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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, 2005
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 001-08007
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.)
2425 Olympic Boulevard
Santa Monica, California 90404
(Address of principal executive offices)
(Zip Code)
(310) 315-5500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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, 2005
Common Stock, $1.00 par value 77,837,000
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FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004 .... 3
Consolidated Statements of Income
Three Months Ended March 31, 2005 and 2004
(Unaudited) ......................................... 4
Consolidated Statements of Changes in Stockholders'
Equity March 31, 2005 and 2004 (Unaudited) .......... 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
(Unaudited) ......................................... 6
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2005 and 2004
(Unaudited) ......................................... 7
Notes to Consolidated Financial Statements
(Unaudited) ......................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 36
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ......................................... 56
Item 4. Controls and Procedures ............................... 58
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 59
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds ..................................... 60
Items 3-5. Not applicable.
Item 6. Exhibits .............................................. 60
Signatures ....................................................... 62
2
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
------------ -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
ASSETS
Cash and cash equivalents ................................................... $ 712,169 $ 904,975
Investment securities classified as available for sale at fair value ........ 1,130 1,236
Federal Home Loan Bank ("FHLB") stock at cost ............................... 127,091 77,127
Loans held for sale - net ................................................... 6,091,751 5,454,692
Loans held for investment - net ............................................. 3,647,437 3,313,089
Mortgage servicing rights - net ............................................. 20,734 18,002
Residual interests in securitized loans at fair value ....................... 12,449 15,774
Accrued interest receivable ................................................. 35,170 34,121
Real estate owned ........................................................... 21,921 23,922
Premises and equipment - net ................................................ 57,011 54,347
Deferred income taxes ....................................................... 147,414 155,529
Other assets ................................................................ 83,322 53,182
------------ ------------
TOTAL ASSETS .............................................................. $ 10,957,599 $ 10,105,996
============ ============
LIABILITIES
Deposits:
Savings accounts .......................................................... $ 1,275,443 $ 1,283,223
Money market deposit accounts ............................................. 457,871 508,227
Certificates of deposit ................................................... 6,027,834 5,755,530
------------ ------------
7,761,148 7,546,980
Warehouse lines of credit ................................................... - -
Federal Home Loan Bank advances ............................................. 1,452,000 900,000
Senior Notes due 2009 ....................................................... 180,211 180,133
Liquid Yield Option Notes due 2013 ("LYONs") ................................ 576 611
Junior Subordinated Debentures .............................................. 103,093 103,093
Other liabilities ........................................................... 360,403 361,531
------------ ------------
TOTAL LIABILITIES ......................................................... 9,857,431 9,092,348
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, par value $ .01 per share - Authorized: 2,000,000 shares;
none issued ............................................................... - -
Common stock, par value $1 per share - Authorized: 150,000,000 shares;
Issued and outstanding: (2005 - 77,855,000 and 2004 - 77,241,000) ......... 77,855 77,241
Additional paid-in capital .................................................. 341,168 330,328
Retained earnings ........................................................... 748,330 663,580
Deferred compensation ....................................................... (67,709) (58,916)
Accumulated other comprehensive income ...................................... 524 1,415
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................ 1,100,168 1,013,648
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 10,957,599 $ 10,105,996
============ ============
The accompanying notes are an integral part of these statements.
3
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
--------- ---------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fee income on loans:
Residential ............................................................ $ 111,011 $ 88,090
Commercial ............................................................. 66,392 76,304
Other .................................................................. 99 109
--------- ---------
177,502 164,503
Interest income - other .................................................. 4,422 2,204
--------- ---------
181,924 166,707
INTEREST EXPENSE:
Deposits ................................................................. 49,356 35,034
FHLB advances ............................................................ 7,506 7,417
Warehouse lines of credit ................................................ 219 125
Senior Notes ............................................................. 3,650 4,208
Junior Subordinated Debentures ........................................... 2,320 2,320
Other .................................................................... 121 40
--------- ---------
63,172 49,144
Net interest income ........................................................ 118,752 117,563
Provision for loan losses .................................................. 1,036 16,399
--------- ---------
Net interest income after provision for loan losses ........................ 117,716 101,164
NON-INTEREST INCOME:
Net gain on whole loan sales and securitizations
of residential real estate loans ....................................... 108,360 122,196
Loan servicing income .................................................... 13,987 6,539
Mortgage servicing rights amortization and impairment provision .......... (4,904) (1,370)
Impairment on residual assets ............................................ (1,218) -
Other .................................................................... 3,681 6,634
--------- ---------
119,906 133,999
NON-INTEREST EXPENSE:
Compensation and related ................................................. 59,280 67,184
Occupancy ................................................................ 6,935 3,526
Other .................................................................... 20,229 22,760
--------- ---------
86,444 93,470
INCOME BEFORE INCOME TAXES ................................................. 151,178 141,693
INCOME TAX EXPENSE ......................................................... 61,076 59,030
--------- ---------
NET INCOME ................................................................. $ 90,102 $ 82,663
========= =========
EARNINGS PER SHARE:
Basic .................................................................... $ 1.26 $ 1.16
Diluted .................................................................. 1.22 1.12
CASH DIVIDENDS DECLARED PER COMMON SHARE ................................... $ 0.07 $ 0.05
The accompanying notes are an integral part of these statements.
4
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE
STOCK CAPITAL EARNINGS COMPENSATION INCOME TOTAL
-------- ---------- --------- ------------ ------------- ----------
(THOUSANDS OF DOLLARS)
BALANCE AT DECEMBER 31, 2003 ................ $ 75,990 $ 296,000 $ 328,044 $ (35,889) $ 587 $ 664,732
Net income ................................ - - 82,663 - - 82,663
Cash dividends declared ................... - - (3,782) - - (3,782)
Conversion of LYONs ....................... 1 2 - - - 3
Stock options exercised ................... 792 14,828 - - - 15,620
Shares issued, acquired or allocated
for employee benefit plans .............. 294 6,519 - (40,759) - (33,946)
Amortization of restricted stock .......... - - - 3,345 - 3,345
Shares allocated to ESOP .................. - 4,810 - 15,157 - 19,967
Other adjustments ......................... - 10,844 - (9,804) - 1,040
Net change in unrealized gain on
investments and residual interests,
net of deferred taxes ................... - - - - 2,119 2,119
-------- ---------- --------- ------------ ------------- -----------
BALANCE AT MARCH 31, 2004 ................... $ 77,077 $ 333,003 $ 406,925 $ (67,950) $ 2,706 $ 751,761
======== ========== ========= ============ ============= ===========
BALANCE AT DECEMBER 31, 2004 ................ $ 77,241 $ 330,328 $ 663,580 $ (58,916) $ 1,415 $ 1,013,648
Net income ................................ - - 90,102 - - 90,102
Cash dividends declared ................... - - (5,352) - - (5,352)
Conversion of LYONs ....................... 2 40 - - - 42
Retirement of common stock ................ (13) (47) - 60 - -
Shares issued, acquired or allocated
for employee benefit plans .............. 625 13,984 - (37,603) - (22,994)
Amortization of restricted stock .......... - - - 4,797 - 4,797
Shares allocated to ESOP .................. - (1,368) - 25,869 - 24,501
Change in cost of common stock
held in trust ........................... - - - (6,067) - (6,067)
Other adjustments ......................... - (1,769) - 4,151 - 2,382
Net change in unrealized gain on
investments and residual interests,
net of deferred taxes ................... - - - - (891) (891)
-------- ---------- --------- ------------ ------------- -----------
BALANCE AT MARCH 31, 2005 ................... $ 77,855 $ 341,168 $ 748,330 $ (67,709) $ 524 $ 1,100,168
======== ========== ========= =========== ============= ===========
The accompanying notes are an integral part of these statements.
5
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
------------ ------------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income ................................................................ $ 90,102 $ 82,663
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ............................................... 1,036 16,399
Increase in mortgage servicing rights ................................... (7,637) (5,910)
Increase in residual interests in securitized loans ..................... (2,285) (3,019)
Cash from residual interests in securitized loans ....................... 4,253 -
Deferred income tax expense ............................................. 8,710 4,745
Depreciation, amortization and impairment of retained interests ......... 12,703 5,619
Increase in accrued interest ............................................ (1,049) (190)
Change in other assets .................................................. (30,047) (21,139)
Increase in borrower principal and interest due investors ............... 48,457 6,997
Increase in deferred compensation obligation ............................ 6,860 19,238
Increase in federal and state income taxes payable ...................... 5,051 40,508
Decrease in accrued incentive compensation .............................. (45,780) (10,784)
Increase in accounts payable and other liabilities ...................... 6,094 6,628
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE LOANS
HELD FOR SALE ACTIVITY ............................................... 96,468 141,755
Originations of loans held for sale ..................................... (7,697,881) (4,728,433)
Sale of and payments received from loans held for sale .................. 7,059,158 4,627,948
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................... (542,255) 41,270
INVESTING ACTIVITIES
Originations and advances funded for loans held for portfolio ............. (825,099) (715,809)
Payments received from and sales of loans held for portfolio .............. 493,032 531,470
Investment securities available for sale:
Purchases ............................................................... - (16)
Maturities or repayments ................................................ 98 206
Net purchases of FHLB stock ............................................... (49,964) (2,823)
Purchases of premises and equipment ....................................... (6,482) (5,205)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................................. (388,415) (192,177)
FINANCING ACTIVITIES
Deposits accepted, net of repayments ...................................... 214,168 457,596
FHLB advances, net of repayments .......................................... 552,000 (183,000)
Extinguishment of Senior Notes ............................................ - (22,385)
Dividends paid ............................................................ (5,309) (3,728)
Stock options exercised ................................................... - 11,602
Increase in deferred compensation plans ................................... (22,995) (33,357)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 737,864 226,728
Change in cash and cash equivalents ......................................... (192,806) 75,821
Cash and cash equivalents at beginning of period .......................... 904,975 835,651
------------ -------------
Cash and cash equivalents at end of period .................................. $ 712,169 $ 911,472
============ =============
The accompanying notes are an integral part of these statements.
6
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Net income ................................................................. $ 90,102 $ 82,663
Other comprehensive income (loss):
Net change in unrealized gains (losses) during the period:
Investment securities .................................................. (8) (15)
Residual interests in securitized loans ................................ (1,478) 3,546
-------- --------
(1,486) 3,531
Less deferred income tax expense (benefit) ............................... (595) 1,412
-------- --------
Other comprehensive net income (loss) ................................ (891) 2,119
-------- --------
TOTAL COMPREHENSIVE NET INCOME ............................................. $ 89,211 $ 84,782
======== ========
The accompanying notes are an integral part of these statements.
7
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Fremont General Corporation ("Fremont General") and its subsidiaries (together
the "Company"), including the Company's principal operating subsidiary, Fremont
Investment & Loan ("FIL"), a California chartered industrial bank which is
engaged in commercial and residential real estate lending on a nationwide basis.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). All intercompany balances and transactions have been eliminated in
consolidation.
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that materially affect the
reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the interim financial
statements have been included. The operating results for the three-month period
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005.
The unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004. Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2: NEW ACCOUNTING STANDARDS
In March 2005, the United States Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107") to provide public companies
additional guidance in applying the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment ("SFAS No. 123R"). SAB 107
expresses the SEC staff's views regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations and provides further information regarding
the valuation of share-based payment arrangements for public companies.
Subsequent to issuing SAB 107, in April 2005, the SEC adopted a new rule that
allows companies to implement SFAS No. 123R at the beginning of their next
fiscal year. Prior to the adoption of this new rule, calendar year-end companies
would have been required to
8
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
implement SFAS No. 123R as of the beginning of the third quarter of 2005. The
Company does not believe that the adoption of SFAS No. 123R or the application
of the accounting described in SAB 107 will have a significant impact on the
Company's financial position or results of operations.
In March 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") FIN 46(R)-5: "Implicit Variable Interests under FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities" ("FIN 46(R)-5"). This FSP was issued to address whether a
reporting enterprise should consider whether it holds an implicit variable
interest in a variable interest entity ("VIE") or potential VIE when specific
conditions exist. FIN 46(R)-5 also provides additional guidance defining
implicit variable interests as implied financial interests in an entity that
change with changes in the fair value of the entity's net assets exclusive of
variable interests. The Company does not believe that its adoption will have a
significant impact on the Company's financial position or results of operations.
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents, as of the dates indicated, are summarized in the
following table:
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
(THOUSANDS OF DOLLARS)
Cash on hand ............................................................... $ 243 $ 257
FHLB shareholder transaction account ....................................... 517,655 710,354
Federal Reserve account .................................................... 2,538 2,030
U. S. Government Agency money market fund .................................. 89,977 147,297
Market interest rate account ............................................... 7 13
Non-interest bearing deposits in other financial institutions .............. 101,749 45,024
--------- -----------
Total cash and cash equivalents ............................................ $ 712,169 $ 904,975
========= ===========
The FHLB shareholder transaction account represents a short-term
interest-bearing transaction account with the Federal Home Loan Bank of San
Francisco. The Company's cash and cash equivalent balances were unrestricted as
of March 31, 2005 and December 31, 2004.
9
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: LOANS HELD FOR SALE
Loans held for sale consist solely of residential real estate loans
(primarily first trust deeds, but also second trust deeds) which are aggregated
prior to their sale and are carried at the lower of aggregate cost, or estimated
fair value. Estimated fair values are based upon current secondary market prices
for loans with similar coupons, maturities and credit quality.
