EXHIBIT 99.1
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OFFICE OF THRIFT SUPERVISION
1700 G STREET, N.W.
WASHINGTON, D.C. 20552
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
OTS DOCKET NUMBER 5770
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FIDELITY FEDERAL BANK,
A FEDERAL SAVINGS BANK
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES 95-1782887
(STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (Zip Code)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 241-6215
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
12% Noncumulative Exchangeable Perpetual Preferred Stock, Series A, no par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 14, 1996, was $174,006,398
As of March 15, 1996, Registrant had outstanding 18,242,465 shares of Class A
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1995 Proxy Statement, which will be filed with
the Office of Thrift Supervision in connection with the Registrant's 1996 Annual
Meeting of Stockholders, are incorporated by reference in Part III hereof.
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FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
PAGE
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PART I
Item 1. Business................................................................................. 1
General.................................................................................. 1
Recent Developments and Regulatory Issues................................................ 3
Business Strategy........................................................................ 5
Retail Financial Services Group.......................................................... 8
Lending Activities....................................................................... 8
Credit Administration.................................................................... 16
Credit Loss Experience................................................................... 26
Foreclosure Policies..................................................................... 31
Real Estate Acquired in Settlement of Loans.............................................. 32
Bulk Sales............................................................................... 34
Treasury Activities...................................................................... 35
Sources of Funds......................................................................... 36
Interest Rate Risk Management............................................................ 40
Competition.............................................................................. 41
Employees................................................................................ 42
Taxation................................................................................. 42
Regulation and Supervision............................................................... 44
Item 2. Properties............................................................................... 61
Item 3. Legal Proceedings........................................................................ 61
Item 4. Submission of Matters to a Vote of Security Holders...................................... 63
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................ 63
Item 6. Selected Financial Data.................................................................. 65
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 67
Overview................................................................................. 67
Results of Operations.................................................................... 67
Net Interest Income...................................................................... 68
Asset/Liability Management............................................................... 71
Asset Quality............................................................................ 74
Noninterest Income/Expense............................................................... 80
Operating Expenses....................................................................... 81
Income Taxes............................................................................. 82
Regulatory Capital Compliance............................................................ 83
Capital Resources and Liquidity.......................................................... 85
Item 8. Financial Statements and Supplementary Data.............................................. F-2
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure...... II-1
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... II-1
Item 11. Executive Compensation................................................................... II-1
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... II-1
Item 13. Certain Relationships and Related Transactions........................................... II-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... II-1
Signatures............................................................................... II-4
i
PART I
ITEM 1. BUSINESS
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK
GENERAL
Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries
("Fidelity" or the "Bank") offers a broad range of consumer financial services,
including demand and term deposits, and loans to consumers, through 33 full-
service branches, all of which are located in Southern California, principally
in Los Angeles and Orange counties. At this time, the Bank primarily provides
residential mortgages and consumer loans, which the Bank does not underwrite or
fund, by referral to certain established providers of mortgage and consumer loan
products with which the Bank has negotiated strategic alliances. In addition,
through its subsidiary Gateway Investment Services, Inc. ("Gateway"), a National
Association of Securities Dealers, Inc. ("NASD") registered broker/dealer, the
Bank provides customers with uninsured investment products, including a number
of mutual funds, annuities and unit investment trusts. The principal executive
offices of Fidelity are located at 4565 Colorado Boulevard, Los Angeles,
California 90039, telephone number (818) 241-6215.
In the fourth quarter of 1995, Fidelity completed a plan of recapitalization
(the "1995 Recapitalization") of the Bank, pursuant to which Fidelity raised
approximately $134.4 million in net new equity. As part of the 1995
Recapitalization, Fidelity adopted an accelerated asset resolution plan (the
"Accelerated Asset Resolution Plan") which is designed to aggressively dispose
of, resolve or otherwise manage a pool of primarily multifamily loans. See "--
Business Strategy; Accelerated Asset Resolution Plan."
Fidelity's deposits are highly concentrated in Los Angeles and Orange
counties. The 33 branches held average deposit balances of $78.8 million and
total balances of approximately $2.6 billion at December 31, 1995. At December
31, 1995, the Bank's gross mortgage loan portfolio aggregated approximately $3.0
billion, 61% of which was secured by residential properties containing 5 or more
units, 31% of which was secured by single family and multifamily residential
properties containing 2 to 4 units and 8% of which was secured by commercial and
other property. At that same date, 97% of the Bank's loans consisted of
adjustable-rate mortgages.
The Bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through the Savings Association Insurance Fund (the
"SAIF") to the maximum extent permitted by law. The Bank is subject to the
examination, supervision and reporting requirements of the Office of Thrift
Supervision (the "OTS"), which is the Bank's primary federal banking regulator,
and is also subject to examination and supervision by the FDIC. As a wholly
owned subsidiary of the Bank, Gateway is subject to examination and supervision
by the OTS and is also subject to regulation as a registered broker/dealer by
the Securities and Exchange Commission (the "SEC").
Unless the context otherwise requires, Fidelity and its subsidiaries are
referred to in this Annual Report on Form 10-K (the "Form 10-K") on a
consolidated basis. All references to the Bank with respect to the period after
August 3, 1994 include Gateway, which was a wholly-owned subsidiary of Citadel
Holding Corporation ("Citadel") during a portion of the periods covered hereby,
and on August 3, 1994, became a wholly-owned subsidiary of Fidelity.
1
SUMMARY FINANCIAL DATA
The following table sets forth selected financial and other data for the Bank
at the dates or for the periods indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Total assets............................ $ 3,299,444 $3,709,838 $4,389,781 $4,695,518 $5,123,835
Total loans, net........................ 2,935,116 3,288,303 3,712,051 3,990,449 4,548,457
Deposits................................ 2,600,869 2,697,272 3,368,664 3,459,648 3,885,861
FHLB advances........................... 292,700 332,700 326,400 581,400 325,000
Other borrowings........................ 150,000 500,000 407,830 327,000 531,150
Subordinated notes...................... -- -- 60,000 60,000 75,000
Stockholders' equity.................... 229,043 156,547 182,284 220,171 221,959
Stockholders' equity per common share 9.72 24.11 173.51 209.57 211.28
(1)(2).................................
Common shares outstanding (1)(2)........ 18,242,465 6,492,465 1,050,561 1,050,561 1,050,561
OPERATING DATA:
Interest income......................... $ 246,477 $ 241,465 $ 289,331 $ 370,715 $ 520,052
Interest expense........................ 174,836 155,828 188,494 240,124 378,514
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Net interest income..................... 71,641 85,637 100,837 130,591 141,538
Provision for estimated loan losses..... 69,724(3) 65,559 65,100 51,180 49,843
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Net interest income after provision for
estimated loan losses.................. 1,917 20,078 35,737 79,411 91,695
Noninterest income (expense)............ 11,062 (7,793) (38,685) (6,247) 6,520
1994 Restructuring and Recapitalization
charges, net........................... -- (65,394) -- -- --
Operating expense other than 1994
Restructuring and Recapitalization
charges................................ (81,954) (91,859) (98,732) (75,044) (75,815)
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(Loss) earnings before income taxes..... (68,975) (144,968) (101,680) (1,880) 22,400
Income tax expense (benefit)............ 4 (16,524) (35,793) (2,167) 14,296
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Net (loss) earnings..................... $ (68,979) $ 128,444) $ (65,887) $ 287 $ 8,104
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Net (loss) earnings per share (1)(2).... $ (8.84) $ (39.08) $ (62.72) $ 0.27 $ 7.72
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Weighted average common shares
outstanding (1)(2)..................... 7,807,201 3,286,960 1,050,561 1,050,561 1,050,561
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SELECTED OPERATING RATIOS:
Return on average assets................ (1.92)% (3.17)% (1.43)% 0.01% 0.15%
Return on average equity................ (42.31)% (83.00)% (29.99)% 0.13% 3.64%
Average equity divided by average assets 4.54% 3.82% 4.77% 4.57% 4.03%
Ending equity divided by ending assets.. 6.94% 4.22% 4.15% 4.69% 4.33%
Operating expense to average assets (4). 2.28% 2.27% 2.14% 1.52% 1.37%
Efficiency ratio (5).................... 89.81% 97.58% 79.66% 45.38% 49.02%
Interest rate spread for the period..... 1.89% 2.24% 2.31% 2.66% 3.20%
Net yield on interest-earning assets.... 2.05% 2.22% 2.31% 2.80% 2.54%
ASSET QUALITY DATA:
NPAs (6)................................ $ 71,431 $ 85,729 $ 235,621 $ 234,405 $ 124,725
NPAs to total assets.................... 2.16% 2.31% 5.37% 4.99% 2.43%
Nonaccruing loans....................... $ 51,910 $ 71,614 $ 93,475 $ 112,041 $ 68,982
Nonaccruing loans to total loans, net... 1.77% 2.18% 2.52% 2.83% 1.53%
(continued)
2
AT OR FOR THE YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REGULATORY CAPITAL RATIOS:
Tangible capital ratio.................. 6.91% 4.28% 4.10% 4.27% 3.86%
Core capital ratio...................... 6.92% 4.29% 4.15% 4.35% 4.02%
Risk-based capital ratio................ 12.43% 8.28% 9.32% 9.76% 9.85%
OTHER DATA:
Sales of investment products (7)........ $89,824 $112,430 $ 96,253 $ 77,078 $ 57,857
Average interest rate on new loans...... 9.61% 5.85% 6.75% 7.77% 9.07%
Loans sold, net (8)..................... $ 390 $273,272 $115,003 $204,435 $282,728
Number of:
Real estate loan accounts (in 12 14 16 18 21
thousands)............................
Deposit accounts (in thousands)........ 207 216 241 233 238
Retail branch offices (9).............. 33 33 42 43 43
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(1) For the periods prior to August 4, 1994, Fidelity's one share owned by
Citadel, its former holding company and sole stockholder, has been
retroactively reclassified into 1,050,561 shares of Class A Common Stock.
(2) On February 9, 1996, the Bank's stockholders approved a one-for-four reverse
stock split (the "Reverse Stock Split"). All per share data and weighted
average common shares outstanding have been retroactively adjusted to
reflect this change. See "--Recent Developments and Regulatory Issues."
(3) In 1995 the Bank recorded a $45 million loan portfolio charge in connection
with its adoption of the Accelerated Asset Resolution Plan. See "--Business
Strategy--Accelerated Asset Resolution Plan."
(4) Excludes the impact of net 1994 restructuring and recapitalization charges
(the "1994 Restructuring and Recapitalization").
(5) The efficiency ratio is computed by dividing total operating expense by net
interest income and noninterest income, excluding infrequent items,
provisions for estimated loan and real estate losses, direct costs of real
estate operations and gains/losses on the sale of securities.
(6) Nonperforming assets ("NPAs") include nonaccruing loans and foreclosed real
estate, net of specific valuation allowances, writedowns and real estate
owned ("REO") general valuation allowance ("GVA"), if any.
(7) Includes 100% of Gateway investment product sales. Gateway was a subsidiary
of the Bank except for a period of time beginning on November 1, 1992 and
ending on August 3, 1994.
(8) Excludes loans sold in certain bulk sales consummated in 1994 (the "Bulk
Sales"), and is net of repurchases.
(9) All retail branch offices are located in Southern California.
For additional information, see Item 6. "Selected Financial Data," Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") and Item 8. "Financial Statements and Supplementary Data".
RECENT DEVELOPMENTS AND REGULATORY ISSUES
Beginning in 1986, Fidelity focused on increasing multifamily lending on
properties of 5 units or more due to economies of scale it could achieve on
larger balance loans. Since 1991, as a result of the decline in the Southern
California economy and real estate market, the Bank incurred significant loan
and real estate losses, increased levels of REO, which were acquired through
foreclosure or otherwise, and nonperforming loans (collectively, NPAs) with
respect to these multifamily loans.
Beginning in 1992, the Bank and Citadel undertook a series of steps to address
the major concerns confronting the Bank by improving asset quality, increasing
operating efficiency and implementing a non-traditional retail financial
services strategy to enable the Bank to more effectively compete in its market
place. Among other things, the Bank significantly restructured its senior
management, increased staffing levels to resolve NPAs and other classified
assets through collections, writedowns and sales of REO and
3
nonperforming loans and reduced other expenses through consolidation of
redundant functions and reduction of related staffing levels, the sale of
branches and outsourcing of certain staff functions.
Notwithstanding these measures, and as a result of continuing recessionary
conditions in the Bank's market area and high levels of loan delinquencies,
Fidelity incurred further operating losses and increased levels of NPAs and
other problem assets. The Bank reported a net loss of $105.4 million for the six
months ended June 30, 1994, and at June 30, 1994, the Bank had NPAs totaling
$274.2 million. As a consequence of planned losses recorded in anticipation of
the Bulk Sales completed in the third and fourth quarters of 1994 and other
aspects of the 1994 Restructuring and Recapitalization, the Bank's capital
position at June 30, 1994, was below the level of an adequately capitalized
institution under the "prompt corrective action" regulations of the OTS (the
"PCA Regulations").
Accordingly, during the third and fourth quarters of 1994, the Bank and
Citadel completed major aspects of the 1994 Restructuring and Recapitalization,
pursuant to which, among other things, (i) Fidelity raised approximately $109.0
million in net new equity and Citadel's ownership in Fidelity was reduced from
100% to approximately 16% of the then outstanding shares of Common Stock, (ii)
Fidelity purchased Gateway from Citadel, (iii) Fidelity redeemed its $60.0
million of subordinated notes, (iv) Fidelity sold approximately $340.0 million
in deposits and other assets at nine branches of the Bank (the "Branch Sales")
and (v) Fidelity consummated Bulk Sales, including certain assets sold to
Citadel, of nonperforming and other primarily problem assets with an aggregate
gross book value of $563.3 million. Following these actions, the Bank was
restored to an adequately capitalized status under the PCA Regulations.
Since the 1994 Restructuring and Recapitalization, the Bank has continued its
efforts to reduce NPAs and other classified assets through smaller bulk sales,
additional writedowns and sales of REO and nonperforming loans. Fidelity has
also continued its strategy of reorganizing its retail branches to integrate
traditional banking services with providing, through Gateway, a broader range of
non-traditional financial services and uninsured investment products. During
1995, the Bank entered into other strategic alliances for mortgage and consumer
products. The Bank continues to evaluate its retail branch network and may, from
time to time, consider the purchase or sale of branches to further its business
strategy. In addition, the Bank has continued to reduce costs by consolidating
functions, reducing the number of employees and outsourcing certain staff
functions.
Subsequent to the 1994 Restructuring and Recapitalization, the Southern
California economy and real estate markets continued to adversely affect the
Bank's loan and real estate portfolios, resulting in increases in expenses
required to monitor these portfolios. Fidelity's portfolios continued to be
impacted by the increased borrowers' defaults in the Bank's primarily ARM
portfolio, in part as a result of increases in interest rates, and the residual
effects of the January 17, 1994 Northridge earthquake. In addition, on June 28,
1995, as a result of findings in the OTS' March 1995 report of examination, the
Bank entered into a supervisory agreement (the "Supervisory Agreement") with the
OTS. Among other things, the Supervisory Agreement required the Bank to develop
and adopt a three-year business plan (i) to increase the Bank's capital levels
to those meeting the criteria for a well-capitalized institution pursuant to the
PCA Regulations, (ii) to improve earnings and (iii) that would include a
schedule to reduce, within a twelve month period, classified assets to less than
50% of the sum of tangible capital and the GVA. In addition, the Supervisory
Agreement required the Bank to enhance its internal asset review policy and
system to address issues raised in the report of examination.
In response to many of the concerns outlined in the Supervisory Agreement, the
Bank completed the 1995 Recapitalization in the fourth quarter of 1995, pursuant
to which Fidelity raised approximately $134.4 million in net new equity through
the sale of 2,070,000 shares of 12% Noncumulative Exchangeable Perpetual
Preferred Stock, Series A ("Series A Preferred Stock"), and 47,000,000 shares of
Class A Common Stock ("Common Stock"). As part of the 1995 Recapitalization,
Fidelity adopted an Accelerated Asset Resolution
4
Plan which is designed to aggressively dispose of, resolve or otherwise manage a
pool of primarily multifamily assets. As a result, the Bank recorded a $45.0
million loan portfolio charge which represents estimated additional losses, net
of previously allocated GVA and specific reserves, anticipated to be realized by
the Bank as a consequence of executing the plan. See "-- Business Strategy;
Accelerated Asset Resolution Plan." Upon the successful completion of the 1995
Recapitalization the OTS agreed to terminate the Supervisory Agreement.
Notwithstanding the termination of the Supervisory Agreement, the Bank remains
committed to addressing the various regulatory concerns expressed by the OTS.
On February 9, 1996, the Bank's stockholders approved a one-for-four Reverse
Stock Split of the issued and outstanding shares of the Bank's Class A Common
Stock. Upon effectiveness of the Reverse Stock Split, each stockholder became
the owner of one share of Common Stock for each four shares of Common Stock held
at the time of the Reverse Stock Split and became entitled to receive cash in
lieu of any fractional shares. All per share data and weighted average common
shares outstanding have been retroactively adjusted to reflect the Reverse Stock
Split.
In February 1996, Fidelity filed an application for quotation of the Class A
Common Stock on the Nasdaq National Market ("NASDAQ"). The Bank believes that
listing on NASDAQ will significantly increase the marketability and liquidity of
the Class A Common Stock. Effective March 14, 1996, the Bank's was listed on
NASDAQ under the symbol "FIDF".
Also in February 1996 Fidelity filed an application with the OTS in 1996 to
reorganize into a unitary savings and loan holding company structure (the
"Holding Company Reorganization"). The Holding Company Reorganization will be
subject to the approval of the OTS and the Bank's stockholders. It is
anticipated that, pursuant to the proposed Holding Company Reorganization, the
Bank would become a subsidiary of a newly-formed holding company and that the
issued and outstanding shares of Fidelity's Common Stock would be converted into
issued and outstanding shares of common stock of the proposed holding company.
No assurances can be given that the Bank's holding company application will be
approved by the OTS or the Bank's stockholders.
The OTS recently completed a compliance and Community Reinvestment Act ("CRA")
examination of the Bank. The examiners have orally indicated to the Bank that
it will receive a satisfactory compliance rating, but that the CRA rating will
be a "needs improvement." While management strongly disagrees with the
examiners' CRA findings, the result of which could have an adverse effect on
certain of the Bank's planned activities, management is evaluating plans to
contest the CRA rating through the normal appeal procedures. The OTS has
indicated that the needs improvement rating stems directly from the Bank's
cessation of lending during the examination period. The Bank's curtailment of
loan origination activities during the examination period was necessitated by
its change in business strategy to de-emphasize multifamily loan originations
and the safe and sound operation of the Bank to conserve capital. The Bank is
evaluating various options to otherwise respond to the indicated needs
improvement rating. These actions may include the purchase of whole loans for
the Bank's portfolio and other actions.
BUSINESS STRATEGY
Fidelity's business strategy is to (i) improve the quality of its loan
portfolio by reducing the level of problem assets through aggressive management
and resolution of excessive levels of problem assets, which includes the
Accelerated Asset Resolution Plan (as discussed below), (ii) continue to
increase operating efficiency and reduce and maintain lower levels of operating
expenses and (iii) be a consumer-focused provider of financial services,
integrating its traditional services and products (deposit services, checking
and savings accounts) with the sale of investment products by Gateway and by
providing consumer credit products through strategic partners.
5
Accelerated Asset Resolution Plan
An important component of the Bank's business strategy is the reduction of
risk in the Bank's multifamily portfolio. Upon the successful closing of the
1995 Recapitalization, the Bank adopted an Accelerated Asset Resolution Plan
designed to aggressively dispose of, resolve or otherwise manage a pool of
primarily multifamily loans which generally have lower debt coverage ratios than
the remainder of the Bank's multifamily loan portfolio and thereby are
considered by the Bank to have higher risk of future nonperformance or
impairment relative to the remainder of the Bank's multifamily loan portfolio.
This plan reflects both an acceleration in estimated timing of resolution of
assets within the pool, as well as a potential change in recovery method from
that which would be anticipated through the normal course of business.
Subsequent to the Recapitalization, the Bank has continued to evaluate the
loan portfolio, and the initial pool of assets, to identify those assets that
should be included in the Accelerated Asset Resolution Pool. Based on property
specific data collected, certain assets originally included in the pool have
been returned to the loan portfolio, and other loans that generally had lower
debt coverage ratios, and are thereby considered by the Bank to have a higher
risk of future nonperformance or impairment, have been added to the pool. As of
December 31, 1995, the Accelerated Asset Resolution Pool was comprised of 411
assets with an aggregate gross book value of approximately $213 million
consisting primarily of accruing and non accruing multifamily real estate loans
and REO properties. As of December 31, 1995, the Bank had resolved assets with
an aggregate gross book value of $37.8 million, and utilized $3.5 million in
Accelerated Asset Resolution Pool reserves.
In an effort to maximize recovery on loans included in the accelerated
resolution pool, the Accelerated Asset Resolution Plan provides for a range of
possible methods of resolution including, but not limited to (i) the bulk sale
of loans, (ii) individual loan restructuring which may include additional
extensions of credit or write off of existing principal, (iii) foreclosure and
sale of collateral properties, and (iv) securitization of loans.
As a consequence of the adoption of the Accelerated Asset Resolution Plan, the
Bank recorded a $45.0 million loan portfolio charge in the fourth quarter of
1995 which was reflected as a credit to the Bank's allowance for estimated loan
and REO losses. This amount represents the estimated losses, net of specific
reserves, anticipated to be incurred by the Bank as a consequence of executing
the Accelerated Asset Resolution Plan. Such additional losses represent, among
other things, the estimated incremental losses associated with recovery through
possible bulk sales of performing and non-performing loans and REO, estimated
reduced recoveries from restructuring loans which the Bank would collect and
resolve, if possible, in its normal course of business, and the acceptance of
lower proceeds from the sale of individual REO. While resulting in reduced
recoveries on certain assets, the Accelerated Asset Resolution Plan is intended
to reduce, among other things, levels of problem assets, the related utilization
of management resources, and direct and indirect costs of credit administration
and problem asset management. Execution of this plan will allow management to
focus on the Bank's core operations.
Continued Reduction of Operating Expenses
During the two years ended December 31, 1995, the Bank reduced annual
operating expenses (excluding net 1994 Restructuring and Recapitalization
charges) by 17.0%. The reductions in personnel expenses of 21.4% reflect a
reduction in the annual average of full-time-equivalent employees of 37.3% (from
884 during 1993 to 554 during 1995).
6
Consumer-Focused Provider of Financial Services
Fidelity's business strategy is to be a consumer-focused provider of financial
services. The continued progress of the Bank's retail financial services
strategy, asset quality management, accelerated asset resolution and cost
reduction are critical components of Fidelity's business strategy. Management
believes that, given the highly competitive nature of the financial services
industry and the regulatory constraints that the Bank faces in competing with
unregulated companies, the Bank must continue to expand from its historical
business focus and adopt a broader product line business strategy. Specifically,
management believes that the Bank's existing customers provide a ready market
for the sale of nontraditional financial services and investment products. This
belief prompted the implementation of a new business strategy for the Bank's
retail financial services group that integrated its traditional functions
(deposit services, checking, savings, etc.) with mortgage and consumer loan
origination and with the sale of investment services and uninsured products by
Gateway. Management's objective is to build a "relationship bank" that works
with customers to determine their financial needs and offers a broad array of
more customized products and services which may or may not be booked to the
Bank's balance sheet.
Internal Integrated Sales Platform
Fidelity is internally organized through its own integrated sales platform to
provide at each of its branch locations, either directly or through Gateway or
its strategic partners, a broad array of mortgage products, financial services
and investment products to current and potential customers. Through this
strategy of targeting retail depositors to become borrowers and offering a
variety of new investment products and services, Fidelity and Gateway hope to
attract more of the Bank's customers' deposits, investment accounts and mortgage
business. As a result of this strategy, fee income is expected to become a
growing portion of the Bank's total revenue. Fidelity has also organized the
personnel structure of its branches to further its strategy of integrating the
delivery of its investment services and loan products with its traditional
deposit activities. Branches are individual profit centers, reporting to a
branch sales manager who has responsibility for determining the sales focus and
resource allocation within the branch. On average, branch staffing consists of
nine individuals who are divided into administrative personnel and sales
personnel, with a branch operations manager and the sales staff reporting to the
sales manager.
Strategic Alliances with Third Party Providers
Through strategic alliances with third party providers, Fidelity has
introduced a wide range of securities and insurance products, and consumer loan
products to increase fee income. The use of strategic partners allows the Bank
to emphasize or de-emphasize particular products based on consumer demand and
other business or market factors without the traditional costs of modification
or discontinuance of product lines. Fidelity has implemented its strategy to
integrate sales of alternative investment products along with traditional
banking products in its offices.
Investment Product Channel
The Bank's investment product channel is responsible for providing the retail
bank distribution system with a variety of investment products to satisfy
customers' financial needs and objectives. In addition to traditional bank
investments such as certificates of deposit, the investment product channel
provides access to mutual funds, fixed and variable annuities, unit investment
trusts and a wide variety of insurance products. Through Gateway, Fidelity has
developed strategic relationships with nationally known providers of investment
and insurance products. The use of strategic partners' products shifts market
acceptance risk away from the Bank, and product and name recognition is enhanced
with top quality partners, who also provide marketing support.
7
Credit Product Channel
The Bank's credit product channel is responsible for providing the retail bank
distribution system with a variety of consumer credit products to satisfy
customers' financial needs and objectives. The retail mortgage lending program
was established in the Bank's branches in 1994 to facilitate the delivery of
mortgage products through the Bank's sales platform. A training program was
developed in the first half of 1994, and sales personnel from each branch were
trained to sell mortgage products in the second half of 1994, avoiding the need
for multiple referrals to separate representatives. In addition, a team of
lending professionals was positioned as full-time liaisons between the sales
force and the lending operations. Strategic alliances are in place with
established providers of auto, boat and recreational vehicle loans, credit
cards, home equity lines of credit and first mortgage products. As a result, the
Bank expects to meet a broader range of customer needs, which should increase
fee income. The Bank uses the strength of its strategic partners to attempt to
minimize product risk, operating expenses and development costs.
RETAIL FINANCIAL SERVICES GROUP
Fidelity operates 33 branches in Los Angeles, Orange and San Bernardino
counties. At each of its branch locations, Fidelity offers loan products,
financial services and investment products to current and potential customers.
These products and services are provided either directly or through Gateway.
Fidelity's deposits are concentrated in Los Angeles and Orange counties. Five
offices exceed $100 million in deposits, fourteen offices have deposits between
$60 million and $100 million and fourteen of the branches are in the $30 million
to $60 million deposit range.
Total deposits at Fidelity have decreased $1.3 billion from December 31, 1991
to December 31, 1995. Management believes the decrease can be attributed to five
major factors: (a) consummation of the Branch Sale in September 1994 with
deposits of $340.0 million, (b) the maturity and subsequent outflow of $150
million in wholesale deposits during 1994, which were not replaced, (c)
Fidelity's current strategy of pricing deposits based on the average rate for
similar products as compared to the Bank's local competitors, (d) the outflow of
$140 million in retirement plan accounts, which were not actively marketed for
retention during this period, and (e) the movement of short-term fixed income
investments into mutual funds and other uninsured products resulting from
depositors' reaction to the general decreasing interest rate environment through
the period. Total net deposits have decreased $96 million during the year ended
December 31, 1995, due to an outflow of $66 million in transaction accounts and
an outflow of $30 million in the Bank's certificate of deposit accounts. The
Bank may consider exploring potential sales or purchases of branches from time
to time to further its business strategy.
LENDING ACTIVITIES
From 1986 through mid-1992, the Bank's mortgage lending activity was focused
on the origination and retention of loans secured by multifamily properties of 5
units or more. Since mid-1992, the emphasis has shifted to the origination of
single family loans. In mid-1993, the Bank initiated a wholesale lending network
which facilitated the origination of single family loans through mortgage
brokers and through correspondent banks and other mortgage originators.
Concurrently, the Bank developed its secondary market outlets for mortgage loan
products in order to depart from the traditional portfolio lender design. During
1994, the Bank's objective was to originate loans which were salable into the
secondary market. The Bank could then choose its desired investments from the
products generated through mortgage lending as opposed to generating mortgage
products to be held in the Bank's portfolio. However, during 1994, due to
changes in market conditions and, as competition increased significantly from
portfolio lenders offering teaser rates, the Bank's ability to originate and
sell into the secondary market at or above par diminished.
8
In the third quarter 1994, the Bank reassessed its competitive environment and
economic outlook and determined that the California market's demand for "teaser
rate" adjustable rate mortgages ("ARMs") tied to the Federal Home Loan Bank (the
"FHLB") Eleventh District Cost of Funds Index ("COFI") was incompatible with the
Bank's primary loan origination strategy for single family loans. The teaser
rate ARMs being originated by major bank and thrift competitors were
sufficiently below the Bank's yield objectives so as to make the Bank's products
noncompetitive. Further, the secondary market for COFI-based ARMs, both for
single and multifamily loans, was unfavorable, with 200 to 300 basis point
discounts as a representative range of discounts for the product. Based on the
economic and competitive environment, the Bank closed its wholesale
correspondent single family origination network and its multifamily origination
operations in the third quarter of 1994. The closure of these operations
resulted in significant reductions in staffing levels and operating costs. As a
result, single family mortgage lending activities are focused on the retail
branch network through the Bank's sales platform. This refocusing of the Bank's
mortgage lending efforts has resulted in a significant reduction of the volume
of mortgages being originated, beginning in the fourth quarter of 1994.
Since the fourth quarter of 1994 the Bank's emphasis has been to find
strategic partners that can provide a variety of consumer credit products to the
Bank's retail customers. The strategy of offering consumer credit products from
a strategic partner to the Bank's retail customers furthers the Bank's goal of
providing a wider array of credit products while reducing credit risks and
diminishing or eliminating related overhead expenses. During the third quarter
of 1995, the Bank entered into strategic partnerships with established providers
of consumer credit products. With these agreements, all consumer credit
products are referred to and underwritten, funded and serviced by the strategic
partners. As a result of this strategy, the Bank sold its remaining portfolio
of home equity lines of credit totaling $6.4 million of outstanding balances in
December 1995. The Bank continues to make home equity credit lines as well as
automobile, recreational vehicle, boat and credit card loans available to its
customers through strategic partners.
The volume of first and second trust deed mortgages originated by the Bank for
its portfolio during the years of 1995 and 1994 was $18.5 million and $417.4
million, respectively. During 1995 and 1994 the Bank also purchased $1.0
million and $104.1 million of mortgage loans.
The Bank offers overdraft protection for checking account customers through
its "Instant Reserve" personal line of credit. Instant Reserve is available to
new and existing checking customers with average credit limits of approximately
$1,500. The committed Instant Reserve lines of credit at December 31, 1995 and
1994 totaled $18.5 million and $17.1 million, respectively. The outstanding
balance of Instant Reserve lines of credit at December 31, 1995 and 1994 totaled
$1.8 million and $1.5 million, respectively.
The Bank continues to promote home ownership in under-served communities
within its business area. The Bank, in a joint venture with Operation Hope,
Inc., established the first non-profit cooperative loan center in South Central
Los Angeles. As the Founding Member of Operation Hope Home Loan Center
("OHHLC"), the Bank has been successful in bringing into OHHLC various community
and business partners and sponsors. The Bank funded the first loan originated by
OHHLC to a first-time home buyer in South Central Los Angeles. In addition, the
Bank has retained through Operation Hope, Inc. a full-time loan agent to OHHLC.
The Bank intends to work toward establishment of additional cooperative loan
centers like OHHLC in other under-served areas of Los Angeles and/or Orange
counties as well as commitments of resources and programs designed to further
promote home ownership and community development within inner cities.
9
Portfolio statistics
All presentations of the Bank's total loan portfolio include loans receivable
and loans held for sale unless stated otherwise. The following table sets forth
the composition of the Bank's total loans by type of security at the dates
indicated:
DECEMBER 31,
---------------------------------------------------------------------------------------------
1991 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
LOANS BY TYPE OF SECURITY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------
(DOLLARS IN THOUSANDS)
Residential loans:
Single family............... $ 594,019 19.58% $ 755,253 22.44% $ 792,054 20.80% $ 857,631 21.09% $1,083,152 23.47%
Multifamily:
2 to 4 units............... 345,884 11.40 393,943 11.71 505,219 13.27 526,826 12.96 566,452 12.27
5 to 36 units.............. 1,521,056 50.13 1,612,926 47.93 1,795,374 47.16 1,880,589 46.25 1,991,089 43.14
37 units and over.......... 329,916 10.87 345,287 10.26 406,330 10.67 444,576 10.93 572,285 12.40
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total multifamily......... 2,196,856 72.4 2,352,156 69.90 2,706,923 71.10 2,851,991 70.14 3,129,826 67.81
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total residential
loans................... 2,790,875 91.98 3,107,409 92.34 3,498,977 91.90 3,709,622 91.23 4,212,978 91.28
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Other real estate loans:
Commercial and
industrial................. 234,384 7.72 248,255 7.38 295,761 7.77 343,270 8.44 385,960 8.36
Land and land
improvements............... 3,032 0.10 2,050 0.06 3,736 0.10 5,353 0.13 9,069 0.19
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other real estate
loans..................... 237,416 7.82 250,305 7.44 7 299,49 7.87 348,623 8.57 395,029 8.55
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Gross mortgage loans......... 3,028,291 99.80 3,357,714 99.78 3,798,474 99.77 4,058,245 99.80 4,608,007 99.83
Loans secured by savings
accounts and other non-
real estate loans........... 6,040 0.20 7,251 0.22 8,758 0.23 8,038 0.20 7,781 0.17
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans, gross........... 3,034,331 100.00% 3,364,965 100.00% 3,807,232 100.00% 4,066,283 100.00% 4,615,788 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
Less:
Undisbursed loan funds...... -- 259 -- 301 2,706
Unearned discounts.......... 2,463 1,980 210 104 120
Deferred loan fees.......... 7,317 7,221 11,139 11,152 12,131
Allowance for estimated
89,435(1) 67,202 83,832 64,277 52,374
losses..................... ---------- ---------- ---------- ---------- ----------
99,215 76,662 95,181 75,834 67,331
---------- ---------- ---------- ---------- ----------
Total loans, net........... $2,935,116 $3,288,303 $3,712,051 $3,990,449 $4,548,457
========== ========== ========== ========== ==========
- --------------------
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
The following table sets forth the composition of the Bank's loans held for
sale, which are included in the table above, by type of security at the dates
indicated:
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ------------------ ---------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
LOANS BY TYPE OF SECURITY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------- ------ -------- ------ ------- ------ ------- ----- -------- ------ ---------
(DOLLARS IN THOUSANDS)
Residential loans:
Single family............... $ -- --% $47,339 97.98% $239,371 65.10% $25,043 94.57% $37,497 100.00%
Multifamily (2 to 4 units).. -- -- 976 2.02 128,317 34.90 1,439 5.43 -- --
------ ----- ------ ------ -------- ------ ------- ------ ------- ------
Total loans held for sale.. $ -- --% $48,315 100.00% $367,688 100.00% $26,482 100.00% $37,497 100.00%
====== ===== ======= ====== ======== ====== ======= ====== ======= ======
10
The following table presents the Bank's gross mortgage loans by type and
location as of December 31, 1995.
COMMERCIAL
MULTIFAMILY AND INDUSTRIAL
---------------------------------- -------------------------
SINGLE 2 TO 4 5 TO 36 37 UNITS HOTEL/ OTHER
FAMILY UNITS UNITS AND OVER MOTEL C&I TOTAL
--------- --------- ----------- -------- -------- ------------- -----------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles.................... $284,621 $126,923 $1,106,515 $216,475 $18,546 $110,568 $1,863,648
Orange......................... 96,437 140,329 163,370 22,716 18,242 43,790 484,884
San Diego...................... 26,372 11,731 86,005 36,636 -- 6,835 167,579
San Bernardino................. 13,081 15,719 32,665 18,800 -- 4,079 84,344
Riverside...................... 19,756 9,570 24,044 10,524 -- 6,557 70,451
Ventura........................ 22,110 5,723 30,402 2,480 -- 1,395 62,110
Other.......................... 14,767 8,325 26,784 7,328 2,551 4,597 64,352
-------- -------- ---------- -------- ------- -------- ----------
477,144 318,320 1,469,785 314,959 39,339 177,821 2,797,368
Northern California Counties:
Santa Clara.................... 46,850 20,218 34,763 -- -- 1,428 103,259
Other.......................... 69,127 7,346 16,508 10,553 1,783 6,883 112,200
-------- -------- ---------- -------- ------- -------- ----------
Total California.............. 593,121 345,884 1,521,056 325,512 41,122 186,132 3,012,827
-------- -------- ---------- -------- ------- -------- ----------
Arizona.......................... 30 -- -- 4,404 -- 6,038 10,472
Maryland......................... -- -- -- -- 2,368 -- 2,368
Pennsylvania..................... -- -- -- -- 1,100 -- 1,100
All other states................. 868 -- -- -- -- 656 1,524
-------- -------- ---------- -------- ------- -------- ----------
Total out-of-state............ 898 -- -- 4,404 3,468 6,694 15,464
-------- -------- ---------- -------- ------- -------- ----------
Gross mortgage loans............. $594,019 $345,884 $1,521,056 $329,916 $44,590 $192,826 $3,028,291
======== ======== ========== ======== ======= ======== ==========
The following table presents the Bank's gross mortgage loans by location and
as a percent to total loans as of December 31, 1995.
PERCENTAGE
OF
TOTAL TOTAL
----------- -----------
California:
Southern California Counties:
Los Angeles.................... $1,863,648 61.5%
Orange......................... 484,884 16.0
San Diego...................... 167,579 5.5
San Bernardino................. 84,344 2.8
Riverside...................... 70,451 2.3
Ventura........................ 62,110 2.1
Other.......................... 64,352 2.2
---------- ------
2,797,368 92.4
Northern California Counties:
Santa Clara.................... 103,259 3.4
Other.......................... 112,200 3.7
---------- ------
Total California.............. 3,012,827 99.5
---------- ------
Arizona.......................... 10,472 0.3
Maryland......................... 2,368 0.1
Pennsylvania..................... 1,100 --
All other states................. 1,524 0.1
---------- ------
Total out-of-state............ 15,464 0.5
---------- ------
Gross mortgage loans............. $3,028,291 100.0%
========== ======
11
The following table sets forth the types of loans by repricing attributes held
by the Bank at the dates indicated:
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- ------- ---------- ------- ---------- ------ ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Adjustable rate loans.. $2,939,807 96.88% $3,257,368 96.80% $3,649,714 95.83% $3,924,093 96.50% $4,447,838 96.36%
Fixed rate loans....... 94,524 3.12 107,597 3.20 157,518 4.17 142,190 3.50 167,950 3.64
---------- ------- ---------- ------- ---------- ------ ---------- ------- ---------- -------
Total loans, gross.... 3,034,331 100.00% 3,364,965 100.00% 3,807,232 100.00% 4,066,283 100.00% 4,615,788 100.00%
======= ======= ====== ======= =======
Less:
Undisbursed loan
funds................ -- 259 -- 301 2,706
Unearned discounts.... 2,463 1,980 210 104 120
Deferred loan fees.... 7,317 7,221 11,139 11,152 12,131
Allowance for
estimated losses..... 89,435 (1) 67,202 83,832 64,277 52,374
---------- ---------- ---------- ---------- ----------
99,215 76,662 95,181 75,834 67,331
---------- ---------- ---------- ---------- ----------
Total loans, net...... $2,935,116 $3,288,303 $3,712,051 $3,990,449 $4,548,457
========== ========== ========== ========== ==========
- -----------------------------
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
The following table sets forth, by contractual maturity and interest rate, the
Bank's fixed rate and adjustable rate real estate loan portfolio at December 31,
1995. The table does not consider the prepayment experience of the loan
portfolio when scheduling the maturities of loans. See Item 7. "MD&A--
Asset/Liability Management."
