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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, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
COMMISSION FILE NUMBER 1-8007
FREMONT GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 95-2815260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2020 Santa Monica Blvd.
Santa Monica, California 90404
(Address of principal executive offices)
(Zip Code)
(310) 315-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock:
SHARES OUTSTANDING
CLASS APRIL 30, 2004
Common Stock, $1.00 par value 77,078,000
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FREMONT GENERAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE
NO.
----
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003 ......... 3
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003 (Unaudited) ... 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 (Unaudited) ... 5
Notes to Consolidated Financial Statements on Form 10-Q
(Unaudited) .............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 35
Item 4. Controls and Procedures ....................................... 36
PART II - OTHER INFORMATION
Items 1-5. Not applicable
Item 6. Exhibits and Reports on Form 8-K .............................. 37
Signatures ............................................................... 39
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
ASSETS
Cash and cash equivalents ................................................... $ 911,472 $ 835,651
Investment securities available for sale at fair value ...................... 1,753 1,958
Federal Home Loan Bank ("FHLB") stock ....................................... 115,410 112,587
Loans held for sale - net ................................................... 3,749,394 3,650,167
Loans held for investment - net ............................................. 4,733,404 4,577,419
Mortgage servicing rights ................................................... 11,438 6,898
Residual interests in securitized loans at fair value ....................... 13,741 6,530
Accrued interest receivable ................................................. 38,853 38,663
Real estate owned - net ..................................................... 37,010 25,466
Premises and equipment - net ................................................ 27,973 24,897
Deferred income taxes ....................................................... 186,858 193,304
Other assets ................................................................ 73,368 48,367
----------- -----------
TOTAL ASSETS ........................................................... $ 9,900,674 $ 9,521,907
=========== ===========
LIABILITIES
Deposits:
Savings accounts .......................................................... $ 1,315,504 $ 1,244,083
Money market deposit accounts ............................................. 450,763 412,524
Certificates of deposit ................................................... 5,324,495 4,976,559
----------- -----------
7,090,762 6,633,166
Warehouse lines of credit ................................................... - -
FHLB advances ............................................................... 1,467,000 1,650,000
Senior Notes due 2004 ....................................................... - 22,377
Senior Notes due 2009 ....................................................... 189,070 188,987
Liquid Yield Option Notes due 2013 ("LYONs") ................................ 659 654
Junior Subordinated Debentures / Preferred Securities ....................... 103,093 100,000
Other liabilities ........................................................... 298,329 261,991
----------- ----------
TOTAL LIABILITIES ...................................................... 9,148,913 8,857,175
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share-- Authorized: 150,000,000 shares;
Issued and outstanding: (2004 - 77,077,000 and 2003 - 75,990,000) ......... 77,077 75,990
Additional paid-in capital .................................................. 333,003 296,000
Retained earnings ........................................................... 406,925 328,044
Deferred compensation ....................................................... (67,950) (35,889)
Accumulated other comprehensive income ...................................... 2,706 587
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................. 751,761 664,732
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 9,900,674 $ 9,521,907
=========== ===========
See notes to consolidated financial statements.
3
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ---------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fee income on loans:
Residential ............................................................ $ 88,090 $ 44,580
Commercial ............................................................. 76,304 73,974
Other .................................................................. 109 82
--------- ---------
164,503 118,636
Interest income - other .................................................. 2,204 2,497
--------- ---------
166,707 121,133
INTEREST EXPENSE:
Deposits ................................................................. 35,034 33,371
FHLB advances ............................................................ 7,417 4,847
Warehouse lines of credit ................................................ 125 -
Senior Notes ............................................................. 4,208 5,193
Junior Subordinated Debentures / Preferred Securities .................... 2,320 2,250
Other .................................................................... 40 267
--------- ---------
49,144 45,928
Net interest income ........................................................ 117,563 75,205
Provision for loan losses .................................................. 16,399 22,920
--------- ---------
Net interest income after provision for loan losses ........................ 101,164 52,285
NON-INTEREST INCOME:
Net gain (loss) on:
Whole loan sales and securitizations of residential real estate loans .. 122,196 55,972
Sales of real estate owned ............................................. (495) (447)
Sale of residual interests in securitized loans ........................ - 17,503
Whole loan sales of other loans ........................................ - 4
Extinguishment of debt ................................................. - 93
Net loan servicing income ................................................ 5,169 1,986
Other .................................................................... 6,820 3,644
--------- ---------
133,690 78,755
NON-INTEREST EXPENSE:
Compensation ............................................................. 67,184 38,682
Occupancy ................................................................ 3,508 2,857
Expenses and provision for losses related to real estate owned ........... 2,095 1,844
Other .................................................................... 20,374 16,831
--------- ---------
93,161 60,214
Income before income taxes ................................................. 141,693 70,826
Income tax expense ......................................................... 59,030 29,250
--------- ---------
Net income ................................................................. $ 82,663 $ 41,576
========= =========
PER SHARE DATA:
NET INCOME:
Basic .................................................................... $ 1.16 $ 0.60
Diluted .................................................................. 1.12 0.60
See notes to consolidated financial statements.
4
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
----------- ------------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income ................................................................ $ 82,663 $ 41,576
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ............................................... 16,399 22,920
Sale of residual interests in securitized loans ......................... - 22,749
Increase in residual interests in securitized loans ..................... (3,019) -
Increase in mortgage servicing rights ................................... (5,910) -
Deferred income tax expense ............................................. 4,745 22,618
Depreciation and amortization ........................................... 5,619 4,398
Change in other assets and liabilities .................................. 40,469 15,069
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE LOANS
HELD FOR SALE ACTIVITY .............................................. 140,966 129,330
Originations of loans held for sale ..................................... (4,727,644) (2,309,381)
Sale of and payments received from loans held for sale .................. 4,627,948 2,180,966
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 41,270 915
INVESTING ACTIVITIES
Originations and advances funded for loans held for investment ............ (715,809) (759,144)
Payments received from and sales of loans held for investment ............. 531,470 754,783
Investment securities available for sale:
Purchases ............................................................... (16) (350,001)
Maturities or repayments ................................................ 206 300,665
Net (purchases) or sales of FHLB stock .................................... (2,823) 9,501
Cash contributions to discontinued insurance operations ................... - (3,313)
Purchases of premises and equipment ....................................... (5,205) (4,351)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES ......................... (192,177) (51,860)
FINANCING ACTIVITIES
Deposits accepted, net of repayments ...................................... 457,596 454,811
FHLB repayments, net of advances .......................................... (183,000) (450,000)
Extinguishment of Senior Notes ............................................ (22,385) (4,316)
Dividends paid ............................................................ (3,728) (1,490)
Stock options exercised ................................................... 11,602 -
(Increase) decrease in deferred compensation plans ........................ (33,357) 118
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................... 226,728 (877)
Increase (decrease) in cash and cash equivalents ............................ 75,821 (51,822)
Cash and cash equivalents at beginning of period ....................... 835,651 236,376
----------- ------------
Cash and cash equivalents at end of period .................................. $ 911,472 $ 184,554
=========== ============
See notes to consolidated financial statements
5
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON FORM 10-Q
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
These consolidated statements of Fremont General Corporation and
subsidiaries (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States and, accordingly, adjustments
(consisting of normal accruals) have been made as management considers necessary
for fair presentations. The Company's principal operating subsidiary is its
industrial bank, Fremont Investment & Loan ("FIL"). For further information,
refer to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Certain 2003 amounts have been reclassified to conform to the 2004 presentation.