The Company's residential real estate loans have loan terms for up to
thirty years and are typically secured by first deeds of trust on single-family
residences. The Company's residential real estate loans held for sale typically
have a significant concentration (generally 75% or above) of "hybrid" loans
which have a fixed rate of interest for an initial period (generally two years)
after origination, after which the interest rate is adjusted to a rate equal to
the sum of six-month LIBOR and a margin as set forth in the mortgage note. The
interest rate then adjusts at each six-month interval thereafter, subject to
various lifetime and periodic rate caps and floors. The loans are generally made
to borrowers who do not satisfy all of the credit, documentation and other
underwriting standards prescribed by conventional mortgage lenders and loan
buyers, such as Fannie Mae and Freddie Mac, and are commonly referred to as
"sub-prime" or "non-prime".
A valuation reserve is maintained for certain non-performing loans and
other loans held for sale based upon the Company's estimate of inherent losses.
Provisions for the valuation reserve are charged against gain on sale of loans.
The following table details the loans held for sale as of the dates indicated:
10
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
(THOUSANDS OF DOLLARS)
Loan principal balance:
1st trust deeds ........................................................... $ 5,596,117 $ 5,036,724
2nd trust deeds ........................................................... 465,581 383,039
----------- -----------
6,061,698 5,419,763
Basis adjustment for fair value hedge accounting ............................ (5,837) (1,327)
Net deferred direct origination costs ....................................... 79,898 74,514
----------- -----------
6,135,759 5,492,950
Less: Valuation reserve .................................................... (44,008) (38,258)
----------- -----------
Loans held for sale - net ................................................... $ 6,091,751 $ 5,454,692
=========== ===========
Loans held for sale on non-accrual status ................................... $ 16,373 $ 11,874
=========== ===========
Since most of the loans that are held for sale are sold within sixty days,
the amount of loans held for sale that are classified as non-accrual or become
real estate owned, is generally small. Loans held for sale may include loans
repurchased from previous whole loan sale transactions and securitizations. In
the ordinary course of business, as the loans held for sale are sold, the
Company makes standard industry representations and warranties about the loans.
The Company may have to subsequently repurchase certain loans due to defects
that occurred in the origination of the loan. Such defects are categorized as
documentation errors, underwriting errors, or fraud. In addition, the Company is
generally required to repurchase loans that experience first payment defaults
(and in limited cases, second payment defaults). If there are no such defects or
early payment defaults, the Company has no commitment to repurchase loans sold.
During the first quarter of 2005, the Company repurchased a total of $35.6
million in loans, as compared to $22.0 million in the first quarter of 2004. The
Company maintains a reserve for the effect of loans estimated to be repurchased
that require a valuation reserve upon repurchase, which is included in other
liabilities and totaled $6.1 million and $4.7 million as of March 31, 2005 and
December 31, 2004, respectively. Provisions for the repurchase reserve are
charged against gain on sale of loans.
The Company also maintains a reserve for premium recapture that represents
the estimate of potential refunds of premiums received on previously completed
loan sales (due to early loan prepayments or for certain loans repurchased from
prior sales) that may occur under the provisions of the various agreements
entered into for the sale of loans held for sale; this reserve totaled $4.6
million and $3.9 million as of March 31, 2005 and December 31, 2004,
respectively, and is included in other liabilities. Provisions for the premium
recapture reserve are charged against gain on sale of loans.
11
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5: LOANS HELD FOR INVESTMENT
Loans held for investment consist of the Company's commercial real estate
loans. Commercial real estate loans, which are primarily variable rate (based
upon six-month LIBOR and a margin), represent loans secured primarily by first
mortgages on properties such as office, retail, industrial, land development,
lodging, multi-family and commercial mixed-use properties. The commercial real
estate loans are comprised of permanent, bridge and construction loans of
relatively short duration (rarely more than five years in length of term and
typically shorter, such as two to three years).
As of March 31, 2005, the Company had $1.9 billion in unfunded commitments
for existing loans and $354.7 million in unfunded commitments for loans not yet
booked, as compared to $1.8 billion and $218.8 million, respectively, as of
December 31, 2004. Due to the variability in the timing of the funding of these
unfunded commitments, and the extent to which they are ultimately funded, these
amounts should not generally be used as a basis for predicting future
outstanding loan balances.
Commercial real estate loans are reported net of participations to other
financial institutions or investors in the amount of $148.9 million and $131.6
million as of March 31, 2005 and December 31, 2004, respectively. The Company's
commercial real estate loans also include mezzanine loans (second mortgage
loans, which are subordinate to the senior or first mortgage loans) in the
amounts of $43.6 million and $48.3 million as of March 31, 2005 and December 31,
2004, respectively.
The Company currently does not carry any residential real estate loans held
for investment as it has done in prior periods. The residential real estate
loans held for investment in prior periods were similar in type to those the
Company currently carries as held for sale. The following tables further detail
the net loans held for investment for the periods indicated:
12
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
-------------------------------------------
COMMERCIAL
REAL ESTATE OTHER TOTAL
----------- ------- -----------
(THOUSANDS OF DOLLARS)
Loans outstanding ............................................... $ 4,000,474 $ 4,579 $ 4,005,053
Participations sold ............................................. (148,897) - (148,897)
----------- ------- -----------
Loans outstanding, net of participations sold ................... 3,851,577 4,579 3,856,156
Unamortized deferred origination fees and costs ................. (36,778) - (36,778)
----------- ------- -----------
Loans outstanding before allowance for loan losses .............. 3,814,799 4,579 3,819,378
Allowance for loan losses ....................................... (171,891) (50) (171,941)
----------- ------- -----------
Loans held for investment - net ................................. $ 3,642,908 $ 4,529 $ 3,647,437
=========== ======= ===========
DECEMBER 31, 2004
------------------------------------------
COMMERCIAL
REAL ESTATE OTHER TOTAL
----------- ------- -----------
(THOUSANDS OF DOLLARS)
Loans outstanding ............................................... $ 3,647,490 $ 4,526 $ 3,652,016
Participations sold ............................................. (131,635) - (131,635)
----------- ------- -----------
Loans outstanding, net of participations sold ................... 3,515,855 4,526 3,520,381
Unamortized deferred origination fees and costs ................. (35,767) - (35,767)
----------- ------- -----------
Loans outstanding before allowance for loan losses .............. 3,480,088 4,526 3,484,614
Allowance for loan losses ....................................... (171,471) (54) (171,525)
----------- ------- -----------
Loans held for investment - net ................................. $ 3,308,617 $ 4,472 $ 3,313,089
=========== ======= ===========
The following table sets forth information regarding the Company's
commercial real estate loans on non-accrual status and restructured loans on
accrual status. In cases where a borrower experiences financial difficulties and
the Company makes certain concessionary modifications to contractual terms
(typically a reduction of the interest rate charged), the loan is classified as
a restructured (accruing) loan if the loan is performing in accordance with the
agreed upon modified loan terms and projected cash proceeds are deemed
sufficient to repay both principal and interest. Restructured loans are
presented as such in the period of restructure and the three subsequent
quarters.
13
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
(THOUSANDS OF DOLLARS)
Non-accrual commercial real estate loans held
for investment ........................................................... $ 77,633 $ 82,289
========= ===========
Restructured commercial real estate loans
on accrual status ........................................................ $ 8,112 $ 9,302
========= ===========
The Company employs a documented and systematic methodology in determining
the adequacy of its allowance for loan losses, which assesses the risk of losses
inherent in the portfolio, and represents the Company's estimate of probable
inherent losses in the loan portfolio as of the date of the financial
statements. The allowance for loan losses methodology incorporates management's
judgment concerning the effect of recent economic events on portfolio
performance, as well as concentration factors (such as property types,
geographic regions and loan sizes). Activity in the allowance for loan losses is
summarized in the following table:
THREE MONTHS ENDED MARCH 31,
-------------------------
2005 2004
-------- ---------
(THOUSANDS OF DOLLARS)
Beginning balance ........................................................... $ 171,525 $ 213,591
Provision for loan losses ................................................... 1,036 16,399
Charge-offs ................................................................. (3,983) (9,396)
Recoveries .................................................................. 3,363 222
--------- ---------
Net charge-offs ....................................................... (620) (9,174)
--------- ---------
Ending balance .............................................................. $ 171,941 $ 220,816
========= =========
In addition to its allowance for loan losses, the Company maintains an
allowance for unfunded commercial real estate loan commitments on existing loans
and, to a lesser degree, loans not yet funded; this allowance totaled $7.9
million and $7.1 million as of March 31, 2005 and December 31, 2004,
respectively, and is included in other liabilities.
NOTE 6: REAL ESTATE OWNED
The Company's real estate owned ("REO") consists of property acquired
through or in lieu of foreclosure on loans secured by real estate. REO is
reported in the financial statements at the lower of cost or estimated
realizable value (net of estimated costs to sell). REO consisted of the
following types of property as of the periods indicated:
14
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
(THOUSANDS OF DOLLARS)
Commercial real estate ...................................................... $ 18,577 $ 21,344
Residential real estate ..................................................... 3,344 2,578
-------- -----------
Real estate owned ........................................................... $ 21,921 $ 23,922
======== ===========
NOTE 7: MORTGAGE SERVICING RIGHTS
At the time of securitization or sale of loans on a whole loan basis with
servicing rights retained, the Company analyzes whether the benefits of
servicing are greater than or less than adequate compensation and, as a result,
records a mortgage servicing rights asset or liability ("MSR"), respectively.
The estimated fair value of the Company's mortgage servicing rights at March 31,
2005 and December 31, 2004 was $20.7 million and $18.0 million, respectively.
The following table summarizes the activity in the Company's mortgage servicing
rights asset as of the periods indicated:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Beginning balance ........................................................... $ 20,044 $ 6,898
Additions from securitization transactions ................................ 7,637 5,910
Amortization .............................................................. (4,485) (1,370)
-------- --------
Ending balance before valuation allowance ................................... 23,196 11,438
Valuation allowance
Beginning balance ......................................................... (2,042) -
Provision for temporary impairment ........................................ (420) -
-------- --------
Ending balance ............................................................ (2,462) -
-------- --------
Mortgage servicing rights - net ............................................. $ 20,734 $ 11,438
======== ========
As servicer, the Company is required to make certain advances on specific
loans it is servicing, to the extent such advances are deemed collectible by the
Company, from collections related to the individual loan. The total amount
outstanding of such servicing advances was $6.5 million and $5.3 million at
March 31, 2005 and December 31, 2004, respectively, and is included in other
assets.
15
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of the MSRs is derived from the net positive cash flows
associated with the servicing agreements. The Company determines the fair value
of the MSRs at the time of securitization and at each reporting date by the use
of a cash flow model that incorporates prepayment speeds, discount rate and
other key assumptions management believes are consistent with assumptions other
major market participants use in valuing the MSRs. The Company determined, as
part of its on-going assessment of the assumptions used to value its MSRs, to
increase the discount rate utilized to 15.0% during the first quarter of 2005.
The key economic assumptions used in subsequently measuring the fair value of
the Company's MSRs as of the periods indicated are as follows:
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
Weighted-average life (years) ............................................... 1.5 1.5
Weighted-average annual prepayment speed .................................... 47.8 % 48.5 %
Weighted-average annual discount rate ....................................... 15.0 % 10.0 %
NOTE 8: RESIDUAL INTERESTS IN SECURITIZED LOANS
Residual interests in loan securitizations are recorded on each transaction
as a result of the sale of residential real estate loans through a
securitization transaction and the subsequent issuance of net interest margin
securities ("NIMs") to monetize the residual interest from the original
securitization transaction.
Residual interests represent the discounted expected future residual cash
flows from the securitizations that inure to the Company's benefit subject to
prepayment, net lifetime credit losses and other factors. The following table
summarizes the activity of the Company's residual interests:
16
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Beginning balance at fair value ............................................. $ 15,774 $ 6,530
Additions to residual interests ............................................. 2,285 3,019
Interest accretion .......................................................... 1,338 646
Cash received ............................................................... (4,253) -
Fair value adjustment ....................................................... (1,477) 3,546
Permanent impairment ........................................................ (1,218) -
-------- --------
Ending balance at fair value ................................................ $ 12,449 $ 13,741
======== ========
Loans sold through securitization transactions are sold by the Company on a
non-recourse basis to off-balance sheet securitization qualified special purpose
entities ("QSPEs"), except for representations and warranties customary within
the mortgage banking industry. In a NIM transaction, the certificates
representing the residual interest in certain excess cash flows from the
original securitization transaction are transferred to a QSPE, which issues
interest-bearing securities. The net proceeds from the sale of these NIM
securities, along with a residual interest certificate that is subordinate to
the issued NIM securities, represents the consideration received by the Company.
The Company allocates its basis in the underlying mortgage loans to the
securities sold, the retained residual interests, including mortgage servicing
rights, in proportion to their relative fair values on the date of transfer. The
residual interest certificate retained from a NIM transaction is subordinate to
the NIM securities issued until the NIM securities are paid in full. The
residual interests retained from the NIM transactions are classified as
"available-for-sale" securities and are measured at fair value; any unrealized
gains or losses, net of deferred taxes, are reported as accumulated other
comprehensive income, which is a separate component of stockholders' equity. The
Company's only ownership interest from its securitization transactions is
reflected in the retained residual interests from the NIM transactions of $12.4
million as detailed above.
As of March 31, 2005, a total of $4.0 billion in loan principal was
outstanding from the Company's securitization transactions. The total amount of
loan principal originally securitized in these transactions was $5.4 billion.
The Company determines the estimated fair values of the residual interests
retained from the NIM transactions by discounting the expected net cash flows to
be received utilizing the cash-out method. The Company uses the forward LIBOR
curve for estimating interest rates on adjustable rate loans and utilizes
17
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
other assumptions that management believes are consistent with assumptions other
major market participants would use to estimate the fair value of its residual
interests.
