expense was $361.1 million for the three
months ended June 30, 1997, an increase of $152.5 million from the three
months ended June 30, 1996. The increase is the result of additional
interest-bearing liabilities assumed in the Cal Fed Acquisition and the 1996
Acquisitions, the assumption of the 10-5/8% Notes and incrementally higher
rates paid on the additional borrowings used to replace the retail deposits
sold in the Branch Sales.
Interest expense on customer deposits, including brokered deposits, was
$187.8 million for the three months ended June 30, 1997, an increase of $82.6
million from the three months ended June 30, 1996. The average balance of
customer deposits outstanding increased from $9.6 billion to $16.8 billion for
the three months ended June 30, 1996 and 1997, respectively. The increase in
the average balance is primarily due to $9.0 billion in deposits assumed in
the Cal Fed Acquisition. The overall weighted average cost of deposits
increased to 4.47% for the three months ended June 30, 1997 from 4.37% for the
three months ended June 30, 1996, due principally to the impact of deposits
acquired in the Cal Fed Acquisition, partially offset by the impact of the
1996 Branch Sales.
Interest expense on securities sold under agreements to repurchase
totalled $38.4 million for the three months ended June 30, 1997, an increase
of $6.6 million from the three months ended June 30, 1996. The average balance
of such borrowings for the three months ended June 30, 1997 and 1996 was $2.6
billion and $2.3 billion, respectively. The increase in the average balance is
attributed to $1.1 billion of such liabilities assumed in the Cal Fed
Acquisition and the 1996 Acquisitions, partially offset by maturities and
payoffs that were refinanced with FHLB advances and deposits acquired in the
Cal Fed and Home Federal Acquisitions. The weighted average interest rate on
these instruments increased to 5.76% during the three months ended June 30,
1997 from 5.63% for the three months ended June 30, 1996, primarily due to an
increase in rates on new borrowings compared to such borrowings during 1996.
Interest expense on borrowings totalled $134.9 million for the three
months ended June 30, 1997, an increase of $63.3 million from the three months
ended June 30, 1996. The increase is attributed to the net effect of an
increase for borrowings assumed in the Cal Fed Acquisition and the 1996
Acquisitions, the assumption of the 10-5/8% Notes
Page 26
<PAGE>
and additional borrowings to replace the deposits sold in the Branch Sales,
partially offset by the impact of decreases in the rates paid on such
borrowings. The average balance outstanding for the three months ended June 30,
1997 and 1996 was $8.5 billion and $4.5 billion, respectively. The weighted
average interest rate on these instruments decreased to 6.39% during the three
months ended June 30, 1997 from 6.48% for the three months ended June 30, 1996,
primarily due to the shorter average maturity of the portfolio at June 30, 1997
compared to June 30, 1996.
Net Interest Income. Net interest income was $166.8 million for the three
months ended June 30, 1997, an increase of $57.2 million from the three months
ended June 30, 1996. The interest rate spread decreased to 2.36% for the three
months ended June 30, 1997 from 2.64% for the three months ended June 30,
1996.
Noninterest Income. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, management fees and gains on the
Branch Sales and on sales of loans, was $82.4 million for the three months
ended June 30, 1997, a decrease of $72.2 million from the three months ended
June 30, 1996. The three months ended June 30, 1996 includes gains on sales of
branches of $55.3 million and gain from the sale of ACS stock of $40.4
million.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $35.3 million for the three months ended June 30, 1997, compared to $33.3
million for the three months ended June 30, 1996. This increase is due to the
addition of the mortgage servicing portfolios acquired in the Cal Fed
Acquisition, the Home Federal Acquisition and the Weyerhaeuser Purchase, as
well as servicing rights originated through the increased origination capacity
provided by these acquisitions, partially offset by portfolio paydowns. The
single-family residential loan servicing portfolio, excluding loans serviced
for the Bank, increased from $44.9 billion at June 30, 1996 to $47.4 billion
at June 30, 1997. During the three months ended June 30, 1997, the Company
sold $1.8 billion in single-family mortgage loans originated for sale as part
of its ongoing mortgage banking operations compared to $1.3 billion of such
sales for the corresponding period in 1996.
Customer banking fees and service charges related to retail banking
operations, consisting of depositor fees for transaction accounts, overdrafts,
and miscellaneous other fees, were $24.2 million for the three months ended
June 30, 1997, compared to $12.0 million for the three months ended June 30,
1996. The increase is primarily attributed to the impact of increased revenues
from the retail banking operations acquired in the Cal Fed and Home Federal
Acquisitions, partially offset by the impact of the Branch Sales.
Management fees totalled $2.2 million for the three months ended June 30,
1997, compared to $2.4 million for the three months ended June 30, 1996. The
decrease is attributed principally to the reduced number of assets under
management as a result of an increase in dispositions of assets being managed
and contracts with third parties which have expired.
Gain on sales of loans was $8.5 million for the three months ended June
30, 1997, compared to a loss of less than $.1 million for the three months
ended June 30, 1996. The increase is primarily attributed to 1997 pay-offs of
commercial loans with unamortized discounts.