SUBTOTAL
MATURITIES MATURES IN
GREATER ----------------------------------------------------------------------
TOTAL LOANS MATURES THAN 1999- 2001- 2006- AFTER
RECEIVABLE IN 1996 ONE YEAR 1997 1998 2000 2005 2010 2010
----------- -------- --------- ------- ------- ------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
Adjustable rate loans:
Under 5.00%........... $ 2,142 $ -- $ 2,142 $ -- $ -- $ -- $ 2,142 $ -- $ --
05.00% - 6.99%........ 24,422 -- 24,422 -- 32 441 97 606 23,246
07.00% - 8.99%........ 2,823,592 3,240 2,820,352 528 8,758 79,513 431,029 327,397 1,973,127
09.00% - 10.99%....... 83,808 15,910 67,898 373 1,213 6,254 26,281 12,272 21,505
11.00% - 12.99%....... 5,843 4,990 853 -- 149 513 191 -- --
---------- ------- ---------- ------- ------- ------- -------- -------- ----------
Total adjustable
rate loans.......... 2,939,807 24,140 2,915,667 901 10,152 86,721 459,740 340,275 2,017,878
---------- ------- ---------- ------- ------- ------- -------- -------- ----------
Fixed rate loans:
Under 5.00%........... 192 192 -- -- -- -- -- -- --
05.00% - 6.99%........ 14,749 202 14,547 2,575 1,536 46 114 2,477 7,799
07.00% - 8.99%........ 37,965 4,401 33,564 1,221 897 878 7,567 4,634 18,367
09.00% - 10.99%....... 35,049 222 34,827 2,169 982 268 5,177 16,756 9,475
11.00% - 12.99%....... 3,636 276 3,360 135 228 15 152 718 2,112
Over 13.00%........... 2,933 1,830 1,103 5 175 -- 16 512 395
---------- ------- ---------- ------- ------- ------- -------- -------- ----------
Total fixed rate
loans............... 94,524 7,123 87,401 6,105 3,818 1,207 13,026 25,097 38,148
---------- ------- ---------- ------- ------- ------- -------- -------- ----------
Total loans,
gross............... 3,034,331 $31,263 $3,003,068 $7,006 $13,970 $87,928 $472,766 $365,372 $2,056,026
========== ======= ========== ====== ======= ======= ======== ======== ==========
Less:
Undisbursed loan
funds................ --
Unearned discounts.... 2,463
Deferred loan fees.... 7,317
Allowance for
estimated losses..... 89,435(1)
----------
99,215
----------
Total loans, net..... $2,935,116
==========
- ----------------
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
12
The following table sets forth, by contractual maturity and property type, the
Bank's real estate loan portfolio at December 31, 1995. The table does not
consider the prepayment experience of the loan portfolio when scheduling the
maturities of loans. See Item 7. "MD&A--Asset/Liability Management."
SUBTOTAL
MATURITIES MATURES IN
GREATER -----------------------------------------------------------
TOTAL LOANS MATURES THAN 1999- 2001- 2006- AFTER
RECEIVABLE IN 1996 ONE YEAR 1997 1998 2000 2005 2010 2010
----------- ------- ---------- ------ ------- ------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Residential loans:
Single family....... $ 594,019 $ 691 $ 593,328 $3,808 $ 2,255 $ 4,269 $ 7,465 $ 16,186 $ 559,345
Multifamily:
2 to 4 units....... 345,884 5 345,879 28 264 9,627 8,527 3,282 324,151
5 to 36 units...... 1,521,056 243 1,520,813 335 715 34,017 240,156 295,114 950,476
37 units and over.. 329,916 32 329,884 -- -- 4,370 75,241 43,241 207,032
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Total multifamily. 2,196,856 280 2,196,576 363 979 48,014 323,924 341,637 1,481,659
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Total residential
loans.......... 2,790,875 971 2,789,904 4,171 3,234 52,283 331,389 357,823 2,041,004
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Other real estate
loans:
Commercial and
industrial........ 234,384 24,255 210,129 1,844 8,692 35,645 141,377 7,549 15,022
Land and land
improvements...... 3,032 92 2,940 991 1,949 -- -- -- --
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Total other real
estate loans...... 237,416 24,347 213,069 2,835 10,641 35,645 141,377 7,549 15,022
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Gross mortgage loans. 3,028,291 25,318 3,002,973 7,006 13,875 87,928 472,766 365,372 2,056,026
---------- ------- ---------- ------ ------- ------- -------- -------- ----------
Loans secured by
savings accounts
and other non-real
estate loans........ 6,040 5,945 95 -- 95 -- -- -- --
---------- -------- ---------- ------ ------- ------- -------- -------- ----------
Total loans, gross... 3,034,331 $31,263 $3,003,068 $7,006 $13,970 $87,928 $472,766 $365,372 $2,056,026
---------- ======== ========== ====== ======= ======= ======== ======== ==========
Less:
Undisbursed loan
funds.............. --
Unearned discounts.. 2,463
Deferred loan fees.. 7,317
Allowance for
estimated losses.... 89,435(1)
----------
99,215
----------
Total loans, net.... $2,935,116
==========
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
13
The following table details the activity in the Bank's loan portfolio for the
periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Principal balance at beginning of
period............................... $3,288,303 $3,712,051 $3,990,449 $4,548,457 $5,092,269
Real estate loans originated:
Conventional:
Single family....................... 3,411 238,944 271,316 261,563 186,320
Multifamily:
2 to 4 units...................... 515 38,100 42,931 29,931 63,146
5 to 36 units..................... 4,743 68,862 89,935 121,940 239,165
37 units and over................. 3,207 65,940 12,887 19,588 15,785
---------- ---------- ---------- ---------- ----------
Total multifamily................ 8,465 172,902 145,753 171,459 318,096
Commercial and industrial............. 6,586 5,597 1,335 993 1,910
Total real estate loans
originated (1)............... 18,462 417,443 418,404 434,015 506,326
---------- ---------- ---------- ---------- ----------
Real estate loans purchased:
Single family (2)................... (1,237) 100,756 -- -- --
Multifamily:
2 to 4 units...................... -- 250 -- -- --
5 to 36 units..................... -- 2,466 3,741 241 --
37 units and over................. -- 665 -- 1,434 1,080
---------- ---------- ---------- ---------- ----------
Total multifamily................ -- 3,381 3,741 1,675 1,080
Commercial and industrial........... 2,171 -- 210 -- --
---------- ---------- ---------- ---------- ----------
Total real estate loans
purchased...................... 934 104,137 3,951 1,675 1,080
Total real estate loans ---------- ---------- ---------- ---------- ----------
funded......................... 19,396 521,580 422,355 435,690 507,406
Loans sold or securitized: ---------- ---------- ---------- ---------- ----------
Whole loans (2)..................... (113,230) (317,725) (115,003) (318,712) (486,413)
Participations...................... -- -- -- -- (32,073)
Bulk Sales.......................... -- (341,432) -- -- --
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized.................... (113,230) (659,157) (115,003) (318,712) (518,486)
---------- ---------- ---------- ---------- ----------
Payments and refinances............... (236,650) (310,697) (575,348) (672,996) (528,353)
(Decrease) increase in non-real
estate loans......................... (1,211) (1,507) 720 257 (962)
Other increase in total loans, net.... 741 9,403 8,433 9,656 32,405
(Increase) decrease in reserves for
loan losses.......................... (22,233) 16,630 (19,555) (11,903) (35,822)
Net (decrease) increase in total ---------- ---------- ---------- ---------- ----------
loans, net.......................... (353,187) (423,748) (278,398) (558,008) (543,812)
---------- ---------- ---------- ---------- ----------
Principal balance at end of period.... $2,935,116 $3,288,303 $3,712,051 $3,990,449 $4,548,457
========== ========== ========== ========== ==========
Loans serviced for others............. $ 600,288 $1,147,015 $ 888,362 $ 982,698 $ 925,368
========== ========== ========== ========== ==========
- ---------------
(1) Includes loans originated to finance sales of REO of $9.0 million, $27.0
million, $51.6 million, $11.2 million and $1.6 million for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
(2) Net of repurchases.
14
Sale of Loans
Over the past several years, the Bank has sold a portion of its loans in the
secondary mortgage market. Net loan sales totaled approximately $0.4 million,
$273.3 million and $115.0 million for the years ended December 31, 1995, 1994
and 1993, respectively. In addition, sales of mortgage backed securities
("MBSs") totaled $160.7 million, $137.1 million, and $522.1 million,
respectively, in the same periods. Fidelity is an approved originator and
servicer for the Federal National Mortgage Association (the "FNMA"), the Federal
Home Loan Mortgage Corporation (the "FHLMC"), the Federal Housing Administration
(the "FHA") and the Veterans Administration (the "VA").
As part of the Bank's goal of providing a wider array of credit products while
avoiding credit risks and diminishing or eliminating related overhead expenses,
the Bank entered into strategic partnerships with established providers of
consumer credit products during the third quarter of 1995. With these
agreements, all consumer credit products are referred to and underwritten,
funded and serviced by the Bank's strategic partners. As a result of this
strategy, the Bank sold all of its remaining portfolio of home equity lines of
credit totaling $6.4 million of outstanding balances in December 1995. The Bank
continues to make home equity credit line and other consumer products available
to its customers through strategic partners.
In addition to loan sales in the normal course of business, the Bank
consummated the Bulk Sales during 1994. The Bulk Sales agreements included
representations and warranties related to the assets transferred. See "--Bulk
Sales."
ARM Loans
To assist in reducing the sensitivity of its earnings to interest rate
fluctuations, Fidelity has emphasized the origination of ARMs for its portfolio.
ARMs help to improve the matching of interest rate repricing between Fidelity's
asset and liability portfolios. ARMs reduce the interest rate risk inherent in a
portfolio of long-term mortgages by repricing each individual asset at regular
intervals over the life of the asset. The initial period before the first
adjustment varies between one month and five years. ARM loans represented 87% of
all loans funded in 1995 and 97% of the total loan portfolio at December 31,
1995. Of Fidelity's ARMs, 92% bear an interest rate which periodically adjusts
at a stated margin (the "contractual spread") above COFI, which is the index
which most closely matches Fidelity's liability base. The risk of different
asset and liability repricing can be reduced by diversifying the ARM portfolio.
Other ARMs originated are generally indexed to U.S. Treasury indices, which are
more volatile than a COFI index.
ARMs may have greater vulnerability to default than fixed rate loans during
times of increasing interest rates due to the potential for substantial
increases in the amount of a borrower's payments or erosion of a borrower's
equity in the underlying property, to the extent payments do not increase, as in
the case of negatively amortizing mortgages. Risks of default may be reduced on
certain loans by caps on both the maximum interest that can be charged and the
amount by which a borrower's payments can be periodically increased. However,
during periods of significant interest rate increases, interest rate caps can
adversely affect interest rate margins and payment caps can increase borrower
exposure to negative amortization, unless the loan contains a prohibition on
negative amortization. When the borrower's payment is not sufficient to cover
the computed interest amount, negative amortization occurs and the difference
then increases the principal balance of the loan. Fidelity uses a combination of
interest rate caps and payment caps to reduce risk of default and, to date,
negative amortization has not adversely affected Fidelity's default ratios.
There was $1.3 million of negative amortization included in the loan portfolio
at December 31, 1995 and $1.1 million at December 31, 1994.
15
A limited number of Fidelity's ARMs also provide for an annual (or periodic)
interest rate cap. In addition, for competitive reasons, ARMs are often offered
at an initial reduced interest rate (the "introductory rate" or "teaser") for a
period of time (one, three, or six months).
During periods of declining interest rates, ARMs with high interest rate caps
relative to market are vulnerable to prepayment as borrowers refinance into ARMs
with lower caps or into fixed rate loans. Fidelity has also attempted to
minimize the risk of default associated with all ARMs by using the COFI (a
relatively stable index) for adjustment, thereby limiting interest rate
volatility over short periods, and utilizing loan-to-value ratios generally not
in excess of 80% unless private mortgage insurance is obtained. During periods
of declining interest rates, ARMs with negative amortization potential will
experience accelerated amortization, thereby offsetting, in whole or in part,
previously incurred negative amortization, if any, or reducing the principal
balance ahead of the original schedule.
CREDIT ADMINISTRATION
The credit administration function identifies, measures and establishes
specific valuation allowances and assesses and establishes an adequate allowance
for loan losses in conformity with regulatory guidelines and generally accepted
accounting principles ("GAAP").
The Bank has recently completed a review of its credit administration area,
internal asset review policies, delinquency migration model and allowance for
loan losses policy as well as its internal asset review function. This review
was undertaken to address issues of communication between various operating
groups concerned with the ongoing administration of the Bank's assets,
consistency in valuation assumptions in measuring the value of various portfolio
assets and a standardized method of documentation. This review also encompassed
a review of the management and other personnel involved in credit administration
as well as the policies administered in this area. See "--Credit Loss
Experience."
As a result of this review, the Bank has (i) reorganized management, including
drawing upon management resources from elsewhere in the Bank, (ii) reorganized
the processes, workflow and responsibilities of the credit administration
personnel in day-to-day operations, (iii) enhanced its loan grading procedures
with the assistance of a nationally known consulting firm and revised and
enhanced the Bank's internal asset review policy and (iv) enhanced its
delinquency migration model utilized for estimating allowance for loan losses.
Loan Portfolio Risk Elements
Fidelity's loan portfolio risk elements and credit loss experience may be more
clearly understood when the following sections are read in conjunction with Item
7. "MD&A--Asset Quality."
Since 1990, worsening economic conditions have resulted in declines in real
estate values in Southern California. During that time Fidelity reassessed its
underwriting practices and, in light of economic conditions, took steps to
increase qualifying ratios including debt service coverage minimums and loan-to-
value maximums. As a result of the economic and real estate deterioration since
1990, some of Fidelity's borrowers have or will become unable or unwilling to
pay interest or principal when due. The reasons for such defaults include,
without limitation, a deterioration of the borrower's financial position,
reduced cash flow on income property or loss of equity.
16
Loan Monitoring
The Bank has a loan review system to meet the following objectives:
. To identify, in a timely manner, loans with potential credit or collateral
weaknesses and to appropriately classify loans with well defined weaknesses
that jeopardize loan repayment so that timely action can be taken and credit
losses can be mitigated.
. To project relevant trends that affect the collectibility of the loan
portfolios and to isolate potential problem areas that may exhibit adverse
trends.
. To provide essential information to determine the adequacy of the allowance
for loan losses and to identify and recognize in a timely manner estimated
specific loan losses.
. To assess the adequacy and adherence to the Bank's internal credit policies
and loan administration procedures and to monitor compliance with the
foregoing and with relevant laws and regulations.
The Bank considers such risk factors as payment history, collateral value,
income property cash flow, property condition, and the borrower's financial
capacity and property management experience in its monitoring and risk grading
process. Current property operating statements are requested on a periodic basis
for substantially all income property collateral and property inspections are
conducted. The relevance of loan grades assigned in the Bank's asset review
process is highly subjective and greatly dependent upon having current and
accurate information regarding the borrower's financial capability and
willingness to repay the debt as well as the collateral property's condition,
operating results and fair value. If current and accurate data is not available,
it is critical to have current knowledge of the general economic conditions
affecting the borrower and the collateral property.
Although these general key information elements are desired for accurate loan
grading, the Bank is required to assign loan grades notwithstanding the lack of
any one or more of these elements. Loan grading decisions are made using
judgment based on the best and most current information available including, but
not limited to, the borrower's payment history with the Bank on all existing
credits, real estate property tax and hazard insurance payment records, the
borrower's aggregate credit standing and payment record, current financial
statements of the borrower, guarantors, and principals or general partners of
the borrower, property inspection reports, rent rolls and operating statements
for income properties and loan "work-out" status, if applicable.
When a borrower requests a modification of loan terms, the loan is considered
to be in a possible work-out status. The Bank will consider a workout of a loan
when the borrower is experiencing financial difficulty and the Bank determines
that the loan, as modified, is likely to result in a greater ultimate recovery
to the Bank than taking title to the property. A work-out may range from (i) a
modification, allowing the payment of interest only for a short period of time
and then returning to payments of principal and interest, to (ii) a complex
agreement which may include, among other things, the Bank writing off a portion
of loan principal or forgiving accrued and unpaid interest. A loan work-out,
therefore, could be a modification or a troubled debt restructuring ("TDR"). The
Bank's policy regarding TDRs governs the classification of TDRs. See "--Credit
Loss Experience." For purposes of loan classification and grading, a loan where
work-out arrangements are currently being negotiated is required to be
classified in a manner that reflects the asset's circumstances at the time of
review.
The Bank also analyzes its multifamily loans, which represent the largest
portion of the Bank's portfolio, by geographic submarkets. In this process the
Bank utilizes a national real estate consulting firm and its appraisal
department to understand key real estate market trends in those submarkets.
17
The following table presents net delinquent loans at December 31, 1995, by
property type and location.
MULTIFAMILY
-----------------------------
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL
-------- ------- -------- -------- --------------- --------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles.................. $ 7,744 $2,383 $18,697 $ 304 $ 4,049 $33,177
Orange....................... 2,507 3,828 1,666 -- 16,123(1) 24,124
San Diego.................... 273 -- 2,259 1,270 -- 3,802
San Bernardino............... 393 1,177 1,918 -- -- 3,488
Riverside.................... 278 705 602 -- -- 1,585
Santa Barbara................ 616 231 -- -- 664 1,511
Kern......................... 95 -- -- -- 846 941
------- ------ ------- ------ ---------- -------
11,906 8,324 25,142 1,574 21,682 68,628
------- ------ ------- ------ ---------- -------
Northern California Counties:
Sacramento................... 83 -- -- 1,920 -- 2,003
Santa Clara.................. 129 377 405 -- -- 911
Other........................ 306 -- -- -- -- 306
------- ------ ------- ------ ---------- -------
518 377 405 1,920 -- 3,220
------- ------ ------- ------ ---------- -------
Total California........... 12,424 8,701 25,547 3,494 21,682 71,848
------- ------ ------- ------ ---------- -------
Texas............................. 9 -- -- -- -- 9
------- ------ ------- ------ ---------- -------
Total delinquent loans.... $12,433 $8,701 $25,547 $3,494 $ 21,682 $71,857
======= ====== ======= ====== ========== =======
- ----------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million.
The following table presents the Bank's delinquencies as a percentage of the
loan portfolio by property type and location at December 31, 1995, with ratios
calculated net of specific reserves and writedowns.
MULTIFAMILY
-----------------------------
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL
------- ------- -------- --------- --------------- -------
California:
Southern California Counties:
Los Angeles........................ 2.7% 1.9% 1.7% 0.1% 3.1% 1.8%
Orange............................. 2.6% 2.7% 1.0% -- 26.0%(1) 5.0%
San Diego.......................... 1.0% -- 2.6% 3.5% -- 2.3%
San Bernardino..................... 3.0% 7.5% 5.9% -- -- 4.1%
Riverside.......................... 1.4% 7.4% 2.5% -- -- 2.2%
Santa Barbara...................... 4.8% 2.8% -- -- 53.0% 3.2%
Kern............................... 11.4% -- -- -- 21.0% 7.0%
Percent of Southern California
delinquencies by property type... 2.5% 2.6% 1.7% 0.5% 10.0% 2.5%
Northern California Counties:
Sacramento......................... 2.4% -- -- 24.2% -- 14.7%
Santa Clara........................ 0.3% 1.9% 1.2% -- -- 0.9%
Other.............................. 2.7% -- -- -- -- 1.7%
Percent of Northern California
delinquencies by property type... 0.4% 1.4% 0.8% 18.2% -- 1.5%
Texas................................... 3.5% -- -- -- -- 3.5%
Percent of total delinquencies
by property type.................... 2.1% 2.6% 1.7% 1.1% 9.3% 2.4%
- ----------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million.
18
The following table presents net delinquent loans at December 31, 1995, by
property type and year of origination.
YEAR OF ORIGINATION
---------------------------------------------------------------------------------------------------------
1986
AND
TOTAL 1995 1994 1993 1992 1991 1990 1989 1988 1987 PRIOR
------- ---- ------ ------ ------ ------ ------- ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Property type:
Single Family......... $12,433 $ -- $1,458 $1,257 $1,217 $1,559 $ 2,728 $ 658 $1,160 $ 699 $ 1,697
Multifamily loans:....
2 to 4 units......... 8,701 -- -- 213 -- 714 2,785 2,119 2,870 -- --
5 to 36 units........ 25,547 -- -- 425 145 7,052 6,916 3,790 3,286 3,305 628
37 units and over.... 3,494 -- -- -- -- 304 -- -- -- -- 3,190
------- ---- ------ ------ ------ ------ ------- ------ ------ ------ -------
Total multifamily... 37,742 -- -- 638 145 8,070 9,701 5,909 6,156 3,305 3,818
Commercial and other.. 21,682 -- -- -- -- -- -- 1,556 634 -- 19,492
------- ---- ------ ------ ------ ------ ------- ------ ------ ------ -------
Total Delinquent
loans.................. $71,857 $ -- $1,458 $1,895 $1,362 $9,629 $12,429 $8,123 $7,950 $4,004 $25,007
======= ===== ====== ====== ====== ====== ======= ====== ====== ====== =======
Percent of net
delinquent loans to
remaining portfolio. 2.4% -- 0.5% 1.0% 0.8% 4.6% 2.3% 2.2% 1.8% 1.4% 5.3%
======= ===== ====== ====== ====== ====== ======= ====== ====== ====== =======
The following tables present net delinquent loans at the dates indicated:
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- --------- ---------
(DOLLARS IN THOUSANDS)
Total delinquencies:
30 to 59 days.......... $ 12,727 $ 17,963 $ 9,567 $ 19,323
60 to 89 days.......... 7,220 8,379 10,343 11,295
90 days and over (1)... 51,910 54,313 64,827 70,519
-------- -------- -------- --------
$ 71,857 $ 80,655 $ 84,737 $101,137
======== ======== ======== ========
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- --------
(DOLLARS IN THOUSANDS)
Total delinquencies:
30 to 59 days.......... $ 24,396 $ 26,234 $ 48,394 $ 54,282
60 to 89 days.......... 10,824 44,876 29,019 25,455
90 days and over (1)... 71,614 58,466 132,026 146,194
-------- -------- -------- --------
$106,834 $129,576 $209,439 $225,931
======== ======== ======== ========
- ---------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million in 1995, and one loan on the same hotel property with a balance of
$13.8 million at December 31, 1994.
The January 17, 1994 Northridge earthquake contributed to the significant
increases in delinquent loans in the first and second quarters of 1994. Bulk
Sales completed in the third and fourth quarters of 1994 contributed to the
significant decreases in delinquent loans in those periods.
19
The following table details Fidelity's net loans which are 30 to 89 days
delinquent at the dates indicated.
DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Loans 30 to 59 days contractually
delinquent:
Single family........................ $ 4,283 $ 4,413 $ 7,480 $ 7,939 $ 6,627
Multifamily:
2 to 4 units...................... 1,748 4,281 3,599 1,432 416
5 to 36 units..................... 5,434 15,438 16,948 15,927 6,515
37 units and over................. 304 -- 4,114 5,623 19,453
------- ------- ------- ------- -------
Total multifamily.............. 7,486 19,719 24,661 22,982 26,384
Commercial and industrial............ 958 264 2,048 1,807 3,040
------- ------- ------- ------- -------
12,727 24,396 34,189 32,728 36,051
------- ------- ------- ------- -------
Loans 60 to 89 days contractually
delinquent:
Single family........................ 924 1,016 2,497 3,665 3,370
Multifamily:
2 to 4 units...................... 282 904 1,707 1,180 1,841
5 to 36 units..................... 5,801 5,247 12,770 9,241 7,811
37 units and over................. -- 2,272 5,035 1,223 --
------- ------- ------- ------- -------
Total multifamily.............. 6,083 8,423 19,512 11,644 9,652
Commercial and industrial............ 213 1,385 1,723 -- 7,869
------- ------- ------- ------- -------
7,220 10,824 23,732 15,309 20,891
------- ------- ------- ------- -------
Total loans delinquent 30 to 89
days.......................... $19,947 $35,220 $57,921 $48,037 $56,942
======= ======= ======= ======= =======
Nonaccruing Loans
The Bank generally places a loan on nonaccrual status whenever the payment of
interest is 90 or more days delinquent, or earlier if management determines that
it is warranted. Loans on nonaccrual status are resolved by the borrower
bringing the loan current, by the Bank and the borrower agreeing to modify the
terms of the loan or by foreclosure upon the collateral securing the loan. See
"--Restructured Loans" and "--Foreclosure Policies."
20
The following table presents Fidelity's net nonaccruing loans by property type
at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Single family.............. $ 7,226 $ 7,775 $12,661 $ 14,064 $ 8,100
Multifamily:
2 to 4 units.............. 6,671 6,590 15,652 6,372 1,256
5 to 36 units............. 14,312 23,112 34,746 37,501 12,620
37 units and over......... 3,190 7,088 17,973 35,357 26,123
---------- ---------- ------- -------- -------
Total multifamily........... 24,173 36,790 68,371 79,230 39,999
Commercial and industrial... 20,511(1) 27,049(1) 12,443 18,747 20,883
---------- ---------- ------- -------- -------
Total nonaccruing loans... $ 51,910 $ 71,614 $93,475 $112,041 $68,982
========== ========== ======= ======== =======
- ---------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million at December 31, 1995 and one loan on the same hotel property with a
balance of $13.8 million at December 31, 1994.
It is the Bank's policy to reserve all earned but unpaid interest on loans
placed on nonaccrual status. The reduction in income related to such reserves,
net of interest recognized on cured delinquencies, was $5.8 million, $10.9
million, and $8.7 million for the years ended December 31, 1995, 1994, and 1993,
respectively.
The following table presents net nonaccruing loans by property type and
geographic location at December 31, 1995.
MULTIFAMILY
----------------------------- PERCENTAGE
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL OF
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL TOTAL
------- ------- -------- -------- --------------- -------- ----------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles.................. $5,546 $1,957 $10,077 $ -- $ 3,091 $20,671 39.8%
Orange....................... 765 3,188 1,275 -- 15,910(1) 21,138 40.7
San Diego.................... 173 -- 1,232 1,270 -- 2,675 5.2
San Bernardino............... 240 420 1,323 -- -- 1,983 3.8
Riverside.................... 247 705 -- -- -- 952 1.8
Santa Barbara................ 13 231 -- -- 664 908 1.8
Kern......................... 95 -- -- -- 846 941 1.8
------ ------ ------- ------ ---------- ------- ------
7,079 6,501 13,907 1,270 20,511 49,268 94.9
------ ------ ------- ------ ---------- ------- ------
Northern California Counties:
Sacramento................... -- -- -- 1,920 -- 1,920 3.7
Santa Clara.................. 129 170 405 -- -- 704 1.4
Other........................ 18 -- -- -- -- 18 --
------ ------ ------- ------ ---------- ------- ------
147 170 405 1,920 -- 2,642 5.1
------ ------ ------- ------ ---------- ------- ------
Total nonaccruing loans...... $7,226 $6,671 $14,312 $3,190 $ 20,511 $51,910 100.0%
====== ====== ======= ====== ========== ======= ======
- ---------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million.
21
Northridge Earthquake
In order to assist borrowers affected by the January 17, 1994 Northridge
earthquake, the Bank developed several earthquake loan accommodation programs.
The OTS encouraged the development of such programs, which were designed to
provide relief to affected borrowers by deferring payments, capitalizing
interest payments or making additional advances to borrowers to repair severely
damaged properties, while remaining consistent with safe and sound banking
practices. Generally with respect to requests for earthquake relief, the Bank
inspected the subject property to verify that the property sustained earthquake
damage, evaluated the credit history of the borrower and considered a number of
additional factors in order to develop an accommodation program suitable to the
particular borrower and affected property.
While many of the accommodations granted were for terms which would have
normally been categorized as TDRs prior to December 31, 1994, the Bank had not
previously categorized them as TDRs based upon its understanding of guidance
provided by the OTS. At December 31, 1994, the Bank categorized accommodations
of earthquake-affected loans with payment deferrals of six months or greater as
TDRs, based solely on the length of their accommodation. This year-end change
was made based upon clarification of policy provided by the OTS in the course of
its annual examination.
As of May 31, 1994, the Bank had identified 494 earthquake-affected loans
warranting accommodation negotiations with a total net book value of $253.2
million. During 1994, the Bank recorded $8.0 million of specific reserves for
all earthquake-affected loans. As of December 31, 1995, the net balance of
earthquake-affected loans was $168.2 million, of which $6.3 million were
included in nonaccruing loans, $1.5 million were delinquent 30 to 89 days and
$13.9 million were TDRs. During the year ended December 31, 1995, the Bank
recorded an additional 16.0 million of specific reserves on earthquake-affected
loans.
Restructured Loans
The Bank will consider modifying the terms of a loan when the borrower is
experiencing financial difficulty and the Bank determines that the loan, as
modified, is likely to result in a greater ultimate recovery to the Bank than
taking title to the property. These modifications take several forms, including
interest only payments for a limited time at current interest rates, a reduced
loan balance in exchange for a paydown of the loan or other terms that are less
favorable to the Bank than the current market.
According to SFAS No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring," a troubled debt restructuring occurs when a creditor, for
economic or legal reasons related to a debtor's difficulties, grants a
concession to the debtor that it would not otherwise consider. Generally,
Fidelity restructures loans by temporarily or permanently reducing interest
rates, allowing interest only payments, reducing the loan balance, extending
property tax repayment plans, extending maturity dates or recasting principal
and interest payments. However, debt restructuring is not necessarily a troubled
debt restructuring even if the borrower is experiencing some difficulties, as
long as the restructuring terms are consistent with current market rates and
risk. The adoption of SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," requires that TDRs be measured for
impairment in the same manner as any impaired loan. A loan is considered
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due (contractual interest and
principal) according to the contractual terms of the loan agreement.
22
The following table presents TDRs by property type at the dates indicated:
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Property type:
Single family............... $ 1,162 $ 459 $ 633 $ 3,160 $ --
Multifamily:
2 to 4 units.............. 2,597 2,511 3,171 4,065 --
5 to 36 units............. 15,189 35,347 13,648 20,404 --
37 units and over......... 9,109 10,292 11,090 54,108 6,939
------- ------- ------- ------- ------
Total multifamily...... 26,895 48,150 27,909 78,577 6,939
Commercial and industrial... 3,688 1,645 -- 5,567 --
Land........................ 946 1,890 171 -- --
------- ------- ------- ------- ------
Total TDRs (1)......... $32,691 $52,144 $28,713 $87,304 $6,939
======= ======= ======= ======= ======
- -------------
(1) Included in TDRs at December 31, 1995 and 1994 are 14 and 41 earthquake-
affected TDRs totaling $13.9 million and $36.1 million, respectively.
The following table presents TDRs at December 31, 1995 by property type and
geographic location.
MULTIFAMILY
----------------------------- PERCENTAGE
SINGLE 2 TO 4 5 TO 37 UNITS COMMERCIAL OF
FAMILY UNITS 36 UNITS AND OVER AND INDUSTRIAL TOTAL TOTAL
------- ------- -------- -------- -------------- ------ -----------
(DOLLARS IN THOUSANDS)
Southern California:
Los Angeles.......... $ 774 $ 875 $10,506 $9,109 $ 946 $22,210 67.9%
Orange............... 347 1,596 2,401 -- 268 4,612 14.1
San Diego............ -- -- 355 -- -- 355 1.1
San Bernardino....... -- -- 669 -- -- 669 2.1
Riverside............ 41 126 472 -- -- 639 1.9
Ventura.............. -- -- 786 -- -- 786 2.4
------ ------ ------- -------- ------ ------- ------
1,162 2,597 15,189 9,109 1,214 29,271 89.5
------ ------ ------- -------- ------ ------- ------
Northern California:
Sacramento........... -- -- -- -- 1,819 1,819 5.6
Santa Clara.......... -- -- -- -- 1,214 1,214 3.7
------ ------ ------- -------- ------ ------- ------
-- -- -- -- 3,033 3,033 9.3
------ ------ ------- -------- ------ ------- ------
Pennsylvania........... -- -- -- -- 387 387 1.2
------ ------ ------- -------- ------ ------- ------
Total TDRs........ $1,162 $2,597 $15,189 $9,109 $4,634 $32,691 100.0%
====== ====== ======= ======== ====== ======= ======
Asset Classification
During 1995 the Bank enhanced its existing policy of specifically identifying
loans in the portfolio through implementation of a loan grading system ("LGS")
that management believes improved the efficiency and accuracy of the grading
process.
As a result of the LGS system implementation and increased resources allocated
to the grading process, 78% or $1.8 billion, of the multifamily and commercial
loan portfolio was graded during the third and fourth quarters of 1995. This
included all loans with balances of $0.5 million or greater (1,309 loans
reviewed
23
totaling $1.4 billion), and 45% of the Bank's loans with balances under $0.5
million (1,366 loans reviewed totaling $0.4 billion). In addition, the Bank
implemented more conservative loan grading policies. As a result, a substantial
number of loans were downgraded to Special Mention or Substandard for reasons
other than degradation of collateral or the borrower's ability to fully repay
the debt. This process has resulted in a significant increased level of
performing assets that were classified.
Credit risk is graded based on the Bank's internal asset review policies and
procedures, and individual loans are categorized as Pass, Special Mention,
Substandard, Doubtful or Loss depending on the risk characteristics of each
loan. All such grading requires the application of considerable subjective
judgment by the Bank. A brief description of these categories follows:
A Pass asset is considered of sufficient quality to preclude designation as
Special Mention or a classified asset. Pass assets generally are protected by
the current net worth and paying capacity of the obligor and by the value of the
underlying collateral.
An asset designated as Special Mention does not currently expose an
institution to a sufficient degree of risk to warrant an adverse classification.
However, it does possess credit deficiencies or potential weaknesses deserving
management's close attention. If uncorrected, such weaknesses or deficiencies
may expose an institution to an increased risk of loss in the future. Special
mention assets are also referred to as criticized.
An asset classified as Substandard is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Assets so classified have a well-defined weakness or weaknesses. They are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have all the weaknesses inherent in those
classified as Substandard. In addition, these weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable or improbable. The Bank will generally classify
assets as Doubtful when inadequate data is available or when such uncertainty
exists as to preclude a Substandard classification.
Assets classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. A Loss classification does not mean that an asset has
absolutely no recovery or salvage value; rather it means that it is not
practical or desirable to defer establishing a specific allowance for a
basically worthless asset even though partial recovery may be effected in the
future. The Bank will generally classify as Loss the portion of assets
identified as exceeding the asset's fair market value and a specific reserve is
established for such excess.
24
The following table summarizes Fidelity's net classified assets at the dates
indicated:
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
NPAs:
Nonaccruing loans................. $ 51,910 $ 71,614 $ 93,475 $112,041 $ 68,982
ISFs(1)........................... -- -- 28,362 47,324 25,490
REO(2)............................ 19,521 14,115 113,784 75,040 30,253
-------- -------- -------- -------- --------
Total NPAs..................... 71,431 85,729 235,621 234,405 124,725
-------- -------- -------- -------- --------
Performing classified loans:
Single family..................... 4,368 544 5,749 6,808 6,963
Multifamily:
2 to 4 units................... 8,297 951 7,616 3,648 3,390
5 to 36 units.................. 85,581 28,872 56,485 38,589 22,757
Over 37 units.................. 39,301 19,925 51,965 49,566 36,405
-------- -------- -------- -------- --------
Total multifamily........... 133,179 49,748 116,066 91,803 62,552
Commercial and industrial......... 10,099 5,515 3,905 9,831 19,584
-------- -------- -------- -------- --------
Total performing classified
loans........................ 147,646 55,807 125,720 108,442 89,099
-------- -------- -------- -------- --------
Other classified assets............. -- -- 11,161 10,891 14,579
-------- -------- -------- -------- --------
Total classified assets........ $219,077 $141,536 $372,502 $353,738 $228,403
======== ======== ======== ======== ========
NPAs to total assets................ 2.16% 2.31% 5.37% 4.99% 2.43%
======== ======== ======== ======== ========
Classified assets to total assets... 6.64% 3.82% 8.49% 7.53% 4.46%
======== ======== ======== ======== ========
- --------------
(1) On January 1, 1994 the Bank implemented SFAS No. 114. Loans previously
considered ISFs are included in loans beginning in 1994. The ISF designation
was effectively eliminated upon the Bank's implementation of SFAS No. 114.
(2) For presentation purposes, NPAs include REO net of REO GVA, if any.
25
The following tables present net classified assets for the quarters indicated:
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
NPAs:
Nonaccruing loans................. $ 51,910 $ 55,114 $ 64,944 $ 70,519
REO, before REO GVA............... 21,821 37,550 27,808 21,350
REO GVA........................... (2,300) -- -- --
-------- -------- -------- --------
Total NPAs..................... 71,431 92,664 92,752 91,869
Performing classified loans......... 147,646 88,337 74,140 73,979
-------- -------- -------- --------
Total classified assets........ $219,077 $181,001 $166,892 $165,848
======== ======== ======== ========
NPAs to total assets................ 2.16% 2.74% 2.68% 2.50%
======== ======== ======== ========
Classified assets to total assets... 6.64% 5.35% 4.82% 4.50%
======== ======== ======== ========
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
NPAs:
Nonaccruing loans................. $ 71,614 $ 58,465 $144,746 $139,376
REO, before REO GVA............... 14,115 16,515 130,179 135,111
REO GVA........................... -- -- (707) (8,524)
-------- -------- -------- --------
Total NPAs..................... 85,729 74,980 274,218 265,963
Performing classified loans......... 55,807 51,759 153,340 112,787
Real estate held for investment..... -- -- 11,682 11,770
-------- -------- -------- --------
Total classified assets........ $141,536 $126,739 $439,240 $390,520
======== ======== ======== ========
NPAs to total assets................ 2.31% 2.02% 6.78% 6.45%
======== ======== ======== ========
Classified assets to total assets... 3.82% 3.42% 10.85% 9.47%
======== ======== ======== ========
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of originating and retaining loans.
The portfolio monitoring procedures discussed earlier (see "--Credit
Administration--Loan Monitoring") assist the Bank in early identification of
potential problem loans and losses. The Bank's loan service and special assets
departments are responsible for working with borrowers to resolve problem loans
and minimize credit losses. See "--Credit Administration--Loan Portfolio Risk
Elements." The Bank's REO department is responsible for selling properties
acquired through foreclosure.
The Bank provides for identified losses on individual loans or real estate
properties by establishing specific loss reserves. When these estimated losses
are determined to be permanent, such as when a loan is foreclosed and the
related property is transferred to REO, specific reserves are charged off and
are then reflected as writedowns. The Bank also maintains loan and REO GVAs for
unidentified potential losses inherent in the loan and REO portfolios.
Specific loss reserves are allocated from the GVA when, in the Bank's
judgment, a loss is likely to be experienced on a loan or REO property. During
1994, prior to the implementation of Regulatory Bulletin No. 32, specific
reserves were determined based on the difference between the net book value of
the asset and either (1) the expected cash flows discounted at the loan's
effective interest rate, or in cases where foreclosure
26
is probable (2) the fair value of the collateral. Loans which, in management's
judgment, are probable of foreclosure were further reserved to provide for the
Bank's expected costs of selling the real estate.