NOTE B: 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 amortized cost or
estimated fair value. Estimated fair values are based upon current market yields
required by investors and recent sales of pools of similar loans. Amortized cost
includes the unpaid loan principal balance and the direct costs of origination,
less the net amount of fees received from the borrower. The following table
details the loans held for sale as of the dates indicated (thousands of
dollars):
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
Loan principal balance:
1st trust deeds ........................................................... $ 3,575,360 $ 3,466,432
2nd trust deeds ........................................................... 153,023 160,855
----------- -----------
3,728,383 3,627,287
Deferred origination costs, net of loan fees received ...................... 53,364 50,067
----------- -----------
3,781,747 3,677,354
Less: Valuation reserve .................................................... (32,353) (27,187)
----------- -----------
Loans held for sale - net ................................................... $ 3,749,394 $ 3,650,167
=========== ===========
Loans held for sale on non-accrual status ................................... $ 10,355 $ 6,253
=========== ===========
6
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 whole loan sale transactions and securitizations. During the
quarters ended March 31, 2004 and 2003, the Company repurchased $22.0 million
and $47.4 million, respectively, of loans from whole loan sale transactions. In
the ordinary course of business, as the loans held for sale are sold, the
Company makes standard industry representation 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 2004, a total of $22.0 million in loans were
repurchased by the Company, as compared to $47.4 million in the first quarter of
2003. The Company maintains a valuation reserve for potential losses that arise
in connection with repurchased loans; this reserve is netted against the total
loans held for sale.
The Company also maintains a reserve for premium recapture that represents
the estimate of potential refunds of premiums received on completed loan sales,
primarily due to early loan prepayments, that may occur under the provisions of
the various agreements entered into for the sale of loans held for sale; this
reserve totaled $9.0 million and $3.9 million as of March 31, 2004 and December
31, 2003, respectively, and is included in other liabilities.
NOTE C: LOANS HELD FOR INVESTMENT
Loans held for investment consist of commercial and residential real estate
loans and syndicated commercial 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, 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, 2004,
the Company had $1.41 billion in unfunded commitments for existing loans and
$152.8 million in unfunded commitments for loans not yet booked. 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 $103.4 million and $78.3 million as
of March 31, 2004 and December 31, 2003, respectively. The Company's commercial
real estate loans receivable include mezzanine loans (second mortgage loans,
which are subordinate to the senior or
7
first mortgage loans) in the amount of $50.7 million and $36.4 million as of
March 31, 2004 and December 31, 2003, respectively. The interest rates charged
by the Company on mezzanine loans are higher than the interest rates on the
Company's senior or first mortgage loans; however, the mezzanine loans do carry
the additional risk of a subordinated position in the borrowing entity's capital
structure.
Residential real estate loans have loan terms for up to thirty years and
are secured by first deeds of trust on single-family residences. The Company's
residential real estate loans receivable and 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".
Syndicated commercial loans are variable rate senior commercial loans and
are generally secured by substantially all of the assets of the borrower.
The following tables further detail the net loans held for investment as of
the dates indicated (thousands of dollars):
8
MARCH 31, 2004
----------------------------------------------------------------
COMMERCIAL RESIDENTIAL SYNDICATED
REAL ESTATE REAL ESTATE COMMERCIAL/OTHER TOTAL
----------- ----------- ---------------- -----------
Loans outstanding ........................................... $ 4,030,509 $ 1,038,038 $ 9,306 $ 5,077,853
Participations sold ......................................... (103,420) - - (103,420)
----------- ----------- ---------------- -----------
Loans outstanding, net of participations sold ............... 3,927,089 1,038,038 9,306 4,974,433
Deferred origination fees and costs ......................... (31,170) 11,062 (105) (20,213)
----------- ----------- ---------------- -----------
Loans before allowance for loan losses ...................... 3,895,919 1,049,100 9,201 4,954,220
Allowance for loan losses ................................... (196,547) (22,150) (2,119) (220,816)
----------- ----------- ---------------- -----------
Loans held for investment-net ............................... $ 3,699,372 $ 1,026,950 $ 7,082 $ 4,733,404
=========== =========== ================ ===========
DECEMBER 31, 2003
----------- ------------------------------------------------
COMMERCIAL RESIDENTIAL SYNDICATED
REAL ESTATE REAL ESTATE COMMERCIAL/OTHER TOTAL
----------- ----------- ---------------- ----------
Loans outstanding ........................................... $ 4,093,313 $ 789,951 $ 11,472 $ 4,894,736
Participations sold ......................................... (78,290) - - (78,290)
---------- ----------- ---------------- ----------
Loans outstanding, net of participations sold ............... 4,015,023 789,951 11,472 4,816,446
Deferred origination fees and costs ......................... (33,101) 7,770 (105) (25,436)
----------- ----------- ---------------- -----------
Loans outstanding before allowance for loan losses .......... 3,981,922 797,721 11,367 4,791,010
Allowance for loan losses ................................... (195,000) (15,607) (2,984) (213,591)
------------ ----------- ---------------- -----------
Loans held for investment-net ............................... $ 3,786,922 $ 782,114 $ 8,383 $ 4,577,419
=========== =========== ================ ===========
The Company employs a documented and systematic methodology in determining
the adequacy of its allowance for loan losses, which assesses the risk and
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. Establishment of the allowance for loan losses involves determining
reserves for individual loans that have been deemed to have significant
weaknesses, including impaired loans, and for groups of loans that are evaluated
collectively. Reviews are performed to set an allowance for loans that have been
individually evaluated and identified as loans which have probable losses; these
loans are generally larger-balance commercial real estate and syndicated
commercial loans, and reserve requirements are attributable to specific
weaknesses evidenced by various factors such as a deterioration in the quality
of the collateral securing the loan, payment delinquency or other events of
default. Loans that currently exhibit no significant identifiable weaknesses or
impairment are evaluated on a collective basis. The allowance for loan losses
methodology incorporates management's judgment concerning the effect of recent
economic events on portfolio performance. Activity in the allowance for loan
losses is summarized in the following table:
9
FOR THE PERIODS ENDED
---------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
--------- ---------- ---------
(THOUSANDS OF DOLLARS)
Balance - beginning of period ...................................... $ 213,591 $ 161,190 $ 161,190
Provision for loan losses .......................................... 16,399 98,262 22,920
Recoveries ......................................................... 222 874 43
Charge-offs ........................................................ (9,396) (46,735) (8,991)
--------- --------- ---------
Balance - end of period ............................................ $ 220,816 $ 213,591 $ 175,162
========= ========= =========
In addition to its allowance for loan losses, the Company maintains an
allowance for unfunded loan commitments on existing loans and loans not yet
funded; this allowance totaled $5.3 million as of March 31, 2004 and is included
in other liabilities.
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. As of March 31, 2004,
commercial real estate loans totaling $9.4 million were included in accrual
status that had been modified during the first quarter of 2004 in connection
with debt restructurings. At March 31, 2003, commercial real estate loans
totaling $9.0 million were included in accrual status that had been modified
during the first quarter of 2003 in connection with debt restructurings.
NOTE D: RESIDUAL INTEREST IN SECURITIZED LOANS AND MORTGAGE SERVICING RIGHTS
Residual interests in loan securitizations are recorded on each transaction
as a result of the sale of loans through a securitization transaction and the
subsequent issuance of net interest margin securities ("NIMs"). In 1999, the
Company securitized $1.41 billion of its residential real estate loans (in three
separate transactions and without the utilization of NIMs); the residual
interests in loan securitizations from the 1999 transactions were all sold
during the first quarter of 2003 resulting in a pre-tax gain of $17.5 million.
