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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
COMMISSION FILE NUMBER 1-8007
FREMONT GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-2815260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2020 Santa Monica Blvd.
Santa Monica, California 90404
(Address of principal executive offices)
(Zip Code)
(310) 315-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required 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. Yes [X] No _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock:
SHARES OUTSTANDING
CLASS APRIL 30, 2003
Common Stock, $1.00 par value 75,734,000
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FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE
NO.
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 ...................... 3
Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002 ................ 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 ................ 5
Notes to Consolidated Financial Statements on Form 10-Q ..... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ... 22
ITEM 4. CONTROLS AND PROCEDURES ..................................... 23
PART II - OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 24
SIGNATURES ............................................................... 25
CERTIFICATIONS ........................................................... 26
2
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
ASSETS
Cash and cash equivalents ................................................... $ 184,554 $ 236,376
Investment securities available for sale at fair value ...................... 423,026 383,232
Loans receivable ............................................................ 3,944,305 3,976,695
Loans held for sale ......................................................... 1,801,560 1,673,145
Residual interests in securitized loans at fair value ....................... - 22,749
Accrued interest receivable ................................................. 27,536 28,529
Deferred income taxes ....................................................... 269,801 299,136
Other assets ................................................................ 67,278 48,794
----------- -----------
Total Assets ........................................................... $ 6,718,060 $ 6,668,656
=========== ===========
LIABILITIES
Deposits:
Savings accounts .......................................................... $ 1,000,276 $ 848,567
Money market deposit accounts ............................................. 308,103 254,857
Certificates of deposit:
Under $100,000 .......................................................... 2,344,223 2,355,571
$100,000 and over ....................................................... 1,347,932 1,086,728
----------- -----------
5,000,534 4,545,723
Federal Home Loan Bank ("FHLB") advances .................................... 725,000 1,175,000
Senior Notes due 2004 ....................................................... 67,273 71,560
Senior Notes due 2009 ....................................................... 188,741 188,658
Liquid Yield Option Notes due 2013 ("LYONs") ................................ 3,128 3,089
Other liabilities ........................................................... 117,361 111,095
Liability to discontinued insurance operations .............................. 71,409 74,514
----------- -----------
Total Liabilities ...................................................... 6,173,446 6,169,639
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company junior subordinated
debentures ("Preferred Securities") ....................................... 100,000 100,000
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share-- Authorized: 150,000,000 shares;
Issued and outstanding: (2003 - 75,734,000 and 2002 - 75,397,000) ......... 75,734 75,397
Additional paid-in capital .................................................. 290,851 288,508
Retained earnings ........................................................... 123,913 84,591
Deferred compensation ....................................................... (45,924) (49,542)
Accumulated other comprehensive income ...................................... 40 63
----------- -----------
Total Stockholders' Equity ............................................. 444,614 399,017
----------- -----------
Total Liabilities and Stockholders' Equity ............................. $ 6,718,060 $ 6,668,656
=========== ===========
See notes to consolidated financial statements.
3
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
--------- ---------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fee income on loans .......................................... $ 118,636 $ 99,377
Interest income on investment securities .................................. 2,497 1,022
--------- ---------
121,133 100,399
INTEREST EXPENSE:
Deposits .................................................................. 33,371 37,671
FHLB advances ............................................................. 4,847 1,574
Senior Notes, LYONs, Preferred Securities and other ....................... 7,710 9,064
--------- ---------
45,928 48,309
Net interest income ......................................................... 75,205 52,090
Provision for loan losses ................................................... 22,920 15,511
--------- ---------
Net interest income after provision for loan losses ......................... 52,285 36,579
NON-INTEREST INCOME:
Net gain on:
Sales of residential real estate loans .................................. 37,732 14,841
Sale of residual interests in securitizations ........................... 17,503 -
Sales of other whole loans .............................................. 4 26
Extinguishment of debt .................................................. 93 880
Other ................................................................... 5,922 3,409
--------- ---------
61,254 19,156
NON-INTEREST EXPENSE:
Compensation .............................................................. 25,234 15,642
Occupancy ................................................................. 2,857 2,063
Expenses and losses on real estate owned .................................. 2,584 1,415
Other ..................................................................... 12,038 6,915
--------- ---------
42,713 26,035
Income before income taxes .................................................. 70,826 29,700
Income tax expense .......................................................... 29,250 11,643
--------- ---------
Net income .................................................................. $ 41,576 $ 18,057
========= =========
PER SHARE DATA:
Net income:
Basic .................................................................. $ 0.60 $ 0.27
Diluted ................................................................ 0.56 0.25
CASH DIVIDENDS .............................................................. 0.03 0.02
WEIGHTED AVERAGE SHARES (IN THOUSANDS):
Basic .................................................................. 68,962 65,930
Diluted ................................................................ 74,590 71,018
See notes to consolidated financial statements.