Commencing in 1995, the Bank was required to comply with Regulatory Bulletin
No. 32 and in particular regulatory requirements and designations of troubled
collateral dependent loans ("TCDLs"). For TCDLs, where it is probable that the
Bank will be unable to collect all amounts due, the deficit between fair value
and the Bank's net book value is reserved through a specific valuation
allowance. Loans which, in management's judgment, are probable of foreclosure
are further reserved to provide for the Bank's expected costs of selling the
real estate.
The establishment of the allowance for loan losses is highly subjective and
involves numerous estimates and assumptions. The Bank's credit administration
department reviews the quality and recoverability of the Bank's assets on an
ongoing basis, in order to establish adequate specific reserves and GVA. The
Bank utilizes several models including the delinquency migration method in
addition to certain management judgments in determining the adequacy of its
allowance for loan losses. The delinquency migration method attempts to capture
the potential future losses as of a particular date associated with a given
portfolio of loans, based on the Bank's own historical migration and loss
experience over a given period of time. The Bank calculates a range of loss by
applying such methodology and then applies judgment and knowledge of particular
credits, economic and classified asset trends, the interest rate environment,
industry experience and other relevant factors to estimate the GVA amount.
Additions to the allowances, in the form of provisions, are reflected in results
of operations in the period of adjustment.
The amount of the Bank's allowance for loan losses represents management's
estimate of the amount of loan losses likely to be incurred by the Bank, based
upon various assumptions as to economic and other conditions. As such, the
allowance for loan losses does not represent the amount of such losses that
could be incurred under adverse conditions that management does not consider to
be the most likely to arise. In addition, management's classification of assets
and evaluation of the adequacy of the allowance for loan losses is an ongoing
process. Consequently, there can be no assurance that material additions to the
Bank's allowance for loan losses will not be required in the future, thereby
adversely affecting earnings and the Bank's ability to maintain or build
capital. While management believes that the current allowance is adequate to
absorb the known and inherent risks in the loan portfolio, no assurances can be
given that the allowance is adequate or that economic conditions which may
adversely affect the Bank's market area or other circumstances will not result
in future loan losses, which may not be covered completely by the current
allowance or may require an increased provision which could have an adverse
effect on the Bank's financial condition and results of operations. Significant
additional loan and real estate loss provisions may negatively impact the Bank's
future results of operations and levels of regulatory capital.
The following table sets forth Fidelity's allowance for estimated loan losses
broken out by GVA and specific reserves for loan or REO at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ---------------------------------
LOANS REO TOTAL LOANS REO TOTAL
------------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
GVA................. $ 8,921(1) $ 2,300 $ 51,221 $ 50,482 $ -- $ 50,482
Specific reserves... 40,514 1,192 41,706 16,720 2,318 19,038
--------- -------- -------- -------- -------- --------
$ 89,435 $ 3,492 $ 92,927 $ 67,202 $ 2,318 $ 69,520
========= ======== ======== ======== ======== ========
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
27
Upon analysis of the adverse impact on market values of properties by recent
bulk divestitures of properties by the Resolution Trust Corporation (the "RTC")
and others in the areas where the Bank has REO properties, and in connection
with the Bank's adoption of Accelerated Asset Resolution Plan, the Bank
allocated $2.3 million from loan GVA to REO GVA at December 31, 1995.
The following table summarizes the activity in the allowance for estimated
loan and REO losses for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period..................... $ 69,520 $ 101,547 $ 80,727 $ 52,374 $ 16,552
Provision for estimated
loan and REO losses..... 73,090(1) 74,327 95,300 69,000 58,405
Charge-offs............... (52,636) (72,505) (79,444) (41,176) (25,567)
GVA charged off on bulk
sale assets............. -- (38,391) -- -- --
Recoveries and other...... 2,953 4,542 4,964 529 2,984
---------- --------- --------- --------- ---------
Balance at end of period.... $ 92,927 $ 69,520 $ 101,547 $ 80,727 $ 52,374
========== ========= ========= ========= =========
- ------------
(1) Included in the provision for estimated loan losses for 1995 is the $45
million loan portfolio charge associated with the Accelerated Asset
Resolution Plan.
The following table presents loan and REO charge-offs by property type for the
periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Single family............... $ 2.7 $ 4.1 $ 3.5 $ 1.7 $ 0.1
Multifamily loans:
2 to 4 units.............. 5.2 8.6 5.0 2.2 --
5 to 36 units............. 33.9 39.1 44.0 12.4 5.6
37 units and over......... 8.2 16.3 21.8 13.2 --
----- ----- ----- ----- -----
Total multifamily...... 47.3 64.0 70.8 27.8 5.6
Commercial and industrial... 2.6 4.4 5.1 11.7 19.9
----- ----- ----- ----- -----
Total charge-offs...... $52.6 $72.5 $79.4 $41.2 $25.6
===== ===== ===== ===== =====
28
The following table presents loan and REO recoveries by property type and net
charge-offs for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Single family.......................... $ 0.1 $ 0.1 $ 0.4 $ -- $0.5
Multifamily loans:
2 to 4 units......................... 0.1 0.2 -- -- --
5 to 36 units........................ 1.8 3.2 3.3 0.2 --
37 units and over.................... 0.8 0.7 0.9 -- 2.4
----- ----- ----- ----- -----
Total multifamily................. 2.7 4.1 4.2 0.2 2.4
Commercial and industrial.............. 0.2 0.3 0.4 0.3 0.1
----- ----- ----- ----- -----
Total recoveries.................. $ 3.0 $ 4.5 $ 5.0 $ 0.5 $ 3.0
===== ===== ===== ===== =====
Total charge-offs, net of recoveries... $49.6 $68.0 $74.4 $40.7 $22.6
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans
outstanding........................... 1.6% 1.9% 1.9% 0.9% 0.4%
===== ===== ===== ===== =====
The following tables present loan and REO charge-offs by property type and
year of loan origination for the periods indicated:
YEAR OF ORIGINATION
------------------------------------------------------------------------------------------------
1986
AND
YEAR ENDED DECEMBER 31, 1995 TOTAL 1994 1993 1992 1991 1990 1989 1988 1987 PRIOR
- ---------------------------- ------- ----- ----- ----- ------ ------ ------ ------ ------ -----
(DOLLARS IN MILLIONS)
Single family.................. $ 2.7 $ -- $ 0.2 $ 0.1 $ 0.2 $ 0.5 $ 1.3 $ 0.2 $ 0.2 $ --
Multifamily:
2 to 4 units.................. 5.2 -- -- 0.1 -- 3.1 1.1 0.9 -- --
5 to 36 units................. 33.9 -- -- 0.6 6.4 11.3 4.0 5.3 5.2 1.1
37 units and over............. 8.2 -- -- -- -- 0.9 2.5 1.1 2.6 1.1
------- ----- ----- ----- ------ ------ ------ ------ ------ -----
Total multifamily........... 47.3 -- -- 0.7 6.4 15.3 7.6 7.3 7.8 2.2
Commercial and industrial...... 2.6 -- -- -- -- -- 1.1 -- -- 1.5
------- ----- ----- ----- ------ ------ ------ ------ ------ -----
Total charge-offs.............. $ 52.6 $ -- $ 0.2 $ 0.8 $ 6.6 $ 15.8 $ 10.0 $ 7.5 $ 8.0 $ 3.7
======= ===== ===== ===== ====== ====== ====== ====== ====== =====
Percent of total charge-offs... 100.0% --% 0.4% 1.5% 12.5% 30.1% 19.0% 14.3% 15.2% 7.0%
======= ===== ===== ===== ====== ====== ====== ====== ===== =====
YEAR OF ORIGINATION
----------------------------------------------------------------------------------------
1986
AND
YEAR ENDED DECEMBER 31, 1994 TOTAL 1993 1992 1991 1990 1989 1988 1987 PRIOR
- ---------------------------- ------- ----- ----- ----- ------ ------ ------ ------ -----
(DOLLARS IN MILLIONS)
Single family.................. $ 4.1 $ -- $ 0.2 $ 0.2 $ 2.3 $ 0.8 $ 0.2 $ 0.2 $ 0.2
Multifamily:
2 to 4 units.................. 8.6 -- -- 0.2 5.9 2.1 0.3 -- 0.1
5 to 36 units................. 39.1 0.4 0.1 3.9 20.4 5.9 6.0 1.3 1.1
37 units and over............. 16.3 -- -- 0.8 2.6 5.5 4.4 0.4 2.6
------- ----- ----- ----- ----- ------ ------ ------ ------
Total multifamily........... 64.0 0.4 0.1 4.9 28.9 13.5 10.7 1.7 3.8
Commercial and industrial...... 4.4 -- -- -- -- -- 2.9 -- 1.5
------- ----- ----- ----- ------ ------ ------ ------ ------
Total charge-offs.............. $ 72.5 $ 0.4 $ 0.3 $ 5.1 $ 31.2 $ 14.3 $ 13.8 $ 1.9 $ 5.5
======= ===== ===== ===== ====== ====== ====== ====== ======
Percent of total charge-offs... 100.0% 0.6% 0.4% 7.1% 42.9% 19.8% 19.0% 2.6% 7.6%
======= ===== ===== ===== ====== ====== ====== ====== ======
29
YEAR OF ORIGINATION
-----------------------------------------------------------------------------
1986
AND
YEAR ENDED DECEMBER 31, 1993 TOTAL 1992 1991 1990 1989 1988 1987 PRIOR
- --------------------------------- ------- ----- ----- ------ ------ ------ ----- -----
(DOLLARS IN MILLIONS)
Single family.................... $ 3.5 $ -- $ 0.3 $ 2.1 $ 0.8 $ 0.3 $ -- $ --
Multifamily:
2 to 4 units.................... 5.0 -- 0.1 3.6 0.8 0.4 0.1 --
5 to 36 units................... 44.0 0.1 6.0 21.7 7.4 4.5 2.6 1.7
37 units and over............... 21.8 -- 0.8 9.1 0.9 5.0 2.3 3.7
------- ----- ----- ------ ------ ------ ----- -----
Total multifamily.............. 70.8 0.1 6.9 34.4 9.1 9.9 5.0 5.4
Commercial and industrial........ 5.1 -- -- -- 0.5 1.1 1.5 2.0
------- ----- ----- ------ ------ ------ ----- -----
Total charge-offs.............. $ 79.4 $ 0.1 $ 7.2 $ 36.5 $ 10.4 $ 11.3 $ 6.5 $ 7.4
======= ===== ===== ====== ====== ====== ===== =====
Percent of total charge-offs... 100.0% 0.1% 9.1% 46.0% 13.1% 14.2% 8.2% 9.3%
======= ===== ===== ====== ====== ====== ===== =====
The following tables present Fidelity's gross mortgage loan portfolio as of
the dates indicated by property type and year of origination (amounts are gross
of reserves and net of writedowns):
DECEMBER 31, 1995
---------------------------------------------------------------------------------------------------
YEAR OF ORIGINATION
---------------------------------------------------------------------------------------
1986
AND
TOTAL 1995 1994 1993 1992 1991 1990 1989 1988 1987 PRIOR
------ ---- ----- ----- ---- ---- ---- ---- ---- ---- -----
(DOLLARS IN MILLIONS)
Single family............. $ 594.0 $ 0.3 $177.3 $ 66.3 $ 33.8 $ 14.4 $ 59.3 $ 44.6 $ 75.9 $ 48.6 $ 73.5
Multifamily:
2 to 4 units............. 345.9 -- 16.5 24.1 13.2 20.7 78.7 62.7 74.4 25.7 29.9
5 to 36 units............ 1,521.1 4.8 64.3 85.6 106.7 167.7 367.6 173.1 208.9 128.6 213.8
37 units and over........ 329.9 3.2 59.4 12.7 15.0 4.7 32.5 57.7 38.7 54.9 51.1
-------- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
multifamily............. 2,196.9 8.0 140.2 122.4 134.9 193.1 478.8 293.5 322.0 209.2 294.8
Commercial and
industrial.............. 237.4 6.5 5.5 1.3 0.6 1.7 11.7 37.5 51.3 21.0 100.3
-------- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross mortgage
loans............... $3,028.3 $14.8 $323.0 $190.0 $169.3 $209.2 $549.8 $375.6 $449.2 $278.8 $468.6
======== ===== ====== ====== ====== ====== ====== ====== ====== ====== ======
Loans by year of
origination to total.... 100.0% 0.5% 10.7% 6.3% 5.6% 6.9% 18.1% 12.4% 14.8% 9.5% 15.5%
Net delinquencies by year ======== ===== ====== ====== ====== ====== ====== ====== ====== ====== ======
of origination............ 2.4% --% 0.5% 1.0% 0.8% 4.6% 2.3% 2.2% 1.8% 1.4% 5.3%
======== ===== ====== ====== ====== ====== ====== ====== ====== ====== ======
Charge-offs by year
of origination............ 1.7% --% --% 0.1% 0.5% 3.2% 2.9% 2.6% 1.7% 2.9% 0.8%
======== ===== ====== ====== ====== ====== ====== ====== ====== ====== ======
30
DECEMBER 31, 1994
----------------------------------------------------------------------------------------
YEAR OF ORIGINATION
------------------------------------------------------------------------------
1986
AND
TOTAL 1994 1993 1992 1991 1990 1989 1988 1987 PRIOR
----- ---- ---- ---- ---- ---- ---- ---- ---- -----
(DOLLARS IN MILLIONS)
Single family................ $ 755.2 $271.1 $ 88.7 $ 42.2 $ 17.1 $ 66.7 $ 49.2 $ 82.4 $ 53.4 $ 84.4
Multifamily:
2 to 4 units................ 394.0 32.0 32.2 14.3 21.1 87.8 67.6 80.0 26.9 32.1
5 to 36 units............... 1,612.9 65.9 88.7 110.9 181.2 394.1 184.4 225.2 136.3 226.2
37 units and over........... 345.3 64.4 12.8 15.1 4.7 32.8 62.0 40.9 59.8 52.8
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total multifamily.......... 2,352.2 162.3 133.7 140.3 207.0 514.7 314.0 346.1 223.0 311.1
Commercial and industrial... 250.3 5.6 1.3 0.6 1.7 12.0 38.8 54.6 21.9 113.8
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross mortgage loans...... $3,357.7 $439.0 $223.7 $183.1 $225.8 $593.4 $402.0 $483.1 $298.3 $509.3
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Loans by year of origination
to total................... 100.0% 13.1% 6.7% 5.5% 6.7% 17.7% 12.0% 14.3% 8.9% 15.1%
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Delinquencies by year of
origination to total loans.. 3.6% 0.1% 0.5% 2.2% 7.1% 4.5% 3.8% 2.6% 2.9% 6.7%
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Charge-offs by year
of origination.............. 2.2% --% 0.2% 0.2% 2.3% 5.3% 3.6% 2.9% 0.6% 1.1%
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Prior to 1986, Fidelity had primarily originated single family loans. At
December 31, 1985, 58% of the Bank's loan portfolio was secured by single family
and multifamily residential properties containing 2 to 4 units, 23% was secured
by residential properties of 5 or more units and 19% was secured by commercial
and other property. Beginning in 1986, Fidelity focused on multifamily lending
due to the economies of scale it could achieve on larger balance loans. Of $0.9
billion in total originations in 1986, 64% were secured by multifamily
properties of 5 units or more. From 1987 through 1991, which were Fidelity's
peak lending volume years, originations totaled $1.3 billion, $1.5 billion, $0.9
billion, $1.2 billion and $0.5 billion, respectively. Of these years' total
originations, approximately 47% were multifamily (5 units or more) loans. As a
result of the decline in the Southern California economy and real estate market
since 1991, the Bank experienced significant loan and real estate losses, high
levels of NPAs and increased levels of REOs with respect to its loans on
multifamily properties of 5 units or more. During 1993, 1994 and 1995, the Bank
reserved and/or charged off amounts corresponding to these peak origination
years totaling $16.4 million for loans originated in 1987, $32.6 million for
1988, $34.7 million for 1989, $83.5 million for 1990 and $18.9 million for 1991,
for a total of $186.1 million. Losses on multifamily loans (5 units or more)
comprised $150.8 million, or 81.0%, of this total. Continued downward pressure
on the economy and real estate market could lead to additional losses in this
portfolio and adversely affect the Bank's performance and loan and real estate
portfolios.
The high level of provisions for loss and charge-offs during 1993, 1994 and
1995 was primarily due to depressed economic conditions for real estate in
Southern California. If these depressed economic conditions continue, it is
likely that additional charge-offs and reserves will be required and if future
declines in the Southern California economy are substantial, it is likely that
the future corresponding charge-offs and reserves will also be significant.
FORECLOSURE POLICIES
The Bank typically initiates foreclosure proceedings between 30 and 90 days
after a borrower defaults on a loan. The proceedings take at least four months
before the collateral for the loan can be sold at "foreclosure" auction, and
this period can be extended under certain circumstances, such as, if the
borrower files bankruptcy or if the Bank enters into negotiations with the
borrower to restructure the loan. In California, foreclosure proceedings almost
always take the form of a nonjudicial foreclosure, upon the
31
completion of which the lender is left without recourse against the borrower for
any deficiency or shortfall from the difference between the value of the
collateral and the amount of the loan, and in most cases the Bank obtains title
to the property. In some cases, while the foreclosure proceedings are under way,
the borrower requests forbearance from foreclosure in order to have more time to
cure the default or restructure the loan. The Bank agrees to restructure when it
determines that the loan, as modified, is likely to result in a greater ultimate
recovery than taking title to the property. Among the factors the Bank considers
in restructuring a loan is the extent to which the borrower pays down the loan,
furnishes more collateral or makes a further investment in the property by way
of repairs or refurbishment, and demonstrates an awareness and ability to manage
the property according to a reasonable operating plan.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans results when property
collateralizing a loan is foreclosed upon or otherwise acquired in satisfaction
of the loan and the Bank takes title to the property. The Bank experiences
foreclosures as part of the normal process of real estate lending. Prior to
January 1, 1994, certain loans were also included in REO when they exhibited
characteristics more closely associated with the risk of real estate ownership
than with loans. These loans were designated as ISF if they met the following
criteria: (a) the borrower currently has little or no equity at fair market
value in the underlying collateral, (b) the only source of repayment is the
property securing the loan and (c) the borrower has abandoned the property or
will not be able to rebuild equity in the foreseeable future.
As a result of the adoption of SFAS No. 114, beginning January 1, 1994, loans
that meet the criteria for ISF designation are no longer reported as REO,
although they continue to be valued based on the fair value of the collateral
and generally continue to be included in NPAs.
The following table presents Fidelity's net REO, including ISFs (prior to
1994), by property type at the dates indicated:
DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Single family............... $ 2,952 $ 930 $ 6,942 $ 7,014 $ 3,032
Multifamily:
2 to 4 units............... 2,598 198 10,345 4,129 695
5 to 36 units.............. 8,421 4,884 41,177 32,535 8,674
37 units and over.......... -- 1,041 47,565 40,924 15,040
-------- ------- -------- --------- -------
Total multifamily....... 11,019 6,123 99,087 77,588 24,409
Commercial and industrial... 7,850 7,062 44,559 51,381 28,302
REO GVA....................... (2,300) -- (8,442) (13,619) --
-------- ------- -------- --------- -------
Total net REO (1)(2)....... $ 19,521 $14,115 $142,146 $ 122,364 $55,743
======== ======= ======== ========= =======
Total ISFs included above..... $ -- $ -- $ 28,362 $ 47,324 $25,490
======== ======= ======== ========= =======
- --------------
(1) Foreclosed real estate is shown net of first trust deed loans to others,
where applicable.
(2) The Bulk Sales in the third and fourth quarters of 1994 contributed to the
significant decrease in REO.
32
The following table presents the Bank's real estate acquired in settlement of
loans by location and property type at December 31, 1995.
COMMERCIAL AND
MULTIFAMILY INDUSTRIAL
============================ =========================
SINGLE 2 TO 4 5 TO 36 37 UNITS OFFICE
FAMILY UNITS UNITS AND OVER BUILDING OTHER TOTAL
------- ------- ------- -------- -------- -------------- --------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles.................... $1,401 $ 292 $6,454 $ -- $ -- $2,237 $10,384
Orange......................... 275 1,202 925 -- -- 670 3,072
San Diego...................... 829 328 -- -- -- -- 1,157
San Bernardino................. 79 421 738 -- -- 416 1,654
Riverside...................... 186 355 304 -- -- 2,447 3,292
------ ------ ------ -------- -------- ------ -------
2,770 2,598 8,421 -- -- 5,770 19,559
Northern California Counties:
Santa Clara.................... 182 -- -- -- 2,080 -- 2,262
------ ------ ------ -------- -------- ------ -------
Total California................. $2,952 $2,598 $8,421 $ -- $2,080 $5,770 $21,821
====== ====== ====== ======== ======== ====== =======
In the current market, the Bank rarely sells REO for a price equal to or
greater than the gross loan balance, and the losses suffered are impacted by the
market factors discussed elsewhere in this document. REO is recorded at
acquisition at the lower of the recorded investment in the subject loan or the
fair market value of the assets received. The fair market value of the assets
received is based upon a current appraisal adjusted for estimated carrying,
rehabilitation and selling costs. Income-producing properties acquired by the
Bank through foreclosure are managed by third party contract managers, under the
supervision of Bank personnel.
During 1995, the Bank sold 210 REO properties with a net book value of $47.9
million for net sales proceeds of $43.0 million. The Bank made 18 loans in
connection with the sales of these REO properties for a total of $9.0 million
during the year. Of these, one loan in the amount of $1.0 million contained
terms favorable to the borrower that were not available to borrowers for the
purchase of non-REO property.
During 1994, excluding the Bulk Sales, the Bank sold 108 REO properties with a
net book value of $33.5 million for net sales proceeds of $3l.3 million. During
1993, the Bank sold 210 properties with a net book value of $138.5 million for
net sales proceeds of $83.5 million. The Bank made 42 loans in connection with
non-Bulk Sales of REO for a total of $13.2 million during 1994. Of these, four
loans in the amount of $2.2 million contained terms favorable to the borrower
that were not available to borrowers for the purchase of non-REO property. The
comparable data for 1993 was 107 loans for with a net book value of $51.6
million, of which $10.9 million contained favorable terms.
During 1995, the Bank foreclosed on 270 properties with gross book values of
$92.7 million. The average gross book value per asset foreclosed in 1995 was
$0.3 million. During 1994 and 1993, the Bank foreclosed on 232 and 282 assets
with gross book values of $102.3 million and $204.7 million, respectively. The
average gross book value per asset foreclosed in 1994 was $0.4 million compared
to $0.7 million in 1993.
33
BULK SALES
During 1994, the Bank completed Bulk Sales of $563.3 million of NPAs and other
problem assets. The table below presents the composition of the gross book value
of assets sold.
PERFORMING NONACCRUAL
LOANS LOANS TDRS REO TOTAL
---------- ---------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
Single family residences........... $ 2,766 $ 14,413 $ -- $ 10,856 $ 28,035
Multifamily:
2 to 4 units.................... 2,947 15,030 1,209 14,081 33,267
5 units and over................ 138,869 75,725 24,484 146,764 385,842
Commercial and other real estate... 26,612 39,377 -- 50,142 116,131
-------- -------- ------- -------- --------
$171,194 $144,545 $25,693 $221,843 $563,275
======== ======== ======= ======== ========
At the date of sale, specific reserves and writedowns of $116.4 million were
associated with these assets. Net proceeds from the sales were $354.9 million.
The Bulk Sale agreements included certain representations and warranties
relating to the assets transferred. For a period of time ranging from 60 to 180
days after the related closings, the purchasers of the assets under the Bulk
Sale agreements had the right to require Fidelity, at Fidelity's option, either
to repurchase Bulk Sale assets as to which representations and warranties were
asserted to be inaccurate or to cure such breach. The repurchase price for each
Bulk Sale asset repurchased is equal to the allocated purchase price paid plus
amounts expended by the purchaser post-closing, minus amounts received by the
purchasers post-closing with respect to such asset.
The Bank has received approximately $18.3 million in claims from one Bulk Sale
purchaser, of which $3.9 million relate to claims of environmental or structural
defects. Under the stockholders' agreement entered into between the Bank and
Citadel in connection with the 1994 Restructuring and Recapitalization, Citadel
must reimburse the Bank in an amount not to exceed $4 million for certain losses
incurred by the Bank in either repurchasing Bulk Sale assets in the event of
breached environmental or structural representations and warranties or curing
such breaches. The $3.9 million of claims made with respect to environmental or
structural defects are subject to a cure threshold resulting in net claims of
approximately $2.7 million. Citadel has been notified of these claims, but
Citadel's obligation to reimburse Fidelity only arises upon the actual
expenditure of funds by Fidelity with respect to such claims. While the Bank
does not anticipate any difficulty in collecting reimbursement for such claims
from Citadel when and if such claims become payable, there can be no assurance
that Citadel will have sufficient liquid assets to satisfy its reimbursement
obligations.
The remaining $14.4 million of claims were received within the 180-day period
for filing claims of breach of general representations and warranties and are
not subject to reimbursement by Citadel. The same purchaser has also made a
general claim, in an unspecified amount, of misrepresentation and concealment of
material facts. The Bank has evaluated the merits of these claims and believes
that such claims are without merit.
An adverse outcome with respect to these claims could have a material adverse
effect on the Bank's financial condition, results of operations and regulatory
capital levels.
34
TREASURY ACTIVITIES
Investments
At December 31, 1995, the Bank maintained an available-for-sale portfolio to
provide a source of liquid earning assets to meet funding and other
requirements.
As a consequence of concerns regarding the Bank's ability to maintain minimum
regulatory capital levels to remain adequately capitalized, the Bank
reclassified all held-to-maturity investment securities and MBS to its
available-for-sale portfolio in the second quarter 1995. Subsequent to their
reclassification, certain available-for-sale securities were sold within the
quarter to maintain the Bank's regulatory capital status. If the Bank seeks to
establish a held-to-maturity investment portfolio in future periods, it may be
precluded from doing so for a period of time.
Fidelity is required by federal regulations to maintain a minimum level of
liquid assets which may be invested in certain government and other specified
securities. See "--Regulation and Supervision--Required Liquidity." Investment
decisions are made within guidelines approved by Fidelity's Board of Directors.
Investment portfolios are managed in an effort to maximize yields while
consistent with maintaining safety of principal and compliance with applicable
regulations.
The Bank's securities portfolio consisted of the following at the dates
indicated:
DECEMBER 31,
=======================================================================
1995 1994 1993
--------------------- --------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Federal funds sold.............. $ -- --% $ -- --% $ 60,000 3.00%
-------- -------- --------
Investment securities:
Available for sale:
U.S. Government and agency
obligations.................. 87,184 4.66 24,158 6.91 87,385 4.59
Other investments............. 7,471 5.54 -- -- 10,676 5.07
-------- ------- --------
94,655 4.70 24,158 6.91 98,061 4.65
-------- ------- --------
Held to maturity:
U.S. Government and agency
obligations.................. -- -- 116,313 5.19 -- --
Commercial paper.............. -- -- -- -- -- --
Other investments............. -- -- 8,920 5.26 -- --
-------- ------- --------
-- -- 125,233 5.20 -- --
-------- -------- --------
Total investment securities... 94,655 4.70 149,391 5.46 98,061 4.65
-------- -------- --------
Mortgage-backed securities:
Available for sale:
FHLMC......................... 3,038 5.51 10,270 6.47 34,184 5.13
FNMA.......................... 91 2.72 4,051 3.92 14,853 4.67
Participation certificates.... 28,604 7.01 31,707 5.80 38,223 5.87
CMOs.......................... -- -- -- -- 3,848 4.39
-------- ------- --------
Total mortgage-backed
securities................... 31,733 6.85 46,028 5.62 91,108 5.33
-------- ------- --------
FHLB and FRB stock.............. 49,425 5.00 47,017 5.00 52,151 3.20
-------- -------- --------
$175,813 5.18 $242,436 5.40 $301,320 4.27
======== ======== ========
35
The following table summarizes the maturity and weighted average yield of the
Bank's investment securities at December 31, 1995.
MATURES IN
----------------------------------------------------------------------------
1997 THROUGH 2001 THROUGH 2006 AND
TOTAL 1996 2000 2005 THEREAFTER
------------------ ------------------ ------------------ ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------ -------- -------- -------- ------ -------- ------- --------
(DOLLARS IN THOUSANDS)
Investment securities:
Available for sale:
U.S. Government and
agency obligations........ $ 87,184 4.66% $22,865 4.42% $64,319 4.75% $ -- --% $ -- --%
Other investments.......... 7,471 5.54 2,522 5.11 4,949 5.77 -- -- -- --
-------- ------- ------- ------ -------
94,655 4.70 25,387 4.48 69,268 4.81 -- -- -- --
Mortgage-backed securities
available for sale......... 31,733 6.85 -- -- 91 2.72 -- -- 31,642 6.87
FHLB Stock................... 49,425 5.00 49,425 5.00 -- -- -- -- -- --
-------- ------- ------- ------ -------
$175,813 5.18 $74,812 4.82 $69,359 4.81 $ -- -- $31,642
======== ======= ======= ====== =======
SOURCES OF FUNDS
The Bank derives funds from deposits, FHLB advances, securities sold under
agreements to repurchase, and other short-term and long-term borrowings. In
addition, funds are generated from loan payments and payoffs as well as from the
sale of loans and investments.
36
Deposits
The largest source of funds for the Bank is deposits. Customer deposits are
insured by the FDIC to the maximum amount permitted by law up to $100,000 per
account. The Bank has several types of deposit accounts designed to attract both
short-term and long-term deposits. The following table sets forth the weighted
average interest rates paid by the Bank and the amounts of deposits held by the
Bank at the dates indicated:
WEIGHTED AVERAGE RATES AT DEPOSITS AT
DECEMBER 31, DECEMBER 31,
------------------------------- ---------------------------------------
1995 1994 1993 1995 1994 1993
-------- ------- ------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Checking-no minimum term:
NOW........................... 1.3% 1.1% 1.0% $ 232,554 $ 251,224 $ 263,192
Money market checking......... 2.8 2.8 1.8 3,363 7,076 50,840
Noninterest bearing........... -- -- -- 73,148 68,111 52,936
Savings-no minimum term:
Passbook...................... 2.0 2.0 2.0 62,934 70,564 82,168
Money market savings.......... 3.1 3.1 2.4 93,901 135,595 280,495
Certificate accounts:
Original term:
Less than 3 months........... 3.3 3.2 2.8 7,053 14,754 118,697
3 months to 5 months......... 4.3 3.4 3.4 29,258 60,880 601,419
6 months to 11 months (1).... 4.9 3.6 3.3 271,951 384,013 740,741
12 months to 23 months (1)... 5.6 4.9 4.2 1,464,757 1,295,473 601,382
24 months to 59 months....... 5.5 4.7 5.3 142,454 174,019 228,194
60 months and over........... 6.7 6.8 6.9 219,496 235,563 348,600
---------- ---------- ----------
Total certificate accounts..... 5.6 4.8 4.2 2,134,969 2,164,702 2,639,033
---------- ---------- ----------
Total deposits............. 4.9% 4.2% 3.6% $2,600,869 $2,697,272 $3,368,664
========== ========== ==========
- -------------
(1) Included in the above balances at December 31, 1995, 1994, and 1993 are
$771.5 million, $1,051.8 million, and $642.2 million, respectively, of
certain accounts with product features including withdrawal and deposit
options without penalty.
The following tables provide additional deposit information by remaining
maturity at December 31, 1995.
OVER 3 OVER 6 OVER 12 OVER 24
MONTHS MONTHS MONTHS MONTHS
WITHIN BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER 36
3 MONTHS 6 MONTHS 12 MONTHS 24 MONTHS 36 MONTHS MONTHS TOTAL
----------- ---------- ---------- ---------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
Type of account,
weighted-average interest rate:
Passbook, 2.00%........................ $ 62,934 $ -- $ -- $ -- $ -- $ -- $ 62,934
Checking and money market checking, 309,065 -- -- -- -- -- 309,065
1.01%.................................
Money market passbook, 3.05%........... 93,901 -- -- -- -- -- 93,901
Certificate accounts:
Under 3.00%........................... 5,924 209 355 246 13 52 6,799
3.01--4.00%........................... 49,417 14,775 200 -- -- 104 64,496
4.01--5.00%........................... 149,872 60,229 84,029 5,031 1,220 3,782 304,163
5.01--6.00%........................... 176,637 215,028 424,006 55,316 21,061 7,971 900,019
6.01--7.00%........................... 569,302 32,452 41,499 122,595 2,501 2,898 771,247
7.01--8.00%........................... 6,735 19,880 32,974 7,711 413 8,454 76,167
Over 8.01%............................ 216 -- -- 11,503 158 201 12,078
---------- -------- -------- -------- ------- ------- ----------
Total deposits....................... $1,424,003 $342,573 $583,063 $202,402 $25,366 $23,462 $2,600,869
========== ======== ======== ======== ======= ======= ==========
37
Certificates of deposit of $100,000 or more totaled $528.3 million and
represented 20.3% of all deposits at December 31, 1995 and $434.6 million and
represented 16.1% of all deposits at December 31, 1994. Fidelity intends to
continue to use such certificates of deposits as a source of funds to manage its
liquidity.
The following table summarizes certificates of deposits of $100,000 or more by
remaining maturity and weighted average rate at December 31, 1995.
WEIGHTED
PERCENT OF TOTAL AVERAGE
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT DEPOSITS RATE
- ---------------------------------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
Within three.......................... $291,835 11.2% 5.90%
Over three but within six............. 67,619 2.6 5.60
Over six but within twelve............ 108,913 4.2 5.58
Over twelve........................... 59,953 2.3 6.46
-------- ----
$528,320 20.3% 5.86
======== ====
The distribution of certificate accounts by date of maturity is an important
indicator of the relative stability of a major source of lendable funds. Longer
term certificate accounts generally provide greater stability as a source of
lendable funds, but currently entail greater interest costs than passbook
accounts. The following tables summarize certificate accounts by maturity, as a
percentage of total deposits and weighted average rate at December 31, 1995:
DECEMBER 31, 1995
==========================================
WEIGHTED
PERCENT OF TOTAL AVERAGE
MATURES IN QUARTER ENDED: AMOUNT DEPOSITS RATE
------------------------ ----------- ---------------- --------
(DOLLARS IN THOUSANDS)
March 31, 1996............ $ 958,103 36.8% 5.63%
June 30, 1996............. 342,573 13.2 5.41
September 30, 1996........ 320,554 12.4 5.41
December 31, 1996......... 262,509 10.2 5.40
March 31, 1997............ 72,106 2.8 6.29
June 30, 1997............. 86,416 3.3 6.64
September 30, 1997........ 30,365 1.2 6.08
December 31, 1997......... 13,515 0.5 5.60
March 31, 1998............ 5,258 0.2 6.01
June 30, 1998............. 6,343 0.2 5.67
September 30, 1998........ 8,542 0.3 5.44
December 31, 1998......... 5,223 0.2 5.27
After December 31, 1998... 23,462 0.9 6.38
---------- ----
$2,134,969 82.2% 5.61
========== ====
The Bank has also utilized brokered deposits as a short-term means of funding.
These deposits are obtained or placed by or through a deposit broker and are
subject to certain regulatory limitations. Should the Bank become
undercapitalized, it would be prohibited from accepting, renewing or rolling
over deposits obtained through a deposit broker. The Bank accepted brokered
deposits pursuant to a waiver obtained from the FDIC, which waiver expired in
October 1994. The Bank is currently eligible to accept brokered deposits;
however, at December 31, 1995, no brokered deposits were outstanding. The Bank
may, from time to time, accept, renew and rollover brokered deposits for short
term funding needs in accordance with applicable
38
regulatory requirements. See "--Regulation and Supervision--Mandatory Sanctions
Tied to Prompt Corrective Action Capital Categories." The following table
summarizes the Bank's outstanding balance of brokered deposits at the dates
indicated:
PERCENT OF WEIGHTED
DECEMBER 31, AMOUNT TOTAL DEPOSITS AVERAGE RATE
------------ ------ --------------- -------------
(DOLLARS IN THOUSANDS)
1995......... $ -- --% --%
1994......... 99 -- 4.75
1993......... 92,196 2.74 3.25
Borrowings
The Bank utilizes FHLB advances as a source of funds for operations. The FHLB
System functions as a source of credit to financial institutions which are
members of a Federal Home Loan Bank. See "--Regulation and Supervision--Federal
Home Loan Bank System." Fidelity may apply for advances from the FHLB secured by
the capital stock of the FHLB owned by Fidelity and certain of Fidelity's
mortgages and other assets (principally obligations issued or guaranteed by the
United States Government or agencies thereof). Advances can be requested for any
business purpose in which Fidelity is authorized to engage, except that advances
with a term greater than 5 years can be granted only for the purpose of
providing funds for residential housing finance. In granting advances, the FHLB
considers a member's creditworthiness and other relevant factors. FHLB advances
to Fidelity totaled $292.7 million and $332.7 million at December 31, 1995 and
1994, respectively. Fidelity's available FHLB line of credit is based primarily
on a portion of Fidelity's residential loan portfolio pledged for such purpose,
up to a maximum of 25% of total assets. During the second quarter of 1995, the
Bank increased its commercial paper line of credit which is guaranteed by the
FHLB subject to the Bank's overall borrowing limits, to $500 million. At
December 31, 1995, Fidelity's remaining available line of credit was $42.1
million, after deducting outstanding advances and the $500 million backup letter
of credit for commercial paper, as described below.
The Bank issues commercial paper, backed by a $500 million letter of credit
from the FHLB of San Francisco, to ensure a high quality investment grade
rating. The letter of credit commitment varies with the level of commercial
paper outstanding, and the commercial paper line of credit increases or
decreases accordingly. Commercial paper outstanding totaled $50 million and $400
million at December 31, 1995 and 1994, respectively. The commercial paper
outstanding at December 31, 1995 had a maturity of 31 days or less and had an
effective interest rate of 5.70%.
The Bank has utilized the capital markets to obtain funds for its lending
operations. The only such borrowing outstanding during 1995 and 1994 was an
8.50% mortgage-backed medium-term note, Series A, due April 15, 1997 (the
"MTN"). At December 31, 1995 and 1994, the MTN had a balance of $100 million.
The balance is secured by mortgage loans and U.S. Treasury notes with a combined
principal balance of $246.5 million and $217.1 million at December 31, 1995, and
1994, respectively.
From time to time, Fidelity enters into reverse repurchase agreements by which
it sells securities with an agreement to repurchase the same securities at a
specific future date (overnight to one year). Fidelity deals only with dealers
perceived by management to be financially strong. There were no reverse
repurchase agreements outstanding at December 31, 1995, or 1994.
In 1994, Fidelity redeemed its $60 million of subordinated notes for a
redemption price equal to $60 million plus accrued interest of approximately
$1.5 million, which amounts were paid in cash, and a
39
recapitalization fee of $1.0 million paid through the issuance of 190,476 shares
of Class A Common Stock to the holders of such notes as part of Fidelity's 1994
Restructuring and Recapitalization.