The following table reflects the activity of the residual interests in loan
securitizations.
10
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
-------- ---------
(THOUSANDS OF DOLLARS)
Beginning balance at fair value ..................................... $ 6,530 $ 22,749
Sale of residual interests from 1999 transactions ................... - (22,749)
Additions of residual interests ..................................... 3,019 -
Accretion of interest ............................................... 646 -
Cash received ....................................................... - -
Fair value adjustment ............................................... 3,546 -
-------- ---------
Ending balance at fair value ........................................ $ 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"). The Company's only ownership interest in the off-balance
sheet QSPEs is reflected in the residual interests of $13.7 million as detailed
below. A summary of the loans securitized and the related residual interests is
as follows:
MARCH 31, 2004
----------------------------------
LOAN
PRINCIPAL LOAN
ORIGINALLY PRINCIPAL RESIDUAL INTERESTS
SECURITIZED OUTSTANDING AT FAIR VALUE
------------ ----------- ------------------
(THOUSANDS OF DOLLARS)
2003-A .................. $ 561,577 $ 497,939 $ 5,261
2003-B .................. 618,904 586,168 5,405
2004-A .................. 832,633 818,641 3,075
------------ ----------- ------------------
$ 2,013,114 $ 1,902,748 $ 13,741
============ =========== ==================
The following are the key assumptions utilized by the Company to estimate
the fair value of its residual interests in loan securitizations as of March 31,
2004:
FREMONT HOME LOAN TRUST
----------------------------
2003-A 2003-B 2004-A
------ ------ ------
Weighted-average life (years) ........................................ 1.77 1.80 1.66
Weighted-average prepayment speed (CPR) .............................. 38.0% 36.2% 34.4%
Expected cumulative credit losses .................................... 5.1% 4.8% 4.5%
Interest rates on adjustable rate loans .............................. ----Forward Libor Curve----
Weighted-average coupon - current .................................... 7.4% 7.2% 7.6%
Discount rate ........................................................ 20% 20% 20%
11
For each of the above loan securitization transactions, the Company
services the underlying loans and receives compensation for doing so. As the
servicer for each securitization, the Company is required to make certain
advances to the securitization QSPE 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 at March 31, 2004 was $1.3 million, although this amount is expected to
increase over time.
The following table summarizes the activity in the Company's mortgage
servicing rights asset for the first quarter of 2004; there were no mortgage
servicing rights in the first quarter of 2003 (in thousands of dollars):
Beginning balance at January 1, 2004 .......................... $ 6,898
Additions from securitization transactions .................... 5,910
Amortization .................................................. (1,370)
--------
Balance at March 31, 2004 ..................................... $ 11,438
========
The estimated fair value of the Company's mortgage servicing rights at
March 31, 2004 was $12.2 million.
NOTE E: DEBT - FREMONT GENERAL CORPORATION
The debt of the holding company, Fremont General Corporation ("FGC"), is
detailed in the following table; none of the debt of FGC is guaranteed by FIL:
MARCH 31, DECEMBER 31,
2004 2003
--------- -----------
(THOUSANDS OF DOLLARS)
Senior Notes due 2004, less discount (2003 - $8) ............................... $ - $ 22,377
Senior Notes due 2009, less discount (2004 - $1,630; 2003 - $1,713) ............ 189,070 188,987
Liquid Yield Option Notes due 2013, less discount (2004 - $406; 2003 - $416) .... 659 654
Junior Subordinated Debentures / Preferred Securities ........................... 103,093 100,000
--------- -----------
$ 292,822 $ 312,018
========= ===========
In 1996, Fremont General Financing I, a statutory business trust (the
"Trust") and consolidated wholly-owned subsidiary of Fremont, sold $100 million
of 9% Trust Originated Preferred Securities SM ("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
12
Securities were invested in 9% Junior Subordinated Debentures of Fremont ("the
Junior Subordinated Debentures"). The Junior Subordinated Debentures are the
sole asset of the Trust.
With the adoption of the Financial Accounting Standards Board ("FASB")
Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46")
the Trust has been deconsolidated from the Company's March 31, 2004 financial
statements. The $103.1 million of Junior Subordinated Debentures represents the
liability to the Trust. The adoption of FIN 46 had no material impact on the
Company's financial position or results of operations.
NOTE F: DEPOSITS, FHLB ADVANCES AND WAREHOUSE LINES OF CREDIT - FREMONT
INVESTMENT & LOAN
FIL utilizes the issuance of deposits, which are insured up to certain
limits by the Federal Deposit Insurance Corporation ("FDIC"), Federal Home Loan
Bank ("FHLB") advances and warehouse lines of credit in funding its operations.
Certificates of deposit as of March 31, 2004 are detailed by maturity and
rates as follows (thousands of dollars, except percents):
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
----------- ------------ ------------
$ 5,060,930 2005 1.93%
177,708 2006 3.53%
33,381 2007 6.08%
2,380 2008 5.02%
35,369 2009 5.57%
14,727 2010 6.27%
----------- -----------
$ 5,324,495 2.04%
=========== ===========
Of the total certificates of deposit outstanding at March 31, 2004, $2.46
billion were obtained through brokers.
The FHLB advances are collateralized by loans pledged to the FHLB. As of
March 31, 2004, a total of $2.78 billion in loans were pledged to the FHLB,
primarily residential real estate loans. The following table details the amounts
due the FHLB as of March 31, 2004 by maturities and rates (thousands of dollars,
except percents):
13
MATURING BY WEIGHTED
AMOUNT MARCH 31, AVERAGE RATE
----------- ----------- ------------
$ 755,000 2005 2.18%
614,000 2006 1.88%
98,000 2007 2.07%
----------- ------------
$ 1,467,000 2.04%
=========== ============
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, 2004 under the
three facilities was $1.5 billion, of which $750 million was committed. There
were no amounts outstanding at March 31, 2004. Borrowings under each of the
facilities 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, 2004, the Company was in compliance with all
financial and other covenants.
NOTE G: INCOME TAXES
The major components of income tax expense (benefit) are summarized in the
following table:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- -------
(THOUSANDS OF DOLLARS)
Federal:
Current ............................................. $ 42,356 $ (4,005)
Deferred ............................................ 5,684 26,920
-------- --------
48,040 22,915
-------- --------
State:
Current ............................................. 11,929 10,637
Deferred ............................................ (939) (4,302)
-------- --------
10,990 6,335
-------- --------
Income tax expense .................................... $ 59,030 $ 29,250
======== ========
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:
14
MARCH 31, DECEMBER 31,
2004 2003
--------- -----------
(THOUSANDS OF DOLLARS)
Deferred tax assets:
Mark-to-market on loans held for sale .................................... $ 131,722 $ 124,255
Allowance for credit losses .............................................. 97,715 94,614
State income and franchise taxes ......................................... 8,989 18,661
Discontinued operations .................................................. 13,654 13,654
Employee benefit expenses ................................................ 12,691 12,100
--------- ----------
Total deferred tax assets .............................................. 264,771 263,284
Deferred tax liabilities:
Deferred loan origination costs .......................................... (70,067) (65,832)
Originated mortgage servicing rights ..................................... (4,866) (2,934)
Other, net ............................................................... (2,980) (1,214)
--------- ----------
Total deferred tax liabilities ......................................... (77,913) (69,980)
--------- ----------
Net deferred tax asset ..................................................... $ 186,858 $ 193,304
========= ==========
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.