Key economic assumptions used in subsequently measuring the fair value of
the Company's residual interests as of the periods indicated are as follows:
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
Weighted-average life (years) ............................................... 1.6 1.6
Weighted-average annual prepayment speed (CPR) .............................. 45.6% 45.7%
Weighted-average lifetime credit losses ..................................... 4.6% 4.5%
Weighted-average annual discount rate ....................................... 20.0% 20.0%
NOTE 9: GAIN ON SALE AND SECURITIZATION OF RESIDENTIAL REAL ESTATE LOANS
The Company routinely sells and securitizes residential mortgage loans into
the secondary market. Gains or losses are recognized at the date of settlement
and when the Company has transferred control over the loans to either a
transaction-specific securitization trust or to a third-party purchaser. The
amount of gain or loss for loan sales or securitizations is based upon the
difference between the net sales proceeds received, including any retained
interests, and the allocated carrying amount of the loans (which includes the
costs directly incurred with the origination of the loans, which are deferred
and recognized when the loans are sold). The following table presents the
detailed components of the gain on sale and securitization of loans:
18
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
----------- -----------
(THOUSANDS OF DOLLARS)
Whole loan sales of residential real estate loans ........................... $ 5,849,309 $ 3,795,315
Securitizations of residential real estate loans ............................ 1,209,849 832,633
----------- -----------
$ 7,059,158 $ 4,627,948
=========== ===========
Gross premium recognized on loan sales and securitizations .................. $ 201,696 $ 199,228
Premium recapture and reversal .............................................. (7,556) (8,693)
----------- ----------
Net premium recognized on loan sales and securitizations .................... 194,140 190,535
Less: Direct costs of loan originations - External .......................... (34,640) (23,255)
Direct costs of loan originations - Internal .......................... (61,372) (40,606)
Direct cost adjustments ............................................... (181) (1,211)
----------- ----------
Total direct costs of loan originations ............................... (96,193) (65,072)
Adjustments to carrying value of loans held for sale ........................ (6,775) (5,218)
Fair value hedge accounting adjustments ..................................... (4,510) -
Net gain on derivative instruments .......................................... 21,698 1,951
----------- ----------
Net gain on sale ......................................................... $ 108,360 $ 122,196
=========== ==========
The net gain on derivative instruments included in the net gain on sale of
residential real estate loans consists of the following items:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Eurodollar futures:
Change in fair value ...................................................... $ 3,497 $ -
Net realized gain ......................................................... 17,035 -
Transaction expenses and other ............................................ (525) -
-------- --------
20,007 -
Change in fair value of:
Interest rate lock commitments ............................................ (187) 205
Forward sales commitments ................................................. 1,878 3,578
Interest rate cap contract ................................................ - (1,832)
-------- --------
$ 21,698 $ 1,951
======== ========
19
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10: LOAN SERVICING INCOME
In addition to the securitized loans that it services, the Company also
services loans sold to other financial institutions on an interim basis (until
servicing is transferred to another party). The following table presents the
components of loan servicing income for the Company:
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
-------- -------
(THOUSANDS OF DOLLARS)
Servicing fee income:
Securitization transactions ............................................... $ 4,380 $ 1,768
Interim ................................................................... 6,507 3,797
Other ..................................................................... 831 -
Ancillary income (1) :
Securitization transactions ............................................... 847 279
Interim and other ......................................................... 1,123 824
Other ....................................................................... 299 (129)
-------- -------
Loan servicing income ....................................................... $ 13,987 $ 6,539
======== =======
(1) Ancillary income represents all service-related contractual fees retained
by the Company and consists primarily of late payment charges.
NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments in connection with
its interest rate risk management activities. In accordance with its interest
rate risk strategy, the Company currently utilizes a combination of forward
sales commitments and Eurodollar futures contracts to hedge its residential
loans held for sale and a certain portion of its unfunded pipeline of interest
rate lock commitments. These derivatives are intended to reduce the risk of
adverse fair value changes in certain interest rate environments. The Company's
forward sales commitments represent obligations to sell loans at a specific
price and date in the future; therefore, the value of these commitments increase
as interest rates increase. Short Eurodollar futures contracts are standardized
exchange-traded contracts, the values of which are tied to spot Eurodollar rates
at specified future dates. The value of these futures contracts increase when
interest rates rise. Conversely, the value of the forward sales commitments and
the short Eurodollar positions decrease when interest rates decrease, while the
related loans are expected to increase in value. The values of the loans, the
forward sales commitments and the Eurodollar positions may not move in
corresponding amounts and time frames and may result in a negative or positive
impact on earnings in any
20
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
given period. In accordance with SFAS No. 133, the derivative financial
instruments are reported at their fair value.
At March 31, 2005, the Company's commitments to sell forward its
residential real estate loans to third party investors in whole loan sales
transactions were approximately $2.68 billion at various rates and terms. The
Company distinguishes commitments to sell forward loans in two categories,
allocated and general. At March 31, 2005, allocated and general forward sale
commitments notional amounts were $1.48 billion and $1.20 billion, respectively.
Allocated forward sales commitments are contractual sales agreements whereby a
specific pool of loans is agreed upon to be sold to specific buyers at a
contractually agreed upon date and price. In accordance with SFAS No. 133, the
allocated forward sales commitments are accounted for as fair value hedges
designated to specific pools of loans that have been contractually agreed upon
for sale. General forward sales commitments are currently treated as economic
hedges not designated as accounting hedges and are classified as free-standing
derivatives. Changes in the fair value of both the general and allocated forward
sales commitments are reported as a component of gain on sale of residential
real estate loans and as either other assets or liabilities, as applicable. The
amount of hedge ineffectiveness related to allocated forward sales commitments
is immaterial.
At March 31, 2005, the Company had a pipeline of loans in process of
approximately $1.56 billion in new residential real estate loans, generally
subject to the potential borrower meeting the conditions of the loan approval.
The Company conditionally quotes interest rates to potential borrowers, which
are then subject to adjustment by the Company if any such conditions are not
satisfied. Since the Company generally funds the loans at the rates
conditionally approved, the quotes are considered to constitute interest rate
locks. These interest rate lock commitments, which generally are for 30 days,
are treated as free-standing derivatives and are carried at their estimated fair
value with any changes recorded as a component of gain on sale of residential
real estate loans. Fair value is estimated based upon the change in the fair
value of the underlying mortgage loans as adjusted for the probability of a
certain amount of loans in the pipeline not funding within the terms of the
initial rate lock. The change in fair value is measured from the date of the
interest rate lock and, therefore, at the time of issuance the value of the
interest rate lock is zero.
The Company's Eurodollar futures contracts are currently treated as
economic hedges and are not currently designated as accounting hedges and are
classified as free-standing derivatives. As of March 31, 2005, the Company had
in place short Eurodollar futures positions covering loan principal of $3.34
billion and $1.15 billion for its loans held for sale and its unfunded loan
pipeline, respectively. Eurodollar futures are utilized in an effort to offset
the changes in value related to the loan inventory and pipeline without the
21
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
necessity of restricting certain loan inventory or pipeline loans to a specific
forward sale commitment. Eurodollar futures are carried at their fair value with
any changes recorded as a component of gain on sale of residential real estate
loans. The Company's Eurodollar futures contracts are collateralized by
maintenance of a margin account which had a balance of $16.2 million as of March
31, 2005.
The estimated fair values of the Company's derivatives were as follows
(included in other assets or liabilities, as applicable, in the consolidated
balance sheets) for the periods indicated:
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
(THOUSANDS OF DOLLARS)
Forward sale commitments .................................................... $ 4,617 $ 2,739
Eurodollar futures .......................................................... 3,475 (22)
Interest rate lock commitments .............................................. (1,287) (1,100)
-------- -----------
$ 6,805 $ 1,617
======== ===========
NOTE 12: INCOME TAXES
The major components of income tax expense (benefit) are summarized in the
following table:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Federal:
Current ............................................ $ 40,329 $ 42,356
Deferred ........................................... 9,673 5,684
-------- --------
50,002 48,040
-------- --------
State:
Current ............................................ 12,037 11,929
Deferred ........................................... (963) (939)
-------- --------
11,074 10,990
-------- --------
Total tax provision .................................. $ 61,076 $ 59,030
======== ========
22
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The deferred income tax balance includes the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and for income tax purposes. The components of the Company's
deferred tax assets are summarized in the following table:
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
(THOUSANDS OF DOLLARS)
Deferred tax assets:
Mark-to-market on loans held for sale ..................................... $ 90,212 $ 77,758
Allowance for loan losses ................................................. 79,023 79,029
Compensation related items ................................................ 14,135 28,459
State income and franchise taxes .......................................... 6,033 20,982
Other - net ............................................................... - 70
--------- ----------
Total deferred tax assets ............................................... 189,403 206,298
Deferred tax liabilities:
Loan origination costs .................................................... (35,368) (45,559)
Mortgage servicing ........................................................ (6,372) (5,210)
Other - net ............................................................... (249) -
--------- ----------
Total deferred tax liabilities .......................................... (41,989) (50,769)
--------- ----------
Net deferred tax asset ...................................................... $ 147,414 $ 155,529
========= ==========
In assessing the realization of deferred income tax assets, the Company
considers whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets depends
in part upon the generation of future taxable income during the periods in which
temporary differences become deductible. In the Company's opinion, the deferred
tax assets will be fully realized and no valuation allowance is necessary as the
Company has the ability to generate sufficient future taxable income to realize
the tax benefits.
The Company has accrued the expected maximum tax and interest exposure for
tax matters that are either in the process of resolution or have been identified
as having the potential for adjustment. These matters primarily consist of
issues relating to the discontinued insurance operations, the apportionment of
income to various states and the deduction of certain expenses.
23
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13: DEBT - FREMONT GENERAL CORPORATION
The debt of Fremont General is detailed in the following table; none of the
Fremont General debt is guaranteed by FIL:
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
(THOUSANDS OF DOLLARS)
Senior Notes due 2009, less discount (2005 - $1,239; 2004 - $1,317) ........ $ 180,211 $ 180,133
Liquid Yield Option Notes due 2013, less discount (2005 - $309;
2004 - $339) .............................................................. 576 611
Junior Subordinated Debentures .............................................. 103,093 103,093
--------- -----------
$ 283,880 $ 283,837
========= ===========
In 1996, Fremont General Financing I, a statutory business trust (the
"Trust") and wholly-owned subsidiary of Fremont General, sold $100 million of 9%
Trust Originated Preferred SecuritiesSM ("the Preferred Securities") in a public
offering. The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust. The proceeds of $103.1 million related to
the sale of the Preferred Securities were invested in 9% Junior Subordinated
Debentures of Fremont General ("the Junior Subordinated Debentures"). The Junior
Subordinated Debentures are the sole asset of the Trust.
NOTE 14: DEPOSITS, FHLB ADVANCES AND WAREHOUSE LINES OF CREDIT - FREMONT
INVESTMENT & LOAN
FIL utilizes the issuance of deposits, which are insured up to the maximum
legal limit by the Federal Deposit Insurance Corporation ("FDIC"), Federal Home
Loan Bank ("FHLB") advances and warehouse lines of credit in funding its
operations.
As of March 31, 2005, the weighted-average interest rate for savings and
money market deposit accounts was 2.23% and for certificates of deposit it was
2.92%. The weighted-average interest rate for all deposits at March 31, 2005 was
2.77%.
24
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Certificates of deposit as of March 31, 2005 are detailed by maturity and
rates as follows:
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
----------- ----------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
$ 5,918,495 2005 2.88%
55,860 2006 4.56%
3,378 2007 4.17%
34,468 2008 5.67%
15,633 2009 6.03%
----------- -----------
$ 6,027,834 2.92%
=========== ===========
Of the total certificates of deposit outstanding at March 31, 2005, $1.6
billion were obtained through brokers.
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------
2005 2004
-------- ---------
(THOUSANDS OF DOLLARS)
Savings and money market deposit accounts ................................... $ 9,840 $ 8,307
Certificates of deposit ..................................................... 39,601 26,780
Penalties for early withdrawal .............................................. (85) (53)
-------- ---------
$ 49,356 $ 35,034
======== =========
Total interest payments on deposits were $48.5 million and $34.1 million
for the three months ended March 31, 2005 and 2004, respectively.
FIL is a member of the Federal Home Loan Bank system, and as such maintains
a credit line with the FHLB of San Francisco that is based upon a percentage of
its total regulatory assets, subject to collateralization requirements and
certain collateral sub-limits. Advances are primarily collateralized by the
residential loans held for sale, and to a lesser extent, by certain commercial
loans held for investment. The maximum amount of credit which the FHLB will
extend varies from time to time in accordance with their policies. At March 31,
2005 and December 31, 2004, FIL had an approximate maximum borrowing capacity of
$2.41 billion and $2.11 billion, respectively, with outstanding borrowings of
$1.45 billion and $900.0 million, respectively. FIL pledged loans with a
carrying value of $2.70 billion and $2.37 billion at March 31, 2005 and December
31, 2004, respectively, to secure the current and any future borrowings. FIL's
25
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
borrowing capacity can be used to borrow under various FHLB loan programs,
including adjustable and fixed-rate financing, for periods ranging from one day
to 30 years, with a variety of interest rate structures available. The
weighted-average interest rate on the amount outstanding at March 31, 2005 was
2.50%. The borrowing capacity has no commitment fees or cost, requires minimum
levels of investment in FHLB stock, and can be withdrawn by the FHLB if there is
any significant change in the financial or operating condition of FIL and is
conditional upon its compliance with certain agreements covering advances,
collateral maintenance, eligibility and documentation requirements. The Company
receives dividend income on its investment in FHLB stock. At March 31, 2005, FIL
was in compliance with all requirements.