The following table sets forth certain information as to the Bank's FHLB
advances, other borrowings and subordinated notes at the dates indicated:
DECEMBER 31,
-----------------------------------
1995 1994 1993
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
FHLB advances:
Fixed rate advances................ $ 80,000 $ 80,000 $110,000
Floating rate advances............. 212,700 252,700 216,400
-------- -------- --------
292,700 332,700 326,400
-------- -------- --------
Other borrowings:
Mortgage-backed notes............... 100,000 100,000 100,000
Commercial paper.................... 50,000 400,000 304,000
Securities sold under agreements to -- -- 3,830
repurchase......................... -------- -------- --------
150,000 500,000 407,830
-------- -------- --------
Subordinated notes.................... -- -- 60,000
-------- -------- --------
Total borrowings................ $442,700 $832,700 $794,230
======== ======== ========
Weighted average interest rate on all 6.05% 5.89% 5.12%
borrowings........................... ======== ======== ========
Percent of total borrowings to total
liabilities and stockholders' ========= ========= =========
equity............................... 13.42% 22.45% 18.09%
======== ======== ========
INTEREST RATE RISK MANAGEMENT
Net interest income is the difference between interest earned on the Bank's
loans, MBSs and investment securities ("interest-earning assets") and interest
paid on its deposits and borrowings ("interest-bearing liabilities"). Net
interest income is affected by the interest rate spread, which is the difference
between the rates earned on the Bank's interest-earning assets and rates paid on
its interest-bearing liabilities, as well as the relative amounts of its
interest-earning assets and interest-bearing liabilities. The Bank's average
interest rate spread for the years ended December 31, 1995, 1994, and 1993 was
1.89%,2.24%, and 2.31%, respectively.
The objective of interest rate risk management is to maximize the net income
of the Bank while controlling interest rate risk exposure. Banks and savings
institutions are subject to interest rate risk when assets and liabilities
mature or reprice at different times (duration risk), against different indices
(basis risk) or for different terms (yield curve risk). The decision to control
or accept interest rate risk can only be made with an understanding of the
probability of various scenarios occurring. Having liabilities that reprice more
quickly than assets is beneficial when interest rates fall, but may be
detrimental when interest rates rise.
The Bank manages interest rate risk by, among other things, maintaining a
portfolio consisting primarily of ARM loans that reprice more closely with its
interest-bearing liabilities. ARM loans comprised 97%, 97%, and 96% of the total
loan portfolio at December 30, 1995, 1994, and 1993, respectively. The
percentage of monthly adjustable ARMs to total loans was approximately 75%, 74%,
and 75% at December 31, 1995, 1994, and 1993, respectively. Interest sensitive
assets provide the Bank with a degree of long-term protection from rising
interest rates. At December 31, 1995, approximately 94% of Fidelity's total loan
portfolio consisted of loans which mature or reprice within one year, compared
to approximately 92% at December 31, 1994 and 96% at December 31, 1993. Fidelity
has in recent periods been negatively impacted by the fact that increases in the
interest rates accruing on Fidelity's ARMs lagged the increases in interest
40
rates accruing on its deposits due to reporting delays and contractual look-back
periods contained in the Bank's loan documents. At December 31, 1995, 92% of the
Bank's loans, which are indexed to COFI at December 31, 1995, as with all COFI
portfolios in the industry, do not reprice until some time after the industry
liabilities composing COFI reprice. The Bank's liabilities reprice generally in
line with the cost of funds of institutions which comprise the FHLB Eleventh
District. In the Bank's case, the lag between the repricing of its liabilities
and its ARM loans indexed to COFI is approximately four months. Thus, when rates
rise sharply, as they did between early 1994 and early 1995, there will be
upward pressure on rates paid on deposit accounts and wholesale borrowings, and
the Bank's net interest income will be adversely affected until the majority of
its interest-earning assets fully reprice. Conversely, in a falling interest
rate environment, as in 1993 and the latter part of 1995, net interest income
will be positively affected. See "--Lending Activities--ARM Loans."
The Bank utilizes various financial instruments in the normal course of its
business. By their nature all such instruments involve risk, and the maximum
potential loss may exceed the value at which such instruments are carried. As is
customary for these types of instruments, the Bank usually does not require
collateral or other security from other parties to these instruments. The Bank
manages its credit exposure to counterparties through credit approvals, credit
limits and other monitoring procedures. The Bank's Credit Policy Committee makes
recommendations regarding counterparties and credit limits which are subject to
approval by the Board of Directors.
The Bank employs interest rate swaps, caps and floors in the management of
interest rate risk. Interest rate swaps generally involve the exchange of fixed
or floating interest payments without the exchange of the underlying principal
amounts. Interest rate caps and floors generally involve the payment of a one
time premium to a counterparty who, if interest rates rise or fall, above or
below a predetermined level, will make payments to the Bank at an agreed upon
rate for the term of the agreement until such time as interest rates fall below
or rise above the cap or floor level. See Item 7. "MD&A--Asset/Liability
Management."
COMPETITION
The Bank believes that the traditional role of thrift institutions, such as
Fidelity, as the nation's primary housing lenders has diminished, and that
thrift institutions are subject to increasing competition from commercial banks,
mortgage bankers and others for both depositor funds and lending opportunities.
In addition, with assets of approximately $3.3 billion at December 31, 1995, the
Bank faces competition from a number of substantially larger institutions. The
ability of thrift institutions, such as Fidelity, to compete by diversifying
into lending activities other than real estate lending and by offering
investments other than deposit-like investments is subject to certain regulatory
and legal restrictions. These thrift institutions' ability to compete is also
limited by their lack of experience in such other activities. However, the Bank
believes these nontraditional activities and the related fee income is vital for
future success. See "--Business Strategy."
The Bank faces significant competition in attracting savings deposits and in
originating loans as many of the nation's largest depository and other financial
institutions are headquartered or have a significant number of branches in the
areas where Fidelity conducts its business. Competition for customers' funds
comes principally from other savings and thrift institutions, commercial banks,
mutual funds, insurance companies, credit unions, corporate and government debt
securities, pension funds and investment banks and investment brokerage firms.
The principal basis of competition for investable funds is the interest rate
paid or effective return, the perceived credit risk and the quality, types, and
costs of services offered. In addition to offering competitive rates and terms,
the Bank attracts customers through advertising, readily accessible office
locations, the diversity of its products, and the quality of its customer
service. Management believes that in
41
the past the Bank's financial condition has, in some cases, also hindered its
ability to attract and retain employees.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), commercial banks will be able to open branch offices
outside of their home state after June 1, 1997, although the extent of their
ability to branch into a new state will depend on the law of the state.
California adopted an early "opt-in" statute that was effective on October 2,
1995. The new legislation permits out-of-state banks to acquire California banks
that satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
"de novo" branching into California are not permitted. The Riegle-Neal Act and
the recently-enacted California branching statute will likely increase
competition from out-of-state banks in the markets in which Fidelity operates.
On August 7, 1995, the FDIC approved a final rule regarding deposit insurance
premiums. The final rule reduced deposit insurance premiums for BIF member
institutions from 23 to zero basis points for institutions in the lowest risk
category, while holding deposit insurance premiums for SAIF members at their
current levels (23 basis points for institutions in the lowest risk category).
The reduction took effect with the September 30, 1995 premium assessment.
Accordingly, in the absence of further legislative action, SAIF members such as
the Bank will be competitively disadvantaged by the resulting premium
differential. See Item 7. "MD&A--Regulatory Capital Requirements" and "--
Regulation and Supervision--Deposit Insurance."
EMPLOYEES
At December 31, 1995, the Bank had 636 active employees (including both full-
time and part-time employees with average FTEs for the fourth quarter 1995 of
554), none of whom were represented by a collective bargaining group. Eligible
employees are provided with 401(k) and other benefits, including life, medical,
dental, vision insurance and short and long-term disability insurance.
The Bank decreased total employee headcount during 1995 by 169 to achieve
organizational goals involving cost reductions, outsourcing opportunities and
changes in product focus. Areas which experienced employee reductions in 1995
included the Consumer Lending Group (a reduction of 41 employees), the Retail
Financial Services Group (a reduction of 79 employees) and other administrative
services and subsidiaries (a reduction of 49 employees). The Bank may have
limited staff reductions during 1996.
TAXATION
Through August 4, 1994, the 1994 Restructuring and Recapitalization date, the
Bank filed a consolidated federal income tax return and a combined California
franchise tax return with its former parent company, Citadel. Fidelity and its
subsidiaries filed a consolidated federal income tax return and a combined
California franchise tax return with the Bank as the common parent corporation
for the period of August 5, 1994 through December 31, 1994, and will file
accordingly for subsequent calendar years.
Although Fidelity ceased to be a member of the Citadel consolidated group as a
result of the 1994 Restructuring and Recapitalization, Fidelity will remain
severally liable for the federal income tax of the Citadel consolidated group
for those tax years during which it was a member of the Citadel consolidated
group at any time. Citadel and Fidelity are parties to a tax disaffiliation
agreement governing certain tax matters. For additional information, see
"Related Party Transactions--Tax Sharing" at Note 16 to the consolidated
financial statements.
42
For federal income tax purposes, the maximum rate of tax applicable to savings
institutions is currently 35% for taxable income over $10 million. For
California franchise tax purposes, savings institutions are taxed as "financial
corporations" at a higher rate than that applicable to nonfinancial corporations
because of exemptions from certain state and local taxes. The California
franchise tax rate applicable to financial corporations is approximately 11%.
Savings institutions are generally subject to federal taxation in the same
manner as other types of corporations. However, under applicable provisions of
the Code, savings institutions that meet certain definitional and other tests
("qualifying institutions") can, unlike most other companies, use the reserve
(versus specific charge-off) method to compute their deduction for bad debt
losses.
Under the reserve method, qualifying institutions are generally allowed to use
either of two alternative computations. Under the "percentage of taxable income
method" computation, qualifying institutions can claim a bad debt deduction
computed as a percentage of taxable income before such deduction. Alternatively,
a qualifying institution may elect to utilize its own bad debt loss experience
to compute its annual addition to its bad debt reserves (the "experience
method"). The Bank began to use the experience method beginning in 1987. The
amount by which a qualifying institution's total bad debt reserves exceed the
amount computed under the experience method ("excess tax bad debt reserves") may
be subject to recapture.
On December 31, 1995, the bad debt reserves of the Bank for federal income tax
purposes did not include any amounts representing excess tax bad debt reserves.
If in the future the Bank fails to meet the definitional or other tests of a
qualifying institution, the entire tax bad debt reserves of $34.7 million will
have to be recaptured and included in taxable income. In addition, there is
legislation currently pending in Congress that would, among other things,
require savings institutions to convert to national or state bank charter by no
later than January 1, 1998. The proposed legislation would require such
converting institutions to recapture the excess of their total tax bad debt
reserves over the adjusted base year (1987 for the Bank) total tax bad debt
reserve balance generally into income over six years starting after 1995. On
December 31, 1995, the Bank's total tax bad debt reserve balance did not exceed
the adjusted base year total tax bad debt reserve balance. In addition, these
institutions would generally no longer be permitted to claim the bad debt
deduction using the reserve method following conversion to bank charter. Given
the uncertainties associated with the proposed legislation, management cannot
predict whether any such legislation will be adopted or, if adopted, whether it
would have a material impact on the Bank. See "--Regulation and Supervision."
The Internal Revenue Service (the "Service") has completed its examination of
the Bank's federal income tax returns through 1991. The California Franchise Tax
Board has completed its examination of the California franchise tax returns
through 1988 and is currently examining the returns for years 1989 through 1991.
For additional information regarding the federal income and California franchise
taxes payable by the Bank, see Note 12 to the consolidated financial statements.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the
"Code") and the Treasury Regulations thereunder generally provide that,
following an ownership change of a corporation with a net operating loss (an
"NOL"), a net unrealized built-in loss (a "NUBIL") or tax credit carryovers, the
amount of annual post-ownership change taxable income that can be offset by pre-
ownership change NOLs or recognized built-in losses, and the amount of post-
ownership change tax liability that can be offset by pre-ownership change tax
credits, generally cannot exceed a limitation prescribed by Section 382. The
Section 382 annual limitation generally equals the product of the fair market
value of the equity of the corporation immediately before the ownership change
(subject to various adjustments) and the long-term tax-exempt rate prescribed
monthly by the Service.
43
As a result of the 1994 Restructuring and Recapitalization, the Bank underwent
an ownership change and ceased to be a member of the Citadel consolidated group.
The Bank incurred an NOL in its taxable year ended August 4, 1994 and has
alternative minimum and general business tax credits carryover to taxable year
ended December 31, 1994 that are subject to limitation under Sections 382 and
383. The Bank had a NUBIL equal to the excess of the tax basis in its assets
over the fair market value of its assets on August 4, 1994. Any portion of the
NUBIL recognized during the 5-year period following the 1994 Restructuring and
Recapitalization will generally be subject to limitation under Section 382. The
Bank believes this NUBIL does not exceed $10 million. As a result, a de minimis
exception will apply, and the recognition of this NUBIL in the future will not
be subject to limitation under Section 382.
As a result of the 1995 Recapitalization, the Bank again underwent an
ownership change for purposes of Section 382. The Bank incurred an NOL for its
taxable year ended December 31, 1994. Additionally, the Bank will incur an NOL
for its 1995 taxable year of which any NOL incurred prior to the 1995 ownership
change would be subject to limitation under Section 382. Based on current
estimates, the Bank had a NUBIL at the time of the 1995 change of ownership. Any
portion of the NUBIL recognized during the 5-year period following such change
in ownership will be subject to limitation under Section 382. If the NUBIL does
not exceed $10 million, a de minimis exception will apply, and the recognition
of this NUBIL in the future will not be subject to limitation under Section 382.
These limitations are inclusive of the limitations imposed by the 1994 change of
ownership.
At December 31, 1995, the Bank had an estimated NOL carryover for federal
income tax purposes of $69.1 million, of which $19.1 million is subject to
annual utilization limitations as a result of the 1994 change of ownership and
expires by year 2008, $20.1 million expires by year 2009 and $29.9 million
expires by year 2010 (all of which are subject to annual and aggregate
utilization limitations as a result of the 1995 change of ownership), if not
utilized. For California franchise tax purposes, there was an estimated NOL
carryover of $22.2 million, of which $5.0 million expires by year 1997 and $0.9
million expires by year 1998 (both of which are subject to annual utilization
limitations as a result of the 1994 change of ownership), $15.8 million expires
by year 1999 and $0.5 million expires by year 2000 (all of which are subject to
annual and aggregate utilization limitations as a result of the 1995 change of
ownership), if not utilized. The deferred tax assets related to these NOLs have
been recorded with a corresponding valuation allowance in an equal amount under
SFAS No. 109.
REGULATION AND SUPERVISION
General
Fidelity is a federally chartered savings bank, a member of the FHLB of San
Francisco, and is subject to regulation by the OTS and the FDIC. Fidelity's
deposits are insured by the FDIC through the SAIF to the maximum extent
permitted by law. Statutes and regulations applicable to Fidelity govern such
matters as the amount of capital Fidelity must hold; dividends, mergers and
changes of control; establishment and closing of branch offices; and the
investments and activities in which Fidelity can engage.
Fidelity is subject to the examination, supervision and reporting requirements
of the OTS, its primary federal regulator, including a requirement for Fidelity
of at least one full scope, on-site safety and soundness examination every year.
The Director of the OTS is authorized to impose assessments on Fidelity to fund
OTS operations, including the cost of examinations. Fidelity is also subject to
examination and supervision by the FDIC, and the FDIC has "back-up" authority to
take enforcement action against Fidelity if the OTS fails to take such action
after a recommendation by the FDIC. The FDIC may impose assessments on Fidelity
to cover the cost of FDIC examinations. In addition, Fidelity is subject to
regulation by the Board of Governors of the Federal Reserve System ("FRB") with
respect to certain aspects of its business.
44
Changes in legislation and regulatory policy have materially affected the
business of Fidelity and other financial institutions in the past and are likely
to do so in the future. Regulations now affecting Fidelity may be changed at any
time and the interpretation of these regulations by the regulatory authorities
and examiners is also subject to change. There can be no assurance that future
changes in the regulations or their interpretation will not adversely affect the
business of Fidelity. Future legislation and regulatory policy could also alter
the structures and competitive relationships among financial institutions.
Regulatory authorities also have the power, in certain circumstances, to
prohibit or limit the payment of dividends to holders of common stock of
Fidelity. In addition, certain regulatory actions, including general increases
in federal deposit insurance premiums, a special insurance premium assessment to
recapitalize the SAIF or the application of the risk-based insurance premium
system to Fidelity, may increase Fidelity's operating expenses in future periods
and may have a material adverse impact on Fidelity's capital levels and results
of operations.
Office of Thrift Supervision Oversight
Fidelity is subject to certain regulatory restrictions including, but not
limited to: (i) a prohibition, absent OTS prior approval, on increases in total
assets during any quarter in excess of an amount equal to net interest credited
on deposit liabilities during the quarter, (ii) a requirement that the Bank
submit to the OTS for prior review and approval the names of proposed new
directors and executive officers and proposed employment contracts with any
director or executive officer, (iii) a requirement that the Bank submit to the
OTS for prior review and approval any third party contracts outside the normal
course of business, and (iv) the ability of the OTS, in its discretion, to
require 30 days' prior notice of all transactions between Fidelity and its
affiliates.
The Bank was notified by the OTS West Regional Office in April 1995 by a
written directive that certain computer software implementation or enhancement
related costs capitalized in accordance with GAAP were required to be
immediately expensed in the Bank's thrift financial report ("TFR") and deducted
from regulatory capital as required in the instructions to the TFR and by OTS
policy. Pursuant to Regulatory Bulletin No. 4a, in June 1995 the Bank filed an
appeal with the OTS Director of Supervision requesting that the directive to
immediately expense capitalized software costs be rescinded and that the Bank be
permitted to capitalize the costs in question in accordance with its existing
practice. Alternatively, the Bank requested the OTS address the issue of whether
software costs should be expensed or capitalized through the notice and comment
rulemaking process. The Bank also asked that it be relieved of any obligation to
comply with the directive during the pendency of the appeal. The OTS granted the
Bank's request for a stay of the effectiveness of the letter directive while it
considered the Bank's appeal. In February 1996 the Bank was orally advised that
the appeal was denied. As of December 31, 1995, the full amount in question,
approximately $4.3 million, was reserved.
On June 28, 1995, the Bank entered into the Supervisory Agreement with the OTS
addressing certain issues raised in a 1994 safety and soundness examination.
Upon the successful completion of the 1995 Recapitalization the OTS agreed to
terminate the Supervisory Agreement. Notwithstanding the termination of the
Supervisory Agreement, the Bank remains committed to addressing the various
regulatory concerns expressed by the OTS. While the Bank believes that the
corrective actions it has taken will address the OTS concerns, there can be no
assurance that the OTS will agree that the corrective actions fully satisfy its
requirements in every aspect.
On February 12, 1996, the OTS commenced its annual safety and soundness
examination of the Bank.
FIRREA Capital Requirements
The OTS capital regulations, as required by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), include three separate minimum
capital requirements for the savings
45
institution industry--a "tangible capital requirement," a "leverage limit" and a
"risk-based capital requirement." These capital standards must be no less
stringent than the capital standards applicable to national banks. The OTS also
has the authority, after giving the affected institution notice and an
opportunity to respond, to establish an individual minimum capital requirement
("IMCR") for a savings institution which is higher than the industry minimum
requirements, upon a determination that an individual minimum capital
requirement is necessary or appropriate in light of the institution's particular
circumstances, such as if the institution is expected to have losses resulting
in capital inadequacy, has a high degree of exposure to credit risk, or has a
high amount of nonperforming loans. Effective January 17, 1995, the OTS amended
the capital regulations by adding to the list of circumstances in which an IMCR
may be appropriate for a savings association the following: a high degree of
exposure to concentration of credit risk or risks arising from nontraditional
activities, or failure to adequately monitor and control the risks presented by
concentration of credit and nontraditional activities.
The industry minimum capital requirements are as follows:
Tangible capital of at least 1.5% of adjusted total assets. Tangible capital
is composed of (1) common stockholders' equity, perpetual noncumulative
preferred stock and related earnings, nonwithdrawable accounts and pledged
deposits qualifying as core capital and minority interests in the equity
accounts of fully consolidated subsidiaries, after deducting (a) intangible
assets other than purchased mortgage servicing rights and (b) the lesser of the
institution's investments in and extensions of credit to subsidiaries engaged as
principal in activities not permissible for national banks, net of any reserves
established against such investments (i) as of April 12, 1989 and (ii) as of the
date on which the institution's tangible capital is being determined. In
general, adjusted total assets equal the institution's consolidated total
assets, minus any assets that are deducted in calculating capital.
Core capital of at least 3% of adjusted total assets (the "leverage limit").
Core capital consists of tangible capital plus (1) goodwill resulting from pre-
April 12, 1989 acquisitions of troubled savings institutions and (2) certain
marketable intangible assets, such as core deposit premium (the premium paid for
acquisition of deposits from other institutions). Deferred tax assets whose
realization depends on the institution's future taxable income (exclusive of
income attributable to reversing taxable temporary differences and
carryforwards) or on the institution's tax-planning strategies must be deducted
from core capital to the extent that such assets exceed the lesser of (1) 10% of
core capital or (2) the amount of such assets that can be realized within one
year, unless such assets were reportable as of December 31, 1992, in which case
no deduction is required.
Effective March 4, 1994, the OTS adopted a regulation with respect to the
inclusion of intangible assets in regulatory capital. Under this regulation,
purchased mortgage servicing rights will generally be includable in tangible and
core capital, and purchased credit card relationships will generally be
includable in core capital, as long as they do not exceed 50% of core capital in
the aggregate, with a separate sublimit of 25% for purchased credit card
relationships. All other intangible assets, including core deposit premium, will
generally have to be deducted. Core deposit premium in existence on March 4,
1994, however, may continue to be included in core capital to the extent
permitted by the OTS, as long as the premium is valued in accordance with GAAP,
supported by credible assumptions, and its amortization is adjusted at least
annually. At December 31, 1995, the Bank had no core deposit premium in core
capital.
Total capital of at least 8% of risk-weighted assets (the "risk-based capital
requirement"). Total capital includes both core capital and "supplementary"
capital items deemed less permanent than core capital, such as subordinated debt
and general loan loss allowances (subject to certain limits). Equity investments
(with the exception of investments in subsidiaries and investments permissible
for national banks) and portions of certain high-risk land loans and
nonresidential construction loans must be deducted from total capital. At least
half of total capital must consist of core capital.
46
Risk-weighted assets are determined by multiplying each category of an
institution's assets, including off balance sheet asset equivalents, by an
assigned risk weight based on the credit risk associated with those assets, and
adding the resulting products. The four risk weight categories range from zero
percent for cash and government securities to 100% for assets (including past-
due loans and real estate owned) that do not qualify for preferential risk-
weighting.
On March 18, 1994, the OTS published a final regulation effective on that date
that permits a loan secured by multifamily residential property, regardless of
the number of units, to be risk-weighted at 50% for purposes of the risk-based
capital standards if the loan meets specified criteria relating to the term of
the loan, timely payments of interest and principal, loan-to-value ratio and
ratio of net operating income to debt service requirements. Under the prior
regulation, only loans secured by multifamily residential properties consisting
of 5 to 36 units were eligible for risk-weighting at 50%, and then only if such
loans had a loan-to-value ratio at origination of not more than 80% and the
collateral property had an average annual occupancy rate of at least 80% for a
year or more.
Any loans that qualified for risk-weighting under the prior regulation as of
March 18, 1994 will be "grandfathered" and will continue to be risk-weighted at
50% as long as they continue to meet the criteria of the prior regulation. Thus
occupancy rates, which recently have been decreasing generally, will continue to
affect the risk-weighting of such grandfathered multifamily loans unless such
loans qualify for 50% risk-weighting under the criteria of the new rule, which
criteria do not include an occupancy requirement.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the OTS was required to revise its risk-based capital standards to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities. The OTS
has incorporated an interest rate risk component into its regulatory capital
rule. The final interest rate risk rule also adjusts the risk-weighting for
certain mortgage derivative securities. Under the revised rule, savings
institutions with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. An institution's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets, liabilities and off-
balance sheet contracts) that would result from a hypothetical 200-basis point
increase or decrease in market interest rates divided by the estimated economic
value of the bank's assets, as calculated in accordance with guidelines set
forth by the OTS. An institution whose measured interest rate risk exposure
exceeds 2% would be required to deduct an interest rate risk component in
calculating its total capital under the risk-based capital rule. The interest
rate risk component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2% multiplied by the estimated
economic value of the bank's assets. That dollar amount would be deducted from a
bank's total capital in calculating compliance with its risk-based capital
requirement. Under the rule, there is a lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. An institution with assets of less than $300
million and risk-based capital ratios in excess of 12% is not subject to the
interest rate risk component, unless the OTS determines otherwise. The rule also
provides that the Director of the OTS may waive or defer a bank's interest rate
risk component on a case-by-case basis. However, the OTS has temporarily
postponed the implementation of the new rule until the OTS has collected
sufficient data to determine whether the rule is effective in monitoring and
managing interest rate risk. No interest rate risk component would have been
required to be added to the Bank's risk-based capital requirement at December
31, 1995 had the rule been in effect at that time.
Effective January 17, 1995, the OTS amended the risk-based capital standards
by explicitly identifying concentration of credit risk and the risks arising
from nontraditional activities, as well as an institution's ability to manage
those risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The Bank does not believe
that this final rule will have a material impact on the Bank's capital
requirements.
47
FDICIA PCA Regulations
FDICIA required the OTS to implement a system requiring regulatory sanctions
against institutions that are not adequately capitalized, with the sanctions
growing more severe the lower the institution's capital. The OTS has established
specific capital ratios under the PCA Regulations for five separate capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
Under the OTS regulations implementing FDICIA, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is at
least 10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%,
its ratio of core capital to adjusted total assets is at least 5.0%, and it is
not subject to any order or directive by the OTS to meet a specific capital
level. An institution will be adequately capitalized if its ratio of total
capital to risk-weighted assets is at least 8.0%, its ratio of core capital to
risk-weighted assets is at least 4.0%, and its ratio of core capital to adjusted
total assets (leverage ratio) is at least 4.0% (3.0% if the institution receives
the highest rating on the OTS financial institutions rating system).
An institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0% total capital
to risk-weighted assets, 3.0% core capital to risk-weighted assets, or 3.0% core
capital to adjusted total assets, it will be treated as significantly
undercapitalized. Finally, an institution will be treated as critically
undercapitalized if its ratio of "tangible equity" (core capital plus cumulative
preferred stock minus intangible assets other than supervisory goodwill and
purchased mortgage servicing rights) to adjusted total assets is equal to or
less than 2.0%.
An institution's capital category is based on its capital levels as of the
most recent of the following dates (1) the date the institution's most recent
quarterly TFR was required to be filed with the OTS, (2) the date the
institution received from the OTS its most recent final report of examination or
(3) the date the institution received written notice from the OTS of the
institution's capital category. If subsequent to the most recent TFR or report
of examination a material event has occurred that would cause the institution to
be placed in a lower capital category, the institution must provide written
notice to the OTS within 15 days, and the OTS shall determine whether to change
the association's capital category. See Item 7. "MD&A--Regulatory Capital
Compliance."
Mandatory Sanctions Tied to Prompt Corrective Action Capital Categories
Capital Restoration Plan. An institution that is undercapitalized must
submit a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels of
activities the institution will conduct, and such other information as the OTS
may require. The OTS must act on the capital restoration plan expeditiously, and
generally not later than 60 days after the plan is submitted.
The OTS may approve a capital restoration plan only if the OTS determines that
the plan is likely to succeed in restoring the institution's capital and will
not appreciably increase the risks to which the institution is exposed. In
addition, the OTS may approve a capital restoration plan only if the
institution's performance under the plan is guaranteed by every company that
controls the institution, up to the lesser of (a) 5% of the institution's total
assets at the time the institution became undercapitalized or (b) the amount
necessary to bring the institution into compliance with all capital standards as
of the time the institution fails to comply with its capital restoration plan.
Such guarantee must remain in effect until the institution has been adequately
capitalized for four consecutive quarters, and the controlling company or
companies must provide the OTS with appropriate assurances of their ability to
perform the guarantee. If the controlling company guarantee is
48
not acceptable, the OTS may treat the undercapitalized institution as
significantly undercapitalized. There are additional restrictions which are
applicable to significantly undercapitalized institutions which are described
below.
Limits on Expansion. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
Capital Distributions. With one exception, an undercapitalized savings
institution generally may not pay any dividends or make other capital
distributions. Under the exception, the OTS may permit, after consultation with
the FDIC, repurchases or redemptions of the institution's shares that are made
in connection with the issuance of additional shares to improve the
institution's financial condition. Undercapitalized institutions also may not
pay management fees to any company or individual that controls the institution.
Similarly, an adequately capitalized institution may not make a capital
distribution or pay a management fee to a controlling person if such payment
would cause the institution to become undercapitalized.
Brokered Deposits and Benefit Plan Deposits. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
Institutions that are ineligible to accept brokered deposits can only offer
FDIC insurance coverage for employee benefit plan deposits up to $100,000 per
plan, rather than $100,000 per plan participant, unless, at the time such
deposits are accepted, the institution meets all applicable capital standards
and certifies to the benefit plan depositor that its deposits are eligible for
coverage on a per-participant basis.
The Bank accepted brokered deposits ($0.1 million as of December 31, 1994)
pursuant to a waiver obtained from the FDIC, which waiver expired in October
1994 and had no such deposits at December 31, 1995. The Bank is currently
eligible to accept brokered deposits.
Restrictions on Significantly and Critically Undercapitalized Institutions.
In addition to the above mandatory restrictions which apply to all
undercapitalized savings institutions, institutions that are significantly
undercapitalized may not without the OTS' prior approval (a) pay a bonus to any
senior executive officer or (b) increase any senior executive officer's
compensation over the average rate of compensation (excluding bonuses, options
and profit-sharing) during the 12 months preceding the month in which the
institution became undercapitalized. The same restriction applies to
undercapitalized institutions that fail to submit or implement an acceptable
capital restoration plan.
If a savings institution is critically undercapitalized, the institution is
also prohibited from making payments of principal or interest on subordinated
debt beginning sixty days after the institution becomes critically
undercapitalized, unless the FDIC permits such payments or the subordinated debt
was outstanding on July 15, 1991 and has not subsequently been extended or
renegotiated. In addition, the institution cannot without prior FDIC approval
enter into any material transaction outside the ordinary course of business.
Critically undercapitalized savings institutions must be placed in receivership
or conservatorship within 90 days of becoming critically undercapitalized unless
the OTS, with the concurrence of the FDIC, determines that some other action
would better resolve the problems of the institution at the least possible long-
term loss to the insurance fund, and documents the reasons for its
determination. A determination by the OTS not to
49
place a critically undercapitalized institution in conservatorship or
receivership must be reviewed every 90 days. If the institution remains
critically undercapitalized on average during the calendar quarter beginning 270
days after it became critically undercapitalized, the findings which the OTS
must make regarding the viability of the institution in order to avoid the
appointment of a conservator or receiver become more stringent.
Discretionary Sanctions Tied to Prompt Corrective Action Capital Categories
Operating Restrictions. With respect to an undercapitalized institution, the
OTS will, if it deems such actions necessary to resolve the institution's
problems at the least possible loss to the insurance fund, have the explicit
authority to: (a) order the institution to recapitalize by selling shares of
capital stock or other securities, (b) order the institution to agree to be
acquired by another depository institution holding company or combine with
another depository institution, (c) restrict transactions with affiliates, (d)
restrict the interest rates paid by the institution on new deposits to the
prevailing rates of interest in the region where the institution is located, (e)
require reduction of the institution's assets, (f) restrict any activities that
the OTS determines pose excessive risk to the institution, (g) order a new
election of directors, (h) order the institution to dismiss any director or
senior executive officer who held office for more than 180 days before the
institution became undercapitalized, subject to the director's or officer's
right to obtain administrative review of the dismissal, (i) order the
institution to employ qualified senior executive officers subject to the OTS'
approval, (j) prohibit the acceptance of deposits from correspondent depository
institutions, (k) require the institution to divest any subsidiary or the
institution's holding company to divest the institution or any other subsidiary
or (l) take any other action that the OTS determines will better resolve the
institution's problems at the least possible loss to the deposit insurance fund.
If an institution is significantly undercapitalized, or if it is
undercapitalized and its capital restoration plan is not approved or implemented
within the required time periods, the OTS must take one or more of the above
actions, and must take the actions described in clauses (a) or (b), (c) and (d)
above unless it finds that such actions would not resolve the institution's
problems at the least possible loss to the deposit insurance fund. The OTS also
may prohibit the institution from making payments on any outstanding
subordinated debt or entering into material transactions outside the ordinary
course of business without the OTS' prior approval.
The OTS' determination to order one or more of the above discretionary actions
will be evidenced by a written directive to the institution, and the OTS will
generally issue a directive only after giving the institution prior notice and
an opportunity to respond. The period for response shall be at least 14 days
unless the OTS determines that a shorter period is appropriate based on the
circumstances. The OTS, however, may issue a directive without providing any
prior notice if the OTS determines that such action is necessary to resolve the
institution's problems at the least possible loss to the deposit insurance fund.
In such a case, the directive will be effective immediately, but the institution
may appeal the directive to the OTS within 14 days.
Receivership or Conservatorship. In addition to the mandatory appointment of
a conservator or receiver for critically undercapitalized institutions,
described above, the OTS or FDIC may appoint a receiver or conservator for an
institution if the institution is undercapitalized and (a) has no reasonable
prospect of becoming adequately capitalized, (b) fails to submit a capital
restoration plan within the required time period or (c) materially fails to
implement its capital restoration plan. FDICIA provides that directors of an
FDIC-insured depository institution will have no liability to the institution's
stockholders or creditors if they consent in good faith to the appointment of a
conservator or receiver or to an FDIC-assisted sale of the institution.
Downgrading to Lower Capital Category. The OTS can apply to an institution
in a particular capital category the sanctions that apply to the next lower
capital category, if the OTS determines, after providing the institution notice
and opportunity for a hearing, that (a) the institution is in an unsafe or
unsound condition or (b) the institution received, in its most recent report of
examination, a less-than-satisfactory rating for asset
50
quality, management, earnings or liquidity, and the deficiency has not been
corrected. The OTS cannot, however, use this authority to require an adequately
capitalized institution to file a capital restoration plan, or to subject a
significantly undercapitalized institution to the sanctions applicable to
critically undercapitalized institutions.
Expanded Regulatory Authority Under FDICIA
In addition to the PCA provisions discussed above based on an institution's
regulatory capital ratios, FDICIA contains several measures intended to promote
early identification of management problems at depository institutions and to
ensure that regulators intervene promptly to require corrective action by
institutions with inadequate operational and managerial standards.
Safety and Soundness Standards. FDICIA requires the OTS to prescribe minimum
acceptable operational and managerial standards, and standards for asset
quality, earnings, and valuation of publicly traded shares, for savings
institutions and their holding companies. The operational standards must cover
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and employee compensation. The asset quality and earnings
standards must specify a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, and minimum ratio of market value to book
value for publicly traded shares.
Any institution or holding company that fails to meet the standards must
submit a plan for corrective action within 30 days. If a savings institution
fails to submit or implement an acceptable plan, the OTS must order it to
correct the safety and soundness deficiency, and may restrict its rate of asset
growth, prohibit asset growth entirely, require the institution to increase its
ratio of tangible equity to assets, restrict the interest rate paid on deposits
to the prevailing rates of interest on deposits of comparable amounts and
maturities, or require the institution to take any other action that the OTS
determines will better carry out the purpose of prompt corrective action.
Imposition of these sanctions is within the discretion of the OTS in most cases
but is mandatory if the savings institution commenced operations or experienced
a change in control during the 24 months preceding the institution's failure to
meet the safety and soundness standards, or underwent extraordinary growth
during the preceding 18 months.
On August 9, 1995, the OTS and the other federal banking agencies adopted a
final rule establishing procedures and deadlines for submission of safety and
soundness compliance plans that may be required for institutions that fail to
meet certain safety and soundness compliance guidelines that are set forth as an
appendix to the final rule. The guidelines establish operational and managerial
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits and excessive compensatory arrangements for executive officers,
employees, directors or principal shareholders. Additional guidelines setting
forth standards with respect to asset quality, earnings and stock valuation are
still being drafted by the agencies. The safety and soundness guidelines do not
specify each procedure that must be followed, but instead set forth general
standards for compliance with safety and soundness objectives.
Expanded Requirements Relating to Internal Controls. Each depository
institution with assets above $500 million must annually prepare a report,
signed by the chief executive officer and chief financial officer, on the
effectiveness of the institution's internal control structures and procedures
for financial reporting, and on the institution's compliance with laws and
regulations relating to safety and soundness. The institution's independent
public accountant must attest to, and report separately on, management's
assertions in that report. The report and the attestations, along with financial
statements and such other disclosure requirements as the FDIC and the OTS may
prescribe, must be submitted to the FDIC and OTS.
51
Every institution with assets above the $500 million threshold must also have
an audit committee of its Board of Directors made up entirely of directors who
are independent of the management of the institution. Audit committees of
"large" institutions (defined by the FDIC as an institution with more than $3
billion in assets, which includes Fidelity) must include members with banking or
financial management expertise, may not include members who are large customers
of the institution, and must have access to independent counsel.
Activities Restrictions Not Related to Capital Compliance
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a limited list of
qualified thrift investments, primarily investments related to housing loans. If
Fidelity fails to satisfy the QTL test and does not requalify as a QTL within
one year, any entity in control of Fidelity must register and be regulated as a
bank holding company, and Fidelity must either convert to a commercial bank
charter or become subject to restrictions on branching, business activities and
dividends as if it were a national bank.
Portfolio assets consist of tangible assets minus (a) assets used to satisfy
liquidity requirements and (b) property used by the institution to conduct its
business. Assets that may be counted as qualified thrift investments without
limit include residential mortgage and construction loans; home improvement and
repair loans; mortgage-backed securities; home equity lines of credit; Federal
Savings and Loan Insurance Corporation ("FSLIC"), FDIC, Resolution Funding
Corporation and Resolution Trust Corporation obligations; and FHLB stock.
Assets includable subject to an aggregate maximum of 20% of portfolio assets
include Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation stock; investments in residential housing-oriented subsidiaries;
consumer and education loans up to a maximum of 10% of portfolio assets; 200% of
loans for development of low-income housing; 200% of certain community
development loans; loans to construct, purchase or maintain churches, schools,
nursing homes and hospitals; and 50% of any residential mortgage loans
originated by the institution and sold during the month for which the QTL
calculation is made, if such loans were sold within 90 days of origination.
Investments and Loans. In general, federal savings institutions such as
Fidelity may not invest directly in equity securities, noninvestment grade debt
securities, or real estate, other than real estate used for the institution's
offices and related facilities. Indirect equity investment in real estate
through a subsidiary is permissible, but subject to limitations based on the
amount of the institution's assets, and the institution's investment in such a
subsidiary must be deducted from regulatory capital in full or (for certain
subsidiaries owned by the institution prior to April 12, 1989) phased out of
capital by no later than July 1, 1996.
Loans by a savings institution to a single borrower are generally limited to
15% of an institution's "unimpaired capital and unimpaired surplus," which is
similar but not identical to total capital. Aggregate loans secured by
nonresidential real property are generally limited to 400% of an institution's
total capital. Commercial loans may not exceed 10% of an institution's total
assets, and consumer loans may not exceed 35% of an institution's total assets.
Activities of Subsidiaries. A savings institution seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC and
OTS. A subsidiary of Fidelity may be able to engage in activities that are not
permissible for Fidelity directly, if the OTS determines that such activities
are reasonably related to Fidelity's business, but Fidelity may be required to
deduct its investment in such a subsidiary from capital. The OTS has the power
to require a savings institution to divest any subsidiary or terminate any
activity conducted by a subsidiary that the OTS determines to be a serious
threat to the financial safety, soundness or stability of such savings
institution or to be otherwise inconsistent with sound banking practices.