NOTE H: 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.
At March 31, 2004, the Company had a pipeline of loans in process of
approximately $2.02 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 marked to estimated fair
value and changes are recorded as a component of
15
gain on the sale of residential real estate loans. Fair value is estimated based
upon the change in the estimated fair value of underlying mortgage loans,
adjusted for the expected impact of loans not funding within the initial terms.
The change is measured from the date of interest rate lock, therefore at the
time of issuance; the value of interest rate lock is zero. Subsequently, the
interest rate lock value can be positive or negative.
The Company also enters into commitments to sell residential real estate
loans to third party investors in whole loan sale transactions. As of March 31,
2004, the Company had approximately $2.28 billion in commitments to sell at
variable rates and terms. These forward sale commitments are recorded at
estimated fair value and changes in value are reported as a component of gain on
the sale of residential real estate loans.
The Company also enters into interest rate cap contracts as part of its
process of securitizing loans and issuing NIMs. These interest rate cap
contracts are recorded at estimated fair value with changes in value, prior to
securitization and the issuance of NIMs, reported as a component of gain on the
sale of residential real estate loans.
As of March 31, 2004, the estimated fair values of the Company's
derivatives were as follows (included in other assets in the consolidated
balance sheets):
ESIMATED
FAIR VALUE
-------------
(THOUSANDS OF
DOLLARS)
Interest rate cap contract ..................................... $ 5,183
Forward sales commitments ...................................... 3,575
Interest rate lock commitments ................................. 205
-------------
$ 8,963
=============
At March 31, 2004, the Company had total loan commitments of $1.57 billion
related to commercial real estate loans pending funding or advances under
existing loan agreements. While commitment amounts are useful for
period-to-period comparisons, caution should be used in attempting to use
commitments as a basis for predicting future outstanding balances.
16
NOTE I: 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 organizations that are experiencing or
anticipating significant growth are generally expected to maintain capital
ratios above minimum levels.
As of March 31, 2004, 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 a total risk-based capital as
set forth in the following table and not be subject to a capital directive
order. There have been no conditions or events since that notification that
management believes have changed FIL's categorization as "well-capitalized". The
FDIC and FIL, however, have agreed that FIL will maintain a Tier 1 Leverage
Ratio of at least 8.5%. As of March 31, 2004, FIL's Tier 1 Leverage Ratio was
9.78%. Management does not anticipate any difficulties in maintaining a Tier 1
Leverage Ratio of at least 8.5%. FIL's actual regulatory amounts and related
ratios are detailed in the table below.
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 stockholders' 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.
17
MARCH 31, 2004
-----------------------------------------
MINIMUM ACTUAL ACTUAL
REQUIRED (1) RATIO AMOUNT
----------- ------ -----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 Leverage Capital ................. 5.00% 9.78% $ 924,933
Risk-Based Capital:
Tier 1 ........................... 6.00% 13.10% $ 924,933
Total ............................ 10.00% 14.39% $ 1,015,797
DECEMBER 31, 2003
-----------------------------------------
MINIMUM ACTUAL ACTUAL
REQUIRED (1) RATIO AMOUNT
----------- ------ -----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 Leverage Capital ................. 5.00% 9.54% $ 831,811
Risk-Based Capital:
Tier 1 ........................... 6.00% 12.57% $ 831,811
Total ............................ 10.00% 13.85% $ 916,887
(1) Regulatory minimum required to qualify as "well-capitalized".
NOTE J: TOTAL COMPREHENSIVE INCOME
The components of total comprehensive income are summarized in the
following table:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
(THOUSANDS OF DOLLARS)
Net income .................................................................. $ 82,663 $ 41,576
Other comprehensive income (loss):
Net change in unrealized gains during the period:
Residual interests in securitized loans ................................. 3,546 -
Investment securities ................................................... (15) (41)
-------- -------
3,531 (41)
Less deferred income tax expense (benefit) ................................ 1,412 (18)
-------- -------
Other comprehensive income (loss) ....................................... 2,119 (23)
-------- --------
Total comprehensive income .................................................. $ 84,782 $ 41,553
======== ========
18
NOTE K: OPERATIONS BY REPORTABLE SEGMENT
The Company's business is engaged in four reportable segments: commercial
real estate; residential real estate; syndicated commercial and retail banking.
Additionally, there are certain corporate revenues and expenses, comprised
primarily of investment income, interest expense and certain general and
administrative expenses, that are not allocated to the reportable segments.
The following data for the three months ended March 31, 2004 and 2003
provide certain information related to the reportable segment disclosure.
Intersegment eliminations relate to the credit allocated to retail banking for
operating funds provided to the other three reportable segments.
COMMERCIAL RESIDENTIAL SYNDICATED RETAIL INTERSEGMENT TOTAL
REAL ESTATE REAL ESTATE COMMERCIAL BANKING OTHER ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- -------- -------- ------------ ------------
(THOUSANDS OF DOLLARS)
Three months ended March 31, 2004
Total revenues .................... $ 77,215 $ 218,008 $ - $ 40,124 $ 5,053 $ (40,003) $ 300,397
Net interest income ............... 52,511 64,034 (60) 4,968 (3,890) - 117,563
Income before income taxes ........ 28,691 133,125 833 - (20,956) - 141,693
Three months ended March 31, 2003
Total revenues .................... $ 75,755 $ 121,375 $ 11 $ 37,955 $ 2,599 $ (37,807) $ 199,888
Net interest income ............... 47,298 28,930 (168) 4,436 (5,291) - 75,205
Income before income taxes ........ 10,317 77,685 2,230 (92) (19,314) - 70,826
19
NOTE L: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- -------
(IN THOUSANDS EXCEPT,
PER SHARE DATA)
Net income
(numerator for basic earnings per share) ................................. $ 82,663 $ 41,576
Effect of dilutive securities:
LYONs .................................................................... 5 23
-------- --------
Net income available to common stockholders after assumed
conversions (numerator for diluted earnings per share) ................ $ 82,668 $ 41,599
======== ========
Weighted-average shares (denominator for basic earnings per share) ......... 71,229 68,962
Effect of dilutive securities using the treasury stock method
for restricted stock and stock options:
Restricted stock ....................................................... 2,244 -
LYONs .................................................................. 41 205
Stock options .......................................................... 128 -
-------- --------
Dilutive potential common shares ........................................... 2,413 205
-------- --------
Adjusted weighted-average shares and assumed conversions
(denominator for diluted earnings per share) ........................... 73,642 69,167
======== ========
Basic earnings per share ................................................... $ 1.16 $ 0.60
======== ========
Diluted earnings per share ................................................. $ 1.12 $ 0.60
======== ========
NOTE M: NEW ACCOUNTING STANDARDS
On March 9, 2004, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin No. 105 "Application of Accounting Principles
to Loan Commitments" ("SAB 105"). This bulletin summarizes the views of the
staff regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments. The provisions of SAB
105 are applicable to loan commitments accounted for as derivatives and entered
into subsequent to March 31, 2004. The Company believes that the application of
the accounting described in SAB 105 will not have a material impact on the
Company's financial position or results of operations.