4
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------ ------------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income ................................................................ $ 41,576 $ 18,057
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ............................................... 22,920 15,511
Net decrease in residual interests in securitized loans ................. 22,749 4,046
Extinguishment of Senior Notes .......................................... (4,316) (5,980)
Deferred income tax expense ............................................. 26,920 10,024
Depreciation and amortization ........................................... 4,398 3,550
Change in other assets and liabilities .................................. 10,767 (17,461)
------------ ------------
Net cash provided by operating activities ............................. 125,014 27,747
INVESTING ACTIVITIES
Loan originations and advances funded .................................... (3,068,525) (1,980,721)
Receipts from repayments and bulk sales of loans ......................... 2,935,749 1,660,763
Investment securities available for sale:
Purchases .............................................................. (350,001) (331,079)
Maturities or repayments ............................................... 310,166 303,979
Cash contributions to discontinued insurance operations .................. (3,313) (6,997)
Purchases of property and equipment ...................................... (4,351) (804)
------------ ------------
Net cash used in investing activities .................................. (180,275) (354,859)
FINANCING ACTIVITIES
Deposits accepted, net of repayments ...................................... 454,811 (75,495)
FHLB advances, net of repayments .......................................... (450,000) 396,000
Dividends paid ............................................................ (1,490) (2,813)
Decrease (increase) in deferred compensation plans ........................ 118 (2,315)
------------ ------------
Net cash provided by financing activities ............................... 3,439 315,377
Decrease in cash and cash equivalents ....................................... (51,822) (11,735)
Cash and cash equivalents at beginning of year ............................ 236,376 151,204
------------ ------------
Cash and cash equivalents at end of year .................................... $ 184,554 $ 139,469
============ ============
See notes to consolidated financial statements
5
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON FORM 10-Q
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
These statements have been prepared in accordance with accounting
principles generally accepted in the United States and, accordingly, adjustments
(consisting of normal accruals) have been made as management considers necessary
for fair presentations. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002. Certain 2002 amounts have
been reclassified to conform to the 2003 presentation.
NOTE B - LOANS RECEIVABLE
Loans receivable consist of commercial and residential real estate loans
and syndicated commercial loans. Commercial real estate loans, which are
primarily variable rate, represent loans secured primarily by first mortgages on
properties such as office, retail, industrial, lodging, multi-family and
commercial mixed-use properties. Commercial real estate loans are reported net
of participations to other financial institutions or investors in the amount of
$115.1 million and $93.2 million as of March 31, 2003 and December 31, 2002,
respectively. Residential real estate loans have loan terms for up to thirty
years and are generally secured by first deeds of trust on single-family
residences. Syndicated commercial loans are commercial variable rate senior
loans and are generally secured by substantially all of the assets of the
borrower.
Loans held for sale consist solely of residential real estate loans which
are aggregated prior to their sale and are carried at the lower of aggregate
amortized cost or market.
NOTE C - DEPOSITS AND FHLB ADVANCES
Certificates of deposit as of March 31, 2003 are detailed by maturity and
rates as follows (thousands of dollars):
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
----------- ----------- ------------
$ 3,323,988 2004 2.39%
219,439 2005 4.22%
65,473 2006 5.34%
32,897 2007 5.65%
2,201 2008 4.73%
48,157 2009 5.38%
-----------
$ 3,692,155
===========
Of the total certificates of deposit at March 31, 2003, $1,104.9 million
were obtained through brokers.
6
The Federal Home Loan Bank ("FHLB") advances are collateralized by loans
pledged to the FHLB. The following table details the FHLB amounts outstanding at
March 31, 2003 by maturities and rates (thousands of dollars):
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
--------- ----------- --------------
$ 340,000 2004 2.20%
385,000 2005 3.21%
---------
$ 725,000
=========
NOTE D - DISCONTINUED INSURANCE OPERATIONS
In December 2002, the Company accrued a charge for all of the potential
future cash contributions to its discontinued workers' compensation, reinsurance
and life insurance businesses. These future contributions include both mandatory
and contingent capital contributions as per the Company's July 2002 agreement
with the California Department of Insurance ("DOI"). At December 31, 2002, the
total amount of these future contributions was $79.5 million ($74.5 million
present value), payable ratably at $13.25 million annually over a period of six
years. The $79.5 million commitment represents the Company's maximum amount of
liability for cash contributions to its discontinued insurance operations under
the agreement with the DOI. At March 31 2003, the remaining amount of these
future cash contributions is $76.2 million ($71.4 million present value).
The assets and liabilities of the discontinued insurance operations are
excluded from the accompanying Consolidated Balance Sheet because the Company no
longer has effective control of these operations whose activities are done at
the consent and under the direction of the DOI.
NOTE E - GAIN ON EXTINGUISHMENT OF DEBT
The Company extinguished debt that resulted in gains that are included in
non-interest income in the accompanying Consolidated Statement of Operations.
Prior period gains have been reclassified from an extraordinary item to conform
to this new presentation. The gains are summarized in the following table:
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------- -------
(THOUSANDS OF DOLLARS)
7.70% SENIOR NOTES DUE 2004:
Par Value of debt extinguished .............................................. $ 4,316 $ 5,980
Pre-tax gain on extinguishment .............................................. 93 880
7
NOTE F - TOTAL COMPREHENSIVE INCOME
The components of total comprehensive income are summarized in the
following table:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
-------- --------
(THOUSANDS OF DOLLARS)
Net income .................................................................. $ 41,576 $ 18,057
Other comprehensive loss:
Net change in unrealized gains during the period .......................... (41) (57)
Less deferred income tax benefit .......................................... 18 20
-------- --------
Other comprehensive loss .............................................. (23) (37)
-------- --------
Total comprehensive income ................................................. $ 41,553 $ 18,020
======== ========
NOTE G - OPERATIONS BY REPORTABLE SEGMENT
The Company's business is engaged in four reportable segments: commercial
real estate; residential real estate; syndicated commercial and retail banking.