The following table details the FHLB amounts outstanding at March 31, 2005
by maturities and rates:
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
----------- ----------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
$ 1,354,000 2006 2.53%
98,000 2007 2.07%
----------- ------------
$ 1,452,000 2.50%
=========== ============
Total interest payments on advances from the FHLB were $7.5 million and
$7.4 million for the three months ended March 31, 2005 and 2004, respectively.
FIL has a line of credit with the Federal Reserve Bank of San Francisco
("Federal Reserve"), and at March 31, 2005 and December 31, 2004 had a borrowing
capacity, based upon collateral pledged, of $293.3 million and $159.0 million
respectively, with no outstanding borrowings or activity at March 31, 2005 or
December 31, 2004. FIL pledged loans with a carrying value of $391.1 million and
$212.1 million at March 31, 2005 and December 31, 2004, respectively to the
Federal Reserve. This line of credit is provided when all other sources of funds
are not reasonably available, and such advances are made with the expectation
that they will be repaid when the availability of the usual source of funds is
restored, usually the next business day.
During 2003, FIL established three separate warehouse lines of credit to
facilitate the funding of residential real estate loans prior to their sale or
securitization. The total funding capacity available at March 31, 2005 under the
three facilities was $2.0 billion, of which $1.0 billion was committed. There
were no amounts outstanding on these facilities at March 31, 2005. Borrowings,
if any, under each of the facilities
26
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
are secured by loans held for sale as pledged by FIL. Each of the facilities is
subject to certain conditions, including but not limited to financial and other
covenants including the maintenance of certain capital and liquidity levels. At
March 31, 2005, the Company was in compliance with all financial and other
covenants related to these facilities.
NOTE 15: OTHER LIABILITIES
The following table details the composition of the Company's other
liabilities as of the dates indicated:
MARCH 31, DECEMBER 31,
2005 2004
--------- -----------
(THOUSANDS OF DOLLARS)
Borrower principal and interest due investors .............................. $ 60,048 $ 11,591
Federal income tax liability ............................................... 57,616 50,652
State income tax liability ................................................. 46,592 50,887
Deferred compensation obligation ........................................... 46,212 33,495
Borrower escrow collections payable ........................................ 28,913 23,091
Accrued incentive compensation ............................................. 28,891 74,671
Accounts payable ........................................................... 25,073 22,950
Accrued Employer Stock Ownership Plan expense .............................. 11,389 29,892
Premium recapture and repurchase reserve ................................... 10,732 8,645
Interest payable ........................................................... 10,202 12,755
Allowance for unfunded loan commitments .................................... 7,925 7,087
Other ...................................................................... 26,810 35,815
--------- -----------
$ 360,403 $ 361,531
========= ===========
NOTE 16: DEFERRED COMPENSATION
Stock award plans are provided for the benefit of certain key members of
management that authorize shares of either stock rights or stock options to be
allocable to participants. Restricted stock awards are amortized to compensation
expense over the service period of the awards that vary from two to ten years.
Unamortized amounts are reported as deferred compensation.
The Company periodically contributes cash to a grantor stock ownership
trust ("GSOP") in order to pre-fund contributions to various employee benefit
plans (e.g., 401(K) match, Employee Stock Ownership Plan contribution, etc.).
The Company consolidates the GSOP under the provisions of Financial Accounting
Standards Board Interpretation No. 46R, Consolidation of Variable Interest
Entities. The GSOP uses the
27
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
contributed cash to acquire shares of the Company's common stock and the shares
held by the GSOP are recorded at fair value and treated as treasury stock for
purposes of calculating the Company's basic and diluted earnings per share.
The Company also maintains a Supplemental Executive Retirement Plan
("SERP") and Excess Benefit Plan ("EBP"); both of which are deferred
compensation plans designed to provide certain employees the ability to receive
benefits that would be otherwise lost under the Company's qualified retirement
plans due to statutory or other limits on salary deferral and matching
contributions.
The following table details the composition of the Company's deferred
compensation balance (which is reported as a component of stockholders' equity)
as of the periods indicated:
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
(THOUSANDS OF DOLLARS)
Unamortized restricted stock awards ........................................ $ 35,757 $ 26,183
GSOP ....................................................................... 14,020 20,868
SERP and EBP ............................................................... 17,932 11,865
-------- -----------
$ 67,709 $ 58,916
======== ===========
NOTE 17: INDUSTRIAL BANK REGULATORY CAPITAL
FIL is subject to various regulatory capital requirements under California
and Federal regulations. Failure to meet minimum capital requirements can result
in regulatory agencies initiating certain mandatory and possibly additional
discretionary actions that, if undertaken, could have a direct material effect
on the consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, FIL must meet specific
capital guidelines that involve quantitative measures of its assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting
practices. FIL's capital amounts, requirements and classifications are also
subject to qualitative judgments by its regulators about components, risk
weightings and other factors. Banking institutions that are experiencing or
anticipating significant growth are generally expected to maintain capital
ratios above minimum levels.
28
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of March 31, 2005, FIL's regulatory capital exceeded all minimum
requirements to which it is subject and the most recent notification from the
FDIC categorized FIL as "well-capitalized". To be categorized as
"well-capitalized", the institution must maintain capital ratios as set forth in
the following table; the FDIC and FIL, however, have agreed that FIL will
maintain a Tier-1 Leverage Ratio of at least 8.5%. There have been no conditions
or events since that notification that management believes have changed FIL's
categorization as "well-capitalized". As of March 31, 2005, FIL's Tier-1
Leverage Ratio was 12.60%. Management does not anticipate any difficulties in
maintaining a Tier-1 Leverage Ratio of at least 8.5%. FIL's actual regulatory
amounts and the related standard regulatory minimum ratios required to qualify
as well capitalized are detailed in the table below.
MARCH 31, 2005
--------------------
MINIMUM ACTUAL
REQUIRED RATIO
-------- ------
Tier-1 Leverage Capital .................................................... 5.00% 12.60%
Risk-Based Capital:
Tier-1 ................................................................... 6.00% 16.73%
Total .................................................................... 10.00% 18.01%
DECEMBER 31, 2004
--------------------
MINIMUM ACTUAL
REQUIRED RATIO
-------- ------
Tier-1 Leverage Capital .................................................... 5.00% 12.71%
Risk-Based Capital:
Tier-1 ................................................................... 6.00% 17.26%
Total .................................................................... 10.00% 18.54%
Regulatory capital is assessed for adequacy by three measures: Tier-1
Leverage Capital, Tier-1 Risk-Based Capital and Total Risk-Based Capital. FIL's
Tier-1 Leverage Capital includes common stockholder's equity, a certain portion
of its mortgage servicing rights not includable in regulatory capital and other
adjustments. Tier-1 Leverage Capital is measured with respect to average assets
during the quarter. The Tier-1 Risk-Based Capital ratio is calculated as a
percent of risk-weighted assets at the end of the quarter. FIL's Total
Risk-Based Capital includes the allowable amount of its allowance for loan
losses (the allowable amount includable is limited to 1.25% of gross
risk-weighted assets). The Total Risk-Based Capital ratio is calculated as a
percent of risk-weighted assets at the end of the quarter. The following table
details the calculation of the respective capital amounts at FIL at the dates
indicated:
29
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(THOUSANDS OF DOLLARS)
Common stockholder's equity at FIL .......................................... $ 1,319,010 $ 1,239,701
Less:
Disallowed portion of mortgage servicing rights ........................... (2,073) (1,800)
Unrealized gains on available-for-sale securities ......................... (523) (1,413)
----------- ------------
Total Tier-1 Capital ........................................................ 1,316,414 1,236,488
Add:
Allowable portion of the allowance for loan losses ...................... 100,661 92,178
----------- ------------
Total Risk-Based Capital (Tier-1 and Tier-2) ................................ $ 1,417,075 $ 1,328,666
=========== ============
NOTE 18: DISCONTINUED INSURANCE OPERATIONS IN REGULATORY LIQUIDATION
In December 2002, the Company accrued a charge by setting up a liability
for the maximum amount of its potential future cash contributions to its
discontinued workers' compensation insurance subsidiary, Fremont Indemnity
Company ("Fremont Indemnity"). These future contributions included both
mandatory and contingent cash contributions as per the July 2, 2002 Letter
Agreement of Run-Off and Regulatory Oversight among the California Department of
Insurance, Fremont General and Fremont Indemnity (the "Agreement"). The
Agreement was included as an exhibit to the Company's Form 8-K which was filed
on July 19, 2002.
The Insurance Commissioner of the State of California sought, and was
granted, an order of conservation over Fremont Indemnity by the Superior Court
of the State of California for the County of Los Angeles on June 4, 2003. The
conservation order incorporates the Agreement and also provides that nothing in
the order is intended to modify any of the provisions of the Agreement. The
Insurance Commissioner of the State of California further sought, and was
granted, an order of liquidation over Fremont Indemnity by the Superior Court of
the State of California for the County of Los Angeles on July 2, 2003. Pursuant
to the provisions of the Agreement, the granting of an order of conservation
and/or liquidation prior to March 1, 2004 extinguishes the obligation of the
Company to provide any further cash contributions to Fremont Indemnity.
While the Company owns 100% of the common stock of Fremont Indemnity, the
assets and liabilities of Fremont Indemnity are excluded from the accompanying
consolidated balance sheets as the Company no longer has effective control over
the operation of this subsidiary.
30
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 19: COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ACTIVITIES
The Company is a defendant in a number of legal actions arising in the
ordinary course of business and from the discontinuance of the insurance
operations. Management and its legal counsel are of the opinion that the
settlement of these actions, individually or in the aggregate, will not have a
material effect on the Company's business, financial position or results of
operations.
On June 2, 2004, the State of California Insurance Commissioner John
Garamendi (the "Commissioner"), as statutory liquidator of Fremont Indemnity,
filed suit in Los Angeles Superior Court against Fremont General alleging
improper utilization by Fremont General of certain net operating loss deductions
("NOLs") allegedly belonging to its Fremont Indemnity subsidiary (the "Fremont
Indemnity case"). This complaint involves issues that Fremont General considers
were resolved in the Agreement among the California Department of Insurance,
Fremont Indemnity and Fremont General. The Agreement, dated July 2, 2002, was
executed on behalf of the California Department of Insurance by the Honorable
Harry Low, the State of California Insurance Commissioner at that time. Fremont
General has honored its obligations under the Agreement, and will continue to do
so and believes that the complaint mischaracterizes the terms of the Agreement
and lacks merit.
On January 25, 2005, the Company's motions to dismiss the lawsuit brought
by the Commissioner, on behalf of Fremont Indemnity, against the Company were
argued and heard before the Superior Court of the State of California. On
January 26, 2005 the Court issued its rulings dismissing all the causes of
action in the complaint as follows:
The Court found that the Company had properly utilized the NOLs in
accordance with the Agreement. As a result of this finding, all causes of action
were dismissed without leave to amend, except for the 7th cause of action for
alleged concealment by the Company of a potential reinsurance dispute, which was
dismissed with leave to amend.
In addition, the Court rejected the Commissioner's request for findings
that the Company's use of the NOLs and worthless stock deduction were voidable
preferences and/or fraudulent transfers. The Court also rejected the
Commissioner's request for injunctive relief to force the Company to amend its
prior consolidated income tax returns to remove and forgo the worthless stock
deduction for its investment in Fremont Indemnity.
31
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 2, 2005 the Commissioner filed an amended complaint with regard to
the 7th cause of action on behalf of Fremont Indemnity against the Company
alleging concealment and misappropriation of certain Fremont Indemnity assets
including the improper utilization by the Company of certain net operating
losses allegedly belonging to Fremont Indemnity. The Company continues to
believe that this litigation is without merit and will vigorously defend against
it.
The Commissioner filed a second complaint against Fremont General on behalf
of Comstock Insurance Company ("Comstock"), a former affiliate of Fremont
Indemnity, which was subsequently merged into Fremont Indemnity. This case
alleged similar causes of action regarding the usage of the NOLs as in the
Fremont Indemnity case as well as improper transactions with other insurance
subsidiaries and affiliates of Fremont Indemnity. This matter was deemed a
related case to the Fremont Indemnity case. On April 22, 2005, the Superior
Court of California dismissed, without leave to amend, the entire Complaint
filed by the Commissioner on behalf of Fremont Indemnity, as successor in
interest to Comstock against the Company. This ruling does not address or
necessarily have legal effect on the related Fremont Indemnity case.
The Company, in relation to one of its commercial real estate lending
transactions, has participated in a standby letter of credit which represents a
conditional obligation of the Company; this letter of credit guarantees the
performance of a borrower to a third party in the amount of approximately $17.5
million.
NOTE 20: OPERATIONS BY REPORTABLE SEGMENT
The Company manages its operations based on the types of products and
services offered by each of its strategic business units. Based on that approach
the Company has grouped its products and services into two reportable segments
-- Commercial and Residential Real Estate.
The Commercial Real Estate segment originates commercial real estate loans
on a nationwide basis marketed through the use of trade advertising, direct
marketing, newsletters and trade shows. Loans originated consist primarily of
bridge, construction and permanent loans. Substantially all of the loans
originated are held in the Company's loan portfolio.