Loss on sales of assets was $.2 million for the three months ended June
30, 1997 compared to a gain of $43.0 million for the three months ended June
30, 1996. The gain is primarily the result of a $40.4 million gain from the
sale of ACS stock in the three months ended June 30, 1996.
Dividends on FHLB stock were $6.0 million for the three months ended June
30, 1997, an increase of $3.2 million from the three months ended June 30,
1996 representing an increase in the volume of such stock owned by the
Company, primarily as a result of the Cal Fed Acquisition.
Other noninterest income was $5.4 million for the three months ended June
30, 1997, a decrease of $.4 million from the three months ended June 30, 1996.
The decrease is primarily attributed to a favorable outcome of an arbitration
hearing during the second quarter of 1996, partially offset by an increase in
disbursement float income during the same period in 1997.
Page 27
<PAGE>
Noninterest Expense. Total noninterest expense was $171.2 million for the
three months ended June 30, 1997, an increase of $67.5 million from the three
months ended June 30, 1996. The increase is principally due to the growth of
the Company through the Cal Fed and Home Federal Acquisitions.
Total compensation and employee benefits expense was $63.0 million for
the three months ended June 30, 1997, an increase of $12.9 million from the
three months ended June 30, 1996. The increase in expense is primarily
attributed to 1,741 additional employees of the Bank at June 30, 1997 compared
to June 30, 1996, as a result of the Cal Fed Acquisition, partially offset by
a reduction in expense from June 30, 1996 to June 30, 1997 of $4.9 million
related to a management incentive plan ("Incentive Plan") between the Company
and certain executive officers of the Bank. FN Holdings has no employees of
its own.
Occupancy and equipment expense was $20.2 million for the three months
ended June 30, 1997, an increase of $7.8 million from the three months ended
June 30, 1996, attributed primarily to the Cal Fed and Home Federal
Acquisitions, partially offset by operations sold in the Branch Sales.
SAIF deposit insurance premiums decreased from $5.5 million to $2.8
million for the three months ended June 30, 1996 and 1997, respectively, due
to a reduction in the quarterly assessment rate from 5.75 cents to 1.63 cents
per $100 of retail deposits, partially offset by an increase in the deposit
assessment base as a result of the net impact of the Cal Fed and Home Federal
Acquisitions and the Branch Sales.
Loan expense was $26.1 million for the three months ended June 30, 1997,
an increase of $19.9 million from the three months ended June 30, 1996. The
increase includes a $16.1 million provision for additional unreimbursable
costs related to the foreclosure of single family loans serviced for others,
which is not expected to be recurring. The increase is also attributed to
additional expenses associated with the higher volume of loans serviced, and
higher outside appraisal fees, inspection fees and provision for loss on FHA
and VA loans serviced.
Marketing expense was $3.6 million for the three months ended June 30,
1997, an increase of $1.0 million from the three months ended June 30, 1996,
attributed primarily to the Cal Fed and Home Federal Acquisitions, partially
offset by reduced nationwide marketing efforts as a result of the Branch
Sales.
Professional fees increased $6.4 million, to $13.4 million, for the three
months ended June 30, 1997, compared to the same period in 1996. This increase
includes additional legal, consulting and audit expenses related to the Cal
Fed and Home Federal Acquisitions, as well as $2.9 million in higher
foreclosure outsourcing costs for loans serviced for others.
Foreclosed real estate operations, including gains on sales, resulted in
a net gain of $1.9 million for the three months ended June 30, 1997 compared
to a net gain of $2.3 million for the same period in 1996. The change is
primarily attributed to an increase in commercial loan foreclosures due to the
expiration of the Put Agreement and additional writedowns on foreclosed
residential assets as a result of a decline in fair values.
Amortization of intangible assets increased to $12.5 million for the
three months ended June 30, 1997 from $2.5 million for the corresponding
period in 1996, primarily due to the amortization of an additional $598.9
million of intangible assets recorded in connection with the Cal Fed and Home
Federal Acquisitions.
Other noninterest expense was $28.2 million for the three months ended
June 30, 1997, an increase of $11.6 million from the three months ended June
30, 1996, due to an increase in provision for subservicing losses as well as
increased telecommunications, postage, office supplies, insurance, OTS
assessments and travel expenses, all of which are attributed primarily to the
Cal Fed Acquisition and the 1996 Acquisitions.
Provision for Income Tax. During the three months ended June 30, 1997 and
1996, FN Holdings recorded income tax expense of $10.2 million and income tax
benefit of $110.4 million, respectively. FN Holdings' effective Federal tax
rates were 2% and (81)% during the three months ended June 30, 1997 and 1996,
respectively, while its statutory
Page 28
<PAGE>
Federal tax rate was 35% during both periods. The difference between the
effective and statutory rates was primarily the result of the utilization of
net operating loss carryforwards for both periods and the recognition of a
$125.0 million deferred tax benefit in the second quarter of 1996. FN Holdings'
effective state tax rate increased to 14% from 8% during the three months ended
June 30, 1997 compared to the same period in 1996, primarily as a result of the
Company's increased presence in California where the state tax rate is
generally higher than in other states and nondeductible goodwill amortization
from various acquisitions.
Minority Interest. Dividends on the REIT Preferred Stock totalling $11.4
million were declared and paid during the three months ended June 30, 1997.