52
Real Estate Lending Standards. The OTS and the other federal banking
agencies have adopted regulations which require institutions to adopt and at
least annually review written real estate lending policies. The lending policies
must include diversification standards, underwriting standards (including loan-
to-value limits), loan administration procedures, and procedures for monitoring
compliance with the policies. The policies must reflect consideration of
guidelines adopted by the banking agencies. Among the guidelines adopted by the
agencies are maximum loan-to-value ratios for land loans (65%); development
loans (75%); construction loans (80%-85%); loans on owner-occupied 1 to 4 family
property, including home equity lines of credit (no limit, but loans at or above
90% require private mortgage insurance); and loans on other improved property
(85%).
The guidelines permit institutions to make loans in excess of the supervisory
loan-to-value limits if such loans are supported by other credit factors, but
the aggregate of such nonconforming loans should not exceed the institution's
risk-based capital, and the aggregate of nonconforming loans secured by real
estate other than 1 to 4 family property should not exceed 30% of risk-based
capital.
Notification of New Officers and Directors. A federal savings bank that has
undergone a change in control in the preceding two years, is subject to a
supervisory agreement with the OTS, or is deemed to be in "troubled condition"
by the OTS, must give the OTS 30 days notice prior to any change in its Board of
Directors or its senior executive officers. The OTS must disapprove such change
if the competence, experience or integrity of the affected individual indicates
that it would not be in the best interests of the public to permit the
appointment. Fidelity is currently subject to this notice requirement.
Deposit Insurance
General. Fidelity's deposits are insured by the FDIC to the maximum limits
permitted by law. Under FIRREA, the FDIC administers two separate deposit
insurance funds: the BIF which insures the deposits of institutions that were
insured by the FDIC prior to FIRREA, and the SAIF which maintains a fund to
insure the deposits of institutions, such as Fidelity, that were insured by the
FSLIC prior to FIRREA.
Insurance Premium Assessments. FDICIA directed the FDIC to establish a risk-
based system for setting deposit insurance assessments. The FDIC has implemented
such a system, under which an institution's insurance assessments will vary
depending on the level of capital the institution holds and the degree to which
it is the subject of supervisory concern to the FDIC.
On August 7, 1995, the FDIC approved a final rule regarding deposit insurance
premiums. The final rule will reduce deposit insurance premiums for BIF member
institutions from 23 to zero basis points for institutions in the lowest risk
category, while holding deposit insurance premiums for SAIF members at their
current levels (23 basis points for institutions in the lowest risk category).
The reduction took effect with the September 30, 1995 premium assessment.
Accordingly, in the absence of further legislative action, SAIF members such as
the Bank will be competitively disadvantaged by the resulting premium
differential.
Both the Congress and the Administration have submitted budget proposals that
contain provisions designed to address the disparity in bank and thrift deposit
insurance premiums. The congressional proposal is contained in Title II of the
Balanced Budget Act of 1995 (approved by the House and Senate in November, 1995,
but subsequently vetoed by the President). The President's proposal is
contained in Title I of the "Balanced Budget Act of 1995 For Economic Growth and
Fairness," submitted to Congress on January 9. 1996. Both proposals would,
among other things: (i) impose a requirement on all SAIF member institutions to
fully recapitalize the SAIF by paying a one-time special assessment estimated to
be approximately 80 basis points on March 31, 1995 deposit balances; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance
53
premium assessment rates applicable to SAIF member institutions be no less than
deposit insurance premium assessment rates applicable to BIF member
institutions; (iv) provide for a merger of the BIF and SAIF on January 1, 1998,
if no insured depository institution is a savings association on that date; and
(v) eliminate the bad-debt recapture of post-1987 additions (the recapture
requirement is subject to certain conditions and could be delayed for up to two
years to the extent the institution meets the "residential loan requirement"
described in the proposed legislation).
While the outcome of the legislation cannot be predicted with certainty, it is
possible that some kind of legislative or regulatory action will be taken that
will impact the Bank's insured deposits. A one time special assessment of 80
basis points would result in the Bank paying approximately $22 million in
additional SAIF premiums, gross of related tax benefits, if any. The enactment
of such legislation may have the effect of immediately reducing the regulatory
capital of SAIF member institutions by the amount of the fee, although, as
discussed above, provisions are included in the legislation that could exempt a
savings association from paying the assessment if the payment would result in
the association becoming undercapitalized. As of December 31, 1995, after giving
effect to the payment and deduction of an 80 basis point assessment, the Bank's
core and risk-based capital ratios would have been approximately 6.29% and
11.35%, respectively. See Item 7. "MD&A--Regulatory Capital Requirements."
As passed by the House, the Balanced Budget Act contained a broader proposal
to require savings and loan holding companies to convert into bank holding
companies (although certain unitary savings and loan holding companies would
have been grandfathered). Although this broader proposal was subsequently
eliminated by members of the House-Senate Conference Committee, "thrift charter
conversion" legislation is still pending in both houses and could be enacted in
1996.
In light of the different proposals currently under consideration and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Bank. A significant continuing disparity
between SAIF and BIF insurance premiums or a significant one-time assessment to
recapitalize the SAIF would likely have an adverse effect on the financial
condition, results of operations and regulatory capital of the Bank. In
addition, to the extent that legislation is adopted that requires a merger of
the thrift and commercial bank charters and divestiture of nonbanking activities
by savings associations, such legislation could limit the Bank's operating
flexibility and interfere with certain of its business objectives.
Termination of Deposit Insurance. The FDIC may initiate a proceeding to
terminate an institution's deposit insurance if, among other things, the
institution is in an unsafe or unsound condition to continue operations. It is
the policy of the FDIC to deem an insured institution to be in an unsafe or
unsound condition if its ratio of Tier 1 capital to total assets is less than
2%. Tier 1 capital is similar to core capital but includes certain investments
in and extensions of credit to subsidiaries engaged in activities not permitted
for national banks.
Conversion of Deposit Insurance. Generally, under a moratorium imposed by
FIRREA, savings institutions may not convert from SAIF membership to BIF
membership until SAIF has increased its reserves to 1.25% of insured deposits.
However, a savings institution may convert to a bank charter, if the resulting
bank remains a SAIF member, and may merge with a BIF-member institution as long
as deposits attributable to the savings institution remain subject to assessment
by the SAIF. In addition, under an exception to the moratorium, savings
institutions may transfer and convert to BIF insurance (for example, in a branch
sale to a BIF-member institution) up to 35% of their deposits. Institutions that
convert from SAIF to BIF membership, either under an exception during the
moratorium or after expiration of the moratorium, must pay exit fees to SAIF and
entrance fees to BIF.
54
Regulation of Fidelity Affiliates and Dividends
Affiliate and Insider Transactions. The ability of affiliates of the Bank to
deal with Fidelity is limited by the affiliate transaction rules, including
Sections 23A and 23B of the Federal Reserve Act, which also govern BIF-insured
banks. With very limited exceptions, these rules require that all transactions
between Fidelity and an affiliate must be on arms' length terms. The term
"affiliate" covers any company that controls or is under common control with
Fidelity, but does not include individuals and generally does not include
Fidelity's subsidiaries.
Under Section 23A and Section 11 of the Home Owners' Loan Act, specific
restrictions apply to transactions in which Fidelity provides funding to its
affiliates: Fidelity may not purchase the securities of an affiliate, make a
loan to any affiliate that is engaged in activities not permissible for a bank
holding company, or acquire from an affiliate any asset that has been
classified, a nonaccrual loan, a restructured loan, or a loan that is more than
30 days past due. As to affiliates engaged in bank holding company-permissible
activities, the aggregate of (a) loans, guarantees, and letters of credit
provided by the savings bank for the benefit of any one affiliate and (b)
purchases of assets by the savings bank from the affiliate, may not exceed 10%
of the savings bank's capital stock and surplus (20% for the aggregate of
permissible transactions with all affiliates). All loans to affiliates must be
secured by collateral ranging from 100% to 130% of the amount of the loan,
depending on the type of collateral.
In addition, OTS regulations on affiliate transactions require, among other
things, that savings institutions retain records of their affiliate transactions
that reflect such transactions in reasonable detail. If a savings institution
has been the subject of a change of control application or notice within the
preceding two-year period, does not meet its minimum capital requirements, has
entered into a supervisory agreement, is subject to a formal enforcement
proceeding, or is determined by the OTS to be the subject of supervisory
concern, the institution may be required to provide the OTS with 30 days' prior
notice of any affiliate transaction.
Under these regulatory limitations, loans by Fidelity to directors, executive
officers and 10% stockholders of Fidelity, any company controlling Fidelity, and
any controlling company's subsidiaries (collectively, "insiders"), or to a
corporation or partnership that is at least 10% owned by an insider (a "related
interest") are subject to limits separate from the affiliate transaction rules.
However, a company that controls a savings institution is excluded from the
coverage of the insider lending rules even if it owns 10% or more of the stock
of the institution, and is subject only to the affiliate transaction rules. All
loans to insiders and their related interests must be underwritten and made on
non-preferential terms; loans in excess of $500,000 must be approved in advance
by Fidelity's Board of Directors; and Fidelity's total of such loans may not
exceed 100% of Fidelity's capital. Loans by Fidelity to its executive officers
are subject to additional limits which are even more stringent. In addition to
these regulatory limitations, Fidelity has adopted a policy which requires prior
approval of its Board of Directors for any loans to insiders or their related
interests.
Payment of Dividends and Other Capital Distributions. The payment of
dividends, stock repurchases, and other capital distributions by Fidelity to its
stockholders is subject to regulation by the OTS. Currently, 30 days' prior
notice to the OTS of any capital distribution is required. The OTS has
promulgated a regulation that measures a savings institution's ability to make a
capital distribution according to the institution's capital position. The rule
establishes "safe-harbor" amounts of capital distributions that institutions can
make after providing notice to the OTS, but without needing prior approval.
Institutions can distribute amounts in excess of the safe harbor only with the
prior approval of the OTS.
For institutions ("Tier 1 institutions") that meet their fully phased-in
capital requirements (the requirements that will apply when the phase-out of
supervisory goodwill and investments in certain subsidiaries from capital is
complete), the safe harbor amount is the greater of (a) 75% of net income for
the
55
prior four quarters, or (b) the sum of (1) the current year's net income and
(2) the amount that would reduce the excess of the institution's total capital
to risk-weighted assets ratio over 8% to one-half of such excess at the
beginning of the year in which the dividend is paid. For institutions that meet
their current minimum capital requirements but do not meet their fully phased-in
requirements ("Tier 2 institutions"), the safe harbor distribution is 75% of net
income for the prior four quarters. As a function of the prompt corrective
action provisions discussed above and the OTS regulation regarding capital
distributions, savings institutions that do not meet their current minimum
capital requirements ("Tier 3 institutions") may not make any capital
distributions, with the exception of repurchases or redemptions of the
institution's shares permitted by the OTS, after consultation with the FDIC,
that are made in connection with the issuance of additional shares and that will
improve the institution's financial condition.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under the regulation if the OTS determines that the distribution
would constitute an unsafe or unsound practice. The OTS also may reclassify a
Tier 1 institution as a Tier 2 or Tier 3 institution by notifying the
institution that it is in need of more than normal supervision. Further, an
adequately capitalized institution may not make a capital distribution if such
payment would cause the institution to become undercapitalized.
On December 5, 1994, the OTS issued a notice of proposed rulemaking to amend
the capital distribution rule to conform to the PCA system. Under the proposed
rule, adequately or well-capitalized institutions that (1) are not held by
savings and loan holding companies, (2) have a composite rating of "1" or "2,"
(3) are not deemed to be in "troubled condition" and (4) will remain at least
adequately capitalized after the proposed capital distribution are not required
to provide notice to the OTS before making capital distributions. Other savings
associations that are not in troubled condition and that will remain at least
adequately capitalized after making a capital distribution would be required to
provide notice to the OTS. Troubled associations and undercapitalized
associations would be permitted to make capital distributions only under certain
limited conditions and would be required to file an application and receive OTS
approval prior to making a capital distribution. If the regulation is adopted as
proposed, Fidelity would be required to obtain OTS approval prior to making a
capital distribution.
The OTS informed the Bank in December 1995 that, subject to consummation of
the 1995 Recapitalization, the OTS would approve the payment of dividends on the
Series A Preferred Stock so long as the Bank's ratio of core capital to risk-
weighted assets and total capital to risk-weighted assets are no less than 4%
and 8%, respectively, immediately after giving effect to the payment of any such
dividend. The OTS also confirmed that no further approvals are or will be
required by any applicable current or future statutory provisions. However,
notwithstanding the foregoing, the OTS may take appropriate supervisory action,
including restricting future dividend payments based on safety and soundness
concerns or subsequent examination findings.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or opportunity
for a hearing, which directive may (a) limit the payment of dividends by the
savings institution, (b) limit transactions between the savings institution and
its holding company or its affiliates and (c) limit any activity of the
association that creates a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or loss
of voting rights in the event such party took any action for or toward causing,
bringing
56
about, participating in, counseling, or aiding and abetting a violation of law
or unsafe or unsound practice by a savings institution.
Limits on Change of Control. Subject to certain limited exceptions, control
of Fidelity may only be obtained with the approval (or in the case of an
acquisition of control by an individual, the nondisapproval) of the OTS, after a
public comment and application review process. Under OTS regulations defining
"control," a rebuttable presumption of control arises if an acquiring party
acquires more than 10% of any class of voting stock of Fidelity (or more than
25% of any class of stock, whether voting or non-voting) and is subject to any
"control factors" as defined in the regulation. Control is conclusively deemed
to exist if an acquirer holds more than 25% of any class of voting stock of
Fidelity, or has the power to control in any manner the election of a majority
of directors.
Any company acquiring control of Fidelity becomes a savings and loan holding
company, must register and file periodic reports with the OTS, and is subject to
OTS examination. With limited exceptions, a savings and loan holding company may
not directly or indirectly acquire more than 5% of the voting stock of another
savings and loan holding company or savings institution without prior OTS
approval.
Classification of Assets
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. A savings institution is also required to
set aside adequate valuation allowances, and to establish liabilities for off-
balance sheet items, such as letters of credit, when a loss becomes probable and
estimable. The OTS has the authority to review the institution's classification
of its assets and to determine whether additional assets must be classified, or
the institution's valuation allowances must be increased. See "--Credit
Administration--Loan Monitoring."
Assets are classified as "pass", "special mention", "substandard", "doubtful"
or "loss." An asset which possesses no apparent weakness or deficiency is
designated "satisfactory". An asset which possesses weaknesses or deficiencies
deserving close attention is designated as "special mention". An asset, or a
portion thereof, is generally classified as "substandard" if it possesses a
well-defined weakness which could jeopardize the timely liquidation of the asset
or realization of the collateral at the asset's book value. Thus, these assets
are characterized by the possibility that the institution will sustain some loss
if the deficiencies are not corrected. An asset, or portion thereof, is
classified as "doubtful" if a probable loss of principal and/or interest exists
but the amount of the loss, if any, is subject to the outcome of future events
which are indeterminable at the time of classification. If an asset, or portion
thereof, is classified as "loss", the institution must either establish a
specific valuation allowance equal to the amount classified as loss or charge
off such amount.
Community Reinvestment Act
The CRA requires each savings institution, as well as other lenders, to
identify and delineate the communities served through and by the institution's
offices and to affirmatively meet the credit needs of its delineated communities
and to market the types of credit the institution is prepared to extend within
such communities. The CRA also requires the OTS to assess the performance of the
institution in meeting the credit needs of its community and to take such
assessment into consideration in reviewing applications for mergers,
acquisitions, and other transactions. An unsatisfactory CRA rating may be the
basis for denying such an application. In connection with its assessment of CRA
performance, the OTS assigns a rating of "outstanding," "satisfactory," "needs
improvement" or "substantial noncompliance." Based on an examination conducted
for 1993, Fidelity was rated satisfactory.
57
The OTS recently completed a compliance and CRA examination of the Bank. The
examiners have orally indicated to the Bank that it will receive a satisfactory
compliance rating, but that the CRA rating will be a "needs improvement".
Management strongly disagrees with the examiners' CRA findings, the result of
which could have an adverse effect on certain of the Bank's planned activities
and is evaluating plans to contest the CRA rating through the normal appeal
procedures. See "--Recent Developments and Regulatory Issues."
On May 4, 1995, the federal bank regulatory agencies, including the OTS,
issued final regulations which changed the manner in which they measure an
institution's compliance with its CRA obligations. The final regulations adopt a
performance-based evaluation system which bases CRA ratings on an institution's
actual lending, service and investment performance rather than the extent to
which the institution conducts needs assessments, documents community outreach
or complies with other procedural requirements.
In addition, under the final regulations, an institution's size and business
strategy will determine the type of CRA examination that it will receive. Large,
retail-oriented institutions will be examined using a performance-based lending,
investment and service test. Small institutions will be examined using a
streamlined approach. Wholesale and limited purpose institutions will be
examined under a community development test. All institutions have the option of
being evaluated under a strategic plan formulated with community input and pre-
approved by the applicable bank regulatory agency.
Federal Home Loan Bank System
The Federal Home Loan Banks provide a credit facility for member institutions.
As a member of the FHLB of San Francisco, Fidelity is required to own capital
stock in the FHLB of San Francisco in an amount at least equal to the greater of
1% of the aggregate principal amount of its unpaid home loans, home purchase
contracts and similar obligations at the end of each calendar year, assuming for
such purposes that at least 30% of its assets were home mortgage loans, or 5% of
its advances from the FHLB of San Francisco. At December 31, 1995, Fidelity was
in compliance with this requirement with an investment in the stock of the FHLB
of San Francisco of $49.4 million. Long-term FHLB advances may be obtained only
for the purpose of providing funds for residential housing finance and all FHLB
advances must be secured by specific types of collateral.
Required Liquidity
OTS regulations require savings institutions to maintain, for each calendar
month, an average daily balance of liquid assets (including cash, certain time
deposits, bankers' acceptances, specified United States government, state and
federal agency obligations, and balances maintained in satisfaction of the FRB
reserve requirements described below) equal to at least 5% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during the
preceding calendar month. The OTS may change this liquidity requirement from
time to time to an amount within a range of 4% to 10% of such accounts and
borrowings depending upon economic conditions and the deposit flows of member
institutions, and may exclude from the definition of liquid assets any item
other than cash and the balances maintained in satisfaction of FRB reserve
requirements. Fidelity's average regulatory liquidity ratio for the month of
December 1995 was 6.85%, and accordingly Fidelity was in compliance with the
liquidity requirement. Monetary penalties may be imposed for failure to meet
liquidity ratio requirements.
OTS regulations also require each member institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets (generally
those having maturities of 12 months or less) equal to at least 1% of the
average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. The average short-term liquidity
ratio of Fidelity for the month of December 1995 was 5.66%.
58
Environmental Risk
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous substances on, under or in such
property. In addition, any person or entity who arranges for the disposal or
treatment of hazardous substances may also be liable for the costs of removal or
remediation of hazardous substances at the disposal or treatment facility. Such
laws and regulations often impose liability regardless of fault and liability
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. Pursuant to these
laws and regulations, under certain circumstances, a lender may become liable
for the environmental liabilities in connection with its borrowers' properties,
if, among other things, it either forecloses or participates in the management
of its borrowers' operations or hazardous substance handling or disposal
practices. Although CERCLA and certain state counterparts provide exemptions for
secured lenders, the scope of such exemptions is limited and a rule issued by
the Environmental Protection Agency clarifying such exemption under CERCLA has
recently been held invalid. In addition, CERCLA and certain state counterparts
impose a statutory lien, which may be prior to the Banks' interest securing a
loan, for certain costs incurred in connection with removal or remediation of
hazardous substances. Other laws and regulations may also require the removal or
remediation of hazardous substances located on a property before such property
may be sold or transferred.
It is the Bank's current policy to identify and review certain environmental
issues pertaining to its borrowers and the properties securing the loans of its
borrowers prior to making any loan and foreclosing on any multifamily property.
If such review reveals any environmental issues, a Phase I environmental audit
(which generally involves a physical inspection without any sampling) and under
certain circumstances, a Phase II environmental audit (which generally involves
sampling) may be conducted by an independent environmental consultant. It is
also the Bank's current policy with respect to loans secured by residential
property with five or more units to automatically conduct a Phase I
environmental audit prior to foreclosing on such property. Under certain
circumstances, the Bank may decide not to foreclose on a property. There can be
no assurances that such review, Phase I environmental audits or Phase II
environmental audits have identified or will identify all potential
environmental liabilities that may exist with respect to a foreclosed property
or a property securing any loan or that historical, current or future uses of
such property or surrounding properties will not result in the imposition of
environmental liability on the Bank.
The Bank is aware that certain current or former properties on which it has
foreclosed and properties securing its loans contain contamination or hazardous
substances, including asbestos and lead paint. Under certain circumstances, the
Bank may be required to remove or remediate such contamination or hazardous
substances. Although the Bank is not aware of any environmental liability
relating to these properties that it believes would have a material adverse
effect on its business or results of operations, there can be no assurances that
the costs of any required removal or remediation would not be material or
substantially exceed the value of affected properties or the loans secured by
the properties or that the Bank's ability to sell any foreclosed property would
not be adversely affected.
Federal Reserve System
The FRB requires savings institutions to maintain noninterest-earning reserves
against certain of their transaction accounts (primarily deposit accounts that
may be accessed by writing unlimited checks) and non-personal time deposits. For
the calculation period at December 31, 1995, Fidelity was required to maintain
$15.4 million in noninterest-earning reserves and was in compliance with this
requirement. The balances maintained to meet the reserve requirements imposed by
the FRB may be used to satisfy Fidelity's liquidity requirements discussed
above.
59
As a creditor and a financial institution, Fidelity is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation B
(Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including Fidelity, may be subject to
potential liability under various statutes and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property. See "--Regulation and Supervision--
Environmental Risk."
Recent Accounting Pronouncements
In October 1994, SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" was issued. This statement amends the
disclosure requirements in SFAS No. 114 to require information about the
recorded investment in certain impaired loans and how a creditor recognizes
interest income related to impaired loans. The adoption of SFAS No. 118 had no
impact on the Bank as this statement allowed for recognition of interest income
in conformity with the Bank's existing interest income recognition policy.
As of January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." SFAS No.
122 amends certain provisions of SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," to require recognition of the rights to service mortgage
loans for others as separate assets, however those rights are acquired,
eliminating the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. SFAS No. 122 also requires that
capitalized mortgage servicing assets be assessed for impairment based on the
fair value of those rights. As a consequence of the adoption of SFAS No. 122,
gains on sales of loans for the year ended December 31, 1995 increased by $0.7
million and the Bank's loss per share decreased by $0.02 (before the impact of
the Reverse Stock Split).
The Bank maintains a stock option plan for the benefit of its executives. In
1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages companies to account for stock-based compensation awards at
their fair values at the date the awards are granted. This statement does not
require the application of the fair value method and allows that continuance of
the current accounting method, which requires accounting for stock-based
compensation awards at their intrinsic value, if any, as of the grant date.
The accounting and disclosure requirements of this statement are effective for
financial statements at various dates beginning after December 15, 1995. The
Bank has elected not to adopt the fair value accounting provisions of this
statement for the year ended December 31, 1995.
Gateway
Gateway has been a NASD registered broker/dealer since October 1993 and offers
securities products, such as mutual funds and variable annuities, to customers
of the Bank. Fixed annuities are offered through the Bank's insurance agency,
Citadel Service Corporation, dba, Fidelity Insurance Agency of Glendale. All
securities transactions are executed and cleared by a clearance broker/dealer.
Gateway does not maintain security or cash accounts for customers or perform
custodial functions relating to customer securities.
Gateway is required to conduct its activities in compliance with the February
1994 interagency guidelines of the federal bank and thrift regulators on retail
sales of uninsured, nondeposit investment products by
60
federally insured financial institutions. The interagency guidelines require
that, among other things, customers are fully informed that investment products
are not insured, are not deposits of or guaranteed by the Bank and involve
investment risk including the potential loss of principal.
The securities business is subject to regulation by the SEC and other federal
and state agencies. Regulatory violations can result in the revocation of
broker/dealer licenses, the imposition of censures or fines and the suspension
or expulsion from the securities business of a firm, its officers or employees.
With the enactment of the Insider Trading and Securities Fraud Enforcement Act
of 1988, the SEC and the securities exchanges have intensified their regulation
of broker/dealers, emphasizing in particular the need for supervision and
control by broker/dealers of their own employees. In 1994, Gateway was audited
by the NASD, SEC and the State of California Department of Corporations.
The NASD has initiated proposed changes to the Rules of Fair Practice. The
proposed rules respond to continuing concerns about the lack of clear guidance
for NASD members in the nature of specific rules or regulations that address the
activities of bank-affiliated broker/dealers. The rules apply exclusively to the
activities of NASD members that are conducting broker/dealer services on the
premises of a financial institution where retail deposits are taken. The main
focus of the proposed rules is to minimize confusion by retail customers. The
proposed rules cover broker/dealer conduct on the premises of financial
institutions, the physical location of sales activity, the use of signage, use
of confidential financial information, personnel registration, personnel
compensation, supervision and responsibility, customer disclosure, and
communication with the public. The proposed rules were published for a comment
period which expired on February 15, 1995. On December 28, 1995, the NASD filed
with the SEC for its approval the rules governing members conducting business on
the premises of a financial institution. The SEC will publish the proposed
rules in the Federal Register, indicating a time period when members and others
may comment. The new rules will not become final until approved by the SEC.
As a broker/dealer registered with the NASD, Gateway is subject to the SEC's
uniform net capital rules, designed to measure the general financial condition
and liquidity of a broker/dealer. Gateway is required to file monthly reports
with the NASD and quarterly and annual reports with the NASD and SEC containing
detailed financial information with respect to its broker/dealer operation.
ITEM 2. PROPERTIES
In February 1996, the executive offices of Fidelity relocated to 4565 Colorado
Boulevard, Los Angeles, California, 90039. This facility also houses the Bank's
administrative operations and has approximately 130,000 square feet of office
space. Present local zoning entitlements will allow for the construction of
approximately 300,000 square feet of additional office space plus parking on
this 7.75-acre parcel. The potential for increasing the amount of office space
at this Los Angeles site would satisfy Fidelity's anticipated facilities
requirements for the foreseeable future.
During 1995 the executive offices of Fidelity were located at 600 N. Brand
Boulevard, Glendale, California 91203. This facility and another branch banking
facility were sold to Citadel and simultaneously leased back by the Bank in May
1995 as part of the 1994 Restructuring and Recapitalization. Fidelity intends
to sublease approximately 46,400 square feet of office space located at the
Brand facility during 1996.
The aggregate net book value of all owned administrative facilities was
approximately $15.8 million as of December 31, 1995. On December 31, 1995,
Fidelity owned 12 of its branch and/or loan office facilities having an
aggregate net book value of approximately $6.5 million, and leased the remaining
21 of its branch and/or loan office facilities under leases with terms
(including optional extension periods) expiring from 1996 through 2050. The
aggregate annual rent under those leases as of December 31, 1995 was
approximately
61
$3.1 million and the aggregate net book value of Fidelity's leasehold
improvements associated with those leased premises was approximately $1.7
million. At December 31, 1995, Fidelity owned furniture, fixtures and equipment,
related to both owned and leased facilities, having a net book value of
approximately $9.4 million.
All owned and leased office facilities are located in Southern California.
ITEM 3. LEGAL PROCEEDINGS
The Bank has been named as a defendant in a purported class action lawsuit
alleging violations of federal securities laws in connection with the offering
of common stock by the Bank in 1994 as part of the Bank's previously reported
1994 Restructuring and Recapitalization. The suit was filed by Harbor Finance
Partners in an alleged class action complaint in the United States District
Court- Central District of California on July 28, 1995 and originally named as
defendants the Bank, Citadel Holding Co., Richard M. Greenwood (the Bank's chief
executive officer and Citadel's former chief executive officer), J. P. Morgan
Securities, Inc., and Deloitte & Touche. The suit alleged that false or
misleading information was provided by the defendants in connection with the
Bank's 1994 Restructuring and Recapitalization and stock offering and that the
defendants knew and failed to disclose negative information concerning the Bank.
A motion to dismiss the original complaint was filed by the Bank, and was
granted without opposition. An amended complaint has recently been received and
the Bank has filed a motion to dismiss the amended complaint, as well. The
amended complaint omits to name J. P. Morgan Securities, Inc. and Deloitte &
Touche as defendants and changes a number of factual and legal contentions from
those set forth originally.
Both the original complaint filed by Harbor Finance Partners and the amended
complaint raise certain claims previously made in a wrongful termination and
defamation action brought by William Strocco against the Bank and Citadel, which
was filed in Los Angeles County Superior Court on March 9, 1995 although the
nature and use of the same varies in the two pleadings. Plaintiff in the
Strocco case is a former manager of the Bank's REO department who alleged, among
other things, that his employment was terminated in violation of public policy
and was a result of breaches of his implied employment contract and the implied
covenant of good faith and fair dealing based on the notion that he objected to
various aspects of the Bank's 1994 Restructuring and Recapitalization, including
the selling of REO properties in Bulk Sales, as not in the best interests of the
Bank, and that he asserted that the same were not fully disclosed to potential
investors and to the OTS. Plaintiff also seeks damages for defamation and
interference with contractual relationship.
Both of these complaints seek damages, including punitive damages, in an
unspecified amount. The Bank believes that these claims are meritless and plans
to vigorously contest them.
In addition, the Bank is a defendant in several individual and purported class
actions brought by several borrowers which raise similar claims with respect to
the manner in which the Bank serviced certain adjustable rate mortgages which
were originated during the period 1983 through 1988. The actions have been filed
between July 1, 1992 and February of 1995. One case is pending in the Ninth
Circuit Court of Appeals after the Bank won a judgment at the trial level. In
another case, judgement in favor of the Bank was recently entered and the time
for appeal has not yet expired, and the others are pending in the Los Angeles
Superior Court. The plaintiffs' principal claim is that the Bank selected an
inappropriate review date to consult the index upon which the rate adjustment is
based that was one or two months earlier than what was required under the terms
of the notes. In a declining interest rate environment, the lag effect of an
earlier review period defers the benefit to the borrower of such decline, and
the reverse would be true in a rising interest rate environment. The Bank
strongly disputes these contentions and is vigorously defending these suits. The
legal responsibility and financial exposure of these claims presently cannot be
reasonably ascertained and, accordingly, there is a risk that the final outcome
of one or more of these claims could result in the payment
62
of monetary damages which could be material in relation to the financial
condition or results of operations of the Bank. At this point, the Bank does not
believe the likelihood of such a result is probable and has not established any
specific litigation reserves with respect to such lawsuits.
In addition, a purchaser of assets from the Bank in the Bulk Sales has
asserted claims against the Bank in an aggregate amount of $18.3 million. The
Bank is evaluating the merits of these claims and believes that such claims are
without merit. For a description of such claims, see "Business--Bulk Sales."
In the normal course of business, the Bank and certain of its subsidiaries
have a number of other lawsuits and claims pending. The Bank's management and
its counsel believe that none of the lawsuits or claims pending will have a
materially adverse impact on the financial condition or business of the Bank.
An adverse outcome with respect to the foregoing claims could have a material
adverse effect on the Bank's financial condition, results of operations and
regulatory capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Other than the slate of directors elected at the 1995 annual shareholders
meeting, there were no matters submitted to the security holders in 1995.
On February 9, 1996 two proposals were submitted for consideration and
approval to the holders of the outstanding shares of the Bank's Class A Common
Stock. The first was a proposal to approve the Bank's 1996 Stock Option Plan
and an accompanying amendment to the Bank's Amended and Restated Charter S to
increase the number of authorized shares of Class A Common Stock to be reserved
for issuance under the 1996 Stock Option Plan. The second was a proposal to
amend the Bank's Amended and Restated Charter S to effect a one-for-four Reverse
Stock Split. Both proposals were approved by the stockholders on February 9,
1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Effective March 14, 1996, the Bank's Common Stock is listed and quoted on the
NASDAQ National Market. During 1995 and part of 1994 the Class A Common Stock
was traded over the counter and quoted on the Over the Counter Bulletin Board
(the "OTCBB"). See Item 1. "Business -- Recent Developments and Regulatory
Issues."
63
The following table sets forth the high and low daily closing sales prices
of the Class A Common Stock on the OTCBB for each of the following quarters:
HIGH LOW
----------- ----------
1995 (1)
Fourth quarter...... 9 1/4 5 1/2
Third quarter....... 11 1/2 6
Second quarter...... 18 11
First quarter (2)... 20 16
1994 (1) (3)
Fourth quarter...... 23 17
Third quarter....... 23 1/2 21
- -------------------
(1) Closing sale prices reflect the one-for-four Reverse Stock Split approved by
the stockholders on February 9, 1996.
(2) Prior to May 5, 1995, the Class A Common Stock was not quoted on the OTCBB
and bid prices were provided by J.P. Morgan Securities, Inc.
(3) Prior to August 4, 1994, Fidelity was wholly owned by Citadel and its stock
was not traded.
HOLDERS OF RECORD
The number of holders of record of the Bank's Class A Common Stock at
January 3, 1996 was 617.
DIVIDENDS
The Bank has paid no dividends since the 1994 Recapitalization and
Restructuring and currently has no plans to pay dividends on the Class A Common
Stock. Due to the Bank's financial condition and certain regulatory
restrictions, it is unlikely that the Bank will pay cash dividends on the Common
Stock in the foreseeable future. See Item 1-- "Business--Regulation and
Supervision--Regulation of Fidelity Affiliates and Dividends."
64
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
The table below sets forth certain historical financial data regarding the
Bank. This information is derived in part from, and should be read in
conjunction with, the Bank's consolidated financial statements and notes thereto
included in Item 8.-- Financial Statements and Supplementary Data.
AT OR FOR THE YEAR ENDED DECEMBER 31,
==========================================================================
1995 1994 1993 1992 1991
------------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Total assets............................ $ 3,299,444 $3,709,838 $4,389,781 $4,695,518 $5,123,835
Total loans, net........................ 2,935,116 3,288,303 3,712,051 3,990,449 4,548,457
Deposits................................ 2,600,869 2,697,272 3,368,664 3,459,648 3,885,861
FHLB advances........................... 292,700 332,700 326,400 581,400 325,000
Other borrowings........................ 150,000 500,000 407,830 327,000 531,150
Subordinated notes...................... -- -- 60,000 60,000 75,000
Stockholders' equity.................... 229,043 156,547 182,284 220,171 221,959
Stockholders' equity per common share 9.72 24.11 173.51 209.57 211.28
(1)(2).................................
Common shares outstanding (1)(2)........ 18,242,465 6,492,465 1,050,561 1,050,561 1,050,561
OPERATING DATA:
Interest income......................... $ 246,477 $ 241,465 $ 289,331 $ 370,715 $ 520,052
Interest expense........................ 174,836 155,828 188,494 240,124 378,514
----------- ---------- ---------- ---------- ----------
Net interest income..................... 71,641 85,637 100,837 130,591 141,538
Provision for estimated loan losses..... 69,724 (3) 65,559 65,100 51,180 49,843
----------- ---------- ---------- ---------- ----------
Net interest income after provision for
estimated loan losses.................. 1,917 20,078 35,737 79,411 91,695
Gains (losses) on loans held for sale,
net.................................... 522 (3,963) 194 1,117 2,118
Gains (losses) on securities
activities, net........................ 4,098 1,130 1,304 -- 8,994
Gains on sales of servicing............. 4,604 -- -- -- --
Fee income from sale of uninsured
investment products (4)................ 4,117 3,419 -- 2,606 2,487
Loans, retail banking and other fees.... 6,866 9,040 8,660 12,291 2,518
Real estate operations.................. (9,145) (17,419) (48,843) (22,261) (9,597)
1994 Restructuring and Recapitalization
charges, net........................... -- (65,394) -- -- --
Operating expense other than 1994
Restructuring and Recapitalization
charges............................... (81,954) (91,859) (98,732) (75,044) (75,815)
----------- ---------- ---------- ---------- ----------
(Loss) earnings before income taxes..... (68,975) (144,968) (101,680) (1,880) 22,400
Income tax expense (benefit)............ 4 (16,524) (35,793) (2,167) 14,296
----------- ---------- ---------- ---------- ----------
Net (loss) earnings..................... $ (68,979) $ (128,444) $ (65,887) $ 287 8,104
=========== ========== ========== ========== ==========
Net (loss) earnings per common share
(1)(2)................................. $ (8.84) $ (39.08) $ (62.72) $ 0.27 7.72
=========== ========== ========== ========== ==========
Weighted average common shares
outstanding (1)(2)..................... 7,807,201 3,286,960 1,050,561 1,050,561 1,050,561
=========== ========== ========== ========== ==========
SELECTED OPERATING RATIOS:
Return on average assets................ (1.92)% (3.17)% (1.43)% 0.01% 0.15%
Return on average equity................ (42.31)% (83.00)% (29.99)% 0.13% 3.64%
Average equity divided by average assets 4.54% 3.82% 4.77% 4.57% 4.03%
Ending equity divided by ending assets.. 6.94% 4.22% 4.15% 4.69% 4.33%
Operating expense to average assets (5). 2.28% 2.27% 2.14% 1.52% 1.37%
Efficiency ratio (6).................... 89.81% 97.58% 79.66% 45.38% 49.02%
Interest rate spread for the period..... 1.89% 2.24% 2.31% 2.66% 3.20%
Net yield on interest-earning assets.... 2.05% 2.22% 2.31% 2.80% 2.54%
(continued)
65
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ----------
(continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSET QUALITY DATA:
NPAs (7)................................ $ 71,431 $ 85,729 $235,621 $234,405 $124,725
NPAs to total assets.................... 2.16% 2.31% 5.37% 4.99% 2.43%
Nonaccruing loans....................... $ 51,910 $ 71,614 $ 93,475 $112,041 $ 68,982
Nonaccruing loans to total loans, net... 1.77% 2.18% 2.52% 2.83% 1.53%
REGULATORY CAPITAL RATIOS:
Tangible capital ratio.................. 6.91% 4.28% 4.10% 4.27% 3.86%
Core capital ratio...................... 6.92% 4.29% 4.15% 4.35% 4.02%
Risk-based capital ratio................ 12.43% 8.28% 9.32% 9.76% 9.85%
OTHER DATA:
Sales of investment products (4)........ $ 89,824 $112,430 $ 96,253 $ 77,078 $ 57,857
Real estate loans funded................ $ 19,396 $521,580 $422,355 $435,690 $507,406
Average interest rate on new loans...... 9.61% 5.85% 6.75% 7.77% 9.07%
Loans sold, net (7)..................... $ 390 $273,272 $115,003 $204,435 $282,728
Number of:
Real estate loan accounts (in
thousands)............................ 12 14 16 18 21
Deposit accounts (in thousands)........ 207 216 241 233 238
Retail branch offices (8).............. 33 33 42 43 43
- ----------------
(1) For the periods prior to August 4, 1994, Fidelity's one share owned by
Citadel, its former holding company and sole stockholder, has been
retroactively reclassified into 1,050,561 shares of Class A Common Stock.
(2) On February 9, 1996, the Bank's stockholders approved a one-for-four reverse
stock split (the "Reverse Stock Split"). All per share data and weighted
average common shares outstanding have been retroactively adjusted to
reflect this change. See Item 1. "Business -- Recent Developments and
Regulatory Issues."
(3) In 1995 the Bank recorded a $45 million loan portfolio charge in connection
with its adoption of the Accelerated Asset Resolution Plan. See Item 1.
"Business--Business Strategy--Accelerated Asset Resolution Plan."
(4) Gateway was a subsidiary of the Bank except for a period of time beginning
on November 1, 1992 and ending on August 3, 1994. Sales of investment
products include 100% of Gateway investment product sales for comparative
purposes.
(5) Excludes the impact of net 1994 Restructuring and Recapitalization
charges.