The Residential Real Estate segment originates non-prime or sub-prime loans
nationally through independent brokers on a wholesale basis. These loans are
then primarily sold to third party investors on a servicing released basis, or,
to a lesser extent, securitized. Net interest income is recognized on these
loans during the period that the Company holds them for sale; in addition,
servicing income is realized on the loans sold into the Company's
securitizations and on loans sold to other parities on an interim basis.
32
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Management measures and evaluates each of these segments based on total
revenues generated, net interest income and pre-tax operating results. The
results of operations include certain allocated corporate expenses as well as
interest expense charged back to the segments for the use of funds generated by
the Company's corporate and retail banking operations. Interest expense is
allocated among the residential and commercial segments using treasury rates
matched to the terms of the respective loans plus a spread to cover the expenses
of the retail banking operations.
Certain expenses that are centrally managed at the corporate level such as
provision for income taxes and other general corporate expenses are excluded
from the measure of segment profitability reviewed by management. Therefore, the
Company has included these expenses along with the results of the Company's
retail banking operation, which does not meet the definition of a reportable
segment, in the Other category. Historical periods have been restated to conform
to this presentation.
Intersegment eliminations shown in the table below relate to the credit
allocated to the retail banking operations for operating funds provided to the
two reportable segments.
33
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RESIDENTIAL COMMERCIAL INTERSEGMENT TOTAL
REAL ESTATE REAL ESTATE OTHER ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED MARCH 31, 2005
Total revenues .............................. $ 229,234 $ 69,621 $ 59,689 $ (56,714) $ 301,830
Net interest income ......................... 70,304 41,181 7,267 - 118,752
Provision for loan losses ................... (5) 1,041 - - 1,036
Net gain on whole loan sales and
securitizations of residential
real estate loans ......................... 108,360 - - - 108,360
Mortgage servicing rights amortization ...... (4,485) - - - (4,485)
Compensation and related .................... 35,023 6,663 17,594 - 59,280
Other non-interest expense .................. 10,715 (1,644) 11,158 - 20,229
Income before income taxes .................. 133,738 36,904 (19,464) - 151,178
Total consolidated assets ................... 6,148,271 3,680,252 1,129,076 - 10,957,599
THREE MONTHS ENDED MARCH 31, 2004
Total revenues .............................. $ 218,503 $ 77,029 $ 45,177 $ (40,003) $ 300,706
Net interest income ......................... 64,034 52,511 1,018 - 117,563
Provision for loan losses ................... 6,641 10,659 (901) - 16,399
Net gain on whole loan sales and
securitizations of residential
real estate loans ......................... 122,196 - - - 122,196
Mortgage servicing rights amortization ...... (1,370) - - - (1,370)
Compensation and related .................... 39,771 8,856 18,557 - 67,184
Other non-interest expense .................. 9,184 4,770 8,806 - 22,760
Income before income taxes .................. 133,125 28,691 (20,123) - 141,693
Total consolidated assets ................... 4,827,085 3,758,467 1,319,291 - 9,904,843
34
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 21: EARNINGS PER SHARE
Earnings per share have been computed based on the weighted-average number
of shares. The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2005 2004
------- -------
(THOUSANDS OF SHARES
AND DOLLARS, EXCEPT
PER SHARE DATA)
Net income
(numerator for basic earnings per share) ................................. $ 90,102 $ 82,663
Effect of dilutive securities:
LYONs .................................................................... 4 5
-------- --------
Net income available to common stockholders after assumed
conversions (numerator for diluted earnings per share) ................... $ 90,106 $ 82,668
======== ========
Weighted-average shares (denominator for basic earnings per share) ......... 71,368 71,229
Effect of dilutive securities using the treasury stock method
for restricted stock and stock options:
Restricted stock ....................................................... 1,272 2,244
Employee benefit plans ................................................. 1,008 -
Stock options .......................................................... 106 41
LYONs .................................................................. 35 128
-------- --------
Dilutive potential common shares ........................................... 2,421 2,413
-------- --------
Adjusted weighted-average shares and assumed conversions
(denominator for diluted earnings per share) ............................. 73,789 73,642
======== ========
Basic earnings per share ................................................... $ 1.26 $ 1.16
======== ========
Diluted earnings per share ................................................. $ 1.22 $ 1.12
======== ========
35
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 or currently reported
results as a result of significant risks, uncertainties and factors, often
beyond the Company's control (as well as the various assumptions utilized in
determining the Company's expectations), and 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 thereof, and the
effectiveness of the Company's interest risk management, including hedging,
of its funded and unfunded loans;
o the ability to access the necessary capital resources in a cost-effective
manner to fund loan originations, the condition of the whole loan sale and
securitization markets and the timing of sales and securitizations;
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 effectively manage the Company's growth in assets and
volume, including its lending concentrations, and to maintain acceptable
levels of credit quality;
o the ability to collect and realize the amounts outstanding, and the timing
thereof, of loans and foreclosed real estate;
o the variability in determining the level of the allowance for loan losses
and the fair value of the mortgage servicing rights and residual interests
in securitizations;
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;
o the ability to maintain effective compliance with laws and regulations and
control expenses, particularly in periods of significant growth for the
Company;
36
o the impact and cost of adverse state and federal legislation and
regulations, litigation, court decisions and changes in the judicial
climate;
o 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 to maintain an effective system of internal and financial
disclosure controls, and to identify and remediate any control
deficiencies, under the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002;
o other events, risks and uncertainties discussed elsewhere in this Form
10-Q, the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, 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.
OVERVIEW
Fremont General Corporation ("Fremont General" or when combined with its
subsidiaries "the Company") is a holding company which is engaged in lending
operations through its indirectly wholly-owned subsidiary, Fremont Investment &
Loan ("FIL"). FIL is a California state-chartered industrial bank. Fremont
General is not a "bank holding company" as defined for regulatory purposes.
FIL has two primary lending operations, commercial and residential real
estate, both of which are done on a nationwide basis. FIL's commercial real
estate lending operation includes nine regional offices and, as of March 31,
2005 had loans outstanding in 37 states. The residential real estate lending
platform originated loans from 46 states through its five regional loan
production centers during the first quarter of 2005. FIL funds its operations
primarily through deposit accounts sourced in California that are insured up to
the maximum legal limit by the Federal Deposit Insurance Corporation ("FDIC"),
and to a lesser extent, advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). As such, FIL is regulated by the FDIC and the Department of
Financial Institutions of the State of California ("DFI").
FIL's residential real estate lending operation originates first, and to a
lesser degree, second mortgage loans on a wholesale basis through a network of
independent mortgage brokers. FIL offers mortgage products that are designed for
borrowers who do not generally satisfy the credit, documentation or other
underwriting standards prescribed by conventional mortgage lenders, such as
Fannie Mae and Freddie Mac and are commonly referred to as "non-prime" or
"sub-prime". These borrowers generally have considerable equity in the
properties securing their loans, but have impaired or limited credit profiles or
higher debt-to-income ratios than conventional mortgage lenders allow. The
borrowers also include individuals who, due to self-employment or other
circumstances, have difficulty documenting their income through conventional
means. FIL seeks to mitigate its exposure to credit risk through underwriting
standards that strive to ensure appropriate loan to collateral valuations. All
of the residential real estate loans that FIL originates are currently either
sold in whole loan sales to various financial institutions, or to a
37
lesser extent, securitized and sold to various investors. The Company has
retained some of these loans as held for investment in prior periods and may do
so again in the future.
FIL's commercial real estate lending operation provides first mortgage
financing on various types of income producing properties. The commercial real
estate loans that FIL originates are all held for investment, with some loans
participated out to reduce credit limit exposures. Loans are originated through
broker and borrower relationships and the borrowers are typically mid-size
developers and owners seeking a loan structure that provides limited recourse
and is short-term, providing bridge or construction financing for comprehensive
construction, renovation, repositioning and lease-up of existing or new
properties. To manage the credit risk involved in this lending, FIL is focused
on the value and quality of the collateral and the quality and experience of the
parties with whom it does business. The size of loan commitments originated
generally range from $10 million to $60 million, with some loans for larger
amounts.
The Company's two operating lines of business are designed to be somewhat
counter-cyclical and to provide balance in varying economic cycles; however,
both of the Company's operating businesses are influenced by the overall
condition of the economy, in particular the interest rate environment and, as a
result, experience cyclicality in volume, loan losses and earnings. The Company
strives to manage its operations so as to optimize operational efficiency and to
maintain risks within acceptable parameters. The Company's lending operations
generate income as follows:
o All of the residential real estate loans originated are currently sold for
varying levels of gain through whole loan sales to other financial
institutions, and to a lesser degree, to various investors through
securitization transactions. A held for sale valuation reserve, a loan
repurchase reserve and a premium recapture reserve are maintained through
provisions (expense) that are recognized in the consolidated statements of
income. Net interest income is recognized on the loans originated during
the period that the Company holds them for sale. Servicing income is
realized on the loans sold into the Company's securitizations and on an
interim basis for loans sold to other financial institutions.
o Commercial real estate loans, which are held for investment, generate net
interest income on the difference between the rates charged on the loans
and the cost of borrowed funds. An allowance for loan losses is maintained
through provisions (expense) that are recognized in the consolidated
statements of income.
The principal market risks the Company faces are interest rate risk, which
is the risk that the valuation of the Company's interest sensitive loans and
liabilities and its net interest income will change due to changes in interest
rates, and liquidity risk, which is the ability of the Company to access the
necessary funding and capital resources, in a cost-effective manner, to fund its
loan originations or to sell its loans held for sale. The Company endeavors to
mitigate interest rate risk by attempting to match the rate reset (or repricing)
characteristics of its assets with its liabilities. The Company also utilizes
forward loan sale commitments to provide liquidity and to hedge its loans held
for sale. The objective of the Company's
38
interest rate and liquidity risk management activities is to reduce the risk of
operational disruption and to reduce the volatility in income caused by changes
in interest rates; however, the mortgage banking industry is inherently subject
to income volatility due to the effect of interest rate variations on loan
production volume, premiums realized on loan sales and securitizations, as well
as loan pre-payment patterns, which in turn affects the valuation of the
Company's residual interests and mortgage servicing rights, as well as the
amount of loan servicing income realized.
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,
2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On an
on-going basis, the Company evaluates its estimates, which are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company has identified four accounting policies as being critical
because they require more significant judgment and estimates about matters that
may differ from the estimates determined under different assumptions or
conditions. These critical accounting policies relate to the gain on whole loan
sales and securitizations, allowance for loan losses, derivatives and income
taxes. The critical accounting policies and estimates are further discussed in
Management's Discussion and Analysis in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
EARNINGS PERFORMANCE
The Company reported net income of $90.1 million for the first quarter of
2005. This is compared to net income of $82.7 million for the first quarter of
2004. The Company reported income before income taxes of $151.2 million for the
first quarter of 2005 as compared to $141.7 million for the first quarter of
2004. The increase in income before income taxes for the first quarter of 2005
represents an increase of 7% over the results for the first quarter of 2004.
This is primarily a result of increased levels of net interest
39
income and residential real estate loan servicing income, a lower provision for
loan losses, and a reduction in non-interest expense, partially offset by a
reduction in the gain on the sale of residential real estate loans.
NET INTEREST INCOME
The Company recorded net interest income for the first quarter of 2005 of
$118.8 million as compared to $117.6 million for the first quarter of 2004. The
increase in net interest income is primarily a result of an increase in the
average interest-earning assets, primarily residential real estate loans. Total
average interest-earning assets increased 10% to $10.4 billion during the first
quarter of 2005, as compared to $9.5 billion during the first quarter of 2004.
The net interest income margin as a percentage of average interest-earning
assets decreased to an annualized 4.64% for the first quarter of 2005 from 4.99%
for the first quarter of 2004. Net interest income is impacted by the volume,
mix and rate of interest-earning assets and interest-bearing liabilities. The
decrease in the Company's quarterly net interest margin is due primarily to
higher funding costs relative to the yields realized on loans outstanding during
the first quarter of 2005.
The following table identifies the consolidated interest income, interest
expense, average interest-earning assets and interest-bearing liabilities, and
net interest margins, as well as an analysis of changes in net interest income
due to volume and rate changes, for the first quarters of 2005 and 2004:
40
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2005 2004
----------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------- --------- ------ ----------- --------- ------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest-earning assets (1):
Commercial real estate loans ................... $ 3,621,587 $ 66,392 7.43% $ 4,009,753 $ 76,304 7.65%
Residential real estate loans (2) .............. 6,227,301 111,109 7.24% 5,076,294 88,199 6.99%
Syndicated commercial loans .................... - - - 5,949 - -
Residual interests in securitized loans ........ 15,257 1,338 35.57% 7,831 646 33.18%
Cash equivalents and investment securities ..... 517,109 3,085 2.42% 364,302 1,558 1.72%
------------ --------- ----- ----------- --------- -------
Total interest-earning assets ................ $ 10,381,254 $ 181,924 7.11% $ 9,464,129 $ 166,707 7.08%
============ ========= ===== =========== ========= =======
Interest-bearing liabilities:
Time deposits .................................. $ 5,896,354 $ 39,567 2.72% $ 5,191,475 $ 26,751 2.07%
Savings deposits ............................... 1,750,069 9,789 2.27% 1,738,433 8,283 1.92%
FHLB advances .................................. 1,346,347 7,506 2.26% 1,516,769 7,417 1.97%
Warehouse lines of credit ...................... - 219 - - 125 -
Senior notes due 2004 .......................... - - - 18,941 372 7.86%
Senior notes due 2009 .......................... 181,450 3,650 8.05% 190,700 3,836 8.05%
LYONs .......................................... 574 7 4.95% 657 8 4.90%
Junior subordinated debentures ................. 103,093 2,320 9.00% 103,093 2,320 9.00%
Other .......................................... 23,982 114 1.93% 6,348 32 2.03%
------------ --------- ----- ----------- --------- -------
Total interest-bearing liabilities ........... $ 9,301,869 $ 63,172 2.75% $ 8,766,416 $ 49,144 2.25%
============ ========= ===== =========== ========= =======
Net interest income .............................. $ 118,752 $ 117,563
========= =========
Percent of average interest-earning assets:
Interest income ............................... 7.11% 7.08%
Interest expense .............................. 2.47% 2.09%
----- ------
Net interest margin ........................... 4.64% 4.99%
===== ======
(1) Average loan balances include non-accrual loan balances.