20
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 beyond the
Company's control (as well as the various assumptions utilized in determining
the Company's expectations) which include, but are not limited to, the
following:
o the variability of general and specific economic conditions and
trends, and changes in, and the level of, interest rates;
o the impact of competition and pricing environments on loan and deposit
products and the resulting effect upon the Company's net interest
margin and net gain on sale;
o changes in the Company's ability to originate loans, and any changes
in the cost and volume of loans originated as a result thereof;
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 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 impact and cost of adverse state and federal legislation and
regulations, litigation, court decisions and changes in the judicial
climate;
21
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 other events, risks and uncertainties discussed elsewhere in this Form
10-Q and from time to time in Fremont's other reports, press releases
and filings with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly update such forward-looking
statements.
GENERAL
Fremont General Corporation ("Fremont" or when combined with its
subsidiaries "the Company") is a financial services holding company. The
Company's financial services business is consolidated within Fremont General
Credit Corporation ("FGCC"), which is engaged in commercial and residential real
estate lending nationwide through its California-chartered industrial bank
subsidiary, Fremont Investment & Loan ("FIL").
FIL operates its lending platform through nine commercial and five
residential regional offices. As of March 31, 2004, FIL had commercial real
estate loans held for investment located in 41 states and during the first
quarter of 2004, it originated residential real estate loans in 45 states.
Revenues are generated primarily from:
o Generally, the commercial real estate loans are held for investment and net
interest income is generated on the difference between the rates charged on
the loans and the cost of borrowed funds. An allowance for loan losses is
maintained for potential loan losses through provisions (expense) that is
recognized in the consolidated statements of operations.
o Residential real estate loans are primarily either sold through whole loan
sales to other financial institutions or to various investors through
securitization transactions. A gain on sale is generated when the loans are
sold for a premium that is in excess of the loan balances plus certain
costs. A certain amount of residential real estate loans are also held for
investment with net interest income generated.
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,
2003.
22
RESULTS OF OPERATIONS
The Company reported net income of $82,663,000 for the first quarter of
2004. This is compared to net income of $41,576,000 for the first quarter of
2003.
The Company reported income before taxes of $141,693,000 for the first
quarter of 2004 as compared to $70,826,000 for the first quarter of 2003. The
increase in income before taxes for the first quarter of 2004 represents a 100%
increase over the results for the first quarter of 2003 and is primarily a
result of increased levels of net interest income and net gain on the sale of
residential real estate loans, offset by an increase in non-interest expenses.
The increases in the gain on sale of residential real estate loans and
non-interest expenses are both a result of significantly higher levels of
residential real estate loan origination volumes.
The following tables identify the 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 2004 and 2003:
23
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
2004 2003
---------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ------ ----------- --------- ------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest-earning assets (1):
Commercial real estate loans .............. $ 4,009,753 $ 76,304 7.65% $ 3,748,651 $ 73,974 8.00%
Residential real estate loans (2) ......... 5,076,294 88,199 6.99% 2,305,668 44,651 7.85%
Syndicated commercial loans ............... 5,949 - - 22,373 11 0.20%
Residual interests in securitized loans ... 7,831 646 33.18% - - -
Cash equivalents and investment securities. 364,302 1,558 1.72% 242,850 2,497 4.17%
----------- ----------- ------ ----------- --------- ------
Total interest-earning assets ........... $ 9,464,129 $ 166,707 7.08% $ 6,319,542 $ 121,133 7.77%
=========== ========= ====== =========== ========= ======
Interest-bearing liabilities:
Time deposits ............................. $ 5,191,475 $ 26,751 2.07% $ 3,658,492 $ 26,506 2.94%
Savings deposits .......................... 1,738,433 8,283 1.92% 1,212,769 6,865 2.30%
FHLB advances ............................. 1,516,769 7,417 1.97% 720,344 4,847 2.73%
Warehouse lines of credit ................. - 125 - - - -
Senior Notes due 2004 ..................... 18,941 372 7.90% 68,663 1,356 8.01%
Senior Notes due 2009 ..................... 190,700 3,836 8.09% 190,700 3,837 8.16%
LYONs ..................................... 657 8 4.90% 3,109 39 5.09%
Junior Subordinated Debentures /
Preferred Securities .................... 103,093 2,320 9.05% 100,000 2,250 9.13%
Other ..................................... 6,348 32 2.03% 78,907 228 1.17%
----------- ---------- ------ ----------- --------- ------
Total interest-bearing liabilities ...... $ 8,766,416 $ 49,144 2.25% $ 6,032,984 $ 45,928 3.09%
=========== ========== ====== =========== ========= ======
Net interest income ......................... $ 117,563 $ 75,205
========== =========
Percent of average interest-earning assets:
Interest income ......................... 7.08% 7.77%
Interest expense ........................ 2.09% 2.95%
------ ------
Net interest margin ..................... 4.99% 4.82%
====== ======
Percent of average interest-earning assets
(financial services only - exlcudes holding
company assets and liabilities):
Interest income ......................... 7.15% 7.77%
Interest expense ........................ 1.85% 2.48%
------ ------
Net interest margin ..................... 5.30% 5.29%
====== ======
(1) Average loan balances include non-accrual loan balances.
(2) Includes loans held for sale.
24
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2004 COMPARED TO 2003
----------------------------------------
CHANGE DUE TO
------------------------
VOLUME RATE TOTAL
-------- --------- ---------
(THOUSANDS OF DOLLARS)
Cash equivalent and investment securities .......................... $ 350 $ (1,289) $ (939)
Loans:
Commercial real estate .......................................... . 4,969 (2,639) 2,330
Residential real estate........................................... 48,084 (4,574) 43,510
Other ............................................................ 697 (24) 673
-------- --------- --------
TOTAL INCREASE / (DECREASE) IN INTEREST INCOME ..................... 54,100 (8,526) 45,574
-------- --------- --------
Time deposits ...................................................... (7,899) 7,654 (245)
Savings deposits ................................................... (2,505) 1,087 (1,418)
FHLB advances ...................................................... (3,895) 1,325 (2,570)
Warehouse lines of credit .......................................... - (125) (125)
Senior notes due 2004 and 2009 ..................................... 985 - 985
LYONs .............................................................. 31 - 31
Junior Subordinated Debentures / Preferred Securities .............. (70) - (70)
Other .............................................................. 366 (170) 196
-------- --------- --------
TOTAL INCREASE / (DECREASE) IN INTEREST EXPENSE .................... (12,987) 9,771 (3,216)
-------- --------- --------
INCREASE IN NET INTEREST INCOME .................................... $ 41,113 $ 1,245 $ 42,358
======== ========= ========
The net interest income for the first quarter of 2004 was $117.6 million as
compared to $75.2 million for the first quarter of 2003. The increase in net
interest income is primarily a result of an increase in the average
interest-earning assets, primarily residential real estate loans. Average
interest-earning assets increased 50% to $9.5 billion during the first quarter
of 2004, as compared to $6.3 billion during the first quarter of 2003. The net
interest income margin also increased to an annualized 4.99% for the first
quarter of 2004 from 4.82% for the first quarter of 2003. The increase in the
Company's net interest margin is due primarily to higher net spreads between the
commercial real estate loan yields and the effective cost of funds employed to
fund these assets as the interest yields on deposits declined on a
quarter-to-quarter comparison more than the yields on commercial real estate
loans. This is due in part to the presence of interest rate floors (in which
the total of the variable base rate, such as six-month LIBOR, plus the related
spread on a commercial real estate loan will not contractually drop below a
certain absolute level) on a significant number of the Company's commercial real
estate loans. The higher margin contribution from the commercial real estate
portfolio was partially offset by a compression in the margin for residential
real estate loans. The residential real estate loans are primarily comprised of
loans held for sale which were predominately originated in or just before the
quarterly periods presented; loans originated in or before the first quarter of
2004 had lower margins than in the first quarter of 2003 due to differing
interest rate conditions.