Minority interest relative to the REIT preferred stock is reflected on the
consolidated statement of operations net of the income tax benefit ($1.5
million) which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes. Dividends on the preferred stock of
the Bank of $13.2 million and $8.6 million were also recorded during the three
months ended June 30, 1997 and 1996, respectively.
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 $39.9 million and $19.8 million during the six
months ended June 30, 1997 and 1996, respectively. The allowance for loan
losses is increased by provisions for loan losses and decreased by charge-offs
(net of recoveries).
Activity in the allowance for loan losses during the six months ended
June 30, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance - January 1 $246,556 $210,484
Purchase - 1996 Acquisitions -- 44,793
Purchase - Cal Fed Acquisition 143,820 --
Provision for loan losses 39,900 19,800
Charge-offs (32,243) (33,792)
Recoveries 2,468 1,756
-------- --------
Balance - June 30 $400,501 $243,041
======== ========
</TABLE>
A significant portion of the Company's loans are secured by real estate
located in Southern California where real estate prices, although improved
during the past year, have not increased as rapidly as real estate prices in
the Company's other primary lending areas. Accordingly, the ultimate
collectibility of those loans is susceptible to changes in the economic
conditions in the region. Management's periodic evaluation of the adequacy of
the allowance for loan losses is based on past loan loss experience, known and
inherent risks in the portfolio, potential adverse situations that may affect
the borrower's ability to repay, the estimated value of underlying collateral,
and current and prospective economic conditions. The increase in the provision
for loan losses during the six months ended June 30, 1997 compared to the same
period in 1996 is primarily due to the increase in the loan portfolio as a
result of the Cal Fed Acquisition.
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
Page 29
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the degree
that their interest-bearing liabilities, consisting principally of deposits,
securities sold under agreements to repurchase and FHLB advances, mature or
reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread
is referred to as asset and liability management. The objective of the
Company's asset and liability management is to maximize its net interest
income within the constraints imposed by prudent lending and investing
practices, liquidity needs and capital planning.
The Company actively pursues investment and funding strategies intended
to minimize the sensitivity of its earnings to interest rate fluctuations
while maintaining the flexibility required to execute its business strategies.
The Company measures the interest rate sensitivity of the balance sheet
through gap and duration analysis, as well as net interest income and market
value simulation, and, after taking into consideration both the variability of
rates and the maturities of various instruments, evaluates strategies which
may reduce the sensitivity of its earnings to interest rate and market value
fluctuations. An important decision is the selection of interest-bearing
liabilities and the generation of interest-bearing assets which best match
relative to interest rate changes. In order to reduce interest rate risk by
increasing the percentage of interest sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Company seeks to purchase
assets or originate real estate loans that reprice frequently and that on the
whole adjust in accordance with the repricing of its liabilities. At June 30,
1997, approximately 92.4% of Company's real estate loan portfolio consisted of
ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Company's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs now offered by the Company have a
fixed monthly payment for a given period, with any changes as a result of
market interest rates reflected in the unpaid principal balance through
negative amortization. From the lender's perspective, these loans respond most
quickly to rate changes because interest accruals immediately reflect the
loans as though they were fully indexed. In general, the closer the interest
rate on a portfolio of ARMs is to the ultimate contractual margin over market
rates, the more sensitive the portfolio yield is to changes in market interest
rates.
In connection with the FN Acquisition and the Cal Fed Acquisition, the
Company acquired the rights and assumed the obligations under certain interest
rate swap agreements. The swaps provide a means of hedging the interest rate
exposure relative to the Company's FHLB advances. Under the terms of these
agreements, the Company pays the variable rate based on LIBOR and receives
fixed rates or a variable rate based on the yield of discount notes issued by
the FHLB System. During the six months ended June 30, 1997, the Company's net
interest income increased by $1.7 million as a result of these interest rate
swap agreements, largely due to a decrease in the variable rate paid due to
changing market interest rates, net of the fixed rate payments received and
the amortization of the premium assigned to these agreements at the time of
acquisition. Gains and losses on early termination of these agreements would
be included in the carrying amount of the FHLB advances and amortized over the
remaining terms of such advances. The requirements that must be satisfied in
order to account for the swap agreements in this manner are as follows: (1)
the FHLB advances must expose the Company to interest rate risk, and (2) at
the inception of the hedge and throughout the hedge period, high correlation
of changes in the market value of the swaps and the fair value of the FHLB
advances shall be probable so that the results of the swaps will substantially
offset the effects of interest rate changes on the FHLB advances. If these
requirements are not met, the swaps would be considered speculative and marked
to market with changes in market value reflected in noninterest income. For
additional information, see Note 22 to the Company's 1996 consolidated
financial statements on Form 10-K.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined interest
earned on interest-
Page 30
<PAGE>
earning assets and the combined interest paid on interest-bearing liabilities.
Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry
is the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
given periods. A gap is considered positive when the interest rate sensitive
assets exceeds interest rate sensitive liabilities, while the opposite results
in a negative gap. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of June 30,
1997. Prepayment rates are assumed in each period on substantially all of the
Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions
were used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at June 30, 1997 is as
follows:
Page 31
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
--------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ------ ----------- -----
(dollars in millions)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 182 $ -- $ -- $ -- $ 182
Securities available for sale (3) 948 -- -- -- 948
Mortgage-backed securities
available for sale (3) 4,950 -- -- -- 4,950
Mortgage-backed securities held
to maturity (1)(4) 1,478 1 1 -- 1,480
Loans held for sale, net (3)(5) 827 -- -- -- 827
Loans receivable, net (1)(6) 17,446 1,463 764 -- 19,673
Investment in FHLB 400 -- -- -- 400
------- ------ ---- ------ -------
Total interest-earning assets 26,231 1,464 765 -- 28,460
Noninterest-earning assets -- -- -- 2,465 2,465
------- ------ ---- ------ -------
$26,231 $1,464 $765 $2,465 $30,925
======= ====== ==== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $14,217 $2,427 $ 14 $ -- $16,658
Securities sold under agreements
to repurchase (1) 2,370 14 -- -- 2,384
FHLB advances (1) 7,164 955 2 -- 8,121
Other borrowings (1) -- 257 841 -- 1,098
------- ------ ---- ------ -------
Total interest-bearing liabilities 23,751 3,653 857 -- 28,261
Noninterest-bearing liabilities -- -- -- 810 810
Minority interest -- -- -- 986 986
Stockholders' equity -- -- -- 868 868
------- ------ ---- ------ -------
$23,751 $3,653 $857 $2,664 $30,925
======= ====== ==== ====== =======
Gap before interest rate swap
agreements $2,480 $(2,189) $(92) $199
Interest rate swap agreements -- -- -- --
------ ------- ----- ----
Gap adjusted for interest rate
swap agreements $2,480 $(2,189) $(92) $199
====== ======= ==== ====
Cumulative gap $2,480 $ 291 $199 $199
====== ======= ==== ====
Gap as a percentage of total assets 8.0% (7.1)% (.3)% .6%
=== === == ==
Cumulative gap as a percentage of
total assets 8.0% .9% .6% .6%
=== == == ==
</TABLE>
- ------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of June 30, 1997. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Company's prepayment
estimates.
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<PAGE>
(2) Consists of $58 million of securities held to maturity, $51 million of
interest-bearing deposits in other banks and $73 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying loans on nonaccrual status of $5 million.
(5) Excludes nonaccrual loans of $31 million.
(6) Excludes allowance for loan losses of $401 million and nonaccrual loans of
$204 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
At June 30, 1997, interest-earning assets of the Company exceeded
interest-bearing liabilities by approximately $199 million. At December 31,
1996, interest-earning assets of the Company exceeded interest-bearing
liabilities by approximately $256 million. The change in the cumulative gap
between the two periods is due principally to the Cal Fed Acquisition and the
assumption of the 10-5/8% Notes.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between
product features and pricing, market rates and future management of the
balance sheet mix. The Company utilizes computer modeling, under various
interest rate scenarios, to provide a dynamic view of the effects of the
changes in rates, spreads, and yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate
funding, and the establishment of asset product priorities by formulating
performance evaluation criteria, risk evaluation techniques and a system to
standardize the analysis and reporting of originations, competitive trends,
profitability and risk. On a quarterly basis, the Board of Directors of the
Bank is apprised of ALCO strategies adopted and their impact on operations. At
least annually, the Board of Directors of the Bank reviews the Bank's interest
rate risk management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government securities and other specified securities
to deposits and borrowings due within one year. The OTS has currently
established a minimum liquidity requirement for the Bank of 5.00%. California
Federal's liquidity ratio was 5.02% and 5.32% at June 30, 1997 and December
31, 1996, respectively.
A major source of the Company's funding is expected to be its retail
deposit branch network, which management believes will be sufficient to meet
its long-term liquidity needs. The ability of the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and brokered deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances, and
other secured and unsecured borrowings. It is anticipated that FHLB advances
and securities sold under agreements to repurchase will continue to be
important sources of funding, and management expects there to be adequate
collateral for such funding requirements.
The Company's primary uses of funds are the origination or purchase of
loans, the funding of maturing certificates of deposit, demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit
scheduled to mature during the twelve months ending June 30, 1998 aggregate
$8.6 billion. The Company may renew these certificates,
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<PAGE>
attract new replacement deposits, replace such funds with other borrowings, or
it may elect to reduce the size of the balance sheet. In addition, at June 30,
1997, FN Holdings had securities sold under agreements to repurchase, FHLB
advances and other borrowings aggregating $8.9 billion maturing within twelve
months. The Company may elect to pay off such debt or to replace such
borrowings with additional FHLB advances or other borrowings at prevailing
rates.
During 1994, the Bank issued 3,007,300 shares of preferred stock
("Preferred Stock"). Cash dividends on such Preferred Stock are noncumulative
and are payable at an annual rate of 11-1/2% if, when, and as declared by the
Board of Directors of the Bank. The payment of dividends by the Bank is
subject to certain federal laws applicable to savings associations. Preferred
Stock dividends totalling $17.3 million were declared and paid during each of
the six months ended June 30, 1997 and 1996.
On September 19, 1996, the Company issued 10,000 shares of preferred
stock with a liquidation value of $150 million (the "FN Holdings Preferred
Stock"). The annual cash dividends on the FN Holdings Preferred Stock,
assuming such dividends have been declared by the Board of Directors of FN
Holdings, approximate $15 million per year.