(2) Includes loans held for sale and other.
41
THREE MONTHS ENDED MARCH 31,
2005 COMPARED TO 2004
--------------------------------------
CHANGE DUE TO
-----------------------
VOLUME RATE TOTAL
-------- --------- ---------
(THOUSANDS OF DOLLARS)
Cash equivalent and investment securities ......................... $ 776 $ 751 $ 1,527
Loans:
Commercial real estate .......................................... (7,116) (2,796) (9,912)
Residential real estate ......................................... 20,517 2,404 22,921
Other ........................................................... 671 10 681
-------- --------- ---------
Total Loans ..................................................... 14,072 (382) 13,690
-------- --------- ---------
Total increase in interest income ................................. 14,848 369 15,217
-------- --------- ---------
Time deposits ..................................................... (4,730) (8,086) (12,816)
Savings deposits .................................................. (65) (1,441) (1,506)
FHLB advances ..................................................... 950 (1,039) (89)
Warehouse lines of credit ......................................... - (94) (94)
Senior notes due 2004 and 2009 .................................... 558 - 558
LYONs ............................................................. 1 - 1
Junior subordinated debentures .................................... - - -
Other ............................................................. (84) 2 (82)
-------- --------- ---------
Total decrease in interest expense ................................ (3,370) (10,658) (14,028)
-------- --------- ---------
Increase (decrease) in net interest income ........................ $ 11,478 $ (10,289) $ 1,189
======== ========= =========
NON-INTEREST INCOME
WHOLE LOAN SALES AND SECURITIZATIONS OF RESIDENTIAL REAL ESTATE LOANS
The gain on the sale of residential real estate loans decreased from $122.2
million in the first quarter of 2004 to $108.4 million for the first quarter of
2005 in spite of a significant increase in the volume of loans sold and
securitized in the first quarter of 2005 as compared to the first quarter of
2004. The decrease in gain on sale is attributable to the realization of lower
gross premiums on loans sold and securitized in the first quarter of 2005, as
compared to the first quarter of 2004, as a result of lower interest rate
margins reflecting price competition in the non-prime mortgage origination
market. The Company realized a net gain on its derivative instruments utilized
to hedge the impact of interest rate volatility on its residential real estate
lending activities during the first quarter of 2005. This net gain primarily
resulted from an increase in the underlying interest rate indices (primarily the
two-year swap rate) which conversely had a negative impact upon the gross
premiums realized during the same period. A total of $7.06 billion in loans were
sold (including loans sold via securitization) during the first quarter of 2005,
as compared to loan sales and securitizations of $4.63 billion during the first
quarter of 2004. The average gross premium on loans sold and securitized during
the first quarter of 2005 was 2.86% as compared to an average of 4.30% for the
first quarter of 2004. Such premiums and the gain or loss on derivative
instruments have exhibited, and are expected to continue to exhibit, variability
(often significant) based on various economic and interest rate environments.
The gain percentage (the net gain after direct costs, net gains or losses on
derivative instruments, and adjustments to the carrying value of loans held for
sale, divided by net loans sold) on these sales decreased from 2.62% in the
first quarter of 2004 to 1.55% in the first quarter of 2005.
42
The following tables provide the amounts of loans sold during the
respective periods and additional detail on the gain on sale:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
----------- -----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
Loan sales (net of repurchases):
Whole loan ................................................................ $ 5,849,309 $ 3,795,315
Securitization ............................................................ 1,209,849 832,633
----------- -----------
$ 7,059,158 $ 4,627,948
=========== ===========
Gross premium recognized on loan sales and securitizations .................. $ 201,696 $ 199,228
Premium recapture and reversal .............................................. (7,556) (8,693)
----------- -----------
Net premium recognized on loan sales and securitizations .................... 194,140 190,535
Less: Direct costs of loan originations - External .......................... (34,640) (23,255)
Direct costs of loan originations - Internal .......................... (61,372) (40,606)
Direct cost adjustments ............................................... (181) (1,211)
----------- -----------
Total direct costs of loan originations ............................... (96,193) (65,072)
Adjustments to carrying value of loans held for sale ........................ (6,775) (5,218)
Fair value hedge accounting adjustments ..................................... (4,510) -
Net gain on derivative instruments .......................................... 21,698 1,951
----------- ------------
Net gain on sale ....................................................... $ 108,360 $ 122,196
=========== ============
Gross premium recognized on loan sales and securitizations .................. 2.86 % 4.30 %
Premium recapture and reversal .............................................. (0.11)% (0.19)%
----------- ------------
Net premium recognized on loan sales and securitizations .................... 2.75 % 4.11 %
Less: Direct costs of loan originations - External .......................... (0.49)% (0.50)%
Direct costs of loan originations - Internal .......................... (0.87)% (0.88)%
Direct cost adjustments ............................................... 0.00 % (0.03)%
----------- ------------
Total direct costs of loan originations ............................... (1.36)% (1.41)%
Adjustments to carrying value of loans held for sale ........................ (0.09)% (0.12)%
Fair value hedge accounting adjustments ..................................... (0.06)% 0.00 %
Net gain on derivative instruments .......................................... 0.31 % 0.04 %
----------- ------------
Net gain on sale ......................................................... 1.55 % 2.62 %
=========== ============
o Percentages are of total loan sales and securitizations, net of
repurchases, during the period indicated.
o Direct costs are costs directly incurred with the origination of the loans,
net of loan fees received from borrowers, and which are deferred and
recognized when the loans are sold.
o Premium recapture and reversal is the reversal or recapture of premium on
loans sold which either prepay early per the terms of each sales contract
or for certain loans repurchased from prior sales; includes some interest
adjustment on loans repurchased.
o The amount of gain on sale is significantly impacted by the timing of loan
sales and securitizations. A number of factors influence the timing of loan
sales and securitizations, including the current market pricing of the
loans, liquidity requirements and other objectives. The sale or
securitization of loans have, from time to time, been delayed to a later
period, and may be so delayed in future periods.
43
LOAN SERVICING AND OTHER NON-INTEREST INCOME
The components of the Company's other non-interest income for the first
three months of 2005 and 2004 are indicated in the following tables:
THREE MONTHS ENDED
MARCH 31,
----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Loan Servicing Income:
Servicing fee income:
Securitization transactions ............................................. $ 4,380 $ 1,768
Interim ............................................................... 6,507 3,797
Other ................................................................. 831 -
-------- --------
11,718 5,565
Ancillary income ........................................................ 1,970 1,103
Other ................................................................... 299 (129)
-------- --------
$ 13,987 $ 6,539
======== ========
MSR Amortization and Impairment:
MSR amortization ........................................................ $ (4,485) $ (1,370)
MSR impairment provision ................................................ (419) -
-------- --------
$ (4,904) $ (1,370)
======== ========
Other Non-Interest Income:
Prepayment fees:
Commercial real estate .................................................. $ 961 $ 565
Residential real estate ................................................. 562 1,568
Commercial real estate transaction fees ................................... 2,063 724
All other ................................................................. 95 3,777
-------- --------
$ 3,681 $ 6,634
======== ========
The Company's loan servicing income (which is all related to residential
real estate), before mortgage servicing rights amortization and impairment
provision, increased from $6.5 million in the first quarter of 2004 to $14.0
million for the first quarter of 2005. This increase was due to an increase in
residential real estate loan origination volume, which resulted in an increase
in loan securitization activity and higher levels of interim servicing during
the first quarter of 2005 as compared to the first quarter of 2004. The
additional loan securitization activity also created a higher level of MSRs,
which resulted in an increase in the amortization (expense) of the MSRs in 2005
versus 2004.
The Company was servicing approximately $18.7 billion in principal balance
of loans as of March 31, 2005. The Company intends to continue to service the
loans held for sale and those loans it securitizes; however, it currently does
not contemplate servicing a significant amount of loans sold to other parties
for more than on an interim basis. The following is a breakdown of the principal
balance of the loans being serviced by categorization as of the periods
indicated:
44
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
(MILLIONS OF DOLLARS)
Loans in securitizations .................................................... $ 4,017 $ 3,172
Loans held for sale ......................................................... 6,062 5,420
Loans sold and serviced on an interim basis ................................. 8,654 6,364
---------- ------------
$ 18,733 $ 14,956
========== ============
PROVISION FOR LOSSES
The provision for loan losses decreased to a $1.0 million expense for the
first three months of 2005 as compared to a $16.4 million expense for the first
three months of 2004, primarily as a result of a significant decrease in the net
charge-offs experienced for the commercial real estate loans held for investment
during the first quarter of 2005. In addition, the Company has continued to
reduce its exposure to commercial real estate loans secured by hotel and lodging
properties which have been the majority of the non-accrual loans and net
charge-offs in prior periods. The provision for loan losses represents the
current period expense associated with maintaining an appropriate allowance for
loan losses. The loan loss provision for each period is dependent upon many
factors, including loan growth, net charge-offs, changes in the composition and
concentrations of the loan portfolio, the number and balances of non-accrual
loans, delinquencies, the level of restructured loans, assessment by management
of the inherent risk in the portfolio, the value of the underlying collateral
and the general economic conditions in the commercial real estate markets in
which the Company lends. Periodic fluctuations in the provision for loan losses
and the allowance for loan losses result from management's on-going assessment
of their adequacy.
NON-INTEREST EXPENSE
Non-interest expense decreased during the first quarter of 2005, as
compared to the first quarter of 2004. Compensation expense for the first
quarter of 2005 represented most of the change as it decreased to $59.3 million
from $67.2 million in the first quarter of 2004. The decrease is due primarily
to an increase in the capitalization level of direct loan origination costs and,
to a lesser degree, lower levels of accrued incentive compensation and a
decrease in the value of the assets held in certain of the Company's employee
benefit plans, partially offset by increased compensation expense related to the
higher residential real estate loan origination volume and an increase in the
loan servicing portfolio. Compensation and non-compensation related operating
expenses are detailed in the following tables:
45
THREE MONTHS ENDED
MARCH 31,
-----------------------
2005 2004
--------- ---------
(THOUSANDS OF DOLLARS)
Compensation and related .................................................... $ 59,280 $ 67,184
Occupancy ................................................................... 6,935 3,526
Other ....................................................................... 20,229 22,760
--------- ---------
Total non-interest expense .................................................. $ 86,444 $ 93,470
========= =========
THREE MONTHS ENDED
MARCH 31,
-----------------------
2005 2004
--------- ---------
(THOUSANDS OF DOLLARS)
Total compensation and related ............................................. $ 124,550 $ 109,710
Deferral of loan origination costs (1) ..................................... (65,270) (42,526)
--------- ---------
Compensation and related .................................................. $ 59,280 $ 67,184
========= =========
(1) Incremental direct costs associated with the origination of loans are
deferred when incurred. For residential real estate loans, when the related
loan is sold, the deferred costs are included as a component of net gain on
sale.
Other non-interest expense for the three months ended March 31, 2005 and
2004 is summarized below:
MARCH 31,
-----------------------
2005 2004
-------- --------
(THOUSANDS OF DOLLARS)
Legal, professional and other outside services .............................. $ 5,448 $ 5,063
Information technology ...................................................... 3,321 2,539
Printing, supplies and postage .............................................. 3,605 2,768
Advertising and promotion ................................................... 2,702 1,833
Auto and travel ............................................................. 2,130 1,864
Leasing and loan expense .................................................... 1,953 2,580
Net real estate owned expenses .............................................. (4,830) 2,404
Telephone ................................................................... 861 782
All other ................................................................... 5,039 2,927
-------- --------
Total other expenses ........................................................ $ 20,229 $ 22,760
======== ========
INCOME TAXES
Income tax expense of $61.1 million and $59.0 million for the quarters
ended March 31, 2005 and 2004, represent effective tax rates of 40.4% and 41.7%,
respectively, on income before income taxes of $151.2 million and $141.7 million
for the same respective periods. The effective tax rates for all periods
presented are different than the Federal enacted tax rate of 35%, due mainly to
various apportioned state income tax provisions resulting from the Company's
nationwide lending operations.
46
REVIEW OF FINANCIAL CONDITION
LOANS HELD FOR SALE
The Company's residential real estate loans held for sale have increased
from $3.75 billion at March 31, 2004 to $6.09 billion at March 31, 2005; this
increase is reflective of a significant increase in loan production volume.