(6) The efficiency ratio is computed by dividing total operating expense by net
interest income and noninterest income, excluding infrequent items,
provisions for estimated loan and real estate losses, direct costs of real
estate operations and gains/losses on the sale of securities.
(7) NPAs include nonaccruing loans and foreclosed real estate, net of specific
valuation allowances, writedowns and REO GVA, if any.
(8) Excludes loans sold in certain Bulk Sales consummated in 1994, and is net
of repurchases.
(9) All retail branch offices are located in Southern California.
66
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Fidelity operates through 33 full-service branches, all of which are located
in Southern California, principally in Los Angeles and Orange Counties. The Bank
offers a broad range of consumer financial services including demand and term
deposits and loans to consumers. At this time, the Bank primarily provides
residential mortgages and consumer loans, which the Bank does not underwrite or
fund, by referral to certain established providers of mortgage and consumer loan
products with which the Bank has negotiated strategic alliances. In addition,
through Gateway, a NASD registered broker/dealer, the Bank provides customers
with uninsured investment products, including a number of mutual funds,
annuities and unit investment trusts.
RESULTS OF OPERATIONS
The Bank reported a net loss of $69.0 million ($8.84 per common share;
computed on the basis of 7,807,201 weighted average common shares outstanding)
for the year ended December 31, 1995. This compares to a net loss of $128.4
million ($39.08 per common share; computed on the basis of 3,286,960 weighted
average common shares outstanding) for the year ended December 31, 1994.
Results of operations for the year ended December 31, 1995, as compared to the
same period in 1994, reflect: (a) net 1994 Restructuring and Recapitalization
charges, with no comparable amounts in 1995, consisting of provisions for
estimated losses on assets held for the Bulk Sale of $56.3 million and $14.1
million of other 1994 Restructuring and Recapitalization related expenses,
partially offset by the Branch Sales gain of $5.0 million, (b) increased
noninterest income of $18.9 million, due to decreased real estate losses and
costs as well as gains recognized on the sale of loans, securities and loan
servicing rights and (c) decreased operating expenses of $9.9 million related to
personnel and other cost reductions. These favorable changes were partially
offset by (a) an increase in provisions for loan losses of $4.2 million due to a
loan portfolio charge of $45 million as a consequence of the adoption of the
Accelerated Asset Resolution Plan, partially offset by a decrease in loan loss
provisions due to a reduction in the amount of nonperforming assets, (b) a
decrease of $16.5 million in income tax benefits resulting from annual
limitations of the Bank's net operating loss carryback potential, and (c) a
decrease in net interest income of $14.0 million caused by increasing rates paid
on deposits and borrowings not offset by increasing loan yields due to the lag
in repricing of the Bank's primarily adjustable rate loan portfolio and a
decrease in interest-earning assets.
The Bank reported a net loss of $128.4 million ($39.08 per common share,
computed on the basis of 3,286,960 weighted average common shares outstanding)
for the year ended December 31, 1994. This compares to a net loss of $65.9
million ($62.72 per common share, computed on the basis of 1,050,561 weighted
average common shares outstanding) for the year ended December 31, 1993.
Results of operations for the year ended December 31, 1994 compared to the
same period of 1993 reflect the combined effects of (a) net 1994 Restructuring
and Recapitalization charges with no comparable amounts in 1993, (b) decreased
net interest income of $15.2 million due to the combined effects of decreased
levels of average net interest-earning assets, decreasing margins and the
negative effects of the apportionment of interest income between the Bank and
the buyers of the Bulk Sale assets and (c) decreased income tax benefits of
$19.3 million. These negative factors were partially offset by (a) decreased
provisions for real estate losses
67
and direct costs of real estate operations of $21.4 million and $10.0 million,
respectively, and (b) decreased amortization of intangible assets of $9.2
million.
In 1993, Fidelity reassessed the valuation of its intangible assets. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its intangible assets related to core deposit premiums paid
upon acquisition of deposits, Fidelity wrote down the carrying value of these
assets in the amount of $5.2 million (which writedown is included in interest
expense). In addition, an analysis was performed of the recoverability of the
goodwill related to a 1978 acquisition. These analyses indicated that the net
expected future earnings from the branches or assets acquired did not support
the carrying value of the goodwill. As a result, Fidelity wrote down the
remaining $8.8 million balance of goodwill related to this acquisition (which
writedown is included in operating expense).
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans,
mortgage-backed securities and investment securities ("interest-earning assets")
and interest paid on savings deposits and borrowings ("interest-bearing
liabilities").
For the year ended December 31, 1995, net interest income totaled $71.6 million,
representing a decrease of $14.0 million from $85.6 million for the comparable
period in 1994. Net interest income in 1994 also declined, by $15.2 million,
from 1993.
Net interest income is affected by (a) the average volume and repricing
characteristics of the Bank's interest-earning assets and interest-bearing
liabilities, (b) the level and volatility of market interest rates, (c) the
level of nonaccruing loans and (d) the interest rate spread between the yields
earned and the rates paid. Additionally, in 1994, net interest income was
negatively impacted by the Bulk Sales in that interest income was apportioned
between the Bank and the buyers, while the Bank bore the entire related interest
cost to carry the assets.
68
The following table presents the primary determinants of the Bank's net
interest income for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1995 1994
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- ------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans....................... $3,196,024 $227,710 7.12 % $3,566,045 $226,949 6.36 %
Mortgage-backed securities.. 55,538 3,535 6.37 53,369 2,868 5.37
Investment securities....... 201,243 12,794 6.36 178,655 9,081 5.08
Investment in FHLB stock.... 48,373 2,438 5.04 50,185 2,567 5.12
---------- -------- ---------- --------
Total interest-earning
assets.................... 3,501,178 246,477 7.04 3,848,254 241,465 6.27
-------- --------
Noninterest-earning assets... 87,525 203,454
---------- ----------
Total assets............... $3,588,703 $4,051,708
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits............ $ 304,644 2,767 0.91 $ 367,828 3,299 0.90
Savings deposits........... 167,000 4,469 2.68 325,367 7,635 2.35
Time deposits.............. 2,207,145 121,006 5.47 2,285,717 97,376 4.26
---------- -------- ---------- --------
Total deposits............ 2,678,789 128,242 4.79 2,978,912 108,310 3.64
Borrowings.................. 716,267 46,594 6.51 887,980 47,518 5.35
---------- -------- ---------- --------
Total interest-bearing
liabilities............... 3,395,056 174,836 5.15 3,866,892 155,828 4.03
-------- --------
Noninterest-bearing
liabilities................. 30,615 30,069
Stockholders' equity......... 163,032 154,747
---------- ----------
Total liabilities and
equity.................... $3,588,703 $4,051,708
========== ==========
Net interest income;
interest rate
spread...................... $ 71,641 1.89 % $ 85,637 2.24 %
======== ===== ======== =====
Net yield on interest earning
assets...................... 2.05 % 2.22 %
===== =====
Average nonaccruing loan
balance included in average
loan balance................ $ 76,758 $ 131,096
========== ==========
Net delinquent interest
removed from interest
income...................... $ 5,813 $ 10,895
======== ========
Reduction in net yield on
interest-earning assets due
to delinquent interest
(in basis points)........... 17 28
===== =====
YEAR ENDED DECEMBER 31,
---------------------------------------
1993
---------------------------------------
AVERAGE AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
----------- -------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans....................... $3,930,262 $269,712 6.86 %
Mortgage-backed securities.. 207,875 11,051 5.32
Investment securities....... 158,060 6,928 4.38
Investment in FHLB stock.... 51,210 1,640 3.20
---------- --------
Total interest-earning
assets.................... 4,347,407 289,331 6.65
--------
Noninterest-earning assets... 260,843
----------
Total assets............... $4,608,250
==========
Interest-bearing liabilities:
Deposits:
Demand deposits............ $ 345,957 4,781 1.38
Savings deposits........... 451,590 11,268 2.50
Time deposits.............. 2,499,076 115,672 4.63
---------- --------
Total deposits............ 3,296,623 131,721 4.00
Borrowings.................. 1,049,291 56,773 5.41
---------- --------
Total interest-bearing
liabilities............... 4,345,914 188,494 4.34
--------
Noninterest-bearing
liabilities................. 42,633
Stockholders' equity......... 219,703
----------
Total liabilities and
equity.................... $4,608,250
==========
Net interest income;
interest rate spread........ $100,837 2.31 %(1)
======== =====
Net yield on interest earning
assets...................... 2.31 %(1)
=====
Average nonaccruing loan
balance included in average
loan balance................ $ 109,792
==========
Net delinquent interest
removed from interest
income...................... $ 8,670
========
Reduction in net yield on
interest-earning assets due
to delinquent interest
(in basis points)........... 20
=====
- --------------
(1) Excluding the writedown of core deposit intangible assets of $5.2 million,
both the interest rate spread and the net yield on interest-earning assets
for the year ended December 31, 1993, would have been 2.43%.
69
The following tables present the dollar amount of changes in interest income
and expense for each major component of interest-earning assets and interest-
bearing liabilities and the amount of change attributable to changes in average
balances and average rates for the periods indicated. Because of numerous
changes in both balances and rates, it is difficult to allocate precisely the
effects thereof. For purposes of these tables, the change due to volume is
initially calculated as the change in average balance multiplied by the average
rate during the prior period and the change due to rate is calculated as the
change in average rate multiplied by the average volume during the prior period.
Any change that remains unallocated after such calculations is allocated
proportionately to changes in volume and changes in rates.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
----------------------------------------- ------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Interest income:
Loans................................ $ (24,838) $ 25,599 $ 761 $ (23,936) $ (18,827) $ (42,763)
Mortgage-backed securities........... 119 548 667 (8,286) 103 (8,183)
Investment securities................ 1,240 2,473 3,713 967 1,186 2,153
Investment in FHLB stock............. (90) (39) (129) (34) 961 927
--------- --------- --------- --------- --------- ---------
Total interest income............. (23,569) 28,581 5,012 (31,289) (16,577) (47,866)
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits:
Demand deposits................... 568 (269) 299 (286) 1,768 1,482
Savings deposits.................. 4,014 (1,324) 2,690 3,015 618 3,633
Time deposits..................... 3,444 (26,365) (22,921) 9,376 8,920 18,296
--------- --------- --------- --------- --------- ---------
Total deposits................. 8,026 (27,958) (19,932) 12,105 11,306 23,411
Borrowings........................... 9,143 (8,219) 924 8,631 624 9,255
--------- --------- --------- --------- --------- ---------
Total interest expense............ 17,169 (36,177) (19,008) 20,736 11,930 32,666
--------- --------- --------- --------- --------- ---------
Decrease in net interest income... $ (6,400) $ (7,596) $ (13,996) $ (10,553) $ (4,647) $ (15,200)
========= ========= ========= ========= ========= =========
The $14.0 million decrease in net interest income between 1995 and 1994 was
primarily the result of increased rates on average interest-bearing liabilities
combined with a decline in the average level of interest-earning assets. These
changes were partially offset by a decline in the level of interest-bearing
liabilities and increased rates on interest-earning assets.
The $15.2 million decrease in net interest income between 1994 and 1993 was
primarily the result of a decline in the average level of interest-earning
assets, combined with reduced yields earned on average interest-earning assets.
This was partially offset by a decline in the level of interest-bearing
liabilities and reduced rates paid on interest-bearing liabilities.
Additionally, net interest income in 1994 was negatively impacted by the closing
of the Bulk Sales. As a result of the apportionment of interest income between
buyer and seller, only interest income collected and applied to the Bulk Sale
loans prior to the closing of each transaction was retained and recognized by
the Bank. The apportionment of interest income resulted in not only the reversal
of previously accrued but uncollected interest, but also the loss of interest
income for the number of days in the month that the Bank held performing Bulk
Sale loans prior to closing. The decline in interest expense on deposits is also
partially due to the writedown of $5.2 million of core deposit intangible assets
in 1993, with no comparable writedown in 1994.
The yield on interest-earning assets and the cost of interest-bearing
liabilities of the Bank both tend to rise or fall in step with COFI, since it is
an aggregation of the cost of funds of the Bank's peers in the FHLB
70
Eleventh District. However, due to reporting delays and contractual look-back
periods contained in the Bank's loan documents, the 92.4% of the Bank's loans
which are indexed to COFI at December 31, 1995, as with all COFI portfolios in
the industry, do not reprice until some time after the industry liabilities
composing COFI reprice. The Bank's liabilities reprice simultaneously with the
cost of funds of institutions which comprise the FHLB Eleventh District. In the
Bank's case, the lag between the repricing of its liabilities and its ARM loans
indexed to COFI is approximately four months. Thus, when rates rise sharply, as
they did between early 1994 and early 1995, there will be upward pressure on
rates paid on deposit accounts and wholesale borrowings, and the Bank's net
interest income will be adversely affected until the majority of its interest-
earning assets fully reprice. Conversely, in a falling interest rate
environment, as in 1993 and the later part of 1995, net interest income will be
positively affected.
The Bank's net interest income, interest rate margin and operating results
have been negatively affected by the level of loans on nonaccrual status. Gross
balances of nonaccruing loans peaked in July 1994 at $171 million and averaged
$76.8 million, $131.1 million and $109.8 million in 1995, 1994 and 1993,
respectively. As a result, the Bank's net interest rate margin was decreased by
17, 28 and 20 basis points in those years, respectively.
ASSET/LIABILITY MANAGEMENT
To reduce fluctuations in net interest income, the Bank maintains a loan
portfolio with a yield that generally fluctuates in step with the cost of its
liabilities. The Bank has traditionally done this by originating and purchasing
primarily ARM loans for its portfolio. ARM loans comprised 97% of the total loan
portfolio at December 31, 1995. All else being equal, to the extent that the
composition of the Bank's liabilities parallels the composition of COFI, changes
in the Bank's cost of funds should parallel changes in COFI. However, due to the
lag in COFI-based ARMs repricing discussed above, and depending upon the level
of increase or decrease in interest rates, interim disparities often occur. The
decline in short-term rates from 1990 to early 1993 contributed significantly to
the Bank's net interest margin. Subsequent increases in rates have caused a
reduction in net interest income. If interest rates were to increase again,
Fidelity's net interest income may again be negatively impacted.
Subsequent to December 31, 1995, under the supervision of the Bank's
Asset/Liability Committee, the Bank's Treasury Department began to engage in
certain option strategies. These strategies, which will involve the purchase and
sale of options on U.S. Government securities, will be an integral part of the
Bank's investment and asset/liability strategies. Financial instruments utilized
in these programs will carried at fair value. Options may produce credit
exposure related to the contractual performance of the counterparties. The
Bank's Credit Policy Committee makes recommendations regarding counterparties
and credit limits which are subject to approval by the Board of Directors.
Realized and unrealized changes in fair values are recognized currently. The
Bank did not engage in these option activities after March 31, 1995; however, at
December 31, 1994, the notional amounts of open option positions were $223.5
million.
The Bank may employ interest rate swaps, caps and floors in the management of
interest rate risk. Interest rate swaps generally involve the exchange of fixed
or floating interest payments without the exchange of the underlying principal
amounts. Interest rate caps and floors generally involve the payment of a one
time premium to a counterparty who, if interest rates rise or fall, above or
below a predetermined level, will make payments to the Bank at an agreed upon
rate for the term of the agreement until such time as interest rates fall below
or rise above the cap or floor level.
During the first quarter of 1995, the Bank terminated interest rate swap
agreements with a notional amount of $700 million, resulting to a deferred gain
of $1.2 million which was fully amortized in 1995. Also, during the fourth
quarter of 1995, the Bank terminated the remaining interest swap agreements with
a notional amount of $446.7 million and as a result recorded a deferred loss of
$3.2 million. As part of its
71
total risk management, the Bank entered into these interest rate swap agreements
in 1993 and 1994 with various reputable counterparties. An interest rate swap
agreement is a financial transaction where two counterparties agree to exchange
different streams of payments over time. An interest rate swap involves no
exchange of principal either at inception or upon maturity; rather, it involves
the periodic exchange of interest payments arising from an underlying notional
principal amount. These interest rate swap agreements are intended to modify the
repricing characteristics of specific assets and liabilities. There were no
outstanding interest rate swap agreements at December 31, 1995.
In March 1994, the Bank purchased two interest rate floor contracts with a
total notional principal amount of $100 million. The Bank's interest rate floor
contracts were designed to protect against interest rate declines below the
fixed rate floor of 4.75%. During the fourth quarter of 1995, these interest
rate floor contracts were terminated.
The Bank is developing a plan to increase the asset size of the Bank by up to
$1 billion. The plan, in general terms, is based upon certain risk adjusted
return and liquidity objectives and is expected to take up to six months to
execute. This action is designed to increase the securities and loan portfolios
to enhance the Bank's earnings capabilities. The proposed increase in earning
assets will be at a lower interest rate spread than the Bank is currently
yielding. Accordingly, if the plan is implemented, the Bank's interest rate
spread is expected to decline. The Bank has formally requested approval from
the OTS for a waiver on the growth restriction currently in place. (See Item 1.
"Business--Regulation and Supervision--Office of Thrift Supervision Oversight.")
There can be no assurance that such approval will be granted. If an approval
were granted, the Bank intends to implement the plan promptly. Management
intends to implement the plan in a manner that would not adversely affect the
current well-capitalized status of the Bank.
72
The following table sets out the maturity and rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1995. "Gap," as reflected in the table, represents the estimated difference
between the amount of interest-earning assets and interest-bearing liabilities
repricing during future periods as adjusted for interest-rate swaps and based on
certain assumptions, including those stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1995
MATURITY OR REPRICING
------------------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
---------- ------------ ------------ -------- -------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Cash................................. $ 5,371 $ -- $ -- $ -- $ -- $ 5,371
Investment securities (1) (2)........ 49,775 25,036 69,269 -- -- 144,080
Mortgage-backed securities (1)....... 28,604 3,038 91 -- -- 31,733
Loans receivable:
ARMs and other adjustables (3)...... 2,403,340 383,125 148,828 4,398 116 2,939,807
Fixed rate loans.................... 81 1,172 11,789 13,915 67,567 94,524
---------- ---------- ---------- ------- ------- ----------
Total gross loans receivable....... 2,403,421 384,297 160,617 18,313 67,683 3,034,331
---------- ---------- ---------- ------- ------- ----------
Total............................. 2,487,171 412,371 229,977 18,313 67,683 $3,215,515
---------- ---------- ---------- ------- ------- ==========
Interest-bearing liabilities:
Deposits:
Checking and savings accounts (4)... 371,999 -- -- -- -- $ 371,999
Money market accounts (4)........... 93,901 -- -- -- -- 93,901
Fixed maturity deposits:
Retail customers................... 891,234 979,459 246,110 829 1,119 2,118,751
Wholesale customers................ 3,117 4,124 8,977 -- -- 16,218
---------- ---------- ---------- ------- ------- ----------
Total deposits.................... 1,360,251 983,583 255,087 829 1.119 2,600,869
---------- ---------- ---------- ------- ------- ----------
Borrowings:
FHLB advances (3)................... 272,700 -- 20,000 -- -- 292,700
Other............................... 50,000 -- 100,000 -- -- 150,000
---------- ---------- ---------- ------- ------- ----------
Total borrowings................... 322,700 -- 120,000 -- -- 442,700
---------- ---------- ---------- ----------
Total............................. 1,682,951 983,583 375,087 829 1.119 $3,043,569
---------- ---------- ---------- ------- ------- ==========
Repricing Gap......................... $ 804,220 $ (571,212) $(145,110) $17,484 $66,564
========== ========== ========== ======= =======
Gap to total assets................... 24.37% (17.31%) (4.40%) 0.53% 2.02%
========== ========== ========== ======= =======
Cumulative Gap to total assets........ 24.37% 7.06% 2.66% 3.19% 5.21%
========== ========== ========== ======= =======
- --------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $49.4 million.
(3) ARMs and variable rate borrowings from the FHLB system ("FHLB advances") are
primarily in the shorter categories as they are subject to interest rate
adjustments.
(4) These liabilities are subject to daily adjustments and are therefore
included in the "Within 3 Months" category.
Analysis of the Gap provides only a static view of the Bank's interest rate
sensitivity at a specific point in time. The actual impact of interest rate
movements on the Bank's net interest income may differ from that implied by any
Gap measurement. The actual impact on net interest income may depend on the
direction and magnitude of the interest rate movement, as well as competitive
and market pressures.
Fidelity's interest rate risk is reviewed on an ongoing basis. At September
30, 1995, the latest date for which information is available, the Bank's
interest rate sensitivity measure was in the 69th percentile (only 31% of
institutions were less sensitive) of all institutions supervised by the OTS, as
measured by the OTS' interest rate risk model. Due to the Bank's relatively low
level of interest rate risk, the Bank would not have
73
been required to include an interest rate risk component in its risk-based
capital had the new regulation regarding such inclusion been in effect at
December 31, 1995. See Item 1. "Business--Regulation and Supervision--FIRREA
Capital Requirements."
ASSET QUALITY
The Bank's loan portfolio is primarily located in Southern California and is
comprised principally of single family and multifamily (2 units or more)
residential loans. At December 31, 1995, 19.6% of Fidelity's real estate loan
portfolio consisted of California single family residences, while another 11.4%
and 61.0% consisted of California multifamily dwellings of 2 to 4 units and 5 or
more units, respectively. At December 31, 1994, 22.4% of Fidelity's real estate
loan portfolio (including loans held for sale) consisted of California single
family residences while another 11.7% and 58.2% consisted of California
multifamily dwellings of 2 to 4 units and 5 or more units, respectively.
The performance of the Bank's multifamily and commercial loan portfolios has
been adversely affected by recent Southern California economic conditions. The
performance of the Bank's multifamily and commercial loan portfolio is
particularly susceptible to the potential for further declines in the Southern
California economy, such as increasing vacancy rates, declining rents,
increasing interest rates, declining debt coverage ratios, and declining market
values for multifamily and commercial properties. In addition, the possibility
that investors may abandon properties or seek bankruptcy protection with respect
to properties experiencing negative cash flow, particularly where such
properties are not cross-collateralized by other performing assets, can also
adversely affect the multifamily loan portfolio. While diminishing in impact,
the Bank's portfolio continues to experience some adverse effects from the
January 17, 1994 Northridge Earthquake. See Item 1. "Business--Credit
Administration--Northridge Earthquake."
California has been hit particularly hard by the current recession and
Southern California has experienced the brunt of the economic downturn in the
state. The Southern California economy is characterized by higher unemployment
than the national and state averages and real estate values that, in many cases,
continue to decline. There can be no assurances that these economic conditions
will improve in the near future as many factors key to recovery may be impacted
adversely by the Federal Reserve Bank's interest rate policy as well as other
factors. Consequently, rents and real estate values may not stabilize, which may
affect future delinquency and foreclosure levels and may adversely impact the
Bank's asset quality, earnings performance and capital levels.
As a result of the 1994 OTS examination of the Bank, Fidelity was required,
among other things, to maintain a minimum GVA of $40 million unless OTS
concurrence was obtained prior to reduction of such GVA. In October 1995, the
Bank requested relief from the minimum GVA level of $40 million. On the basis of
various presentations by management and an informal on-site review, the OTS
advised the Bank that it took no objection to the Bank's reducing the level of
GVA to $35 million as of December 31, 1995.
As a consequence of the adoption of the Accelerated Asset Resolution Plan, the
Bank recorded a $45.0 million loan portfolio charge in the fourth quarter of
1995. This amount represents the estimated losses, net of specific reserves,
anticipated to be incurred by the Bank as a consequence of executing the
Accelerated Asset Resolution Plan. Such additional losses represent, among
other things, the estimated incremental losses associated with recovery through
possible bulk sales of performing and non-performing loans and REO, estimated
reduced recoveries from restructuring loans which the Bank would collect and
resolve, if possible, in its normal course of business, and the acceptance of
lower proceeds from the sale of individual REO. See Item 1. "Business--
Accelerated Asset Resolution Plan."
On January 1, 1994, the Bank adopted SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." This statement generally requires that creditors measure
impairment when it is probable that a creditor
74
will be unable to collect all amounts due (including interest and principal)
according to the contractual terms of the loan agreement. When a loan is
impaired, a creditor must measure the extent of that impairment based upon
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral, if the loan is collateral-dependent. If it is determined that
foreclosure is probable, impairment is measured based on the fair value of the
collateral.
In October 1994, SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" was issued. This statement amends the
disclosure requirements in SFAS No. 114 by requiring information about the
recorded investment in certain impaired loans and how a creditor recognizes
interest income related to impaired loans. The adoption of SFAS No. 118 had no
impact on the Bank as this statement permitted recognition of interest income in
conformity with the Bank's existing interest income recognition policy.
75
During the year ended 1995, total delinquent loans decreased $35.0 million, or
32.7%, from December 31, 1994. The following table presents loan delinquencies
by number of days delinquent and by property type as of the dates indicated. All
assets are reported net of specific reserves and writedowns.
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
Delinquencies by number of days:
30 to 59 days......................... 0.43 % 0.74 %
60 to 89 days......................... 0.24 0.33
90 days and over...................... 1.74 2.18
------- --------
Loan delinquencies to net loan
portfolio......................... 2.41 % 3.25 %
======= ========
Delinquencies by property type:
Single family:
30 to 59 days......................... $ 4,283 $ 4,413
60 to 89 days......................... 924 1,016
90 days and over...................... 7,226 7,775
------- --------
12,433 13,204
------- --------
Percent of applicable loan
portfolio......................... 2.10 % 1.74 %
Multifamily (2 to 4 units):
30 to 59 days......................... 1,748 4,281
60 to 89 days......................... 282 904
90 days and over...................... 6,671 6,590
------- --------
8,701 11,775
------- --------
Percent of applicable loan
portfolio......................... 2.57 % 2.99 %
Multifamily (5 to 36 units):
30 to 59 days......................... 5,434 15,438
60 to 89 days......................... 5,801 5,247
90 days and over...................... 14,312 23,112
------- --------
25,547 43,797
------- --------
Percent of applicable loan
portfolio......................... 1.71 % 2.73 %
Multifamily (37 units and over):
30 to 59 days......................... 304 --
60 to 89 days......................... -- 2,272
90 days and over...................... 3,190 7,088
------- --------
3,494 9,360
------- --------
Percent of applicable loan
portfolio......................... 1.07 % 2.75 %
Commercial and industrial:
30 to 59 days......................... 958 264
60 to 89 days......................... 213 1,385
90 days and over (1).................. 20,511 27,049
------- --------
21,682 28,698
------- --------
Percent of applicable loan
portfolio......................... 9.26 % 11.52 %
Total loan delinquencies, net........... $71,857 $106,834
======= ========
Loan delinquencies to net loan portfolio 2.41 % 3.25 %
======= ========
- --------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million at December 31, 1995 and one loan on the same hotel property with a
balance of $13.8 million at December 31, 1994.
76
Included in total delinquent loans as of December 31, 1995 and 1994 are $7.8
million and $23.3 million, respectively, of loans which were secured by
properties which were damaged as a result of the January 17, 1994 Northridge
earthquake and previously identified as "earthquake-affected loans." See Item 1.
"Business--Credit Administration--Northridge Earthquake."
The following table presents net delinquent loans at the dates indicated:
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1995 1995 1995 1995 1994
------------ ------------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Number of days delinquent:
30 to 59 days.............. $12,727 $17,963 $ 9,567 $ 19,323 $ 24,396
60 to 89 days.............. 7,220 8,379 10,343 11,295 10,824
90 days and over (1)....... 51,910 54,313 64,827 70,519 71,614
------- ------- ------- -------- --------
Total delinquencies..... $71,857 $80,655 $84,737 $101,137 $106,834
======= ======= ======= ======== ========
- --------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million at December 31, 1995 and one loan on the same hotel property with a
balance of $13.8 million at December 31, 1994.
Total classified assets increased $77.5 million or 55% during 1995 to $219.1
million at December 31, 1995. Nonperforming classified assets decreased $14.3
million during 1995 while performing classified assets increased $91.8 million
primarily due to the LGS system implementation in the second half of 1995. See
Item 1. "Business -- Credit Administration -- Asset Classification." The ratio
of NPAs to total assets decreased from 2.31% at December 31, 1994 to 2.16% at
December 31, 1995. This decrease is primarily due to reduced levels of
nonaccruing loans at December 31, 1995 compared to December 31, 1994. All
assets and ratios are reported net of specific reserves and writedowns unless
otherwise stated. The following table presents asset quality details at the
dates indicated:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
NPAs by type:
Nonaccruing loans.............. $ 51,910 $ 71,614
REO, net of REO GVA............ 19,521 14,115
-------- --------
Total NPAs.................. $ 71,431 $ 85,729
======== ========
NPAs by composition:
Single family residences....... $ 10,178 $ 8,705
Multifamily 2 to 4 units....... 9,269 6,788
Multifamily 5 units and over... 25,923 36,124
Commercial and other (1)....... 28,361 34,112
REO GVA........................ (2,300) --
-------- --------
Total NPAs.................. 71,431 85,729
Total TDRs (2)................... 32,691 52,144
-------- --------
Total TDRs and NPAs......... $104,122 $137,873
======== ========
Classified assets:
NPAs........................... $ 71,431 $ 85,729
Performing classified loans.... 147,646 55,807
-------- --------
Total classified assets..... $219,077 $141,536
======== ========
(continued)
---------
77
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(continued) (DOLLARS IN THOUSANDS)
Classified asset ratios:
Nonaccruing loans to total assets... 1.57% 1.93%
NPAs to total assets................ 2.16% 2.31%
TDRs to total assets................ 0.99% 1.41%
NPAs and TDRs to total assets....... 3.16% 3.72%
Classified assets to total assets... 6.64% 3.82%
REO to NPAs......................... 27.33% 16.46%
Nonaccruing loans to NPAs........... 72.67% 83.54%
- --------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million at December 31, 1995 and one loan on the same hotel property with a
balance of $13.8 million at December 31, 1994.
(2) Included in TDRs at December 31, 1995 and December 31, 1994 are 14 and 41
earthquake-affected TDRs totaling $13.9 million and $36.1 million,
respectively.
Direct costs of foreclosed real estate operations totaled $5.8 million, $8.7
million, and $18.6 million for the years ended December 31, 1995, 1994, and
1993, respectively. The decrease was primarily due to higher sales activity, and
decreases in both the number and average gross book value of properties
foreclosed. The following table provides information about the change in the
book value and the number of properties owned and foreclosed for the periods
indicated:
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1995 1994
----------------- -----------------
(DOLLARS IN THOUSANDS)
REO net book value............................................................... $19,521 $ 14,115
Increase (decrease) in REO for the period........................................ $ 5,406 $(128,031)
Number of real properties owned.................................................. 109 64
Increase (decrease) in number of properties owned for the period................. 45 (173)
Number of properties foreclosed for the period................................... 270 232
Gross book value of properties foreclosed........................................ $92,661 $ 102,293
Average gross book value of properties foreclosed................................ $ 343 $ 441
78
The following table summarizes the Bank's reserves, writedowns and certain
coverage ratios at the dates indicated:
DECEMBER 31,
-------------------------
1995 1994
------------- ---------
(DOLLARS IN THOUSANDS)
Loans:
GVA................................... $48,921 $50,482
Specific reserves..................... 40,514 16,720
------- -------
Total allowance for estimated loan
losses............................ $ 9,435(1) $67,202
======= =======
Writedowns (2)........................ $ 316 $ 502
======= =======
Total loan allowances and loan
writedowns to gross loans............ 2.96% 2.01%
Total loan allowances to gross loans.. 2.95% 2.00%
Loan GVA to loans (3)................. 1.64% 1.51%
Loan GVA to nonaccruing loans......... 94.24% 70.49%
Nonaccruing loans to total loans, net. 1.77 2.18%
Real estate owned:
REO GVA............................... $ 2,300 $ --
Specific reserves..................... 1,192 2,318
------- -------
Total REO allowance for estimated
losses............................ $ 3,492 $ 2,318
======= =======
Writedowns (2)........................ $17,584 $16,640
======= =======
Total REO allowances and REO
writedowns to gross REO.............. 51.92% 57.32%
Total REO allowances to gross REO (4). 15.17% 14.11%
REO GVA to REO (3).................... 10.54% --
Total loans and REO:
GVA................................... $51,221 $50,482
Specific reserves..................... 41,706 19,038
------- -------
Total allowance for estimated
losses............................ $ 2,927(1) $69,520
======= =======
Writedowns (2)........................ $17,900 $17,142
======= =======
Total allowances and writedowns to
gross loans and REO.................. 3.60% 2.55%
Total allowances to gross loans and
REO (3).............................. 3.04% 2.06%
Total GVA to loans and REO (3)........ 1.70% 1.51%
Total GVA to NPAs..................... 69.47% 58.89%
(1) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
(2) Writedowns include cumulative charge-offs on outstanding loans and REO as of
the date indicated.
(3) Loans and REO, as applicable, in these ratios are calculated prior to their
reduction for loan and REO GVA, respectively, but are net of specific
reserves and writedowns.
(4) Net of writedowns.
79
The following tables summarize the activity in the Bank's allowances for
estimated loan and real estate losses at the dates indicated:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------------------------------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
--------------------- ---------------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
Balance on January 1,........ $ 67,202 $ 2,318 $ 69,520 $ 83,832 $ 17,715 $ 101,547
Provision for losses........ 69,724(1) 3,366 73,090 65,559 8,768 74,327
Charge-offs................. (44,278) (8,358) (52,636) (55,685) (16,820) (72,505)
Allocations from GVA to REO. (6,166) 6,166 -- -- -- --
GVA charged off on Bulk -- -- -- (30,497) (7,894) (38,391)
Sale assets................
Recoveries.................. 2,953 -- 2,953 3,993 549 4,542
---------- -------- --------- --------- --------- ---------
Balance on December 31,...... $ 89,435 $ 3,492 $ 92,927 $ 67,202 $ 2,318 $ 69,520
========== ======== ========= ========= ========= =========
(1) Included in the provision for estimated loan losses in 1995 is the $45
million loan portfolio charge associated with the Accelerated Asset
Resolution Plan.
The following table details the activity affecting specific loss reserves for
the periods indicated:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------------------------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
--------- ----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Balance on January 1,................ $ 16,720 $ 2,318 $ 19,038 $ 12,254 $ 9,273 $ 21,527
Allocations from GVA to specific
reserves........................... 68,072 7,473 75,545 60,151 9,316 69,467
Charge-offs......................... (44,278) (8,599) (52,877) (55,685) (16,271) (71,956)
--------- -------- --------- --------- --------- ---------
Balance at end of period indicated... $ 40,514 $ 1,192 $ 41,706 $ 16,720 $ 2,318 $ 19,038
========= ======== ========= ========= ========= =========
NONINTEREST INCOME/EXPENSE
Noninterest income has three major components: (a) noninterest income from
ongoing operations, which includes loan fee income, gains or losses on loans
held for sale, fees earned on the sale of securities and annuities and retail
banking fees, (b) income/expenses associated with owned real estate, which
includes both the provision for real estate losses as well as income/expenses
incurred by the Bank associated with the operations of its owned real estate
properties and (c) gains and losses on the sales of loan servicing, investment
securities and mortgage-backed securities. Items (b) and (c) can fluctuate
widely, and could therefore mask the underlying fee generating performance of
the Bank on an ongoing basis.
Noninterest income improved by $18.9 million from net noninterest expense of
$7.8 million in the year ended December 31, 1994 to net noninterest income of
$11.1 million in the year ended December 31, 1995. The major components of this
improvement are: (a) real estate provisions and costs decreased by $8.3 million
in the year ended December 31, 1995, as a result of decreased average levels of
REO, (b) net gains on securities activities of $4.1 million in the year ended
December 31, 1995 improved from $1.1 million during the same period in 1994
primarily as a result of the sales of securities for regulatory capital
maintenance purposes, (c) a net gain of $4.6 million was realized in the year
ended December 31, 1995 from the sale of rights to service loans for others (no
such sales were recorded during the same period of 1994), (d) net gains on loan
sales improved by $4.5 million to a gain of $0.5 million in the year ended
December 31, 1995 from a
80
loss of $4.0 million during the same period in 1994 (loan sale gains and losses
during both periods were a consequence of sales of loans to reduce the overall
size of the Bank to maintain minimum regulatory capital ratios) and (e) fee
income from the sale of uninsured investment products increased by $0.7 million
from $3.4 million for the year ended December 31, 1994 to $4.1 million for the
year ended December 31, 1995, reflecting the progress of the Bank's integrated
sales strategy and the consolidation of Gateway's operations since August 1994,
when it was purchased by the Bank from Citadel as part of the 1994 Restructuring
and Recapitalization. Until that time, Gateway was a wholly owned subsidiary of
Citadel and only a portion of its fee income was shared with the Bank under a
fee sharing arrangement.
Net noninterest expense improved by $30.9 million from net noninterest expense
of $38.7 million in 1993 to net noninterest expense of $7.8 million in 1994. The
major components of this improvement were (a) increased fee income from
investment products of $3.4 million due to the apportionment of fee income
between Gateway and Fidelity beginning in January 1994 and the consolidation of
Gateway's operations since August 1994, when it was purchased by Fidelity from
Citadel as a part of the 1994 Restructuring and Recapitalization and (b) a
decrease in costs and provisions related to REO of $31.4 million from $48.8
million in 1993 to $17.4 million in 1994 due to the significant decrease in the
level of REOs after the consummation of the Bulk Sales. This improvement was
partially offset by (a) a $4.2 million decrease in gains on loans held for sale
from a gain of $0.2 million in 1993 to a loss of $4.0 million in 1994 resulting
from dispositions of loans for capital planning purposes and (b) a decrease of
$0.4 million in loan fee income related to a decline in the Bank's servicing
portfolio.
OPERATING EXPENSES
Operating expenses decreased by $9.9 million to $82.0 million for the year
ended December 31, 1995 compared to $91.9 million for the year ended December
31, 1994, excluding net 1994 Restructuring and Recapitalization charges. The
change was primarily due to (a) a decrease of $9.5 million in personnel and
benefits due to a decline of 229 or 26.2% in the twelve-month average FTEs, (b)
a decrease of $1.4 million in occupancy and other office related costs partially
as a result of the reduction in FTEs, (c) a $1.1 million decrease in FDIC
insurance premiums partially due to a decrease in deposits as a result of the
Branch Sale, and (d) a $2.0 million decrease in office related costs partially
as a result of the reduction in FTEs and tighter cost controls. These favorable
changes were partially offset by a provision of $4.3 million for computer
software costs. See Item 1. "Business- Office of Thrift Supervision Oversight:
Supervisory Agreement.".
The Bank decreased total employee headcount during 1995 by 169 to achieve
organizational goals involving cost reductions, outsourcing opportunities and
changes in product focus. Areas which experienced employee reductions in 1995
included the Consumer Lending Group (a reduction of 41 employees), the Retail
Financial Services Group (a reduction of 79 employees) and other administrative
services and subsidiaries (a reduction of 49 employees). The Bank may have
limited staff reductions during 1996. In addition, the Bank is evaluating the
elimination or reduction of certain nonpersonnel expenditures.
Staff reductions in 1994 decreased total employee headcount by 197 and
included reductions of 86 employees in the Consumer Lending Group, 56 employees
in the Retail Financial Services Group, 28 employees in Credit Administration
and 27 employees in various other administrative service departments and
subsidiaries.