As a result of the Cal Fed Acquisition, the Bank is obligated with
respect to the following outstanding securities of Cal Fed: (i) $50 million of
10.66% senior subordinated notes due 1998, (ii) $2.7 million of 6-1/2%
convertible subordinated debentures due 2001, (iii) $4.3 million of 10%
subordinated debentures due 2003 and (iv) $172.5 million of the Cal Fed
Preferred Stock. The annual interest cost from the assumed notes is $5.9
million, and the annual dividend requirement on the Cal Fed Preferred Stock is
$18.3 million.
The annual dividends, net of taxes, on the REIT Preferred Stock are
expected to approximate $39.8 million.
In the FN Escrow Merger, FN Holdings assumed the 10-5/8% notes which have
an annual interest cost of $61.1 million.
FN Holdings' primary source of cash to pay the interest on and principal
of the 10-5/8% Notes, its $200 million of 12-1/4% Senior Notes due 2001 (the
"Senior Notes") and its $140 million of Senior Subordinated Notes is expected
to be distributions from the Bank. The annual interest on the Senior Notes and
Senior Subordinated Notes is $24.5 million and $12.8 million, respectively.
Although FN Holdings expects that distributions from the Bank will be
sufficient to pay interest when due and the principal amount of the Senior
Notes, the Senior Subordinated Notes, and the 10-5/8% Notes at maturity, there
can be no assurance that earnings from the Bank will be sufficient to make
such distributions to FN Holdings. In addition, there can be no assurance that
such distributions will be permitted by the terms of any debt instruments of
FN Holdings' subsidiaries then in effect, by the terms of any class of
preferred stock issued by the Bank, including the Preferred Stock and the Cal
Fed Preferred Stock, or under applicable federal thrift laws.
The Company anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements in the foreseeable future. In addition to
cash and cash equivalents of $442.1 million at June 30, 1997, the Company has
substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of
cash flows, the sources of liquidity vary between periods. The primary sources
of funds during the six months ended June 30, 1997 were net loan repayments of
$622.8 million, $9.1 billion in additional borrowings, a $500.9 million net
increase in securities sold under agreements to repurchase, $482.4 million
from the issuance of the REIT Preferred Stock, net of issuance costs, $572.9
million in proceeds from principal payments and maturities of securities and
mortgage-backed securities available for sale and $603.3 million in proceeds
from the FN Escrow Merger. The primary uses of funds were $8.6 billion in
principal payments on borrowings, $2.4 billion in purchases of securities and
mortgage-backed securities available for sale, $810.3 million from a net
decrease in deposits and $161.2 million in net cash paid for the Cal Fed
Acquisition.
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<PAGE>
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Company bases the measurement of collateral-dependent impaired
loans on the fair value of the loan's collateral. The amount, if any, by which
the recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
At June 30, 1997, the carrying value of loans that are considered to be
impaired totalled $123.9 million (of which $39.4 million were on nonaccrual
status). The average recorded investment in impaired loans during the six
months ended June 30, 1997 was approximately $124.7 million. For the six
months ended June 30, 1997, FN Holdings recognized interest income on those
impaired loans of $5.2 million, which included $.2 million of interest income
recognized using the cash basis method of income recognition.
The following table presents the amounts, net of specific allowances for
loan losses and purchase accounting adjustments, of the Company's nonaccrual
loans, foreclosed real estate, troubled debt restructurings and impaired loans
as of the dates indicated. These categories are not mutually exclusive;
certain loans are included in more than one classification.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $196 $ -- $ 3
5+ unit residential 20 56 8
Commercial and other 19 66 26
Land -- -- --
Construction 1 2 --
---- ---- ---
Total real estate 236 124 37
Non-real estate 4 -- --
---- ---- ---
Total loans, net 240 $124 (b) $37
==== ===
Foreclosed real estate, net 73
----
Total non-performing assets $313 (a)
====
December 31, 1996
----------------------------------------------
Nonaccrual Impaired Restructured
---------- -------- ------------
(in millions)
Real Estate:
1-4 unit residential $146 $ -- $ 3
5+ unit residential 13 47 55
Commercial and other 9 54 28
Land -- -- 1
Construction 1 1 --
---- ---- ---
Total real estate 169 102 87
Non-real estate 3 -- --
---- ---- ---
Total loans 172 $102 (b) $87
==== ===
Foreclosed real estate, net 52
----
Total non-performing assets $224 (a)
====
- --------------------
</TABLE>
Page 35
<PAGE>
(a) Includes loans securitized with recourse on nonaccrual status of $5.0
million and $6.0 million at June 30, 1997 and December 31, 1996,
respectively, and loans held for sale on nonaccrual status of $31.0
million at June 30, 1997.
(b) Includes $39.4 million and $22.6 million of loans on nonaccrual
status at June 30, 1997 and December 31, 1996, respectively. Also
includes $16.3 million and $18.3 million of loans classified as
troubled debt restructurings at June 30, 1997 and December 31, 1996,
respectively.
There were no accruing loans contractually past due 90 days or more at
June 30, 1997 or December 31, 1996.