Additionally, there are certain corporate revenues and expenses, comprised
primarily of investment income, interest expense and certain general and
administrative expenses, that are not allocated to the reportable segments.
The following data for the three months ended March 31, 2003 and 2002
provide certain information related to the reportable segment disclosure.
Intersegment eliminations relate to the credit allocated to retail banking for
operating funds provided to the other three reportable segments.
COMMERCIAL RESIDENTIAL SYNDICATED RETAIL INTERSEGMENT TOTAL
REAL ESTATE REAL ESTATE COMMERCIAL BANKING CORPORATE ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------- --------- ------------ ------------
(THOUSANDS OF DOLLARS)
Three months ended March 31, 2003
Total revenues ................... $ 76,495 $ 103,134 $ 11 $ 37,955 $ 2,599 $ (37,807) $ 182,387
Net interest income .............. 47,298 28,930 (168) 4,436 (5,291) - 75,205
Income before income taxes ....... 10,317 77,685 2,230 (92) (19,314) - 70,826
Three months ended March 31, 2002
Total revenues ................... $ 71,973 $ 43,837 $ 1,407 $ 41,453 $ 2,239 $ (41,354) $ 119,555
Net interest income .............. 38,219 16,029 673 3,683 (6,514) - 52,090
Income before income taxes ....... 19,494 24,201 (950) (91) (12,954) - 29,700
8
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2003 and 2002:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income
(numerator for basic earnings per share) ................................. $ 41,576 $ 18,057
Effect of dilutive securities:
LYONs .................................................................... 23 32
-------- --------
Net income available to common
stockholders after assumed conversions
(numerator for diluted earnings per share) ............................... $ 41,599 $ 18,089
======== ========
Weighted-average shares
(denominator for basic earnings per share) ............................... 68,962 65,930
Effect of dilutive securities:
Restricted stock ......................................................... 5,423 4,795
LYONs .................................................................... 205 293
-------- --------
Dilutive potential common shares ........................................... 5,628 5,088
-------- --------
Adjusted weighted-average shares and assumed
conversions (denominator for diluted earnings per share) ................. 74,590 71,018
======== ========
Basic earnings per share ................................................... $ 0.60 $ 0.27
======== ========
Diluted earnings per share ................................................. $ 0.56 $ 0.25
======== ========
NOTE I - NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" that
amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148
provides alternative methods of transition to the fair value method of
accounting for stock-based employee compensation. The statement also amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company believes that the impact of this new standard on the Company's
financial position and results of operations will be consistent with the SFAS
No. 123 pro forma disclosure.
9
NOTE J - SUBSEQUENT EVENT
On May 7, 2003, the Company repurchased an additional $45.0 million in par
value of its 7.7% senior notes outstanding. These notes were repurchased at par
value and the outstanding par value of the 7.7% senior notes due in 2004 has now
been reduced to $22.4 million. The Company has extinguished a total of $211.9
million in par value of its original $425 million par value in senior notes
outstanding.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements and the currently reported results are based upon the current
expectations and beliefs of Fremont General Corporation ("Fremont") and its
subsidiaries (combined "the Company") concerning future developments and their
potential effects upon the Company. These statements and the Company's results
reported herein are not guarantees of future performance or results and there
can be no assurance that actual developments and economic performance will be as
anticipated by the Company. Actual developments and/or results may differ
significantly and adversely from the Company's expected results as a result of
significant risks, uncertainties and factors beyond the Company's control (as
well as the various assumptions utilized in determining the Company's
expectations) which include, but are not limited to, the following:
o the variability of general and specific economic conditions and
trends, and changes in, and the level of, interest rates;
o the impact of competition and pricing environments on loan and deposit
products and the resulting effect upon the Company's net interest
margin and net gain on sale;
o changes in the Company's ability to originate loans, and any changes
in the cost and volume of loans originated as a result;
o the ability to access the necessary capital resources in a
cost-effective manner to fund loan originations and the condition of
the whole loan sale and securitization markets;
o the ability of the Company to sell or securitize the residential real
estate loans it originates, the pricing of existing and future loans,
and the net premiums realized upon the sale of such loans;
o the ability of the Company to sell certain of the commercial real
estate loans and foreclosed real estate in its portfolio and the net
proceeds realized upon the sale of such;
o the impact of changes in the commercial and residential real estate
markets, and changes in the fair values of the Company's assets and
loans, including the value of the underlying real estate collateral;
o the ability to collect and realize the amounts outstanding, and the
timing thereof, of loans and foreclosed real estate, and the
variability in determining the level of the allowance for loan losses;
o the effect of certain determinations or actions taken by, or the
inability to secure regulatory approvals from, the Federal Deposit
Insurance Corporation, the Department of Financial Institutions of the
State of California or other regulatory bodies on various matters;
o the ability of the Company to maintain cash flow sufficient for it to
meet its debt service and other obligations;
11
o the impact and cost of adverse state and federal legislation and
regulations, litigation, court decisions and changes in the judicial
climate;
o the ability of the Company to utilize the net operating loss
carryforwards currently held and the impact of changes in federal and
state tax laws and interpretations, including tax rate changes, and
the effect of any adverse outcomes from the resolution of issues with
taxing authorities;
o the ability of the Company to meet its contribution and other
obligations as set forth in its July 2002 agreement with the
California Department of Insurance regarding its discontinued
insurance operations and the impact in enforcing its rights under the
agreement; and
o other events, risks and uncertainties discussed elsewhere in this Form
10-Q and from time to time in Fremont's other reports, press releases
and filings with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly update such
forward-looking statements.