Operating expenses, excluding net 1994 Restructuring and Recapitalization
charges, decreased by $6.8 million to $91.9 million for the year ended December
31, 1994 compared to $98.7 million in 1993. The change was primarily due to (a)
a reduction in the amortization of intangible assets of $9.2 million due to the
1993 writedown of goodwill and (b) a reduction in consulting fees of $3.4
million from the 1993 level, due primarily to financial advisory fees incurred
during 1993 in reviewing the Bank's strategic objectives and developing a
restructuring plan and in the related asset valuation process. These items were
partially offset by
81
(a) increased outside data processing costs of $1.7 million and software
depreciation of $1.0 million due to systems conversions during 1993 and 1994,
(b) increased FDIC insurance expense of $0.7 million due to an increase in the
assessment rate, (c) increased loan modification costs of $0.5 million and (d) a
reduction of management fees received from Citadel of $0.9 million for services
rendered by the Bank until the closing of the 1994 Restructuring and
Recapitalization.
Net 1994 Restructuring and Recapitalization charges in 1994 of $65.4 million
consisted of provisions for estimated losses on assets held for Bulk Sale of
$56.3 million and $14.1 million of other general and administrative expenses,
including legal and consulting expenses, partially offset by the Branch Sale
gain of $5.0 million.
Total personnel and benefits expenses increased $0.1 million from $44.3
million in 1993 to $44.4 million in 1994. This increase was primarily due to the
effects of (a) increased severance expenses of $1.3 million and (b) increased
incentive compensation paid to branch personnel of $1.1 million. These increases
were offset by decreased benefits costs of $2.3 million due to the elimination
of the Bank's participation in retiree medical costs and to the curtailment of
the Bank's defined benefit pension plan. The Bank streamlined operations during
1994, resulting in a reduction in full-time equivalent employees from 896
(headcount 1,002) in December 1993 to 724 (headcount 805) in December 1994.
The decrease in total average asset size of the Bank (from $4.1 billion for
1994 to $3.6 billion for 1995) resulted in an increase in the annual operating
expense ratio from 2.27% for 1994 to 2.28% for 1995, notwithstanding the
decreased operating expenses computed without the impact of the 1994
Restructuring and Recapitalization charges.
The decrease in total average asset size of the Bank (from $4.6 billion for
1993 to $4.1 billion for 1994) resulted in an increase in the annual operating
expense ratio from 2.14% for 1993 to 2.27% for 1994, notwithstanding the
decreased operating expenses computed without the impact of the 1994
Restructuring and Recapitalization charges.
Due to the sensitivity of the operating expense ratio to changes in the size
of the balance sheet, management also looks at trends in the efficiency ratio to
assess the changing relationship between operating expenses and income. The
efficiency ratio measures the amount of cost expended by the Bank to generate a
given level of revenues in the normal course of business. It is computed by
dividing total operating expense by net interest income and noninterest income,
excluding infrequent items. A decrease in the efficiency ratio is favorable in
that it indicates that less expenses were incurred to generate a given level of
revenue.
The efficiency ratio improved between the year ended December 31, 1994 and
December 31, 1995 from 97.58% to 89.81%. These favorable changes were due to
increased noninterest income and decreased operating expense, which were
partially offset by decreased net interest income.
The efficiency ratio increased between the year ended December 31, 1993 and
December 31, 1994, from 79.66% to 97.58%. The increase was due to unfavorable
changes in all three of the ratio's components.
INCOME TAXES
The Bank's combined federal and state statutory tax rate is approximately
42.4% of earnings before income taxes. However, no income tax benefits were
recognized on losses before income taxes in 1995. An effective tax rate of 11.4%
was reflected on losses before income taxes in 1994. The reduction in income tax
benefits results primarily from the limitation of federal and state net
operating loss carryforwards for financial reporting purposes.
82
The effective tax rate of 11.4% on losses before income taxes in 1994 was less
than the effective tax rate of 35.2% on losses before income taxes in 1993,
primarily as a result of limitations on the recognition of federal and state net
operating loss carryforwards for financial reporting purposes. Due to the 1994
Restructuring and Recapitalization and the 1995 Recapitalization, the
utilization in future periods of net operating loss carryforwards generated
prior to these events will be limited.
REGULATORY CAPITAL COMPLIANCE
FDICIA required the OTS to implement a system providing for regulatory
sanctions against institutions that are not adequately capitalized. The severity
of these sanctions increases to the extent that an institution's capital
continues to decline. Under FDICIA, the OTS issued the PCA Regulations which
established specific capital ratios for five separate capital categories as set
forth below:
CORE CAPITAL TO CORE CAPITAL
ADJUSTED TO TOTAL CAPITAL
TOTAL ASSETS RISK-WEIGHTED TO
(LEVERAGE RATIO) ASSETS RISK-WEIGHTED ASSETS
----------------- -------------- ---------------------
Well capitalized................. 5% or above 6% or above 10% or above
Adequately capitalized........... 4% or above 4% or above 8% or above
Undercapitalized................. Under 4% Under 4% Under 8%
Significantly undercapitalized... Under 3% Under 3% Under 6%
Critically undercapitalized...... Ratio of tangible equity to adjusted total assets of 2%
or less
At December 31, 1995 the Bank was considered well capitalized. See Item 1
"Business--Regulation and Supervision --FIRREA Capital Requirements and --FDICIA
PCA Regulations."
The following table summarizes the capital ratios required by FDICIA for an
institution to be considered well capitalized and Fidelity's regulatory capital
at December 31, 1995 as compared to such ratios.
TANGIBLE CAPITAL CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO
TO ADJUSTED ADJUSTED RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS TOTAL ASSETS ASSETS ASSETS
--------------------- --------------------- ---------------------- ----------------------
BALANCE % BALANCE % BALANCE % BALANCE %
----------- ------- ----------- ------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Fidelity's regulatory capital... $ 227,800 6.91% $ 228,100 6.92% $ 228,100 11.16% $ 254,000 12.43%
Well capitalized requirement.... 98,900 3.00% 164,900 5.00% 122,600 6.00% 204,400 10.00%
---------- ----- ---------- ----- ---------- ------ ---------- ------
Excess capital.................. 128,900 3.91% $ 63,200 1.92% $ 105,500 5.16% $ 49,600 2.43%
========== ===== ========== ===== ========== ====== ========== ======
Adjusted assets (1)............. $3,297,500 $3,297,900 $2,044,100 $2,044,100
========== ========== ========== ==========
- ---------------
(1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital
requirements.
The Bank was notified by the OTS West Regional Office in April 1995 that
certain computer software implementation or enhancement related costs
capitalized in accordance with GAAP are required to be immediately expensed in
the Bank's TFR and deducted from regulatory capital, as required in the
instructions to the TFR and by OTS policy. In June 1995 the Bank filed an
appeal with the OTS Director of Supervision requesting that the directive to
immediately expense software costs be rescinded and that the Bank be permitted
to capitalize the costs in question in accordance with its existing practice.
Alternatively, the Bank
83
requested that the OTS address the issue of whether software costs should be
expensed or capitalized through the notice and comment rulemaking process. In
February 1996 the Bank was orally advised that the appeal was denied. As of
December 31, 1995, the full amount in question, approximately $4.3 million, was
reserved.
The proposed changes discussed in Item 1. "Business--Regulation and
Supervision--Deposit Insurance." would also have an impact on the Bank's capital
ratios. As of December 31, 1995, after giving effect to the payment and
deduction of an 80 basis point SAIF deposit assessment, the Bank's core and
risk-based capital ratios would have been approximately 6.29% and 11.35%,
respectively, and the Bank would have remained well-capitalized under the PCA
Regulations.
FDICIA also required the OTS and the federal bank regulatory agencies to
revise their risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk, and risks
of nontraditional activities. Effective January 1, 1994, the OTS incorporated an
interest rate risk component into its regulatory capital rule. Under the revised
rule, savings institutions with "above-normal" interest rate risk exposure would
be subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. An institution's interest rate risk is measured
by the decline in the net present value ("NPV") of its assets that would result
from a hypothetical 200-basis point increase or decrease in market interest
rates divided by the estimated economic value of a bank's assets, as calculated
in accordance with guidelines set forth by the OTS. An institution whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of a bank's assets. That dollar
amount would be deducted from a bank's total capital in calculating compliance
with its risk-based capital requirement. Under the rule, there is a lag between
the reporting date of an institution's financial data and the effective date for
the new capital requirement based on that data. However, the OTS has temporarily
postponed the implementation of the new rule until the OTS has collected
sufficient data to determine whether the rule is effective in monitoring and
managing interest rate risk. No interest rate risk component would have been
required to be added to the Bank's risk-based capital requirement at December
31, 1995 had the rule been in effect at that time. Effective in January 1995,
the OTS amended the risk-based capital standards by explicitly identifying
concentration of credit risk and the risks arising from nontraditional
activities, as well as an institution's ability to manage those risks, as
important factors to be taken into account by the agency in assessing an
institution's overall capital adequacy.
The Bank is also subject to OTS capital regulations under FIRREA. These
regulations require Fidelity to maintain: (a) tangible capital of at least 1.5%
of adjusted total assets (as defined in the regulations), (b) core capital of at
least 3% of adjusted total assets (as defined in the regulations) and (c) total
capital of at least 8.0% of risk-weighted assets (as defined in the
regulations).
84
The following table summarizes the regulatory capital requirements under
FIRREA for the Bank at December 31, 1995. As indicated in the table, the Bank's
capital levels at December 31, 1995 exceeded all three of the currently
applicable minimum FIRREA capital requirements.
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
---------------------- ---------------------------- --------------------------
BALANCE % BALANCE % BALANCE %
------------ ------- ------------ ------------- ------------ -----------
(DOLLARS IN THOUSANDS)
Stockholders' equity (1)........ $ 229,000 $ 229,000 $ 229,000
Unrealized loss on securities... (800) (800) (800)
Adjustments:
Intangible assets.............. (300) -- --
Nonincludable subsidiaries..... (100) (100) (100)
GVA............................ -- -- 25,900
---------- ---------- ----------
Regulatory capital (2).......... 227,800 6.91% 228,100 6.92% 254,000 12.43%
Required minimum................ 49,500 1.50 98,900 3.00 163,500 8.00
---------- ------ ---------- ------------ ---------- ----------
Excess capital.................. $ 178,300 5.41% $ 129,200 3.92% $ 90,500 4.43%
========== ====== ========== ============ ========== ==========
Adjusted assets (3)............. $3,297,500 $3,297,900 $2,044,100
========== ========== ==========
- ---------------
(1) Fidelity's total stockholders' equity, in accordance with GAAP, was 6.94% of
its total assets at December 31, 1995.
(2) Both the OTS and the FDIC may examine the Bank as part of their legally
prescribed oversight of the industry. Based on their examinations, the
regulators can direct that the Bank's financial statements be adjusted in
accordance with their findings.
(3) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. section 567.1 (bb) for purposes of risk-based capital
requirements.
CAPITAL RESOURCES AND LIQUIDITY
Sales and Securitization of Loans:
During the first and second quarters of 1995, the Bank securitized $46.4
million and $66.4 million, respectively, of single family adjustable rate
mortgages through a swap of whole loans for MBS. See "--Sales of Securities"
below. Proceeds generated from sales of loans held for sale totaled $1.3 million
during the year ended December 31, 1995 compared to $280.5 million during the
same period in 1994. Loan sales and securitizations in both periods were
completed for the purpose of downsizing the Bank's assets to maintain regulatory
capital ratios. Net proceeds from loan sales and Bulk Sales totaled $621.4
million in the year ended December 31, 1994 compared to $138.4 million during
1993. The increase of $483.0 million in loan sales proceeds was primarily
related to the Bank's efforts to reduce assets for capital planning purposes and
as a consequence of the Bulk Sales. During the third and fourth quarters of 1994
the Bank sold performing and nonperforming loans in the Bulk Sales with a gross
book value of $341.4 million. Sales of loans are dependent upon various factors,
including volume of loans originated, interest rate movements, investor demand
for loan products, deposit flows, the availability and attractiveness of other
sources of funds, loan demand by borrowers, desired asset size and evolving
capital and liquidity requirements. Due to the volatility and unpredictability
of these factors, the volume of Fidelity's sales of loans has fluctuated
significantly and no estimate of future sales can be made at this time. At
December 31, 1995, the Bank had no loans held for sale, compared to $48.3
million at December 31, 1994. Sales of loans, if any, from the held for
investment portfolio would be caused by unusual events.
FHLB Advances:
The Bank had net repayments of FHLB advances of $40.0 million for the year
ended December 31, 1995. This compares to net advances of $6.3 million for the
year ended December 31, 1994.
85
Commercial Paper:
During 1995, the Bank increased its commercial paper line of credit to $500
million, an increase of $100 million from December 31, 1994. Commercial paper
outstanding was reduced by $350 million for the year ended December 31, 1995.
Commercial paper provided $96.0 million of net funds for the year ended December
31, 1994.
Loan Payments and Payoffs:
Loan principal payments, including prepayments and payoffs, provided $194.1
million and $240.4 million for the years ended December 31, 1995 and 1994,
respectively. The Bank expects that loan payments and prepayments will remain a
significant funding source.
Sales of Securities:
The sale of investment securities and MBS provided $264.4 million and $156.1
million for the years ended December 31, 1995 and 1994, respectively. The Bank
held $126.4 million and $70.2 million of investment securities and MBS in its
available for sale portfolio as of December 31, 1995 and 1994, respectively.
The reduction in the investment securities and MBS available for sale portfolio
was a result of the Bank's regulatory capital management.
Sale of Common and Preferred Stock:
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity through the sale of 2,070,000 shares of Series A Preferred Stock and
11,750,000 shares of Class A Common Stock. In August 1994, the Bank received
$109 million in net new equity from the issuance and sale of common stock in
connection with the 1994 Restructuring and Recapitalization.
Undrawn Sources:
Fidelity maintains other sources of liquidity to draw upon, which at December
31, 1995 include (a) unused commercial paper facility capacity of $450 million,
(b) a line of credit with the FHLB with $42.1 million available (assuming all of
the $500 million commercial paper capacity is used), (c) $84.4 million in
unpledged securities available to be placed in reverse repurchase agreements or
sold and (d) $846.2 million of unpledged loans, some of which would be available
to collateralize additional FHLB or private borrowings, or be securitized.
86
Deposits:
At December 31, 1995, the Bank had deposits of $2.6 billion, down from the
December 31, 1994 balance of $2.7 billion. This reduction in 1995 was also, in
part, a result of the Bank's reduction in total assets and, in part, the result
of depositors' withdrawal of funds. The following table presents the
distribution of the Bank's deposit accounts at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- -----------------------
(DOLLARS IN THOUSANDS)
Money market accounts................... $ 93,901 3.6 % $135,595 5.0 %
Checking accounts....................... 309,065 11.8 326,411 12.1
Passbook accounts....................... 62,934 2.4 70,564 2.6
---------- ------ ---------- ------
Total transaction accounts......... 465,900 17.8 532,570 19.7
---------- ------ ---------- ------
Certificates of deposit $100,000 and
over................................... 528,320 20.3 434,637 16.1
Certificates of deposit less than
$100,000............................... 1,606,649 61.9 1,729,966 64.2
---------- ------ ---------- ------
Total certificates of deposit...... 2,134,969 82.2 2,164,603 80.3
---------- ------ ---------- ------
Brokered funds.......................... -- -- 99 --
---------- ------ ---------- ------
Total deposits..................... $2,600,869 100.0 % $2,697,272 100.0 %
========== ====== ========== ======
The Bank accepted brokered deposits pursuant to a waiver obtained from the
FDIC, which waiver expired in October 1994. The Bank is currently eligible to
accept brokered deposits; however, there were no brokered deposits outstanding
at December 31, 1995.
Reverse Repurchase Agreements:
From time to time the Bank enters into reverse repurchase agreements by which
it sells securities with an agreement to repurchase the same securities at a
specific future date (overnight to 30 days). The Bank deals only with dealers
who are recognized as primary dealers in U.S. Treasury securities by the Federal
Reserve Board or perceived by management to be financially strong. There were no
reverse repurchase agreements outstanding at December 31, 1995 and 1994. In the
year ended December 31, 1995, the Bank borrowed and repaid funds from reverse
repurchase agreements of $46.5 million. During 1994, the Bank had net repayments
of reverse repurchase agreements of $3.8 million.
Loan Fundings:
Fidelity funded $19.1 million of gross loans (excluding Fidelity's
refinancings) in the year ended December 31, 1995 compared to $509.2 million in
the same period of 1994. The large decrease in loan fundings during 1995 is
attributable to the closing of the Bank's multifamily, wholesale and
correspondent lending operations in the fourth quarter of 1994.
Contingent or Potential Uses of Funds:
The Bank had no unfunded loans at December 31, 1995, compared to $2.8 million
at December 31, 1994.
Liquidity:
The OTS regulations require the maintenance of an average daily balance of
liquid assets of at least 5% of the average daily balance of the net
withdrawable accounts and short term borrowings (the "regulatory liquidity
ratio"). The Bank's monthly average regulatory liquidity ratio was 6.85% and
5.48% for December 1995 and December 1994, respectively.
87
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT............................................. F-2
CONSOLIDATE FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition......................... F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Fidelity Federal Bank, a Federal Savings Bank
Los Angeles, California
We have audited the consolidated statements of financial condition of Fidelity
Federal Bank, a Federal Savings Bank and subsidiaries (the "Bank") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Fidelity Federal Bank,
a Federal Savings Bank and subsidiaries at December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 9, 1996
F-2
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
ASSETS:
Cash and cash equivalents.............. $ 94,444 $ 74,065
Investment securities available for
sale, at fair value................... 94,655 24,158
Investment securities held to
maturity, at amortized cost
(market value of $128,437 at December
31, 1994)............................ -- 125,233
Mortgage-backed securities available
for sale, at fair value............... 31,733 46,028
Loans held for sale, at lower of cost
or market............................. -- 48,315
Loans receivable, net of allowances of
$89,435 and $67,202 at December 31,
1995 and 1994, respectively........... 2,935,116 3,239,988
Interest receivable.................... 20,162 20,256
Investment in FHLB stock............... 49,425 47,017
Real estate owned, net................. 19,521 14,115
Premises and equipment, net............ 34,333 50,039
Other assets........................... 20,055 20,624
---------- ----------
$3,299,444 $3,709,838
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits.............................. $2,600,869 $2,697,272
FHLB advances......................... 292,700 332,700
Commercial paper...................... 50,000 400,000
Mortgage-backed notes................. 100,000 100,000
Other liabilities..................... 26,832 23,319
---------- ----------
3,070,401 3,553,291
---------- ----------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, no par value;
10,000,000 shares authorized;
2,070,000 shares outstanding;
liquidation preference $25 per share. 51,750 --
Common stock:
Class A Common stock, par value
$.01 per share; 78,500,000 shares
authorized; 18,242,465 and
4,965,119 shares outstanding at
December 31, 1995 and December 31,
1994, respectively................. 182 50
Class B Common stock, par value $.01
per share; no shares authorized
or outstanding at December 31,
1995, 14,000,000 shares
authorized, and 1,050,561 shares
outstanding at December 31, 1994.. -- 11
Class C Common stock, par value
$.01 per share; 3,000,000 shares
authorized, no shares outstanding
at December 31, 1995 and 476,786
shares outstanding at December 31,
1994... -- 5
Paid-in capital....................... 262,151 179,625
Unrealized gains (losses) on
securities........................... 788 (3,482)
Minimum pension liability adjustment.. -- (2,813)
Accumulated deficit................... (85,828) (16,849)
---------- ----------
229,043 156,547
---------- ----------
$3,299,444 $3,709,838
========== ==========
See notes to consolidated financial statements.
F-3
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------- ------------
INTEREST INCOME:
Loans................................. $ 227,710 $ 226,949 $ 269,712
Mortgage-backed securities............ 3,535 2,868 11,051
Investment securities and other....... 15,232 11,648 8,568
---------- ---------- ----------
Total interest income.............. 246,477 241,465 289,331
---------- ---------- ----------
INTEREST EXPENSE:
Deposits.............................. 128,242 108,310 131,721
FHLB advances......................... 17,411 17,663 17,077
Other borrowings...................... 29,183 25,526 32,323
Subordinated notes.................... -- 4,329 7,373
---------- ---------- ----------
Total interest expense............. 174,836 155,828 188,494
---------- ---------- ----------
NET INTEREST INCOME..................... 71,641 85,637 100,837
Provision for estimated loan losses... 69,724 65,559 65,100
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES................. 1,917 20,078 35,737
---------- ---------- ----------
NONINTEREST INCOME (EXPENSE):
Loan fee income....................... 3,606 4,518 4,942
Gains (losses) on loans sales, net.... 522 (3,963) 194
Fee income from sale of uninsured
investment products.................. 4,117 3,419 --
Fee income on deposits and other
income............................... 3,260 4,522 3,718
Gains on securities activities, net... 4,098 1,130 1,304
Gains on sales of servicing........... 4,604 -- --
---------- ---------- ----------
20,207 9,626 10,158
---------- ---------- ----------
Provision for estimated real estate
losses............................... (3,366) (8,768) (30,200)
Direct costs of real estate (5,779) (8,651) (18,643)
operations, net...................... ---------- ---------- ----------
(9,145) (17,419) (48,843)
---------- ---------- ----------
Total noninterest income (expense). 11,062 (7,793) (38,685)
---------- ---------- ----------
OPERATING EXPENSE:
Personnel and benefits................ 34,859 44,368 44,266
Occupancy............................. 12,337 13,707 13,086
FDIC insurance........................ 8,205 9,340 8,628
Professional services................. 10,601 10,208 11,351
Office-related expenses............... 4,611 6,647 6,449
Capitalized software charge........... 4,297 -- --
Goodwill impairment charge............ -- -- 8,776
Other................................. 7,044 7,589 6,176
---------- ---------- ----------
81,954 91,859 98,732
1994 Restructuring and
Recapitalization charges, net........ -- 65,394 --
---------- ---------- ----------
Total operating expense............ 81,954 157,253 98,732
---------- ---------- ----------
LOSS BEFORE INCOME TAXES................ (68,975) (144,968) (101,680)
Income tax expense (benefit).......... 4 (16,524) (35,793)
---------- ---------- ----------
NET LOSS................................ $ (68,979) $ (128,444) $ (65,887)
========== ========== ==========
NET LOSS PER COMMON SHARE............... $ (8.84) $ (39.08) $ (62.72)
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................ 7,807,201 3,286,960 1,050,561
========== ========== ==========
See notes to consolidated financial statements.
F-4
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
CLASS A CLASS B CLASS C
PREFERRED STOCK COMMON STOCK (1) COMMON STOCK (1) COMMON STOCK
--------------------- --------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ----------- ------- ---------- ------- ---------- -------
Balance, January 1, 1993(1).. -- $ -- 1 $ -- -- $ -- -- $ --
Capital contribution from
Citadel..................... -- -- -- -- -- -- -- --
Net loss for 1993............ -- -- -- -- -- -- -- --
--------- --------- ------------ ------ --------- ------ --------- ------
Balance, December 31, 1993... -- -- 1 -- -- -- -- --
Issuance of Class A and B
common stock(1)............. -- -- 19,860,473 199 4,202,243 42 -- --
Issuance of Class C common
stock....................... -- -- -- -- -- -- 1,907,143 19
Unrealized loss on securities
available for sale.......... -- -- -- -- -- -- -- --
Minimum pension liability
adjustment.................. -- -- -- -- -- -- -- --
Net loss for 1994............ -- -- -- -- -- -- -- --
--------- --------- ------------ ------ --------- ------ --------- ------
Balance, December 31, 1994... -- -- 19,860,474 199 4,202,243 42 1,907,143 19
Reclass Class B Stock to
Class A Stock............... -- -- 4,202,243 42 (4,202,243) (42) -- --
Reclass Class C Stock to
Class A Stock............... -- -- 1,907,143 19 -- -- (1,907,143) (19)
Issuance of Preferred
Stock(2).................... 2,070,000 51,750 -- -- -- -- -- --
Issuance of Class A Stock(2). 47,000,000 470 -- -- -- --
Unrealized gain on securities
available for sale.......... -- -- -- -- -- -- -- --
Minimum pension liability
adjustment.................. -- -- -- -- -- -- -- --
Effect of one-for-four
Reverse Stock Split(3)...... -- -- (54,727,395) (548) -- -- -- --
Net loss for 1995............ -- -- -- -- -- -- -- --
--------- --------- ------------ ------ --------- ------ --------- ------
Balance, December 31,1995.... 2,070,000 $ 51,750 18,242,465 $ 182 -- $ -- -- $ --
========= ========= ============ ====== ========= ====== ========= ======
UNREALIZED MINIMUM RETAINED TOTAL
GAIN PENSION EARNING/ STOCK-
PAID IN (LOSS) ON LIABILITY (ACCUMULATED HOLDERS'
CAPITAL SECURITIES ADJUSTMENT DEFICIT) EQUITY
---------- ----------- ---------- ------------ ----------
Balance, January 1, 1993(1).. $ 42,689 $ $ $ 177,482 $ 220,171
Capital contribution from
Citadel..................... 28,000 -- -- -- 28,000
Net loss for 1993............ -- -- -- (65,887) (65,887)
-------- ---------- ---------- ---------- ----------
Balance, December 31, 1993... 70,689 -- -- 111,595 182,284
Issuance of Class A and B
common stock (1)............ 99,211 -- -- -- 99,452
Issuance of Class C common
stock....................... 9,531 -- -- -- 9,550
Unrealized loss on securities
available for sale.......... -- (3,482) -- -- (3,482)
Minimum pension liability
adjustment.................. -- -- (2,813) -- (2,813)
Net loss for 1994............ -- -- -- (128,444) (128,444)
-------- ---------- ---------- ---------- ----------
Balance, December 31, 1994... 179,431 (3,482) (2,813) (16,849) 156,547
Reclass Class B Stock to
Class A Stock............... -- -- -- -- --
Reclass Class C Stock to
Class A Stock............... -- -- -- -- --
Issuance of Preferred
Stock(2).................... -- -- -- -- 51,750
Issuance of Class A Stock(2). 82,172 -- -- -- 82,642
Unrealized gain on securities
available for sale.......... -- 4,270 -- -- 4,270
Minimum pension liability
adjustment.................. -- -- 2,813 -- 2,813
Effect of one-for-four
Reverse Stock Split(3)...... 548 -- -- -- --
Net loss for 1995............ -- -- -- (68,979) (68,979)
-------- ---------- ---------- ---------- ----------
Balance, December 31,1995.... $262,151 $ 788 $ -- $ (85,828) $ 229,043
======== ========== ========== ========== ==========
(1) The one share of common stock owned by Citadel Holding Corporation
("Citadel") prior to August 4, 1994 is included in Class A common stock
for purposes of this statement until it was converted to 1,050,000
shares of Class B common stock on August 4, 1994.
(2) During 1995, Fidelity issued and sold to investors in a public offering
2,070,000 shares of preferred stock for $51.8 million and 11,750,000
shares of Class A Common Stock for $82.7 million.
(3) Common Stock share data has been retroactively adjusted for the one-
for-four reverse stock split approved by stockholders on February 9,
1996.
See notes to consolidated financial statements.
F-5
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $ (68,979) $ (128,444) $ (65,887)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provisions for estimated loan and real estate losses................. 73,090 74,327 95,300
Provisions for capitalized software charge........................... 4,297 -- --
Provisions for bulk sale losses...................................... -- 56,296 --
Gain on sale of branches............................................. -- (5,048) --
Capitalized loan origination costs................................... (58) (411) (2,187)
Gains (losses) on sale of loans and securities....................... (4,620) 2,833 (1,498)
FHLB stock dividends................................................. (2,438) (2,376) (1,640)
Depreciation and amortization........................................ 5,587 6,561 23,085
Amortization of deferred loan items, net............................. (2,790) (2,616) (1,163)
Investment securities held for sale, lower of cost or market
adjustment......................................................... -- -- 2,074
Deferred income tax (benefit) expense................................ -- (14,789) 15,526
Purchases of investment securities held for trading................... -- -- (248,272)
Proceeds from sales of securities held for trading.................... -- -- 248,248
Purchases of mortgage-backed securities ("MBS") held for trading...... -- -- (51,248)
Proceeds from sales of MBS held for trading........................... -- -- 51,277
Originations of loans held for sale................................... -- (105,867) (162,868)
Purchases of loans held for sale...................................... -- (91,534) --
Proceeds from sales of loans held for sale............................ 1,290 280,486 138,399
Interest receivable decrease.......................................... 94 2,793 4,083
Other assets (increase) decrease...................................... (1,092) 44,187 (50,564)
Interest payable increase (decrease).................................. 8,017 (6,970) (5,102)
Other liabilities and deferred income (decrease) increase............. (400) 1,304 (15,245)
------------ ------------- ------------
Net cash provided by (used in) operating activities............... 11,998 110,732 (27,682)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale................. (45,919) (43,972) (420,921)
Maturities of investment securities available for sale................ 22,286 2,686 260,816
Proceeds from sales of investment securities available for sale....... 102,061 18,988 76,674
Purchase of investment securities held to maturity.................... (25,001) (34,083) (200,055)
Maturities of investment securities held to maturity.................. 10,000 -- 226,617
Proceeds from sales of investment securities held to maturity......... -- -- 26,908
Purchases of MBS available for sale................................... (27,858) (61,780) (395,561)
Principal repayments of MBS available for sale........................ 7,952 12,954 68,430
Proceeds from sales of MBS available for sale.......................... 162,365 137,102 470,818
Purchase of MBS held to maturity...................................... (16,234) -- --
Principal repayments of MBS held to maturity.......................... 3,408 -- --
Proceeds from bulk sales, net......................................... -- 340,963 --
Purchases of loans for investment..................................... -- -- (3,951)
Loans receivable, net decrease (increase)............................. 131,608 (56,815) 153,229
Redemption of FHLB stock.............................................. -- 7,310 --
Redemption of FRB stock............................................... -- 200 --
(Continued on following page)
F-6
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Year ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES: (CONTINUED)
Proceeds from sales of real estate, net.................................... $ 34,063 $ 18,300 $ 41,608
Purchase of Gateway Investment Services, net of cash acquired.............. -- 523 --
Premises and equipment dispositions (additions), net....................... 1,661 (3,024) (6,933)
Other, net................................................................. -- -- (45)
------------ ------------- ------------
Net cash provided by investing activities.............................. 360,392 339,352 297,634
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net decrease......................... (66,670) (197,040) (113,311)
Certificate accounts, net (decrease) increase.............................. (29,733) (138,205) 22,327
Payment for deposits included in branch sale, net.......................... -- (331,099) --
Proceeds from FHLB advances................................................ 80,000 570,000 250,000
Repayments of FHLB advances................................................ (120,000) (563,700) (505,000)
Repayment of subordinated notes............................................ -- (60,000) --
Short-term borrowing (decrease) increase................................... (350,000) 92,170 242,830
Proceeds from issuance of capital stock, net............................... 134,392 109,002 --
Repayments of long-term borrowings......................................... -- -- (162,000)
Capital contributions...................................................... -- -- 28,000
------------ ------------- ------------
Net cash used in financing activities.................................. (352,011) (518,872) (237,154)
------------ ------------- ------------
Net (decrease) increase in cash activities........................... 20,379 (68,788) 32,798
Cash and cash equivalents at beginning of period....................... 74,065 142,853 110,055
------------ ------------- ------------
Cash and cash equivalents at end of the period......................... $ 94,444 $ 74,065 $ 142,853
============ ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest on deposits, advances and other borrowings...................... $ 166,239 $ 164,412 $ 180,861
Income taxes............................................................. (5,837) (40,927) (754)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to real estate acquired through foreclosure...................... 51,872 74,214 193,641
Loans originated to finance sale of real estate owned...................... 9,037 13,151 51,607
Loans originated to finance bulk sale of real estate owned to Citadel...... 5,339 13,930 --
Transfers from held to maturity portfolio to available for sale portfolio:
Loans receivable......................................................... 68,995 85,301 325,222
Investment securities.................................................... 141,678 -- 14,264
MBS...................................................................... 16,404 -- 214,310
Transfers from available for sale portfolio to held to maturity portfolio:
Loans receivable......................................................... -- 246,885 --
Investment securities.................................................... -- 96,942 --
MBS...................................................................... 3,603 -- --
Mortgage loans exchanged for MBS........................................... 112,840 44,453 --
In-substance foreclosures transferred to loans, net........................ -- 28,362 --
See notes to consolidated financial statements.
F-7
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Fidelity Federal
Bank, a Federal Savings Bank and its subsidiaries (the "Bank" or "Fidelity").
The Bank offers a broad range of consumer financial services, including demand
and term deposits, and loans to consumers, through 33 full-service branches, all
of which are located in Southern California, principally in Los Angeles and
Orange counties. All significant intercompany transactions and balances have
been eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1995 presentation.
In the fourth quarter of 1995, Fidelity completed a plan of recapitalization
(the "1995 Recapitalization") of the Bank, pursuant to which Fidelity raised
approximately $134.4 million in net new equity through the sale of 2,070,000
shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock, Series A
("Series A Preferred Stock"), and 47,000,000 shares of Class A Common Stock. As
part of the 1995 Recapitalization, Fidelity adopted the accelerated asset
resolution plan (the "Accelerated Asset Resolution Plan") which is designed to
aggressively dispose of, resolve or otherwise manage a pool of primarily
multifamily mortgage loans and real estate owned ("REO"). As a result, the Bank
recorded a $45.0 million loan portfolio charge which represents the estimated
additional losses expected to be incurred and was recorded in the allowance for
estimated loan losses.
On February 9, 1996, the Bank's stockholders approved a one-for-four reverse
stock split (the "Reverse Stock Split") of the issued and outstanding shares of
the Bank's Class A Common Stock. Upon effectiveness of the Reverse Stock Split,
each stockholder became the owner of one share of Common Stock for each four
shares of Common Stock held at the time of the Reverse Stock Split and became
entitled to receive cash in lieu of any fractional shares. All per share data
and weighted average common shares outstanding have been retroactively adjusted
to reflect the Reverse Stock Split.
On August 4, 1994, Fidelity and its former sole stockholder, Citadel Holding
Corporation ("Citadel"), completed major aspects of a plan of restructuring and
recapitalization (the "1994 Restructuring and Recapitalization"), pursuant to
which Fidelity raised approximately $109 million in net new equity, and
Citadel's ownership interest in Fidelity was reduced to 16.2% of the then
outstanding common stock. Citadel's ownership interest was reclassified into
4,202,243 shares of Class B Common Stock. All share and per share amounts have
been restated to retroactively reflect the reclassification of Citadel's
ownership interest in Fidelity.
In April 1995, Citadel transferred an aggregate of 4,195,000 shares of its
Class B Common Stock to various third parties, retaining 7,243 shares. As a
result of these transfers, all of the outstanding Class B Common Stock was
reclassified into Class A Common Stock in accordance with the stockholders'
agreement entered into as a part of the 1994 Restructuring and Recapitalization.
Unless the context otherwise requires, financial presentations reflect the
current outstanding common stock ownership of Fidelity.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods. There were no federal
F-8
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
funds outstanding at December 31, 1995 and December 31, 1994. Fidelity is
required by the Federal Reserve System to maintain noninterest-earning cash
reserves based upon the outstanding balances in certain of its transaction
accounts. At December 31, 1995, the required reserves, including vault cash,
totaled $15.4 million.
Investment Securities and Mortgage-backed Securities
The Bank's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. The Bank adopted Statement of
Financial Accounting Standard No. 115 ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" at January 1, 1994. In accordance
with SFAS No. 115, the Bank classifies its investment in securities as held to
maturity securities, trading securities and available for sale securities as
applicable. The Bank did not hold any trading securities at December 31, 1995
or 1994.
Prior to January 1, 1994, any securities held for investment were those
securities which the Bank had the intent and ability to hold until maturity, and
were carried on the amortized cost basis. Securities to be held for indefinite
periods of time, including securities that management intended to use as part of
its asset/liability strategy, or that may have been sold in response to changes
in interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar factors, were classified as held for sale (shown as
"available for sale" on the statement of financial condition for comparability
purposes) and were carried at the lower of cost or market value. Any investment
securities held for trading were carried at market value.
Loans
On January 1, 1994, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." This statement
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings ("TDRs"). SFAS No. 114 states that a loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest amounts due according to the contracted terms of the loan
agreement. A creditor is required to measure impairment by discounting expected
future cash flows at the loan's effective interest rate, or by reference to an
observable market price, or by determining the fair value of the collateral for
a collateral dependent asset. Regardless of the measurement method, a creditor
shall measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. The statement also clarifies
the existing accounting for in-substance foreclosures ("ISFs") by stating that a
collateral dependent real estate loan would be reported as REO only if the
lender had taken possession of the collateral. On December 29, 1994, the Office
of Thrift Supervision (the "OTS") published RB 32 "Valuation and Classification
of Troubled, Collateral - Dependent Loans" which revised OTS policy to require
valuation of troubled, collateral-dependent loans based only on the fair value
of the collateral where, based on current information and events, it is probable
that the lender will be unable to collect all amounts due (both principal and
interest), with selling cost adjustments for loans which are probable
foreclosures. RB 32 was effective March 31, 1995.
F-9
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Interest on loans, including impaired loans, is credited to income as earned
and is accrued only if deemed collectible, using the interest method. Unpaid
interest income is reversed when a loan becomes over 90 days contractually
delinquent and on other loans, if management determines it is warranted, prior
to being 90 days delinquent. While a loan is on nonaccrual status, interest is
recognized only as cash is received. Discounts and premiums on purchased loans
are classified with loans receivable on the statement of financial condition and
are credited or charged to operations over the estimated life of the related
loans using the interest method. The Bank charges fees for originating loans.
Loan origination fees, net of certain direct costs of originating the loan, are
recognized as an adjustment of the loan yield over the estimated life of the
loan by the interest method. When a loan is sold, unamortized net loan
origination fees and direct costs are recognized in earnings with the related
gain or loss on sale. Other loan fees and charges representing service costs for
the prepayment of loans, for delinquent payments or for miscellaneous loan
services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
The Bank may designate certain of its loans receivable as being held for sale.
In determining the level of loans held for sale, the Bank considers whether
loans (a) would be sold as part of its asset/liability strategy, or (b) may be
sold in response to changes in interest rates, changes in prepayment risk, the
need to increase regulatory capital or other similar factors. Loans held for
sale are carried at the lower of aggregate cost or market value. The market
value calculation includes consideration of commitments and related fees.
Adjustments to the lower of cost or market are charged to current operations and
are included in net gains/losses on loan sales in the statement of operations.
In the normal course of business, Fidelity has sold loans, without
relinquishing the right to service such loans, which has generated a stream of
loan servicing revenue and cash for lending or liquidity. Sales of loans are
dependent upon various factors, including interest rate movements, investor
demand for loan products, deposit flows, the availability and attractiveness of
other sources of funds, loan demand by borrowers and liquidity and capital
requirements. Due to the volatility and unpredictability of these factors, the
volume of Fidelity's sales of loans has fluctuated. The Bank sells loans
primarily from its held for sale portfolio. However, the Bank may sell certain
individual nonperforming or problem loans in an effort to maintain a lower level
of NPAs. The Bank believes that it has the intent and ability to hold all of
its loans, other than those designated as held for sale, until maturity. From
time to time, Fidelity may consider selling all or a portion of its rights to
service loans. Additionally, the Bank may from time to time consider purchasing
others' rights to service loans.
As of January 1, 1995, the Bank adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends certain provisions of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to require recognition of
the rights to service mortgage loans for others as separate assets, however
those rights are acquired, eliminating the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. SFAS No. 122 also
requires that capitalized mortgage servicing assets be assessed for impairment
based on the fair value of those rights. As a consequence of the adoption of
SFAS No. 122, gains on sales of loans for the year ended December 31 , 1995
increased by $0.7 million and the Bank's loss per share decreased by $0.08.