FN Holdings' non-performing assets, consisting of nonaccrual loans, net
of purchase accounting adjustments, and foreclosed real estate, net, increased
to $313 million at June 30, 1997, compared with $224 million at December 31,
1996, primarily as a result of assets acquired in the Cal Fed Acquisition.
Non-performing assets as a percentage of the Bank's total assets decreased to
1.01% at June 30, 1997, from 1.37% at December 31, 1996.
FN Holdings, through the Bank, manages its credit risk by regularly
assessing the current and estimated future performance of the real estate
markets in which it operates. The Company continues to place a high degree of
emphasis on the management of its asset portfolio. The Company has three
distinct asset management functions: performing loan asset management, problem
loan asset management and credit review. These three functions are charged
with the responsibility of reducing the risk profile within the residential,
commercial and multi-family asset portfolios by applying asset management and
risk evaluation techniques that are consistent with the Company's portfolio
management strategy and regulatory requirements. In addition to these asset
management functions, the Company has a specialized credit risk management
group that is charged with the development of credit policies and performing
credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 1997:
<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:
California $150 $53 $203 65.7%
Northeast (1) 44 9 53 17.2
Other regions 42 11 53 17.1
---- --- ---- -----
Total $236 $73 $309 100.0%
==== === ==== =====
</TABLE>
- ------------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments and specific allowances for losses.
Page 36
<PAGE>
At June 30, 1997, the Company's largest non-performing asset was
approximately $5.7 million, and it had eight non-performing assets over $2
million in size with balances averaging approximately $3.4 million. The
Company has 2,333 non-performing assets below $2 million in size, including
2,204 non-performing 1-4 unit residential assets.
A summary of the activity in the allowance for loan losses by loan type
is as follows for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1996 $123 $115 $ 9 $247
Purchases/acquisitions 55 79 10 144
Provision for loan losses 30 6 4 40
Charge-offs (21) (5) (6) (32)
Recoveries 1 -- 1 2
---- ---- --- ----
Balance - June 30, 1997 $188 $195 $18 $401
==== ==== === ====
Ratio of allowance for loan losses
to non-performing loans:
December 31, 1996 83.9% 503.2% 280.9% 143.2%
==== ===== ===== =====
June 30, 1997 95.8% 494.1% 397.9% 166.8%
==== ===== ===== =====
</TABLE>
MORTGAGE BANKING OPERATIONS
The Company, through FNMC, has significantly expanded its mortgage
banking operations. Effective May 31, 1997, FNMC consummated the Weyerhaeuser
Purchase involving the acquisition of a residential mortgage loan servicing
portfolio of approximately $3.2 billion and 42,000 loans for a purchase price
of $37.1 million. With the consummation of the Weyerhaeuser Purchase, the
acquisition of additional single-family loan servicing portfolios in the Cal
Fed Acquisition and the originated servicing, the single-family residential
loans serviced for others totalled $47.4 billion at June 30, 1997, an increase
of $4.3 billion and $2.5 billion from December 31, 1996 and June 30, 1996,
respectively. During the six months ended June 30, 1997, the Company, through
FNMC, originated and sold (generally with servicing retained) single-family
residential loans totalling approximately $3.0 billion. Gross revenues from
mortgage loan servicing activities for the six months of 1997 totalled $122.4
million, an increase of $21.0 million from the six months ended June 30, 1996.
Changes in long-term interest rates generally cause an acceleration or
deceleration of mortgage loan prepayments and, consequently, in amortization
of mortgage servicing rights, resulting in a change in the market value of
mortgage servicing rights and in the Company's servicing fee income. In order
to reduce the sensitivity of its earnings to interest rate and market value
fluctuations, the Company initiated a program to hedge the change in value of
its servicing rights based on changes in interest rates ("MSR Hedge"). At June
30, 1997, the Company, through FNMC, was a party to several interest rate
floor contracts maturing from October 2001 through June 2002. The Company paid
counterparties a premium in exchange for cash payments in the event that the
10-year Constant Maturity Treasury rate falls below negotiated strike prices.
At June 30, 1997, the notional amount of the interest rate floors was $970
million and the strike prices were between 5.0% and 6.5%. In addition, the
Company, through FNMC, entered into principal-only swap agreements related to
principal-only securities with a market value of $95.4 million. The estimated
market values of interest rate floor contracts and swaps designated as hedges
against mortgage servicing rights at June 30, 1997 were $7.4 million and $(.9)
million, respectively.
The premium paid by the Company on the interest rate floor contracts is
amortized against the carrying value of mortgage servicing rights ("MSRs")
based on the option decay rate. Amounts received or paid under the
principal-only
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<PAGE>
swap agreements are included in the carrying value of mortgage servicing
rights. Gains and losses on early termination of these hedges would be
included in the carrying amount of the related MSRs and amortized over the
remaining terms of the assets. Two requirements must be met in order to use
these hedge accounting methods: (i) MSRs must expose the Company to interest
rate risk, and (ii) at the inception of the hedge and throughout the hedge
period, high correlation of changes in the market value of the interest floor
contracts and the principal-only swaps and the fair value of the MSRs shall be
probable so that the results of the interest floor contracts and the
principal-only swaps will substantially offset the effects of interest rate
changes on the MSRs. If these requirements are not met, the interest floor
contracts and the principal-only swaps would be considered speculative and
marked to market with changes in market value reflected in current earnings.