GENERAL
Fremont General Corporation ("Fremont" or when combined with its
subsidiaries "the Company") is a financial services holding company. The
Company's financial services business is consolidated within Fremont General
Credit Corporation ("FGCC"), which is engaged in commercial and residential real
estate lending nationwide through its California-chartered industrial bank
subsidiary, Fremont Investment & Loan ("FIL"). Additionally, there are certain
corporate revenues and expenses, comprised primarily of investment income,
interest expense and certain general and administrative expenses, which are not
allocated by Fremont to FGCC or to the discontinued insurance operations.
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto presented under Item 1, and
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
12
RESULTS OF OPERATIONS
The Company reported net income of $41,576,000 for the first quarter of
2003. This is compared to net income of $18,057,000 for the first quarter of
2002. The following table presents a summary of the Company's income before
income taxes and net income for the quarterly periods ended March 31, 2003 and
2002, respectively:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
--------- ---------
(THOUSANDS OF DOLLARS)
Income (loss) before income taxes:
Financial services ........................................................ $ 87,724 $ 42,186
Unallocated corporate interest and other expenses ......................... (16,898) (12,486)
--------- ---------
Income before income taxes .................................................. 70,826 29,700
Income tax expense .......................................................... (29,250) (11,643)
--------- ---------
Net income .................................................................. $ 41,576 $ 18,057
========= =========
The Company's financial services operation recorded income before taxes of
$87.7 million for the first quarter of 2003 as compared to $42.2 million for the
first quarter of 2002. This increase in financial services pre-tax income for
the first quarter of 2003, which represents an 108% increase over the results
for the first quarter of 2002, is the primary reason for the increase in net
income during the first quarter of 2003, offset to a lesser degree by increases
in the amount of unallocated corporate interest and other expense and in income
tax expense. See "Financial Services Operation" for further discussion regarding
the financial services operation's results.
The unallocated corporate interest and other expense loss before taxes for
the quarter ended March 31, 2003, was $16.9 million as compared to $12.5 million
for the same quarter in 2002. The increase for the first quarter of 2003, as
compared to the first quarter of 2002, is substantially due to the net effect of
the following: during the first quarter of 2003 the Company incurred a write-off
of intercompany receivables from the discontinued insurance operation in the
amount of $2.3 million and $1.7 million in higher compensation expense,
primarily incentive related, offset by lower interest expense of $1.4 million
and $1.1 million in interest income from a tax refund; during the first quarter
of 2002, the Company had a reduction of $1.7 million in the amount of
compensation expense, primarily due to cash received from forfeited shares in
the Company's incentive compensation plan, and an additional $800,000 in gain
from the extinguishment of debt.
13
During the quarter ended March 31, 2003, the Company extinguished $4.3
million in principal amount of its publicly traded 7.70% Senior Notes due 2004
and recognized a pre-tax gain of $93,000.
Income tax expense of $29.3 million and $11.6 million for the quarters
ended March 31, 2003 and 2002, respectively, represents effective tax rates of
41.3% and 39.2%, respectively, on income before income taxes of $70.8 million
and $29.7 million for the same respective periods. The effective tax rates for
both periods presented are different than the federal enacted tax rate of 35%,
due mainly to various state income tax provisions within the Company's financial
services operation.