During the first quarter of 2005, residential real estate loan originations
totaled $7.76 billion as compared to $5.09 billion for the first quarter of
2004. The following table details the loans held for sale as of the dates
indicated:
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
(THOUSANDS OF DOLLARS)
Loan principal balance:
1st trust deeds ......................................................... $ 5,596,117 $ 5,036,724
2nd trust deeds .......................................................... 465,581 383,039
----------- -----------
6,061,698 5,419,763
Basis adjustment for fair value hedge accounting ........................... (5,837) (1,327)
Net deferred direct origination costs ...................................... 79,898 74,514
Less: Valuation reserve ................................................... (44,008) (38,258)
----------- -----------
Loans held for sale - net .................................................. $ 6,091,751 $ 5,454,692
=========== ===========
47
The following table profiles the loan origination volume for the periods
indicated:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
----------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
Loan origination volume by lien position:
Firsts .................................................................... $ 7,160,431 $ 4,885,972
Seconds ................................................................... 601,241 207,129
----------- -----------
$ 7,761,672 $ 5,093,101
=========== ===========
For First Mortgages origination volume only:
Average loan size ......................................................... $ 234,016 $ 207,279
Weighted-average coupon ................................................... 7.05% 6.89%
Average bureau credit score (FICO) ........................................ 621 621
Average loan-to-value (LTV) ............................................... 81.0% 81.9%
Product Mix:
ARM - 2/28 ................................................................ 86.4% 71.0%
ARM - 3/27 ................................................................ 3.0% 3.8%
ARM - 5/25 ................................................................ 0.9% 0.0%
Fixed ..................................................................... 9.7% 25.2%
----------- -----------
100.0% 100.0%
=========== ===========
Loan purpose:
Purchase .................................................................. 45.3% 37.9%
Refinance ................................................................. 54.7% 62.1%
----------- -----------
100.0% 100.0%
=========== ===========
First & Second Mortgages - Origination by geographic dispersion:
California ................................................................ 30.2% 38.0%
New York .................................................................. 11.0% 12.4%
Florida ................................................................... 9.7% 8.0%
New Jersey ................................................................ 6.9% 3.6%
Maryland .................................................................. 4.9% 3.6%
All other states .......................................................... 37.3% 34.4%
----------- -----------
100.0% 100.0%
=========== ===========
LOANS HELD FOR INVESTMENT
The Company's net loans held for investment before the allowance for loan
losses, was approximately $3.82 billion at March 31 2005, as compared to $3.48
billion at December 31, 2004. The following table shows the total commercial
real estate new loan commitment volume for the periods indicated.
48
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ----------
(THOUSANDS OF DOLLARS)
Senior loans ............................................................... $ 1,080,649 $ 385,583
Mezzanine loans ............................................................ - 11,350
----------- -----------
$ 1,080,649 $ 396,933
=========== ===========
Average senior loan size originated ........................................ $ 30,876 $ 22,681
=========== ===========
The following table shows detail for the Company's loans held for
investment outstanding as of the dates indicated:
MARCH 31, 2005 DECEMBER 31, 2004
-------------------------- -------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------------ ---------- ----------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Commercial real estate loans:
Bridge ................................................ $ 1,727,554 45 % $ 1,512,532 43 %
Construction .......................................... 1,162,263 30 % 1,020,370 29 %
Permanent ............................................. 802,040 21 % 805,760 23 %
Single tenant credit .................................. 159,720 4 % 177,193 5 %
------------ ---------- ----------- ---------
3,851,577 100 % 3,515,855 100 %
Other ................................................... 4,579 - 4,526 -
------------ ---------- ----------- ---------
3,856,156 100 % 3,520,381 100 %
Net deferred loan fees and origination costs ............ (36,778) (1)% (35,767) (1)%
------------ ---------- ----------- ---------
3,819,378 99 % 3,484,614 99 %
Allowance for loan losses ............................... (171,941) (5)% (171,525) (5)%
------------- ---------- ----------- ---------
Loans held for investment - net ......................... $ 3,647,437 94 % $ 3,313,089 94 %
============= ========== =========== =========
As of March 31, 2005, approximately 35.4% and 14.4% of the Company's
commercial real estate loans outstanding were secured by properties located
within California and New York, respectively; no other state except Florida
(10.6%) represented greater than 10% of the loan portfolio. The real estate
securing these loans includes a wide variety of property types including
multi-family, office, retail, industrial, land development, lodging and
mixed-use properties. The loans in the portfolio were distributed by property
type as follows as of the dates indicated:
49
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
Multi-family - Condominiums ................................................. 28% 25%
Office ...................................................................... 17% 18%
Land Development ............................................................ 13% 12%
Commercial Mixed-Use ........................................................ 9% 12%
Industrial .................................................................. 9% 11%
Multi-family - Other ........................................................ 8% 5%
Retail ...................................................................... 7% 7%
Special Purpose ............................................................. 5% 5%
Hotels & Lodging ............................................................ 4% 5%
--------- -----------
100% 100%
======== ===========
The following table stratifies the commercial real estate loans held for
investment by loan amounts outstanding as of March 31, 2005 (in thousands of
dollars, except percents and number of loans):
NUMBER TOTAL LOANS
LOAN SIZE RANGE OF LOANS OUTSTANDING %
---------------------------------- --------- ----------- ------
$ 0 - $ 1 million ...... 96 $ 16,513 1%
> $ 1 million - $ 5 million ...... 121 335,227 9%
> $ 5 million - $10 million ...... 90 663,184 17%
> $10 million - $15 million ...... 41 498,852 13%
> $15 million - $20 million ...... 23 395,499 10%
> $20 million - $30 million ...... 24 606,302 16%
> $30 million - $40 million ...... 14 479,386 12%
> $40 million - $50 million ...... 7 316,711 8%
> $50 million .................... 8 539,903 14%
---------- ----------- ------
424 $ 3,851,577 100%
========== =========== ======
As of March 31, 2005, the average loan size was $9.1 million (or $11.7
million when loans under $1 million are excluded) and the average loan-to-value
ratio was approximately 73%, using the most current available appraised values
and current loan balances outstanding.
The Company's largest single individual commercial real estate loan
outstanding at March 31, 2005 was $105.0 million with a total loan commitment of
$105.0 million; during the second quarter of 2005, $21.0 million of this loan
was participated out to another financial institution. The Company's largest net
commitment for a single loan at March 31, 2005 was $105.0 million; this
represents the maximum potential loan amount to the borrower. As of March 31,
2005, the largest concentration of loans (separate loans on different
properties) which have a common investor or equity sponsor totaled $97.6 million
in loan principal outstanding and $205.4 million in total loan commitment and is
comprised of three separate loans, all of which were performing as of March 31,
2005.
50
The following tables provide additional information related to the
Company's commercial real estate non-accrual loans and foreclosed assets
("non-performing assets") and restructured loans on accrual status, as well as
reflect the related net loss experience and allowance for loan loss
reconciliation applicable to the loans held for investment as of and for the
respective periods ended as shown below:
MARCH 31, DECEMBER 31,
2005 2004
-------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
Non-accrual commercial real estate loans
held for investment ("HFI") .............................................. $ 77,633 $ 82,289
Commercial real estate REO .................................................. 18,577 21,344
-------- ---------
Total non-performing assets ................................................. $ 96,210 $ 103,633
======== =========
Accruing commercial real estate loans past due
90 days or more ........................................................... $ - $ -
======== =========
Restructured commercial real estate loans
on accrual status: ........................................................ $ 8,112 $ 9,302
======== =========
Non-accrual loans to total loans HFI ........................................ 2.03% 2.36%
Allowance for loan losses to total loans HFI ................................ 4.50% 4.92%
Allowance for loan losses to non-accrual loans .............................. 221.5% 208.4%
51
THREE MONTHS ENDED MARCH 31, 2005
-------------------------------------------------------
COMMERCIAL RESIDENTIAL
REAL ESTATE REAL ESTATE OTHER TOTAL
----------- ----------- ------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Beginning allowance for loan losses ........................ $ 171,471 $ - $ 54 $ 171,525
Provision for loan losses .................................. 1,041 (1) (4) 1,036
Charge-offs ................................................ (3,983) - - (3,983)
Recoveries ................................................. 3,362 1 - 3,363
----------- ------------ ------- ---------
Net charge-offs ....................................... (621) 1 - (620)
---------- ----------- ------- ---------
Ending allowance for loan losses ........................... $ 171,891 $ - $ 50 $ 171,941
=========== =========== ======= =========
Net loan charge-offs to average total loans
held for investment ................................... 0.07% 0.00% 0.00% 0.07%
=========== =========== ======= ==========
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------
COMMERCIAL RESIDENTIAL
REAL ESTATE REAL ESTATE OTHER TOTAL
----------- ---------- ------ ---------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Beginning allowance for loan losses ........................ $ 194,957 $ 15,643 $ 2,991 $ 213,591
Provision for loan losses .................................. 10,659 6,641 (901) 16,399
Charge-offs ................................................ (9,211) (185) - (9,396)
Recoveries ................................................. 99 87 36 222
----------- ------------ ------- ---------
Net charge-offs ....................................... (9,112) (98) 36 (9,174)
----------- ------------ ------- ---------
Ending allowance for loan losses ........................... $ 196,504 $ 22,186 $ 2,126 $ 220,816
=========== ============ ======= =========
Net loan charge-offs to average total loans
held for investment ................................... 0.91% 0.05% (2.43)% 0.76%
========== ============ ======= =======
There were 14 commercial real estate non-accrual loans held for investment
(the largest having a balance of $15.4 million) totaling $77.6 million, or 2.1%
of the total loans held for investment, as of March 31, 2005. At December 31,
2004 there were 13 commercial real estate loans totaling $82.3 million on
non-accrual status, which represented 2.5% of the total loans held for
investment as of that date. Loans secured by hotel and lodging properties
represented 58% and 55% of the total commercial real estate loans on non-accrual
status as of March 31, 2005 and December 31, 2004, respectively.
REO related to commercial real estate loans was $18.6 million at March 31,
2005, consisting of six properties (the largest having a balance of $7.2
million), which were acquired through or in lieu of foreclosure on loans secured
by real estate. At December 31, 2004 there were 8 commercial real estate
properties owned, totaling $21.3 million.
The level of non-performing assets fluctuates and specific loans can have a
material impact upon the total. Consideration must be given that, due to the
secured nature of the Company's loans and the presence of larger-balance loans,
the classification, and the timing thereof, of an individual loan as non-
52
accrual or REO can have a significant impact upon the level of total
non-performing assets, without necessarily a commensurate increase in loss
exposure.
The allowance for loan losses, as a percentage of total loans held for
investment decreased to 4.50% as of March 31, 2005, as compared to 4.92% as of
December 31, 2004. Total net charge-offs in the first quarter of 2005 totaled
$620,000, as compared to $9.2 million for the first quarter of 2004. In both
periods, substantially all of the charge-offs related to commercial real estate
loans. The net charge-off ratio for commercial real estate loans for the first
three months of 2005 was 0.07% as compared to 0.91% for the first three months
of 2004. Loans secured by hotel and lodging properties represented 0.0% and
78.8% of the total commercial real estate net charge-offs for the first three
months of 2005 and 2004, respectively.
DISCONTINUED INSURANCE OPERATIONS
The property and casualty insurance operation, which was primarily
represented by the underwriting of workers' compensation insurance policies, was
classified as discontinued during the fourth quarter of 2001. The intention at
that time was to allow the liabilities (primarily loss and loss adjustment
expense reserves) related to the discontinued insurance business to run-off and,
as a result, the property and casualty insurance operation was accounted for as
a discontinued operation using the liquidation basis of accounting. Accordingly,
the Company's operating results for 2001 and prior periods were restated to
reflect reporting in this manner for all periods presented. In July 2002,
Fremont General and its discontinued workers' compensation insurance subsidiary,
Fremont Indemnity Company ("Fremont Indemnity") entered into an agreement (the
"Agreement") with the California Department of Insurance (the "DOI") that
allowed Fremont Indemnity, with the oversight of the DOI, to self-administer the
run-off of its operations by paying claims and operating expenses in the
ordinary course of business and also preserve the Company's net operating loss
carryforwards attributable to Fremont Indemnity. The Agreement also obligated
Fremont General to make certain additional cash contributions to Fremont
Indemnity. Further, as a result of the restrictions in the Agreement with the
DOI, the additional adverse loss development, and other actions taken by the DOI
during the fourth quarter of 2002, including placing further restrictions on
Fremont Indemnity's ability to direct the activities of the run-off of the
discontinued insurance operations, the Company no longer had effective control
of these operations and its activities were done at the consent and under the
direction of the DOI. Accordingly, the assets and liabilities of the
discontinued insurance operations as of December 31, 2002 were removed from the
consolidated balance sheets of the Company.
The State of California Insurance Commissioner (the "Commissioner") sought,
and was granted, an order of conservation over Fremont Indemnity by the Superior
Court of the State of California for the County of Los Angeles on June 4, 2003.
The conservation order incorporates the Agreement and also provides that nothing
in the order is intended to modify any of the provisions of the Agreement. The
Commissioner further sought, and was granted, an order of liquidation over
Fremont Indemnity by the Superior Court of the State of California for the
County of Los Angeles on July 2, 2003. Pursuant to the provisions of the
Agreement,
53
the granting of an order of conservation and/or liquidation prior to March 1,
2004 extinguishes the obligation of Fremont General to provide any further cash
contributions to Fremont Indemnity.