25
The gain on the sale of residential real estate loans, increased from $56.0
million in the first quarter of 2003 to $122.2 million for the first quarter of
2004. This increase is attributable to a significant increase in the volume of
loans sold in the first quarter of 2004, as compared to the first quarter of
2003. A total of $4.63 billion in loans were sold (including loans sold via
securitization) during the first quarter of 2004, as compared to loan sales of
$2.18 billion during the first quarter of 2003. The average gross premium on
loans sold during the first quarter of 2004 was 4.30% as compared to an average
of 4.28% for the first quarter of 2003. Such premiums have exhibited, and are
expected to continue to exhibit, variability (often significant) based on
various economic and interest rate environments. The gain percentage on these
sales increased from 2.56% in the first quarter of 2003 to 2.62% in the first
quarter of 2004. The following tables provide the amounts of loans sold during
the respective periods and additional detail on the gain on sale (thousands of
dollars):
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
----------- -----------
Loan sales (net of repurchases):
Whole loan .................................................... $ 3,795,315 $ 2,180,966
Securitization ................................................ 832,633 -
----------- -----------
$ 4,627,948 $ 2,180,966
=========== ===========
26
THREE MONTHS ENDED
MARCH 31,
2004 2003
--------- ---------
Gross premium recognized on loan sales and securitizations .................. $ 199,228 $ 93,353
Premium recapture and reversal .............................................. (8,693) (3,259)
--------- ---------
Net premium recognized on loan sales and securitizations .................... 190,535 90,094
Less: Direct costs of loan originations, net of fees received ............... (65,072) (27,867)
Adjustments to carrying value of loans held for sale ........................ (5,218) (6,255)
Change in fair value of derivative instruments .............................. 1,951 -
--------- ---------
Gain on sale (GAAP) .................................................... 122,196 55,972
Less: Origination expenses allocated during the period of origination ....... (46,365) (18,240)
--------- ---------
Net operating gain on sale ............................................. $ 75,831 $ 37,732
========= =========
Gross premium recognized on loan sales and securitizations .................. 4.30 % 4.28 %
Premium recapture and reversal .............................................. (0.19)% (0.15)%
--------- ---------
Net premium recognized on loan sales and securitizations .................... 4.11 % 4.13 %
Less: Direct costs of loan originations, net of fees received ............... (1.41)% (1.28)%
Adjustments to carrying value of loans held for sale ........................ (0.12)% (0.29)%
Change in fair value of derivative instruments .............................. 0.04 % 0.00 %
---------- ---------
Gain on sale (GAAP) .................................................... 2.62 % 2.56 %
Less: Origination expenses allocated during the period of origination ....... (1.00)% (0.83)%
--------- ---------
Net operating gain on sale ............................................. 1.62 % 1.73 %
========= =========
(1) Percentages are of total loan sales and securitizations, net of
repurchases, during the period indicated.
(2) 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.
(3) Premium recapture and reversal represent the recapture or reversal 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.
(4) Origination expenses represent indirect expenses related to the origination
of residential real estate loans during the period of origination and which
are not deferred for GAAP. These expenses are included in non-interest
expense in the consolidated statement of operations during the period
incurred.
(5) Net operating gain on sale is a supplement to, and not a substitute for,
the information presented in the consolidated statement of operations as
prepared in accordance with GAAP. Furthermore, our definition of the
indirect origination expenses may not be comparable to similarly titled
measures reported by other companies. The net operating gain on sale amount
does not include net interest income on residential real estate loans held
for sale or any fair value adjustments on the Company's residual interests
in securitized loans.
(6) 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.
The provision for loan losses decreased to $16.4 million for the first
quarter of 2004 as compared to $22.9 million for the first quarter of 2003. The
decrease in loss provision for the first quarter of 2004 is primarily due to an
expected higher realization on certain of the Company's non-accrual loans and
foreclosed commercial real estate properties.
The Company's net loans held for investment before the allowance for loan
losses, were approximately $4.95 billion at March 31, 2004, as compared to $4.79
billion and $4.12 billion at December 31, 2003 and March 31, 2003, respectively.
The Company's residential real estate loans held for sale have
27
increased from $1.80 billion at March 31, 2003 to $3.75 billion at March 31,
2004; this increase is reflective of a significant increase in loan production
volume. During the first quarter of 2004, residential real estate loan
originations totaled $5.09 billion as compared to $2.33 billion for the first
quarter of 2003.
Non-interest expense increased during the first quarter of 2004, as
compared to the first quarter of 2003. Compensation expense represented
substantially all of the change as it increased to $67.2 million for the first
quarter of 2004 from $38.7 million in the first quarter of 2003. This increase
is substantially a result of increased residential real estate loan origination
volume (which increased 119% on a quarter-to-quarter comparative basis). To a
lesser degree, other corporate personnel costs increased, as did benefit plan
expenses and accruals.
Income tax expense of $59.0 million and $29.3 million for the quarters
ended March 31, 2004 and 2003, respectively, represents effective tax rates of
41.7% and 41.3%, respectively, on income before income taxes from continuing
operations of $141.7 million and $70.8 million for the same respective periods.
The effective tax rates for both periods presented are different than the
federal enacted tax rate of 35%, due mainly to various state income tax
provisions within the Company's financial services operation.
LOANS HELD FOR INVESTMENT AND SALE
The following table shows detail for the Company's loans held for
investment outstanding as of the dates indicated (in thousands of dollars):
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ----------- ------------
Commercial real estate loans:
Bridge ....................................................... $ 1,728,551 $ 1,659,847 $ 1,743,880
Permanent .................................................... 1,215,851 1,281,877 1,370,319
Construction ................................................. 726,685 804,793 364,665
Single tenant credit ......................................... 256,002 268,506 292,298
----------- ----------- -----------
3,927,089 4,015,023 3,771,162
Residential real estate loans ................................... 1,038,038 789,951 349,755
Syndicated commercial loans ..................................... 4,581 6,857 13,519
Other ........................................................... 4,725 4,615 4,221
---------- ----------- -----------
4,974,433 4,816,446 4,138,657
Deferred loan fees and origination costs ........................ (20,213) (25,436) (19,190)
---------- ----------- -----------
4,954,220 4,791,010 4,119,467
Allowance for loan losses ....................................... (220,816) (213,591) (175,162)
---------- ----------- -----------
Loans held for investment - net ................................. $ 4,733,404 $ 4,577,419 $ 3,944,305
=========== =========== ============
As of March 31, 2004, approximately 38% and 12% of the Company's commercial
real estate loans outstanding were secured by properties located within
California and New York, respectively; no other state represented greater than
9% of the loan portfolio. The Company's largest single individual commercial
real
28
estate loan outstanding at March 31, 2004 was $64.0 million with a total loan
commitment of $67.9 million. This same loan, however, is cross-collateralized
and cross-defaulted, with the same investment fund on a related real estate
project. The combined loan principal outstanding and total loan commitment of
these two loans at March 31, 2004 is $78.0 million and $81.9 million,
respectively. The Company's largest net commitment for a single loan at March
31, 2004 was $109.5 million; this represents the maximum potential loan amount
to the borrower. In addition, the commercial real estate loan portfolio's
largest concentration by common investor or sponsor totaled $110.5 million in
loan principal outstanding and $148.8 million in total loan commitment at March
31, 2004, and is comprised of four separate loans, each of which was performing
as of March 31, 2004.