FINANCIAL SERVICES OPERATION
The following table summarizes the Company's financial services operation's
earnings for the respective quarters indicated:
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
--------- ---------
(THOUSANDS OF DOLLARS)
FINANCIAL SERVICES
Interest and fee income on loans ............................................ $ 118,636 $ 99,377
Interest income on investment securities .................................... 1,146 723
--------- ---------
Total interest income .................................................... 119,782 100,100
Interest expense ............................................................ 38,238 39,261
--------- ---------
Net interest income ...................................................... 81,544 60,839
Provision for loan losses ................................................... 22,920 15,511
--------- ---------
Net interest income after provision for loan losses ...................... 58,624 45,328
Net gain on sales of residential real estate loans .......................... 37,732 14,841
Net gain on sale of residual interests in securitizations ................... 17,503 -
Other non-interest income ................................................... 5,926 3,105
Operating expenses .......................................................... (32,061) (21,088)
--------- ---------
Income before income taxes .................................................. $ 87,724 $ 42,186
========= =========
The Company's financial services operation recorded income before taxes of
$87.7 million for the first quarter of 2003 as compared to $42.2 million for the
first quarter of 2002. The increase in income before taxes for the first quarter
of 2003 represents an 108% increase over the results for the first quarter of
2002 and is a result of significantly increased levels of net interest income
and net gain on the sale of residential real estate loans, a $17.5 million gain
on the sale of residual interests in securitizations, offset by a higher
provision for loan losses and operating expenses. The net interest income for
the first quarter of 2003 was $81.5 million as compared to $60.8 million for the
first quarter of 2002. The increase in net interest income is primarily a result
of an increase in the net interest
14
income margin (net interest income as a percentage of average interest-earning
assets). The net interest income margin improved to an annualized 5.29% for the
first quarter of 2003 from 4.98% for the first quarter of 2002. The net gain on
the sale of residential real estate loans, net of reductions in the carrying
valuations of loans held for sale, increased from $14.8 million in the first
quarter of 2002 to $37.7 million for the first quarter of 2003. This increase is
primarily attributable to a significant increase in the volume of loans sold in
the two comparable quarters. A total of $2.18 billion in loans were sold during
the first quarter of 2003, as compared to loan sales of $896.8 million during
the first quarter of 2002. The net gain percentage (net gain after allocated
costs divided by net whole loan sales) on these sales increased from 1.65% in
the first quarter of 2002 to 1.73% in the first quarter of 2003. The provision
for loan losses increased to $22.9 million for the first quarter of 2003 as
compared to $15.5 million for the first quarter of 2002. The Company's net loans
receivable (excluding loans held for sale), before the allowance for loan
losses, were approximately $4.12 billion at March 31, 2003, as compared to $4.14
billion and $3.88 billion at December 31, 2002 and March 31, 2002, respectively.
The Company's residential real estate loans held for sale have increased from
$1.03 billion at March 31, 2002 to $1.80 billion at March 31, 2003; this
increase is reflective of a significant increase in loan production volume -
during the first quarter of 2002, residential real estate loan originations
totaled $1.33 billion as compared to $2.33 billion for the first quarter of
2003.
The following table shows loans receivable outstanding (excluding loans
held for sale) in the various financing categories as of the dates indicated:
15
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
Commercial real estate loans:
Bridge .................................................................... $ 1,743,880 $ 1,712,085 $ 1,501,953
Permanent ................................................................. 1,370,319 1,393,427 1,351,525
Construction .............................................................. 364,665 328,974 318,077
Single tenant credit ...................................................... 292,298 296,787 305,394
----------- ----------- -----------
3,771,162 3,731,273 3,476,949
Residential real estate loans ............................................... 349,755 392,061 346,723
Syndicated commercial loans ................................................. 13,519 26,216 67,010
Other - consumer loans ...................................................... 4,221 4,272 3,703
----------- ----------- -----------
4,138,657 4,153,822 3,894,385
Deferred fees and costs ..................................................... (19,190) (15,937) (10,069)
----------- ----------- -----------
Loans receivable before allowance for loan losses ......................... 4,119,467 4,137,885 3,884,316
Allowance for loan losses ................................................... (175,162) (161,190) (114,076)
----------- ----------- -----------
Loans receivable, net of allowance for loan losses ........................ $ 3,944,305 $ 3,976,695 $ 3,770,240
=========== =========== ===========
Residential real estate loans held for sale ................................. $ 1,801,560 $ 1,673,145 $ 1,032,923
=========== =========== ===========
As of March 31, 2003, approximately 45% of the Company's commercial real
estate loans outstanding were secured by properties located within California;
no other state represented greater than 8% of the loan portfolio. The Company's
largest single commercial real estate loan outstanding at March 31, 2003 was
$53.1 million; this loan has a total loan commitment of $67.9 million, however,
it is cross-collateralized and cross-defaulted with another loan with the same
investment fund on a related real estate project. The combined loan principal
outstanding and total loan commitment of these two loans at March 31, 2003 is
$67.1 million and $81.9 million, respectively. The Company's largest net
commitment for a single loan at March 31, 2003 was $82.5 million; this
represents the maximum loan amount to the borrower. In addition, the portfolio
has one concentration by common investor or sponsor that is in excess of $75
million in loan principal outstanding. This concentration, which totals $101.2
million in loan principal outstanding and $130.4 million in total loan
commitment at March 31, 2003, is from one investment fund (common advisor) and
is comprised of fourteen separate loans, each of which was performing as of
March 31, 2003.