The following is a summary of activity in MSRs and the MSR Hedge for the
six months ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1996 $420,187 $3,505 $423,692
Additions - Cal Fed Acquisition 45,101 -- 45,101
Additions - Weyerhaeuser Purchase 45,497 -- 45,497
Originated servicing 63,174 -- 63,174
Additions - other 11,607 -- 11,607
Premium on interest rate floor contracts, net -- 6,767 6,767
Net amount paid under principal-only swap
agreements 2,252 -- 2,252
Amortization (49,584) (1,486) (51,070)
Impairment -- -- --
-------- ------ --------
Balance at June 30, 1997 $538,234 $8,786 $547,020
======== ====== ========
</TABLE>
Capitalized mortgage servicing rights are amortized over the period of
estimated future net servicing income. SFAS No. 122 requires enterprises to
measure the impairment of servicing rights based on the difference between the
carrying amount of the servicing rights and their current fair value. At June
30, 1997 and December 31, 1996, no allowance for impairment of the mortgage
servicing rights was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core (leverage) capital and risk-based
capital. In general, an institution's tangible capital, which must be at least
1.5% of adjusted total assets, is the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interest in equity accounts of fully consolidated subsidiaries, less
disallowed intangibles. An institution's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 3%. Core capital
generally is the sum of tangible capital plus certain qualifying intangibles.
Under the risk-based capital requirement, a savings bank must have total
capital (core capital plus supplementary capital) equal to at least 8% of
risk-weighted assets (which equals assets plus the credit risk equivalent of
certain off-balance sheet items, each multiplied by the appropriate risk
weight). Supplementary capital, which may not exceed 100% of core capital for
purposes of the riskbased requirements, includes, among other things, certain
permanent capital instruments such as qualifying cumulative perpetual
preferred stock, as well as some forms of term capital instruments, such as
qualifying subordinated debt. The capital requirements are viewed as minimum
standards by the OTS, and most institutions are expected to maintain capital
levels well above the minimum. In addition, the OTS regulations provide that
minimum capital levels higher than those provided in the regulations may be
established by the OTS for individual savings associations, depending upon
their particular circumstances. The Bank is not subject to any such individual
minimum regulatory capital requirement. These capital requirements are
applicable to the Bank but not to FN Holdings.
Page 38
<PAGE>
At June 30, 1997, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.63%, 5.63% and 11.72%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1997:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank at June 30, 1997 $2,278 $2,278 $2,278
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities
available for sale, net (53) (53) (53)
Non-qualifying loan-servicing rights (55) (55) (55)
Non-allowable capital:
REIT Preferred Stock in excess of 25%
of Tier 1 capital (80) (80) (80)
Intangible assets (698) (698) (698)
Goodwill Litigation Asset (100) (100) (100)
Investment in subsidiaries (50) (50) (50)
Excess deferred tax asset (60) (60) (60)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 102
General loan loss reserves -- -- 212
Assets required to be deducted:
Equity investments required to be deducted -- -- (27)
Land loans with more than
80% LTV ratio -- -- (1)
------ ------ ------
Regulatory capital of the Bank 1,682 1,682 1,968
Minimum regulatory capital requirement 448 897 1,344
Fully capitalized items -- -- 2
------ ------ ------
Excess above minimum capital requirement $1,234 $ 785 $ 622
====== ====== ======
Regulatory capital of the Bank 5.63% 5.63% 11.72%
Minimum regulatory capital requirement 1.50 3.00 8.00
---- ---- ------
Excess above minimum capital requirement 4.13% 2.63% 3.72%
==== ==== ======
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios is $29.9 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $16.8 billion.
The Bank is also subject to the provisions of the FDICIA, which, among
other things, define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions categorized
as "undercapitalized" or worse are subject to certain restrictions, including
the requirement to file a capital plan with the OTS, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by the OTS or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
Page 39
<PAGE>
To be considered "well capitalized," a savings institution must generally
have a core capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital
ratio of at least 10.00%. An institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2.00% or less. At June
30, 1997, the Bank's capital levels were sufficient for it to be considered
"well capitalized":
<TABLE>
<CAPTION>
Core Risk-based
-------------------------
Capital Tier 1 Total Capital
------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.63% 10.02% 11.72%
Well capitalized ratio 5.00 6.00 10.00
---- ----- -----
Excess above well capitalized ratio .63% 4.02% 1.72%
==== ===== =====
</TABLE>
OTS capital regulations allow a savings bank to include a net deferred
tax asset in regulatory capital, subject to certain limitations. To the extent
that the realization of a deferred tax asset depends on a savings bank's
future taxable income, such deferred tax asset is limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year or 10 percent of core capital. At June 30, 1997, $60 million of the net
tax benefit was determined to be attributable to the amount of taxable income
that may be realized in periods beyond one year. Accordingly, such amount has
been excluded from regulatory capital at June 30, 1997.