The following table stratifies the commercial real estate loans held for
investment by loan amounts outstanding as of March 31, 2004 (thousands of
dollars, except percents and number of loans):
NUMBER TOTAL LOANS
LOAN SIZE RANGE OF LOANS OUTSTANDING %
- ----------------------------- -------- ----------- ---
$0 - $1 million ...................... 124 $ 30,869 1%
> $1 million - $5 million ............ 180 497,488 13%
> $5 million - $10 million ........... 99 724,520 18%
> $10 million - $15 million .......... 48 579,874 15%
> $15 million - $20 million .......... 29 488,690 12%
> $20 million - $30 million .......... 23 563,329 14%
> $30 million - $40 million .......... 14 471,532 12%
> $40 million - $50 million .......... 9 391,207 10%
> $50 million ........................ 3 179,580 5%
-------- ----------- ---
529 $ 3,927,089 100%
======== =========== ===
The following tables report the non-performing asset classifications,
accruing loans past due 90 days or more, loan loss experience and allowance for
loan losses reconciliation for the Company's loans held for investment as of or
for the respective periods ended; the level of non-performing assets fluctuates
and individual commercial real estate loans can have a material impact upon the
total (thousands of dollars):
29
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ----------- -----------
Non-accrual loans held for investment:
Commercial real estate ......................................... $ 68,668 $ 71,758 $ 57,970
Residential real estate ........................................ 11,167 8,482 6,605
Syndicated commercial loans .................................... 4,476 6,752 6,854
----------- ----------- -----------
$ 84,311 $ 86,992 $ 71,429
=========== =========== ===========
Accruing commercial real estate loans past
due 90 days or more ............................................. $ 4,052 $ 36,406 $ 11,571
=========== =========== ===========
Foreclosed real estate (REO):
Commercial real estate ......................................... $ 35,075 $ 23,621 $ 25,477
Residential real estate ........................................ 1,935 1,845 1,418
----------- ----------- -----------
$ 37,010 $ 25,466 $ 26,895
=========== =========== ===========
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------------------------------------
COMMERCIAL RESIDENTIAL SYNDICATED
REAL ESTATE REAL ESTATE COMMERCIAL LOANS TOTAL
----------- ----------- ---------------- ----------
Beginning allowance for loan losses ......... $ 195,000 $ 15,607 $ 2,984 $ 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 ............ $ 196,547 $ 22,150 $ 2,119 $ 220,816
=========== =========== ================ ==========
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------
COMMERCIAL RESIDENTIAL SYNDICATED
REAL ESTATE REAL ESTATE COMMERCIAL LOANS TOTAL
----------- ----------- ---------------- ---------
Beginning allowance for loan losses ......... $ 147,227 $ 7,844 $ 6,119 $ 161,190
Provision for loan losses ................... 25,673 (259) (2,494) 22,920
Charge-offs ................................. (8,622) (170) (199) (8,991)
Recoveries .................................. - 34 9 43
----------- ----------- ---------------- ---------
Net Charge-offs ............................. (8,622) (136) (190) (8,948)
----------- ----------- ---------------- ---------
Ending allowance for loan losses ............ $ 164,278 $ 7,449 $ 3,435 $ 175,162
=========== =========== ================ =========
Non-accrual loans held for investment were $84.3 million as of March 31,
2004. This is 1.70% of the total loans held for investment as of March 31, 2004.
This is compared to $71.4 million in total non-accrual loans as of March 31,
2003, which was 1.73% of the total loans held for investment as of that date. As
of March 31, 2004, $68.7 million of the total $84.3 million in non-accrual loans
were related to the commercial real estate portfolio. The $68.7 million was
comprised of 15 non-accrual loans (the largest having a balance of $24.7
million).
30
Total REO was $37.0 million at March 31, 2004, as compared to $26.9 million
at March 31, 2003. Commercial real estate REO at March 31, 2004 was comprised of
11 properties, the largest having a balance of $7.2 million. The Company
maintains a valuation allowance on REO, which is detailed as follows (in
thousands of dollars):
AS OF MARCH 31, 2004
-----------------------------------------
COMMERCIAL RESIDENTIAL
REAL ESTATE REAL ESTATE TOTAL
-----------------------------------------
REO .............................................. $ 38,064 $ 2,026 $ 40,090
Valuation allowance .............................. (2,989) (91) (3,080)
----------- ----------- --------
REO - net ........................................ $ 35,075 $ 1,935 $ 37,010
=========== =========== ========
During the first quarter of 2004, there were three commercial real estate
loans restructured as to their terms and included in accrual status at March 31,
2004. The total loan principal outstanding under these three loans was $9.4
million at March 31, 2004 and the Company incurred $1.8 million in charge-offs
related to the restructuring of these loans during the first quarter of 2004.
During the first quarter of 2003, there was one loan that was restructured and
included in accrual status.
The allowance for loan losses, as a percentage of total loans held for
investment, increased to 4.46% as of March 31, 2004, as compared to 4.25% at
March 31, 2003. The increase in the allowance for loan losses during the first
quarter of 2004, as compared to the first quarter of 2003, is primarily due to
an increased level of commercial and residential real estate loans on
non-accrual status assets and an increase in the balance of loans held for
investment, primarily of residential real estate loans, as of March 31, 2004.
Total net charge-offs in the first quarter of 2004 totaled $9.2 million, as
compared to $8.9 million for the first quarter of 2003. The net charge-offs for
both the first quarter of 2004 and 2003, respectively, were substantially all
related to commercial real estate loans.
The following table shows detail for the Company's residential real estate
loans held for sale as of the dates indicated (the Company does not retain any
second mortgages in its held for investment portfolio):
31
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
Residential real estate loans held for sale:
Loan principal outstanding:
First trust deeds ............................................. $ 3,575,360 $ 3,466,432 $ 1,725,738
Second trust deeds ............................................ 153,023 160,855 83,314
----------- ----------- -----------
3,728,383 3,627,287 1,809,052
Deferred origination costs, net of loan fees received ........... 53,364 50,067 23,113
Valuation reserve ............................................... (32,353) (27,187) (30,605)
----------- ----------- -----------
Residential real estate loans held for sale - net ............. $ 3,749,394 $ 3,650,167 $ 1,801,560
=========== =========== ===========
Non-accrual residential real estate loans held for sale ("HFS") ... $ 10,355 $ 6,253 $ 5,670
=========== =========== ===========
The increase in residential real estate loans held for sale is a result of
significantly increased loan origination volume. The following table details
residential real estate loan origination for the respective periods indicated
(thousands of dollars):
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
----------- -----------
Loan originations:
First mortgage ............................................................ $ 4,885,972 $ 2,231,781
Second mortgage ........................................................... 207,129 97,339
---------- -----------
$ 5,093,101 $ 2,329,120
=========== ===========
32
FIRST MORTGAGES - ORIGINATION
- -------------------------------------------------------------------
1ST QUARTER
--------------------------
2004 2003
--------- ---------
TYPE OF PRODUCT:
Adjustable Rate (2/28) 71.0% 76.7%
Adjustable Rate (3/27) 3.8% 1.2%
Fixed 25.2% 22.1%
--------- ---------
100.0% 100.0%
========= =========
PURPOSE:
Refinance 62.1% 65.0%
Purchase 37.9% 35.0%
--------- ---------
100.0% 100.0%
========= =========
Average Loan Size $ 207,279 $ 188,257
Average FICO Score 621 617
FIRST & SECOND MORTGAGES - ORIGINATION
- ---------------------------------------------------------------------
GEOGRAPHIC DISPERSION:
California 38.0% 42.4%
New York 12.4% 7.7%
Florida 8.0% 10.9%
Illinois 5.4% 4.4%
All other states 36.2% 34.6%
--------- ---------
100.0% 100.0%
========= =========
LIQUIDITY AND CAPITAL RESOURCES
FIL finances its lending activities primarily through Federal Deposit
Insurance Corporation ("FDIC") insured customer deposits, which totaled $7.1
billion at March 31, 2004. FIL is also eligible for financing through the
Federal Home Loan Bank of San Francisco ("FHLB"), for which financing is
available to FIL based upon advance rates on certain pledged collateral and at
various rates and terms. At March 31, 2004, FIL had borrowing availability with
the FHLB of $2.36 billion, of which $1.47 billion was borrowed and outstanding.