The following table stratifies the commercial real estate portfolio by loan
amounts outstanding as of March 31, 2003 (in thousands of dollars, except
percents and number of loans):
16
NUMBER TOTAL LOANS
LOAN SIZE RANGE OF LOANS OUTSTANDING %
--------------------------- -------- ----------- ---
$0 - $5 million .......................................... 384 $ 746,274 20%
> $5 million - $10 million ............................... 115 824,336 22%
> $10 million - $15 million .............................. 49 604,459 16%
> $15 million - $20 million .............................. 29 495,918 13%
> $20 million - $30 million .............................. 23 587,707 16%
> $30 million - $40 million .............................. 11 371,256 10%
> $40 million - $50 million .............................. 2 88,110 2%
> $50 million ............................................ 1 53,102 1%
-------- ----------- ---
614 $ 3,771,162 100%
======== =========== ===
The following table identifies the interest income, interest expense,
average interest-earning assets and interest-bearing liabilities, and net
interest margins for the Company's financial services operation for the periods
indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST (1) BALANCE INTEREST COST (1)
----------- --------- ------- ----------- --------- -------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest-earning assets (2) :
Commercial real estate loans ........... $ 3,748,651 $ 73,974 8.00% $ 3,502,364 $ 71,152 8.24%
Residential real estate loans (3) ...... 2,305,668 44,651 7.85 1,250,870 26,881 8.72
Syndicated commercial loans ............ 22,373 11 0.20 97,009 1,344 5.62
Investment securities .................. 178,470 1,146 2.60 101,919 723 2.88
----------- --------- ----------- ---------
Total interest-earning assets ........ $ 6,255,162 $ 119,782 7.77% $ 4,952,162 $ 100,100 8.20%
=========== ========= =========== =========
Interest-bearing liabilities:
Time deposits .......................... $ 3,658,492 $ 26,506 2.94% $ 3,195,323 $ 30,745 3.90%
Savings deposits ....................... 1,212,769 6,865 2.30 998,451 6,926 2.81
Debt with FHLB ......................... 720,344 4,847 2.73 272,278 1,574 2.34
Other .................................. 4,289 20 1.89 3,300 16 1.97
----------- --------- ----------- ---------
Total interest-bearing liabilities ... $ 5,595,894 $ 38,238 2.77% $ 4,469,352 $ 39,261 3.56%
=========== ========= =========== =========
Net interest income ...................... $ 81,544 $ 60,839
========= ========
Percent of average interest-earning
assets(1):
Interest income ...................... 7.77% 8.20%
Interest expense ..................... 2.48% 3.22%
-------- -------
Net interest margin .................. 5.29% 4.98%
======== =======
-----------------------
(1) Annualized.
(2) Average loan balances include non-accrual loan balances and exclude residual interests in securitized loans.
(3) Includes loans held for sale and other consumer loans.
17
The Company's net interest margin as a percentage of average
interest-earning assets increased to 5.29% in the first quarter of 2003 as
compared to 4.98% for the first quarter of 2002. The increase in the Company's
net interest margin is due primarily to higher net spreads between the
commercial and residential real estate loans yields and the effective cost of
funds employed to fund these assets as the interest yields on deposits and
Federal Home Loan Bank ("FHLB") borrowings declined on a quarter-to-quarter
comparison more than the yields on commercial and residential real estate loans
did. This is due in part to the presence of interest rate floors (in which the
total of the variable base rate, such as six-month LIBOR, plus the related
spread on a commercial real estate loan will not contractually drop below a
certain absolute level, such as 7%) on a significant number of the Company's
commercial real estate loans, as well as various economic and market factors.
The following tables report the non-performing asset classifications,
accruing loans past due 90 days or more, loan loss experience and allowance for
loan losses reconciliation of the financial services operation as of or for the
respective periods ended:
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Non-accrual loans receivable:
Commercial real estate loans .............................................. $ 57,970 $ 70,031 $ 96,152
Residential real estate loans - portfolio ................................. 6,605 5,600 3,516
Residential real estate loans - held for sale ............................. 5,670 6,709 20,291
Syndicated commercial loans ............................................... 6,854 11,239 10,200
Other ..................................................................... - - 116
--------- --------- ---------
77,099 93,579 130,275
Real estate owned ("REO"):
Commercial real estate loans .............................................. 25,477 10,598 31,519
Residential real estate loans - portfolio ................................. 563 315 269
Residential real estate loans - held for sale ............................. 855 2,850 5,306
--------- --------- ---------
26,895 13,763 37,094
--------- --------- ---------
Total non-performing assets ("NPA") ......................................... $ 103,994 $ 107,342 $ 167,369
========= ========= =========
Accruing loans past due 90 days or more:
Commercial real estate loans .............................................. $ 11,571 $ - $ 36,550
Residential real estate loans ............................................. - - -
Other ..................................................................... - - -
--------- --------- ---------
$ 11,571 $ - $ 36,550
========= ========= =========
NPA to total loans receivable, loans held for sale ("HFS") and REO .......... 1.75% 1.84% 3.38%
Accruing loans past due 90 days or more to total loans receivable and HFS ... 0.20% 0.00% 0.74%
18
MARCH 31,
-------------------------
2003 2002
--------- ---------
(THOUSANDS OF DOLLARS)
Beginning allowance for loan losses ........................................ $ 161,190 $ 104,179
Provision for loan losses .................................................. 22,920 15,511
Charge-offs:
Commercial real estate loans ............................................. (8,622) (3,608)
Residential real estate loans ............................................ (170) (35)
Syndicated commercial loans .............................................. (199) (1,979)
Other-consumer ........................................................... - -
--------- ---------