Page 40
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FN Holdings and California Federal are involved in legal proceedings on
claims incidental to the normal conduct of its business. Although it is
impossible to predict the outcome of any outstanding legal proceedings,
management believes that such legal proceedings and claims, individually or in
the aggregate, will not have a material effect on the financial condition or
results of operations of the Company.
In addition to legal proceedings within the normal course of business,
the Bank is the plaintiff in a claim against the United States in the lawsuit,
California Federal Bank v. United States, Civil Action No. 92-138C (the "Cal
Fed Litigation"). In the Cal Fed Litigation, which the Bank assumed in the Cal
Fed Acquisition, the Bank alleges, among other things, that the United States
breached certain contractual commitments regarding the computation of its
regulatory capital for which the Bank seeks damages and restitution. Cal Fed's
claims arose from changes, mandated by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for
computing regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United
States. The Supreme Court held that the government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which to date have not been awarded.
On October 30, 1996, Cal Fed filed a motion for partial summary judgment
as to the Federal government's liability to Cal Fed for breach of contract,
which has been opposed by the Federal government. In addition, the government
filed a cross-motion for partial summary judgment as to certain liability
issues on December 30, 1996. A hearing on the motions for partial summary
judgment on liability was held on August 7, 1997, at which time the judge took
the motions under advisement for a later ruling. Although the decision of the
Supreme Court has been rendered, a court may still determine that Cal Fed's
claims involve sufficiently different facts and/or legal issues as to render
the Winstar Cases inapplicable to the Cal Fed Litigation and thereby compel a
different conclusion from that of the Winstar Cases. The trial of the Bank's
case is currently expected to begin in late 1998.
In connection with the Cal Fed Acquisition, the Company recorded as an
asset the estimated after-tax cash recovery from the Cal Fed Litigation that
will inure to the Company, net of amounts payable to holders of the Litigation
Interests and the Secondary Litigation Interests (the "Goodwill Litigation
Asset"). The Goodwill Litigation Asset was recorded at its estimated fair
value of $100 million, net of estimated tax liabilities, as of January 3,
1997, and is included in the unaudited consolidated statement of financial
condition as of June 30, 1997.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Page 41
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Fifth Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Exhibit 3.1 to
Amendment No. 1 to the Registrant's Registration Statement
on Form S-1 (File No. 333- 21015).)
3.2 By-laws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-21015).)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended June 30, 1997, the Company made one filing
on Form 8-K:
1. Filing dated April 8, 1997, reporting on Item 5, "Other Events"
and Item 7, "Financial Statements, Pro Forma Financial
Information and Exhibits." This filing included the following
exhibit and financial statements:
Consent of Independent Auditors
Audited Consolidated Financial Statements of Cal Fed
Bancorp Inc. and its Subsidiaries for the year ended
December 31, 1996.
Page 42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Nationwide Holdings Inc.
/s/ Laurence Winoker
--------------------------------
By: Laurence Winoker
Vice President and Controller
(Signing on behalf of the Registrant and as the
Principal Accounting Officer)
August 13, 1997
Page 43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extraxted from the consolidated
financial statements of financial condition and operations found on pages
3 and 4 of the Company's Form 10-Q for the six months ended June 30, 1997.
</LEGEND>
<RESTATED>
<CIK> 0000928358
<NAME> FIRST NATIONWIDE HOLDINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 317,707
<INT-BEARING-DEPOSITS> 50,734
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,898,491
<INVESTMENTS-CARRYING> 1,543,242
<INVESTMENTS-MARKET> 1,543,242<F1>
<LOANS> 20,334,681
<ALLOWANCE> 400,501
<TOTAL-ASSETS> 30,925,372
<DEPOSITS> 16,657,905
<SHORT-TERM> 8,950,787
<LIABILITIES-OTHER> 809,431
<LONG-TERM> 2,652,356
0
88,884<F2>
<COMMON> 1
<OTHER-SE> 779,550
<TOTAL-LIABILITIES-AND-EQUITY> 30,925,372
<INTEREST-LOAN> 817,290
<INTEREST-INVEST> 223,298
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,040,588
<INTEREST-DEPOSIT> 374,787
<INTEREST-EXPENSE> 706,056
<INTEREST-INCOME-NET> 334,532
<LOAN-LOSSES> 39,900
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 324,475
<INCOME-PRETAX> 131,444
<INCOME-PRE-EXTRAORDINARY> 109,553
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,560<F3>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.55
<LOANS-NON> 240,167
<LOANS-PAST> 0
<LOANS-TROUBLED> 37,076
<LOANS-PROBLEM> 68,243
<ALLOWANCE-OPEN> 246,556
<CHARGE-OFFS> 32,243
<RECOVERIES> 2,468
<ALLOWANCE-CLOSE> 400,501<F4>
<ALLOWANCE-DOMESTIC> 6,909
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 393,592
<FN>
<F1> Loans includes Loans held for sale of $858,587 and Allowance for
loan losses of $400,501
<F2> Preferred excludes $486,458 in Minority interest for the preferred
stock of California Federal Bank and $500,000 in Minority interest for the
preferred stock of California Federal Preferred Capital Corporation
<F3> Net income available to common stockholders: $58,317
<F4> Allowance-close includes $143,820 related to loans acquired in the
Cal Fed Acquisition
</FN>
</TABLE>