The $2.36 billion in borrowing availability was based upon a total of $2.78
billion in pledged loan collateral at March 31, 2004. 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 $3.40
billion.
As of March 31, 2004, FIL had three separate warehouse lines of credit in
place for the funding of residential real estate loans prior to their sale or
securitization. The total funding capacity of these three
33
facilities was $1.5 billion at March 31, 2004. Borrowings under each of the
facilities are secured by loans held for sale as pledged by FIL. There were no
amounts outstanding at March 31, 2004. The three facilities are summarized as
follows:
o $500 million master loan and security facility ($250 million committed)
with Greenwich Capital Financial Products expiring in July 2004,
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 October 2004,
interest at overnight LIBOR plus a margin of 0.50%.
o $500 million master repurchase facility ($250 million committed) with
Goldman Sachs Mortgage Company expiring in December 2004, interest at
one-month 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, 2004, 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 availability of $350.5 million at March 31,
2004. There were no amounts outstanding under the line of credit with the FRB at
March 31, 2004.
The FDIC has established certain capital and liquidity standards for its
member institutions, and FIL was in compliance with these standards as of March
31, 2004. The Company believes it has sufficient liquidity and capital resources
to fund its financial services operation for the foreseeable future.
As a holding company, Fremont pays its operating expenses, interest expense
and stockholders' dividends, and meets its other obligations primarily from its
cash on hand and intercompany tax payments from FIL. Dividends of $3.7 million
and $1.5 million were paid on Fremont's common stock in the quarters ending
March 31, 2004 and 2003, respectively; however, the Company can give no
assurance that future common stock dividends will be declared.
During 2003, Fremont 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 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 will
offset taxable income generated by FIL; as a
34
result, beginning in 2004, Fremont is expected to pay most of the federal income
taxes it receives from FIL to the federal taxing authorities. There exist
certain California Franchise Tax matters pending resolution, of which Fremont is
not yet able to make a determination of their ultimate liability. Fremont
expects that the final resolution of these matters may take several years, but
does not believe that the actual outcomes of these matters will adversely impact
its liquidity.
During the first quarter of 2004, Fremont retired at maturity the remaining
$22.4 million in principal amount of its 7.70% Senior Notes due 2004. Fremont
has cash and cash equivalents of $126.9 million at March 31, 2004 and no debt
maturities until March of 2009 and believes that, with its other available
sources of liquidity, it will have sufficient means to satisfy its liquidity
needs for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk resulting primarily from fluctuations
in interest rates arising from balance sheet financial instruments such as
investments, loans (both held for investment and for sale) and debt. Changes in
interest rates will affect the Company's net investment income, loan interest,
net gain on the sale of residential real estate loans, interest expense and
total stockholders' equity. The level of net gain on the sale of residential
real estate loans is highly dependent upon the level of loan origination volume
and the net premium paid by the purchasers of such loans. Both the volume and
net premium, in turn, are highly dependent upon changes in, and the level of,
interest rates and other economic factors. The Company may experience a decrease
in the amount of net gain it realizes should significant interest rate increases
occur or if other economic factors have a negative impact on the value and
volume of the loans the Company originates. The objective of the Company's asset
and liability management activities is to provide the highest level of net
interest and investment income and to seek cost effective sources of capital,
while maintaining acceptable levels of interest rate and liquidity risk. It is
not the Company's policy to utilize derivative instruments as a means to
speculate on interest rates.
As part of its residential real estate mortgage banking operations, the
Company enters into commitments to originate loans ("interest rate lock
commitments"), which represent commitments that have been extended by the
Company, generally for a period of 30 days, at a stated interest rate to its
potential borrowers. Typically, the Company hedges the risk of overall changes
in the fair value for its loans held for sale through entering into forward loan
sale commitments. The Company determined that certain of its interest rate lock
commitments and forward sales commitments have met the definition of derivatives
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and records them at their estimated fair value.
35
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, 2003. 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, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, the Company evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures. The
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"). Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2004. 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.
36
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q, for the period ended June 30, 1998,
Commission File Number 1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of Fremont
General Corporation. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1998, Commission File Number 1-8007.)
3.3(a) Amended and Restated By-Laws of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
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.)
4.1 Form of Stock Certificate for Common Stock of the Registrant.
(Incorporated by reference to Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 2000,
Commission File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between
the Registrant and Bankers Trust Company. (Incorporated by reference
to Exhibit 4.4 to the Registrant's Registration Statement on Form S-3
filed on October 1, 1993, Registration Number 33-68098.)
4.3 Indenture among the Registrant, the Trust and Bank of New York
(originated with First Interstate Bank of California), a New York
Banking Corporation, as trustee. (Incorporated by reference to Exhibit
4.3 to the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007.)
4.4 Amended and Restated Declaration of Trust among the Registrant, the
Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking
corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A.,
a national banking association, as Institutional Trustee.
(Incorporated by reference to Exhibit 4.5 to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.5 Preferred Securities Guarantee Agreement between the Registrant and
The Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee. (Incorporated by reference to Exhibit 4.6
to the Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant. (Incorporated
by reference to Exhibit 4.7 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5). (Incorporated
by reference to Exhibit 4.8 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
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.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
37
With respect to long-term debt instruments, the Registrant undertakes to provide
copies of such agreements upon request by the Commission.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED MARCH 31, 2004:
On January 29, 2004 the Company filed a Current Report on Form 8-K,
Item 5, to report that rating agency Fitch affirmed its senior debt
rating of Fremont General Corporation ("the Company") at CCC+ and
revised its Rating Outlook to "Positive" from "Stable." Fitch also
affirmed its trust preferred rating of the Company's subsidiary,
Fremont General Financing I at CC and revised its Rating Outlook to
"Positive" from "Stable." The Form 8-K also reported that on January
27, 2004, Moody's Investors Service upgraded its senior debt rating of
the Company to B3 from Caa1 and upgraded its rating of the Company's
subordinated debt to Caa2 from Caa3. Moody's also upgraded its rating
of the Company's trust preferred securities to Caa2 from Caa3, and
stated its outlook for the ratings as "Stable."
On February 25, 2004, the Company filed a Current Report on Form 8-K,
Item 12, furnishing information regarding its results of operations
and financial condition at, and for the year ended December 31, 2003.
38
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 10, 2004 /s/ LOUIS J. RAMPINO
-----------------------------------------
Louis J. Rampino, President,
Chief Operating Officer and Director
Date: May 10, 2004 /s/ PATRICK E. LAMB
-----------------------------------------
Patrick E. Lamb, Senior Vice President,
Controller and Chief Accounting Officer
(Principal Accounting Officer)
39