Total charge-offs ...................................................... (8,991) (5,622)
--------- ---------
Recoveries:
Commercial real estate loans ............................................. - 1
Residential real estate loans ............................................ 34 -
Syndicated commercial loans .............................................. 9 -
Other-consumer ........................................................... - 7
--------- ---------
Total recoveries ....................................................... 43 8
--------- ---------
Net charge-offs ............................................................ (8,948) (5,614)
--------- ---------
Ending allowance for loan losses ........................................... $ 175,162 $ 114,076
========= =========
Allowance for loan losses to total loans receivable ........................ 4.25% 2.94%
Net loan charge-offs to average total loans
receivable (excluding HFS)* ............................................. 0.87% 0.58%
* Annualized
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Allocation of allowance for loan losses:
Commercial real estate loans .............................................. $ 164,279 $ 147,228 $ 100,131
Residential real estate loans ............................................. 7,449 7,844 10,731
Syndicated commercial loans ............................................... 3,434 6,118 3,224
Other-consumer ............................................................ - - (10)
--------- --------- ---------
Total allowance for loan losses ......................................... $ 175,162 $ 161,190 $ 114,076
========= ========= =========
Non-performing assets decreased to $104.0 million, or 1.75% of total loans
receivable, loans held for sale and real estate owned at March 31, 2003, from
$107.3 million or 1.84% at December 31, 2002 and $167.4 million or 3.38% at
March 31, 2002. Accruing loans 90 days or greater past due totaled $11.6 million
at March 31, 2003 and include loans that are contractually past maturity, but
continue to make full interest payments. The level of non-performing assets
fluctuates and specific loans can have a material impact upon the total. During
the first quarter of 2003, there was one loan restructured as to its terms and
included in accrual status at March 31, 2003. The total loan principal
19
outstanding under this one loan was $8.9 million at March 31, 2003 and the
Company incurred a $139,000 charge-off related to the restructuring of the loan
during the first quarter of 2003. During the first quarter of 2002, there were
five commercial real estate loans, with a total outstanding balance of $103.2
million at March 31, 2002, that were restructured and included in accrual
status. Of the five loans restructured during the first quarter of 2002, three
(total balance of $56.4 million) were paid off in full during the second quarter
of 2002, and two (total balance of $46.8 million) remained on accrual status as
of March 31, 2003. The Company incurred $559,000 in charge-offs related to the
restructuring of the five loans during the first quarter of 2002.
The provision for loan losses for the first quarter of 2003 increased to
$22.9 million, as compared to $15.5 million in the first quarter of 2002. The
allowance for loan losses, as a percentage of total loans receivable, excluding
loans held for sale, increased to 4.25% as of March 31, 2003, as compared to
2.94% at March 31, 2002. The increase in the provision for loan losses during
the first quarter of 2003, as compared to the first quarter of 2002, is
primarily due to an increased level of net loan charge-offs in the first quarter
of 2003 and a small amount of growth in the total loan portfolio. Net
charge-offs in the first quarter of 2003 totaled $8.9 million, as compared to
$5.6 million for the first quarter of 2002. The total increase is a result of an
increase of $5.0 million in net charge-offs for commercial real estate loans,
offset by $1.8 million less in syndicated commercial loan net charge-offs. The
increase in net charge-offs for commercial real estate loans during 2003
primarily is a reflection of the effect of a contracted economic environment.
During the first quarter of 2003, the Company sold all of its residual
interests in its three securitizations of residential real estate loans for
$40.2 million in cash to an unaffiliated third party. The Company recognized a
pre-tax gain on the sale of $17.5 million during the first quarter of 2003.
20
LIQUIDITY AND CAPITAL RESOURCES
FIL finances its lending activities primarily through Federal Deposit
Insurance Corporation ("FDIC") insured customer deposits, which totaled $5.0
billion at March 31, 2003. FIL is also eligible for financing through the
Federal Home Loan Bank of San Francisco ("FHLB"), which financing is available
at various rates and terms. At March 31, 2003, FIL had borrowing availability
with the FHLB of $1.39 billion, of which $725 million was borrowed and
outstanding. In addition, FIL has a line of credit with the Federal Reserve Bank
of San Francisco ("FRB") with a borrowing availability of $161.2 million at
March 31, 2003. There were no amounts outstanding under the line of credit with
the FRB at March 31, 2003. The FDIC has established certain capital and
liquidity standards for its member institutions, and FIL was in compliance with
these standards as of March 31, 2003. The Company believes it has sufficient
liquidity and capital resources to fund its financial services operation for the
foreseeable future.
As a holding company, Fremont pays its operating expenses, interest expense
and stockholders' dividends, and meets its other obligations primarily from its
cash on hand and intercompany-tax payments from FIL. Dividends of $1.5 and $2.8
million were paid on Fremont's common stock in the quarters ending March 31,
2003 and 2002, respectively; however, the Company can give no assurance that
future common stock dividends will be declared. Fremont is obligated under an
agreement with the California Department of Insurance to make certain cash
contributions to its discontinued workers' compensation insurance subsidiary.
The total amount of these future contributions is $76.2 million as of March 31,
2003, payable quarterly at a rate of $13.25 million per year through 2008. The
present value of these contributions has been accrued for and a liability of
$71.4 million is reflected on the Company's consolidated balance sheets.
Fremont has available to it significant federal tax net operating loss
carryforwards, which may be utilized to reduce or eliminate future tax payments.