LIQUIDITY AND CAPITAL RESOURCES
The commercial and residential real estate lending activities are financed
primarily through deposit accounts offered by FIL and which are insured by the
FDIC. FIL offers certificates of deposit and savings and money market deposit
accounts (insured by the FDIC to the legal maximum) through its 19 branches in
California. FIL minimizes the costs associated with its accounts by not offering
traditional checking, safe deposit boxes, ATM access and other traditional
retail services. Deposits totaled $7.76 billion at March 31, 2005 and are
summarized as to type as follows (in thousands of dollars):
NUMBER OF TOTAL
ACCOUNTS DEPOSITS
--------- -----------
Savings and money market deposit accounts ................................... 30,827 $ 1,733,314
Certificates of deposit:
Retail ................................................................... 97,460 4,397,339
Brokered ................................................................. - 1,630,495
-----------
$ 7,761,148
===========
FIL is also eligible for financing through the Federal Home Loan Bank of
San Francisco ("FHLB"), from which financing is available based upon advance
rates on certain pledged collateral and at various rates and terms. At March 31,
2005, FIL had borrowing capacity with the FHLB of $2.41 billion, of which $1.45
billion was borrowed and outstanding. The $2.41 billion in borrowing capacity
was based upon a total of $2.70 billion in pledged loan collateral at March 31,
2005. FIL's maximum financing availability, based upon its regulatory assets and
subject to the amount of collateral pledged and their related advance rates, was
approximately $3.50 billion as of March 31, 2005.
To add flexibility and capacity to its ability to fund the origination of
residential real estate loans, the Company currently maintains three separate
warehouse lines of credit. The total funding capacity of these three facilities
was $2.0 billion at March 31, 2005. Borrowings, if any, under each of the
facilities are secured by loans held for sale as pledged by FIL. There were no
amounts outstanding at March 31, 2005. The three facilities are summarized as
follows:
o $1 billion master repurchase facility ($500 million committed) with Goldman
Sachs Mortgage Company expiring in February 2006, secured by certain
residential real estate loans held for sale, interest at one-month LIBOR
plus a margin of 0.45%.
o $500 million master loan and security facility ($250 million committed)
with Greenwich Capital
54
Financial Products expiring in September 2005, secured by certain
residential real estate loans held for sale, interest at one-month LIBOR
plus a margin of 0.50%.
o $500 million master repurchase facility ($250 million committed) with
Credit Suisse First Boston Mortgage Capital expiring in January 2006 ,
secured by certain residential real estate loans held for sale, interest at
overnight LIBOR plus a margin of 0.50%.
Each of the facilities is subject to certain conditions, including but not
limited to financial and other covenants. At March 31, 2005, FIL was in
compliance with all financial and other covenants under these facilities.
In addition, FIL has a line of credit with the Federal Reserve Bank of San
Francisco ("FRB") with a borrowing capacity of $293.3 million at March 31, 2005.
There were no amounts outstanding under the line of credit with the FRB at March
31, 2005.
The Company's residential loan disposition strategy is to primarily utilize
whole loan sales and, to a lesser extent, securitizations. The Company attempts
to build multiple whole loan sale relationships to achieve diversity and enhance
market liquidity. During the first three months of 2005, the Company had
transacted whole loan sales with 10 different financial institutions, the
largest institution representing 28.1% of the total whole loan sales volume
during this period.
As a holding company, Fremont General currently pays its operating
expenses, interest expense, taxes, obligations under its various employee
benefit plans, and stockholders' dividends, and meets its other obligations
primarily from its cash on hand and intercompany tax payments and benefit plan
reimbursements from FIL. During 2002 and 2003, Fremont General had significant
net operating loss carryforwards which were used to offset taxable income
generated by FIL. As a result, intercompany payments of federal income tax
obligations from FIL, which were otherwise payable to taxing authorities, were
available for use by Fremont General for general working capital purposes. The
last of the net operating loss carryforwards were fully utilized during 2003 and
only current operating losses at Fremont General will offset taxable income
generated by FIL; as a result, during 2004 and 2005, Fremont General paid most
of the federal income taxes it received from FIL to the federal taxing
authorities. Dividends of $5.3 million and $3.7 million were paid on Fremont
General's common stock in the quarters ending March 31, 2005 and 2004,
respectively; however, no assurance can be given that future common stock
dividends will be declared.
There exist certain California Franchise Tax matters pending resolution, of
which Fremont General is not yet able to make a determination of their ultimate
liability, but does not believe that the actual outcomes of these matters will
adversely impact its liquidity. It is expected that the final resolution of
these matters may take several years.
55
Fremont General has cash and cash equivalents of $89.4 million at March 31,
2005 and no debt maturities until March of 2009.
OFF-BALANCE SHEET ACTIVITIES
In the first quarter of 2005, the Company continued to securitize a certain
amount of its residential real estate loans. Securitization is a process of
transforming the loans into securities, which are sold to investors. The loans
are sold to a qualifying special-purpose entity (a "QSPE") which is legally
isolated from the Company. The QSPE, in turn, issues interest-bearing
securities, commonly known as asset-backed securities, that are secured by the
future cash flows to be derived from the sold loans. The QSPE uses the proceeds
from the issuance of the securities to pay the purchase price of the sold loans.
The Company does not utilize unconsolidated special-purpose entities as a
mechanism to remove non-performing assets from the consolidated balance sheets.
Securitization is used by the Company to provide an additional source of
liquidity. The QSPEs are not consolidated into the Company's financial
statements since they meet the criteria established by SFAS No. 140, "Accounting
for the Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." In general, those criteria require the QSPE to be isolated and
distinct from the transferor (the Company), be limited to permitted activities,
and have defined limits on the assets it can hold and the permitted sales,
exchanges or distributions of its assets.
During the first quarter of 2005, the Company securitized $1.21 billion in
residential real estate loans. The investors and the QSPEs do not have any
recourse to the Company if the cash flows generated by the sold loans are
inadequate to service the securities issued by the QSPEs. At the close of each
securitization, the Company removes from its balance sheet the carrying value of
the loans sold and adds to its balance sheet the estimated fair value of the
assets obtained in consideration for the loans which generally include the cash
received (net of transaction expenses), retained junior class securities
(referred to as residual interests) and mortgage servicing rights.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is subject to market risk resulting primarily from the impact
of fluctuations in interest rates upon balance sheet financial instruments such
as loans, debt and derivatives. Changes in interest rates can affect loan
interest income, gains on the sale of residential real estate loans, interest
expense, loan origination volume, net investment income, and total stockholders'
equity. The level of gain on the sale of residential real estate loans is
dependent upon the level of loan origination volume, the premium paid by the
purchasers of such loans and the gain or loss realized from hedging activities.
Each of these factors, in turn, are highly dependent upon changes in, and the
level of, interest rates and other economic factors. The
56
Company may experience a decrease in the amount of gain it realizes should
significant interest rate volatility 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 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.
The Company is subject to interest rate risk resulting from differences
between the rates on, and repricing characteristics of, interest-earning loans
held for investment (and loans held for sale) and the rates on, and repricing
characteristics of, interest-bearing liabilities used to finance its loans such
as deposits and debt. Interest rate gaps may arise when assets are funded with
liabilities having different repricing intervals or different market indices to
which the instruments' interest rate is tied and to this degree, earnings will
be sensitive to interest rate changes. Additionally, interest rate gaps could
develop between the market rate and the interest rate on loans in the loan
portfolio, which could result in borrowers' prepaying their loan obligations.
The Company attempts to match the characteristics of interest rate sensitive
assets and liabilities to minimize the effect of fluctuations in interest rates.
For the Company's financial instruments, the expected maturity date does not
necessarily reflect the net market risk exposure because certain instruments are
subject to interest rate changes before expected maturity. With respect to the
Company's residential real estate loans held for sale and its unfunded loan
pipeline, the Company attempts to minimize its interest rate risk exposure
through forward loan sale commitments and other derivatives, such as Eurodollar
futures contracts. These derivatives meet the definition of a derivative under
generally accepted accounting principles and, accordingly, they are recorded in
the consolidated financial statements.
The Company is reliant upon the secondary mortgage market for execution of
its whole loan sales and securitizations of residential real estate loans. While
the Company strives to maintain adequate levels of liquidity support and capital
to withstand certain disruptions in the secondary mortgage market, a significant
disruption could adversely impact the Company's ability to fund, sell,
securitize or finance its residential real estate loan origination volume,
leading to reduced gains on sale and a corresponding decrease in revenue and
earnings. A deterioration in performance of the residential real estate loans
after being sold in whole loan sales and securitizations could adversely impact
the availability and pricing of such future transactions.
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, 2004. There have been no material changes in such risks or in
the Company's asset and liability management activities during the three months
ended March 31, 2005.
57
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2005, 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, and its audit committee, have concluded that the
Company's disclosure controls and procedures were effective as of March 31,
2005.
There have been no changes in the Company's internal controls over
financial reporting that occurred in the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
58
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On June 2, 2004, the State of California Insurance Commissioner John
Garamendi (the "Commissioner"), as statutory liquidator of Fremont Indemnity,
filed suit in Los Angeles Superior Court against Fremont General alleging
improper utilization by Fremont General of certain net operating loss deductions
("NOLs") allegedly belonging to its Fremont Indemnity subsidiary (the "Fremont
Indemnity case"). This complaint involves issues that Fremont General considers
were resolved in the Agreement among the California Department of Insurance,
Fremont Indemnity and Fremont General. The Agreement, dated July 2, 2002, was
executed on behalf of the California Department of Insurance by the Honorable
Harry Low, the State of California Insurance Commissioner at that time. Fremont
General has honored its obligations under the Agreement, and will continue to do
so and believes that the complaint mischaracterizes the terms of the Agreement
and lacks merit.
On January 25, 2005, the Company's motions to dismiss the lawsuit brought
by the Commissioner, on behalf of Fremont Indemnity, against the Company were
argued and heard before the Superior Court of the State of California. On
January 26, 2005 the Court issued its rulings dismissing all the causes of
action in the complaint as follows:
The Court found that the Company had properly utilized the NOLs in
accordance with the Agreement. As a result of this finding, all causes of action
were dismissed without leave to amend, except for the 7th cause of action for
alleged concealment by the Company of a potential reinsurance dispute, which was
dismissed with leave to amend.
In addition, the Court rejected the Commissioner's request for findings
that the Company's use of the NOLs and worthless stock deduction were voidable
preferences and/or fraudulent transfers. The Court also rejected the
Commissioner's request for injunctive relief to force the Company to amend its
prior consolidated income tax returns to remove and forgo the worthless stock
deduction for its investment in Fremont Indemnity.
On May 2, 2005 the Commissioner filed an amended complaint with regard to
the 7th cause of action on behalf of Fremont Indemnity against the Company
alleging concealment and misappropriation of certain Fremont Indemnity assets
including the improper utilization by the Company of certain net operating
losses allegedly belonging to Fremont Indemnity. The Company continues to
believe that this litigation lawsuit is without merit and will vigorously defend
against it.
The Commissioner filed a second complaint against Fremont General on behalf
of Comstock Insurance Company ("Comstock"), a former affiliate of Fremont
Indemnity, which was subsequently merged into Fremont Indemnity. This case
alleged similar causes of action regarding the usage of the NOLs as in the
Fremont Indemnity case as well as improper transactions with other insurance
subsidiaries and affiliates of Fremont Indemnity.
59
On April 22, 2005, the Superior Court of California dismissed, without
leave to amend, the entire complaint filed by the Commissioner on behalf of
Fremont Indemnity any, as successor in interest to Comstock, against the
Company. This ruling does not address or necessarily have legal effect on the
related Fremont Indemnity case.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------------------------------------------------------
(c) TOTAL NUMBER (d) MAXIMUM NUMBER
(a)TOTAL OF SHARES (OR UNITS) (OR APPROXIMATE DOLLAR
NUMBER OF (b) AVERAGE PURCHASED AS PART VALUE) OF SHARES (OR
SHARES PRICE PAID OF PUBLICLY UNITS) THAT MAY YET BE
(OR UNITS) PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED (1) (OR UNIT) (1) OR PROGRAMS PLANS OR PROGRAMS
----------------------------------- ------------- ------------ ------------------- -----------------------
January 1-31, 2005 1,213,618 $ 24.95 1,213,618
------------------------------------------------------------------------------------------------------------------------------
February 1-28, 2005 167 $ 24.71 167
------------------------------------------------------------------------------------------------------------------------------
March 1-31, 2005 2,500 $ - 2,500
------------------------------------------------------------------------------------------------------------------------------
Total 1,216,285 $ 24.90 1,216,285 355,869
=============================================================================================================================
(1) Shares of common stock purchased by the Company from participants under its
restricted stock program and/or Supplemental Executive Retirement Plan.
ITEM 6: 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(a) Amended and Restated Bylaws 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.)
3.3(b) Fremont General Corporation Bylaw Amendment Adopted by the Board of
Directors on November 30, 2003. (Incorporated by reference to Exhibit
3.3(b) to the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 2003, Commission File Number 1-8007.)
3.3(c) Fremont General Corporation Bylaw Amendment Adopted by the Board of
Directors on March 16, 2004. (Incorporated by reference to Exhibit 3.1
to the Registrant's Quarterly Report on Form 10-Q, for the period
ended June 30, 2004, Commission File Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1
60
EXHIBIT
NO. DESCRIPTION
------ ---------------------------------------------------------------------
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.)
10.1 Fremont General Corporation Executive Officer Annual Bonus Plan.
(Incorporated by reference to the Registrant's Current Report on Form
8-K filed on March 30, 2005, Commission File Number 1-8007.)
10.2 Fremont General Corporation Executive Officer Long Term Incentive
Compensation Plan. (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on March 30, 2005, Commission File
Number 1-8007.)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
With respect to long-term debt instruments, the Registrant undertakes to provide
copies of such agreements upon request by the Commission.
61
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 9, 2005 /s/ LOUIS J. RAMPINO
-----------------------------------------
Louis J. Rampino
President and Chief Executive Officer
Date: May 9, 2005 /s/ PATRICK E. LAMB
-----------------------------------------
Patrick E. Lamb
Senior Vice President, Chief Financial
Officer, Chief Accounting Officer and
Treasurer
(Principal Accounting Officer)
62