As a result, intercompany payments of federal tax obligations from FIL, which
would otherwise be payable to taxing authorities, are available for use by
Fremont for general working capital purposes, including the extinguishment of
debt. The Company currently pays various state taxes, primarily California
Franchise Taxes, as there are no significant state net operating loss
carryforwards available to it for offset. The Company's discontinued insurance
operations are generally subject to state premium taxes, and not income taxes,
and thus no significant state net operating loss carryforwards were generated.
The Company has certain California Franchise Tax issues pending resolution. The
Company does not believe that the ultimate outcome of these
21
matters, which are expected to take several years to resolve, will have a
material effect on the Company's financial position or liquidity.
Fremont has cash and short term investments of $61.3 million at March 31,
2003 and no debt maturities until March of 2004 and believes that, with its
other available sources of liquidity, it will have sufficient means to satisfy
its liquidity needs for at least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk resulting primarily from fluctuations
in interest rates arising from balance sheet financial instruments such as
investments, loans and debt. Changes in interest rates will affect the Company's
net investment income, loan interest, net gain on the sale of residential real
estate loans, interest expense and total stockholders' equity. The level of net
gain on the sale of residential real estate loans is highly dependent upon the
level of loan origination volume and the net premium paid by the purchasers of
such loans. Both the volume and net premium, in turn, are highly dependent upon
changes in, and the level of, interest rates and other economic factors. The
Company may experience a decrease in the amount of net gain it realizes should
significant interest rate increases occur or if other economic factors have a
negative impact on the value and volume of the loans the Company originates. The
objective of the Company's asset and liability management activities is to
provide the highest level of net interest and investment income and to seek cost
effective sources of capital, while maintaining acceptable levels of interest
rate and liquidity risk.
As part of its residential real estate mortgage banking operations, the
Company enters into commitments to originate loans ("interest rate lock
commitments"), which represent commitments that have been extended by the
Company, generally for the period of 30 days, at a stated interest rate to its
potential borrowers. The Company determined that its interest rate lock
commitments have met the definition of derivatives under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"; however, the
impact of the change in fair value of such derivative instruments is not
material to the Company's results of operations. Typically, the Company hedges
the risk of overall changes in the fair value for its loans held for sale
through entering into forward loan sale commitments.
Quantitative and qualitative disclosures about the Company's market risk
are included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002. There have
22
been no material changes in such risks or in the Company's asset and liability
management activities during the three months ended March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, the Company evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures. The
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"). Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2003. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2003 through the
date of the filing of this Form 10-Q.
23
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q, for the period ended June 30, 1998,
Commission File Number 1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of Fremont
General Corporation. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1998, Commission File Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 2000,
Commission File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between
the Registrant and Bankers Trust Company. (Incorporated by reference
to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3
filed on October 1, 1993, Registration Number 33-68098.)
4.3 Indenture among the Registrant, the Trust and Bank of New York
(originated with First Interstate Bank of California), a New York
Banking Corporation, as trustee. (Incorporated by reference to Exhibit
4.3 to the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007.)
4.4 Amended and Restated Declaration of Trust among the Registrant, the
Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking
corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A.,
a national banking association, as Institutional Trustee.
(Incorporated by reference to Exhibit 4.5 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.5 Preferred Securities Guarantee Agreement between the Registrant and
The Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee. (Incorporated by reference to Exhibit 4.6
to the Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant. (Incorporated
by reference to Exhibit 4.7 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated
by reference to Exhibit 4.8 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
On April 29, 2003 the Company filed a Current Report on Form 8-K
furnishing Regulation FD Disclosure under Item 9 to report its results
of operations for the first quarter of 2003.
24
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.
FREMONT GENERAL CORPORATION
Date: May 14, 2003 /s/ LOUIS J. RAMPINO
----------------------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: May 14, 2003 /s/ PATRICK E. LAMB
----------------------------------------
Patrick E. Lamb, Senior Vice President,
Controller and Chief Accounting Officer
(Principal Accounting Officer)
25
CERTIFICATIONS
I, James A. McIntyre, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fremont General
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b.) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b.) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ JAMES A. McINTYRE
-----------------------
James A. McIntyre
Chairman of the Board and Chief Executive Officer
26
I, Wayne R. Bailey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fremont General
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b.) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b.) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ WAYNE R. BAILEY
--------------------
Wayne R. Bailey
Executive Vice President, Treasurer and
Chief Financial Officer
27
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q, for the period ended June 30, 1998,
Commission File Number 1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of Fremont
General Corporation. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1998, Commission File Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 2000,
Commission File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between
the Registrant and Bankers Trust Company. (Incorporated by reference
to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3
filed on October 1, 1993, Registration Number 33-68098.)
4.3 Indenture among the Registrant, the Trust and Bank of New York
(originated with First Interstate Bank of California), a New York
Banking Corporation, as trustee. (Incorporated by reference to Exhibit
4.3 to the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007.)
4.4 Amended and Restated Declaration of Trust among the Registrant, the
Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking
corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A.,
a national banking association, as Institutional Trustee.
(Incorporated by reference to Exhibit 4.5 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.5 Preferred Securities Guarantee Agreement between the Registrant and
The Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee. (Incorporated by reference to Exhibit 4.6
to the Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant. (Incorporated
by reference to Exhibit 4.7 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated
by reference to Exhibit 4.8 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.