F-10
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Real Estate Owned
Real estate held for sale acquired in settlement of loans generally results
when property collateralizing a loan is foreclosed upon or otherwise acquired by
the Bank in satisfaction of the loan. Real estate acquired through foreclosure
is recorded at the lower of fair value or the recorded investment in the loan
satisfied at the date of foreclosure. Fair value is based on the net amount that
the Bank could reasonably expect to receive for the asset in a current sale
between a willing buyer and a willing seller, that is, other than in a forced or
liquidation sale. Inherent in the computation of estimated fair value are
assumptions about the length of time the Bank may have to hold the property
before disposition. The holding costs through the expected date of sale and
estimated disposition costs are included in the valuations. Adjustments to the
carrying value of the assets are made through valuation allowances and charge-
offs, recognized through a charge to operations.
Allowances for Estimated Losses on Loans and Real Estate Owned
The allowances for estimated losses on loans and REO represents the Bank's
estimate of identified and unidentified losses in the Bank's portfolios. These
estimates, while based upon historical loss experience and other relevant data,
are ultimately subjective and inherently uncertain. The Bank has established
valuation allowances for estimated losses on specific loans and REO ("specific
valuation allowances") and for the inherent risk in the loan and REO portfolios
which has yet to be specifically identified ("general valuation allowances" or
"GVA"). Additions to the GVA, in the form of provisions, are reflected in
current operations. Specific valuation allowances are allocated from the GVA
when, in the Bank's judgment, a loan is impaired or REO has declined in value
and the loss is probable and estimable. When these estimated losses are
determined to be permanent, such as when a loan is foreclosed and the related
property is transferred to REO, specific valuation allowances are charged off.
The Bank's internal asset review process reviews the quality and
recoverability of each of those assets which exhibit credit risk to the Bank
based on delinquency and other criteria in order to establish adequate specific
valuation allowances and general valuation allowances. The Bank utilizes the
delinquency migration method, along with a variety of other methodologies in
determining the adequacy of its GVA. The delinquency migration method attempts
to capture potential future losses as of a particular date associated with a
given portfolio of loans, based on the Bank's own historical delinquency
migration and loss experience over a given period of time. The Bank calculates
an estimated range of possible loss by applying these methodologies and then
applies judgment and knowledge of particular credits, economic trends, industry
experience and other relevant factors to estimate the appropriate level for the
GVA.
Depreciation and Amortization
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the lives of the respective leases or the useful
lives of the improvements, whichever is shorter.
F-11
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Supplementary Loss/Earnings per Share Data
Assuming, after giving effect to the one-for-four Reverse Stock Split, that
(a) 11,750,000 shares of Class A common stock were issued at the beginning of
1995 and 17,191,904 shares of Class A common stock were issued at the beginning
of each respective period and (b) Citadel's previously existing share of common
stock was reclassified into 1,050,561 shares of Class A common stock at the
beginning of each respective period, the net loss per share would have been
$3.78, $7.04 and $3.61 for 1995, 1994 and 1993, respectively.
Income Taxes
Through August 4, 1994, the 1994 Restructuring and Recapitalization date, the
Bank filed a consolidated federal income tax return and a combined California
franchise tax return with its former parent company, Citadel. Fidelity and its
subsidiaries filed a consolidated federal income tax return and a combined
California franchise tax return with the Bank as the common parent corporation
for the period of August 5, 1994 through December 31, 1994, and will file
accordingly for subsequent calendar years.
Income taxes are provided for under SFAS No. 109, "Accounting for Income
Taxes." This accounting standard requires, subject to limitations, that
deferred tax assets or liabilities shown on the balance sheet be adjusted to
reflect the tax effects of differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements.
Financial Instruments
The Bank utilizes various financial instruments in the normal course of its
business. By their nature all such instruments involve risk, and the maximum
potential loss may exceed the value at which such instruments are carried. As is
customary for these types of instruments, the Bank is required to pledge
collateral or other security to other parties to these instruments. The Bank
controls its credit exposure to counterparties through credit approvals, credit
limits and other monitoring procedures.
The Bank has employed interest rate swaps, caps and floors in the management
of interest rate risk. Additionally, the Bank may engage in certain option
activities as an integral part of the Bank's investment and asset/liability
strategies which involve the purchase and sale of options on U.S. Government
securities. Interest rate swaps generally involve the exchange of fixed or
floating interest payments without the exchange of the underlying principal
amounts. Interest rate caps and floors generally involve the payment of a one
time premium to a counterparty who, if interest rates rise or fall, above or
below a predetermined level, will make payments to the Bank at an agreed upon
rate for the term of the agreement until such time as interest rates fall below
or rise above the cap or floor level.
Option positions are carried at fair value. Realized and unrealized changes in
fair values are recognized in earnings in the period in which the changes occur.
For interest rate swaps, amounts receivable or payable under the swaps are
recognized as interest income or expense, depending upon the assets or
liabilities to which they are matched. Gains or losses on early terminations of
swaps are included in the carrying amount of the related asset or liability and
amortized as yield adjustments over the remaining terms of the asset or
F-12
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
liability. The premiums paid for interest rate floors are capitalized and
amortized over the life of the contracts using the straight line method.
The Bank adopted SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," on December 31, 1994. SFAS
No. 119 requires various disclosures regarding derivative activities which are
set forth in Note 3 to the consolidated financial statements.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. Financial instruments are defined as
cash, evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
Much of the information used to determine fair value is highly subjective.
When applicable, readily available market information has been utilized.
However, for a significant portion of the Bank's financial instruments, active
markets do not exist. Therefore, considerable judgment was required in
estimating fair value for certain items. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair values are estimated as of December 31, 1995 and 1994,
the amounts that will actually be realized or paid at settlement or maturity of
the instruments could be significantly different. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
The Bank maintains a stock option plan for the benefit of its executives. In
1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages companies to account for stock-based compensation awards at
their fair values at the date the awards are granted. This statement does not
require the application of the fair value method and allows the continuance of
the current accounting method, which requires accounting for stock-based
compensation awards at their intrinsic value, if any, as of the grant date.
F-13
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The accounting and disclosure requirements of this statement are effective for
financial statements at various dates beginning after December 15, 1995. The
Bank has elected not to adopt the fair value accounting provisions of this
statement.
The following table summarizes the Bank's investment securities and MBS
portfolios. Amortized cost amounts shown for securities included in the held to
maturity portfolio that were previously transferred from the available for sale
portfolio may include unamortized market value adjustments recorded at the time
of transfer.
Amortized Unrealized Aggregate
----------------------
Cost Gains Losses Fair Value
--------- --------- ---------- ----------
(Dollars in thousands)
DECEMBER 31, 1995
Available for Sale:
Investment securities:
U.S. Treasury and agency securities.... $ 84,200 $ 2,984 $ -- $ 87,184
Other investments (1).................. 7,449 52 (30) 7,471
--------- -------- ---------- ----------
91,649 3,036 (30) 94,655
--------- -------- ---------- ----------
MBS:
FHLMC.................................. 3,068 -- (30) 3,038
FNMA................................... 55 36 -- 91
Participation certificates............. 28,123 481 -- 28,604
--------- -------- ---------- ----------
31,246 517 (30) 31,733
--------- -------- ---------- ----------
Total available for sale............. $ 122,895 $ 3,553 $ (60) $ 126,388
========= ======== ========== ==========
DECEMBER 31, 1994
Available for Sale:
Investment securities:
U.S. Treasury and agency securities.... $ 24,177 $ -- $ (19) $ 24,158
MBS:
FHLMC.................................. 10,490 -- (220) 10,270
FNMA................................... 4,130 -- (79) 4,051
Participation certificates............. 32,635 -- (928) 31,707
--------- -------- ---------- ----------
47,255 -- (1,227) 46,028
--------- -------- ---------- ----------
Total available for sale............. $ 71,432 $ -- $ (1,246) $ 70,186
========= ======== ========== ==========
Held to maturity:
Investment securities:
U.S. Treasury and agency securities.... $ 116,313 $ 3,839 $ (152) $ 120,000
Other investments (1).................. 8,920 -- (483) 8,437
--------- -------- ---------- ----------
Total held to maturity............... $ 125,233 $ 3,839 $ (635) $ 128,437
========= ======== ========== ==========
- ------------
(1) Represents U.S. Treasury securities which have been pledged as credit
support to a securitization of loans by the Bank.
F-14
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
During the fourth quarter of 1994, the Bank reevaluated its investment
strategy and transferred $96.9 million of investment securities from its
available for sale portfolio to its held to maturity portfolio, at fair value.
Additionally, at the end of the first quarter of 1995, the Bank transferred $3.6
million of MBS from its available for sale portfolio to its held to maturity
portfolio, at fair value.
As a consequence of concerns regarding the Bank's ability to maintain minimum
regulatory capital levels to remain adequately capitalized, the Bank
reclassified all held to maturity investment securities and MBS to its available
for sale portfolio in the second quarter of 1995. Subsequent to their
reclassification, certain available for sale securities were sold. Under the
Bank's current operating plan, all securities will be classified as available
for sale for the foreseeable future. The Bank may be precluded from classifying
securities as held to maturity for a period of time.
The following table summarizes the weighted average yield of debt securities
as of the dates indicated:
December 31,
-----------------
1995 1994
------- -------
Investment securities:
Available for sale.... 4.70% 6.91%
Held to maturity...... -- 5.20
MBS available for sale... 6.85 5.62
The following table presents the Bank's securities at December 31, 1995 by
contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
Maturity
-----------------------------------------------------
Over 1 Over 5
Year Years
Within To To Over
1 Year 5 Years 10 Years 10 Years Total
-------- -------- -------- -------- ---------
(Dollars in thousands)
Available for Sale:
Investment Securities... $ 25,386 $ 69,269 $ -- $ -- $ 94,655
MBS..................... -- 91 -- 31,642 31,733
-------- -------- -------- -------- ---------
$ 25,386 $ 69,360 $ -- $ 31,642 $ 126,388
======== ======== ======== ======== =========
F-15
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
Net unrealized gains (losses) associated with the available for sale
securities which are included in stockholders' equity in the consolidated
statement of financial condition consist of the following:
December 31
-----------------
1995 1994
------- -------
(Dollars in thousands)
Net unrealized gains (losses),
debt securities.......................... $ 127 $(6,263)
Net unrealized gains, hedging activities... 661 1,162
Deferred income tax benefit................ -- 1,619
------- -------
Net unrealized gains (losses)........... $ 788 $(3,482)
======= =======
The following gains and losses were realized from the sale of investment
securities and MBS, the costs of which were computed on a specific
identification method, during the periods indicated:
Gross
-------------------------------
Sales Gains Losses
--------- ------- ---------
(Dollars in thousands)
Year ended December 31,
1995................. $ 264,426 $ 3,903 $ (566)
1994................. 156,090 260 (1,799)
1993................. 873,925 8,867 (5,489)
Gains on securities activities include $0.8 million and $2.1 million of gains
from trading options and futures during 1995 and 1994, respectively.
Additionally, in 1994 the Bank recorded a $0.6 million gain related to the lower
of cost or market valuation adjustment on certain securities previously recorded
in 1993.
At December 31, 1995 and 1994, interest receivable in the accompanying
statements of financial condition include accrued interest receivable on debt
securities of $1.0 million and $1.5 million, respectively.
F-16
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 3--FINANCIAL INSTRUMENTS
During 1995 and 1994, the Bank recognized net gains from options activities of
$0.8 million and $2.1 million, respectively. No comparable amounts were
recognized during 1993. The following table summarizes the Bank's option
positions.
December 31,
----------------------
1995 1994
---------- ---------
(Dollars in thousands)
Options:
Notional amount at year-end....... $ -- $ 223,500
Fair value at year-end............ -- 149
Average fair value for the year... 181 355
At December 31, 1994, the notional amount of interest rate swap and floor
contracts outstanding totaled $1.1 billion and $100 million, respectively. At
December 31, 1994, the average receive rate on interest rate swaps was 5.97% and
the average pay rate was 6.22%. During December 1995, the Bank terminated all
the interest rate contracts outstanding and as a result, a deferred loss of $3.2
million, which will be amortized over the original term of the underlying
contracts, was recorded. No interest rate contracts were outstanding as of
December 31, 1995.
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE
Total loans include loans receivable and loans held for sale and are
summarized as follows:
December 31,
-------------------------
1995 1994
----------- -----------
(Dollars in thousands)
Real estate loans:
Single family....................... $ 594,019 $ 755,253
Multifamily:
2 to 4 units....................... 345,884 393,943
5 to 36 units...................... 1,521,056 1,612,926
37 units and over.................. 329,916 345,287
----------- -----------
Total multifamily................ 2,196,856 2,352,156
----------- -----------
Commercial and industrial........... 234,389 248,255
Land................................ 3,027 2,050
----------- -----------
Total real estate loans.......... 3,028,291 3,357,714
Other................................. 6,040 7,251
----------- -----------
3,034,331 3,364,965
----------- -----------
Less:
Undisbursed loan funds............. -- 259
Unearned discounts................. 2,463 1,980
Deferred loan fees................. 7,317 7,221
Allowance for estimated losses..... 89,435 67,202
----------- -----------
99,215 76,662
----------- -----------
$ 2,935,116 $ 3,288,303
=========== ===========
F-17
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE--(CONTINUED)
During the fourth quarter of 1994, the Bank sold $45.0 million of outstanding
balances of home equity lines of credit and recorded a gain of $1.2 million. In
December 1995, the Bank sold the remaining outstanding balances of the home
equity lines of credit of $6.4 million and recorded a loss of $0.1 million.
Included in the table above is $2.2 million of amounts drawn under home equity
lines of credit at December 31, 1994.
Also included in the preceding table are loans held for sale, consisting of
the following at the dates indicated:
December 31,
----------------------
1995 1994
---------- ---------
(Dollars in thousands)
Residential loans:
Single family................ $ -- $ 47,339
Multifamily 2 to 4 units..... -- 976
---------- ---------
Total loans held for sale... $ -- $ 48,315
========== =========
Fidelity's portfolio of mortgage loans serviced for others amounted to $600.3
million at December 31, 1995 and $1.1 billion at December 31, 1994.
Fidelity's loan portfolio includes multifamily, commercial and industrial
loans of $2.4 billion at December 31, 1995 and $2.6 billion at December 31, 1994
which depend primarily on operating income to provide debt service coverage.
These loans generally have a greater risk of default than single family
residential loans and, accordingly, earn a higher rate of interest to compensate
in part for the risk. Approximately 99% of these loans are secured by property
within the state of California.
The Bank has modified a number of its loans. In some cases, the modifications
have taken the form of "early recasts" in which the amortizing payments are
revised (or recalculated) earlier than scheduled to reflect current lower
interest rates. In other cases, the Bank has agreed to accept interest only
payments for a limited time at current interest rates. In still other cases, the
Bank has modified the terms of a number of its loans that it would not otherwise
consider to protect its investment by granting concessions to borrowers because
of borrowers' financial difficulties. These modifications take several forms,
but are generally for terms that are less favorable to the Bank than the current
market. Modifications which are classified as troubled debt restructurings
("TDRs") are granted when the collateral is inadequate or the borrower does not
have the ability or willingness to continue making scheduled payments and
management determines that the modification is the best alternative for the
collection of its investment. At December 31, 1995 and 1994, outstanding TDRs
totaled $32.7 million and $52.1 million, respectively.
In order to assist borrowers affected by the January 17, 1994 Northridge
earthquake, the Bank developed several earthquake loan accommodation programs.
The OTS encouraged the development of such programs, which were designed to
provide relief to affected borrowers by deferring payments, capitalizing
interest payments or making additional advances to borrowers to repair severely
damaged properties, while remaining consistent with the Bank's safe and sound
business practices.
F-18
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE--(CONTINUED)
For the years ended December 31, 1995 and 1994, interest income of $3.2
million and $2.1 million, respectively, was recorded on TDRs. During 1995 and
1994 the reduction in interest income had the loans performed according to their
original terms was immaterial. During 1993, $8.3 million of interest income was
recorded on TDRs, $0.1 million less than would have been recorded had the loans
performed according to their original terms.
The total of loans on nonaccrual status was $51.9 million, $71.6 million and
$93.5 million at December 31, 1995, 1994 and 1993, respectively. The reduction
in income related to these loans upon which interest was not paid was $5.8
million, $10.9 million and $8.7 million for the corresponding years.
See Note 14 for a discussion of bulk sales (the "Bulk Sales") of loans and REO
as a part of the Bank's 1994 Restructuring and Recapitalization.
The Bank adopted an Accelerated Asset Resolution Plan designed to
aggressively dispose of, resolve or otherwise manage a pool of primarily
multifamily loans which generally have lower debt coverage ratios than the
remainder of the Bank's multifamily loan portfolio and thereby are considered by
the Bank to have higher risk of future nonperformance or impairment relative to
the remainder of the Bank's multifamily loan portfolio. This plan reflects both
an acceleration in estimated timing of resolution of assets within the pool, as
well as a potential change in recovery method from that which would be
anticipated through the normal course of business. The Bank has designated 411
assets with an aggregate book value of approximately $213 million as the
Accelerated Asset Resolution Pool. These assets consist primarily of accruing
and nonaccruing multifamily real estate loans and REO. As of December 31, 1995,
the Bank had resolved assets with an aggregate value of $37.8 million, and
utilized $3.5 million in Accelerated Asset Resolution Pool reserves.
NOTE 5--REAL ESTATE OWNED
Real estate owned consists of the following:
December 31,
------------------------
1995 1994
----------- ----------
(Dollars in thousands)
Real estate acquired through
foreclosure.......................... $ 23,013 $ 16,433
Allowance for estimated losses........ (3,492) (2,318)
----------- ----------
$ 19,521 $ 14,115
=========== ==========
F-19
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 5--REAL ESTATE OWNED--(CONTINUED)
The following summarizes the results of real estate owned operations:
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
(Loss) income from:
Real estate acquired for investment
or development..................... $ -- $ 95 $ 110
Real estate acquired through
foreclosure........................ (5,779) (8,746) (18,753)
Provision for estimated real estate
losses............................. (3,366) (8,768) (30,200)
-------- --------- ---------
Net loss from real estate
operations...................... $ (9,145) $ (17,419) $ (48,843)
======== ========= =========
See Note 14 for a discussion of Bulk Sales of loans and REO as a part of the
Bank's 1994 Restructuring and Recapitalization.
NOTE 6--ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES
The following summarizes the activity in the Bank's allowances for estimated
loan and real estate losses:
REAL ESTATE
LOANS OWNED TOTAL
------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1993............. $ 64,277 $ 16,450 $ 80,727
Provision for losses.................. 65,100 30,200 95,300
Charge-offs........................... (50,504) (28,940) (79,444)
Recoveries and other.................. 4,959 5 4,964
---------- --------- ---------
Balance at December 31, 1993........... 83,832 17,715 101,547
Provision for losses.................. 65,559 8,768 74,327
Charge-offs........................... (55,685) (16,820) (72,505)
GVA charged off on Bulk Sale assets... (30,497) (7,894) (38,391)
Recoveries and other.................. 3,993 549 4,542
---------- --------- ---------
Balance at December 31, 1994........... 67,202 2,318 69,520
Provision for losses.................. 69,724(1) 3,366 73,090
Charge-offs........................... (44,278) (8,358) (52,636)
Allocations from GVA to REO........... (6,166) 6,166 --
Recoveries and other.................. 2,953 -- 2,953
---------- --------- ---------
Balance at December 31, 1995........... $ 89,435 $ 3,492 $ 92,927
========== ========= =========
- ---------------
(1) Included in the provision for estimated loan losses for 1995 is the $45
million loan portfolio charge associated with the Accelerated Asset
Resolution Plan.
At December 31, 1995 and December 31, 1994, the recorded investment in loans
that are considered to be impaired under SFAS Nos. 114 and 118 was $149.3
million, and $148.0 million, respectively. Included in these amounts are $117.2
million and $46.5 million of impaired loans for which allowance for credit
losses
F-20
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 6--ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES--(CONTINUED)
have been established totaling $39.1 million and $16.1 million. The average
recorded investment and the amount of interest income recognized on impaired
loans during 1995 and 1994 was $148.7 million and $169.5 million and $7.8
million and $2.2 million, respectively.
The performance of the Bank's loan portfolio has been adversely affected by
recent Southern California economic conditions. The performance of the Bank's
multifamily loan portfolio is particularly susceptible to further declines in
the Southern California economy, increasing vacancy rates, declining rents,
increasing interest rates, declining debt coverage ratios, declining market
values for multifamily residential properties, and the possibility that
investors may abandon properties or seek bankruptcy protection with respect to
properties experiencing negative cash flow, particularly where such properties
are not cross-collateralized by other performing assets. There can be no
assurances that these economic conditions will improve in the near future as
many factors key to recovery may be impacted adversely by the Federal Reserve
Bank's interest rate policy as well as other factors. Consequently, rents and
real estate values may not stabilize which may affect future delinquency and
foreclosure levels and may adversely impact the Bank's asset quality, earnings
performance and capital levels.
NOTE 7--INTANGIBLE ASSETS
In December 1994, the Bank sold $340.0 million of deposits to another
financial institution. Core deposit intangible assets related to such deposits
totaling $0.5 million were written off and are netted against the gain on the
sale. See Note 14.
Fidelity reassessed the valuation of its intangible assets annually. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its core deposit intangible assets, Fidelity wrote down the
carrying value of its core deposit intangible assets in 1995 and 1993 by $0.1
million and $5.2 million, respectively, (which writedowns were included in
interest expense). In addition, an analysis was performed of the recoverability
of the goodwill related to a 1978 acquisition. This analysis indicated that the
expected future net earnings from the branches or assets acquired did not
support the carrying value of the goodwill. As a result, in 1993, Fidelity wrote
down the remaining $8.8 million balance of goodwill related to the acquisition.
F-21
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 8--DEPOSITS
Deposits consist of the following balances at the dates indicated:
DECEMBER 31,
-------------------------------------------------
1995 1994
----------------------- -----------------------
AMOUNT % AMOUNT %
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
TYPE OF ACCOUNT, WEIGHTED AVERAGE
INTEREST RATE:
Passbook, 2.00% at December 31, 1995
and 1994............................. $ 62,934 2.4% $ 70,564 2.6%
Checking and money market checking,
1.01% at December 31, 1995 and
0.87% at December 31, 1994.......... 309,065 11.8 326,411 12.1
Money market savings,
3.05% at December 31, 1995 and
3.12% at December 31, 1994.......... 93,901 3.6 135,595 5.0
---------- ------ ---------- ------
465,900 17.8 532,570 19.7
---------- ------ ---------- ------
Certificates with rates of:
Under 3.00%........................ 6,799 0.3 16,190 0.6
3.01 - 4.00%....................... 64,496 2.5 523,863 19.4
4.01 - 5.00%....................... 304,163 11.7 952,931 35.4
5.01 - 6.00%....................... 900,019 34.6 437,463 16.2
6.01 - 7.00%....................... 771,247 29.7 155,681 5.8
7.01 - 8.00%....................... 76,167 2.9 56,137 2.1
Over 8.00%......................... 12,078 0.5 22,437 0.8
---------- ------ ---------- ------
2,134,969 82.2 2,164,702 80.3
---------- ------ ---------- ------
Total deposits.................. $2,600,869 100.0% $2,697,272 100.0%
========== ====== ========== ======
Weighted average interest rate........ 4.89% 4.15%
========== ==========
Fidelity had noninterest-bearing checking accounts of $73.1 million and $68.1
million at December 31, 1995 and 1994, respectively. At December 31, 1995,
certificate accounts were scheduled to mature as follows:
YEAR OF MATURITY AMOUNT
---------------- ----------------------
(DOLLARS IN THOUSANDS)
1996............. $1,883,739
1997............. 202,402
1998............. 25,366
1999............. 16,349
2000 and after... 7,113
----------
$2,134,969
==========
F-22
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 8--DEPOSITS--(CONTINUED)
At December 31, 1995, loans totaling $40.5 million were pledged as collateral
for $1.2 million of public funds on deposit with the Bank and potential future
deposits.
Certificates of deposits of $100,000 or more accounted for $528 million and
represented 20% of all deposits at December 31, 1995 and $435 million or 16% of
all deposits at December 31, 1994.
The Bank has also utilized brokered deposits as a short-term means of funding.
These deposits are obtained or placed by or through a deposit broker and are
subject to certain regulatory limitations. Should the Bank become
undercapitalized, it would be prohibited from accepting, renewing or rolling
over deposits obtained through a deposit broker. The Bank accepted brokered
deposits pursuant to a waiver obtained from the FDIC, which waiver expired in
October 1994. The Bank is currently eligible to accept brokered deposits. The
Bank had no brokered deposits outstanding at December 31, 1995, compared to $0.1
million at December 31, 1994.
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
Balance at year-end................... $ 292,700 $ 332,700
Average amount outstanding during the $ 314,918 $ 392,707
year.................................
Maximum amount outstanding at any $ 412,700 $ 527,700
month-end............................
Weighted average interest rate during
the year............................. 5.53% 4.50%
Weighted average interest rate at
year-end............................. 5.27% 4.93%
Secured by:
FHLB Stock......................... $ 49,425 $ 47,017
Loans receivable (1)............... 1,174,513 1,557,548
---------- ----------
$1,223,938 $1,604,565
========== ==========
- --------------
(1) Includes pledged loans available for use under the letter of credit securing
commercial paper. See Note 10.
F-23
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES--(CONTINUED)
The maturities and weighted average interest rates on FHLB advances are
summarized as follows:
-------------------------------------------------------
1995 1994
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
--------- -------------- --------- --------------
(DOLLARS IN THOUSANDS)
Year of Maturity
1995............ $ -- --% $ 40,000 7.33%
1996............ 60,000 4.88 60,000 4.88
1997............ 212,700 5.06 212,700 4.14
2000............ 20,000 8.61 20,000 8.61
-------- --------
$292,700 5.27 $332,700 4.93
======== ========
NOTE 10--OTHER BORROWINGS
Other borrowings consist of the following:
DECEMBER 31,
YEAR OF ----------------------
MATURITY 1995 1994
-------- ---------- ---------
(DOLLARS IN THOUSANDS)
Short-term borrowings:
Commercial paper................... 1996 $ 50,000 $400,000
Long-term borrowings:
8 1/2% Mortgage-backed medium-term
notes ("MTNs").................... 1997 100,000 100,000
-------- --------
$150,000 $500,000
======== ========
F-24
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 10--OTHER BORROWINGS--(CONTINUED)
The mortgage-backed notes are secured by a joint pool of mortgage loans and
U.S. Treasury notes, at cost, totaling $246.5 million and $217.1 million at
December 31, 1995 and 1994, respectively.
Borrowings other than the mortgage-backed notes are summarized as follows:
DECEMBER 31,
------------------------
1995 1994
----------- ----------
(DOLLARS IN THOUSANDS)
Commercial paper:
Balance at year-end................ $ 50,000 $400,000
Average amount outstanding during
the year.......................... $289,028 $357,360
Maximum amount outstanding at any
month-end......................... $400,000 $400,000
Weighted average interest rate
during the year................... 6.02% 4.34%
Weighted average interest rate at
year end.......................... 5.70% 5.99%
Secured by Letter of Credit from
FHLB.............................. $500,000 $400,000
Securities sold under agreement to
repurchase:
Balance at year-end................ $ -- $ --
Average amount outstanding during
the year.......................... $ 12,424 $ 2,405
Maximum amount outstanding at any
month-end......................... $ 20,345 $ 3,830
Weighted average interest rate
during the year................... 5.88% 3.24%
The weighted average interest rate on other borrowings was 7.57% and 6.49% at
December 31, 1995 and 1994, respectively.
NOTE 11--BENEFIT PLANS
Postretirement Benefits
The Bank provides certain health and life insurance postretirement benefits
for all eligible retired employees. Eligibility for the plan is met when the
participant reaches age 55 and the applicable service requirements are obtained;
a. Employees hired on or before December 31, 1991, must have completed five
or more years of service on the date of termination.
b. Employees hired on or after January 1, 1992, must have completed ten or
more years of service on the date of termination.
In November 1994, the Board of Directors passed a resolution adjusting the
Bank's participation in the cost of the plan by transferring 100% of the retiree
health cost to current and future retirees. This plan amendment resulted in a
curtailment under SFAS No. 106, "Employers' Accounting for Postretirement
F-25
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLANS--(CONTINUED)
Benefits Other than Pensions." The curtailment resulted in the elimination of
any net periodic postretirement benefit cost and the reversal of the accumulated
postretirement benefit obligation previously recorded.
Retirement Income Plan
The Bank has a retirement income plan covering substantially all employees.
The defined benefit plan provides for payment of retirement benefits commencing
normally at age 65 in a monthly annuity; however, the option of a lump sum
payment is available upon retirement or in the event of early termination. An
employee becomes vested upon five years of service. Benefits payable under the
plan are generally determined on the basis of the employee's length of service
and average earnings over the previous five years. Annual contributions to the
plan are sufficient to satisfy legal funding requirements.
In February 1994, the Board of Directors passed a resolution to amend the
plan by discontinuing participation in the plan by newly hired employees and
freezing the level of service and salaries used to compute the plan benefit to
February 28, 1994 levels. This plan amendment resulted in a curtailment which
reduced the projected benefit obligation by $3.8 million. Additionally, as a
result of employee terminations associated with the Bank's downsizing and cost
curtailment programs during 1994, many lump sum payouts were made by the plan
which resulted in a partial settlement of the plan's liabilities. As a
consequence, the Bank recorded at December 31, 1994, a minimum pension liability
of $3.2 million of which $2.8 million was offset to the equity account.
The Bank funded the Retirement Income Plan such that the fair value of plan
assets exceeded the projected benefit obligation. The funding of the plan
resulted in the elimination of the minimum pension liability and minimum pension
adjustment to the equity account.
The components of net pension costs are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------- -------- -------
(DOLLARS IN THOUSANDS)
Service cost.................... $ -- $ 219 $ 943
Interest cost................... 218 542 688
Actual return on plan assets.... (371) 444 (632)
Net amortization and deferral... 92 (945) (87)
Effect of partial settlements... 252 1,389 --
------ ------ ------
$ 191 $1,649 $ 912
====== ====== ======
F-26
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLANS--(CONTINUED)
The funded status of this plan, as of the dates indicated, was as follows:
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Accumulated benefit obligation:
Vested............................. $ 2,663 $ 4,307
Nonvested.......................... 123 587
-------- --------
$ 2,786 $ 4,894
======== ========
Projected benefit obligation.......... $ (2,786) $ (4,894)
Fair value of plan assets............. 2,589 1,685
-------- --------
Deficiency of assets under projected
benefit obligation................... (197) (3,209)
Unrecognized net transition gain...... -- --
Unrecognized net loss from experience
differences.......................... -- --
Unrecognized prior service cost....... -- --
Minimum liability adjustment.......... 988 2,813
-------- --------
Prepaid pension (liability) cost... $ 791 $ (396)
======== ========
Actuarial assumptions:
Discount rate...................... 7.25% 8.00%
Expected long-term rate of return
on plan assets.................... 9.00% 9.00%
401(k) Plan
The Bank has a 401(k) defined contribution plan available to all employees who
have been with the Bank for one year and have reached the age of 21. Employees
may generally contribute up to 15% of their salary each year, and the Bank
matches 12.5% up to the first 6% contributed by the employee; the matching
contribution was adjusted down from 50% to 12.5% during 1995. In addition, the
Bank may elect, at its discretion, to match an amount based on the Bank's
profitability and determined on an annual basis by the Board of Directors. THE
BANK'S CONTRIBUTION EXPENSE WAS $0.3 MILLION IN THE YEAR ENDED DECEMBER 31,
1995, AND $0.5 MILLION IN 1994 AND 1993.
Director Retirement Plan
In November 1994, the Board of Directors approved a retirement plan for non-
employee directors who have at least three years of Board service, including
service on the Board prior to the 1994 Restructuring and Recapitalization.
An eligible director shall, after termination from Board service for any
reason other than cause, be entitled to receive a quarterly payment equal to one
quarter of his/her average annual compensation (including compensation for
service on the Board of any of the Bank's subsidiaries), including all retainers
and meeting fees, received during his/her last three years of Board service.
Such payments shall commence at the beginning of the first fiscal quarter
subsequent to termination and continue for a 3-year period. If a director's
Board membership is terminated for cause, no benefits are payable under this
plan.
F-27
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLAN--(CONTINUED)
If a director's Board membership is terminated within two years following the
effective date of a change in control, then he/she also shall be eligible for a
lump sum payment in an amount that is the greater of: (1) 150% times average
annual compensation during the preceding 3-year period, (2) the sum of all
retirement benefits payable under normal retirement provisions described in the
preceding paragraph or (3) $78,000. The Bank's accumulated benefit obligation
and net pension costs at and for the year ended December 31, 1995 were $0.2
million and $0.2 million, respectively.
NOTE 12--INCOME TAXES
Income tax expense/benefit was comprised of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----- ----------- ----------
(DOLLARS IN THOUSANDS)
Current income tax expense (benefit):
Federal............................ $ -- $ (1,744) $ (50,229)
State.............................. 4 9 (1,090)
----- --------- ---------
4 (1,735) (51,319)
----- --------- ---------
Deferred income tax expense (benefit):
Federal............................ -- (14,789) 17,784
State.............................. -- -- (2,258)
----- --------- ---------
-- (14,789) 15,526
----- --------- ---------
$ 4 $ (16,524) $ (35,793)
===== ========= =========
Income tax liability/receivable was comprised of the following:
DECEMBER 31,
--------------------------
1995 1994
---------- -----------
(DOLLARS IN THOUSANDS)
Current income tax (receivable) liability:
Federal..................................... $ 477 $ (5,416)
State....................................... -- 52
--------- ---------
477 (5,364)
--------- ---------
Deferred income tax (receivable) liability:
Federal..................................... (35,225) (13,270)
Valuation allowance--Federal................ 35,225 12,075
State....................................... (10,217) (4,265)
Valuation allowance--State.................. 10,217 3,841
--------- ---------
-- (1,619)
--------- ---------
$ 477 $ (6,983)
========= =========
F-28
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
The components of the net deferred tax liability/asset are as follows:
DECEMBER 31,
------------------------
1995 1994
---------- -----------
(DOLLARS IN THOUSANDS)
FEDERAL:
Deferred tax liabilities:
Loan fees and interest.......... $ 7,583 $ 10,067
FHLB stock dividends............ 12,545 11,691
California franchise tax........ -- --
Unrealized gain on securities
available for sale............. 244 --
Other........................... 6,672 3,031
--------- ---------
Gross deferred tax liabilities..... 27,044 24,789
--------- ---------
Deferred tax assets:
Bad debt and loan loss deduction 27,836 12,953
Net operating loss carryover.... 24,196 18,321
REO operations/acquisition costs 965 633
Deposit base intangibles........ 6,481 3,866
Unrealized loss on securities
available for sale
transferred to held to
maturity....................... -- 1,195
Unrealized loss on securities
available for sale............. -- 386
Other........................... 2,791 705
--------- ---------
Gross deferred tax assets.......... 62,269 38,059
Valuation allowance................ (35,225) (12,075)
--------- ---------
Deferred tax assets, net of
allowance......................... 27,044 25,984
--------- ---------
Net deferred tax (asset) liability. $ -- $ (1,195)
========= =========
STATE:
Deferred tax liabilities:
Loan fees and interest.......... $ 3,248 $ 3,299
FHLB stock dividends............ 4,050 3,831
Unrealized gain on securities
available for sale............. 87 --
Other........................... 1,783 1,334
--------- ---------
Gross deferred tax liabilities..... 9,168 8,464
--------- ---------
Deferred tax assets:
Bad debt and loan loss deduction 13,739 5,778
Net operating loss carryover.... 2,505 1,930
Deposit base intangibles........ 1,620 1,584
Unrealized loss on securities
available for sale
transferred to held to
maturity....................... -- 424
Unrealized loss on securities
available for sale............. -- 137
Other........................... 1,521 2,876
--------- ---------
Gross deferred tax assets.......... 19,385 12,729
Valuation allowance................ (10,217) (3,841)
--------- ---------
Deferred tax assets, net of
allowance......................... 9,168 8,888
--------- ---------
Net deferred tax (asset) liability. $ -- $ (424)
========= =========
F-29
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
Valuation allowances under SFAS No. 109 have been provided for both federal
and state purposes to the extent uncertainty exists as to the recoverability of
the deferred assets. As of December 31, 1995, valuation allowances were provided
for the total net deferred tax assets. As of December 31, 1994, valuation
allowances were also provided for the total net deferred tax assets, with the
exception of tax benefits associated with unrealized losses on available for
sale securities that were transferred to held to maturity. Future reductions in
the valuation allowance will be dependent upon a more likely than not
expectation of recovery of tax benefits.
In conjunction with the implementation of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," certain securities were
classified as available for sale during a portion of 1994 but were subsequently
classified as held to maturity at December 31, 1994. Under SFAS No. 115,
adjustments to the fair market value of securities held as available for sale
are reflected through an adjustment to stockholders' equity. For those
securities transferred from available for sale to held to maturity in 1994,
deferred tax benefits for unrealized losses reflecting the reduced fair market
value through the date of transfer were provided. As these securities were to be
held to maturity, unrealized losses as of the date of transfer were not expected
to be realized and, as a consequence, recovery of the related tax benefits was
expected. Accordingly, no valuation allowances have been provided for these
amounts at December 31, 1994. Since the securities were reclassified to
available for sale as of June 30, 1995, the related unrealized losses were
expected to be realized with the recovery of the related tax benefits uncertain.
As a result, full valuation allowances have been provided on these amounts.
A reconciliation from the consolidated statutory federal income tax benefit to
the consolidated effective income tax benefit follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Expected federal income tax benefit..... $(24,141) $(50,739) $(35,588)
Increases (reductions) in taxes
resulting from:
Franchise tax expense (benefit),
net of federal income tax and
valuation allowance................. 4 6 (4,386)
Addition to valuation allowance...... 23,779 11,689 --
Goodwill............................. -- -- 3,108
Limitation of net operating loss
carryover benefits due to 1994
Restructuring and Recapitalization.. -- 19,507 --
Bad debt recapture................... -- 4,678 --
Limitation of tax benefit on
intercompany transactions........... -- 3,235 --
Redetermination of tax............... -- (5,600) --
Other, net........................... 362 700 1,073
--------- -------- --------
Income tax expense (benefit)............ $ 4 $(16,524) $(35,793)
========= ======== ========
F-30
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
The Internal Revenue Service (the "Service") has completed its examination of
the Bank's federal income tax returns through 1991. The California Franchise Tax
Board has completed its examination of the California franchise tax returns
through 1988 and is currently examining the returns for years 1989 through 1991.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations thereunder generally provide that,
following an ownership change of a corporation with a net operating loss (an
"NOL"), a net unrealized built-in loss (a "NUBIL"), or tax credit carryovers,
the amount of annual post-ownership change taxable income that can be offset by
pre-ownership change NOLs, or recognized built-in losses, and the amount of
post-ownership change tax liability that can be offset by pre-ownership change
tax credits, generally cannot exceed a limitation prescribed by Section 382. The
Section 382 annual limitation generally equals the product of the fair market
value of the equity of the corporation immediately before the ownership change
(subject to various adjustments) and the federal long-term tax-exempt rate
prescribed monthly by the Service.
As a result of the 1994 Restructuring and Recapitalization, the Bank underwent
an ownership change and ceased to be a member of the Citadel consolidated group.
The Bank incurred an NOL in its taxable year ended August 4, 1994 and has
alternative minimum and general business tax credits carryover to taxable year
ended December 31, 1994 that are subject to limitation under Sections 382 and
383. The Bank had a NUBIL to the extent the tax basis in its assets exceeded the
fair market value of its assets on August 4, 1994. Any portion of the NUBIL
recognized during the 5-year period following the 1994 Restructuring and
Recapitalization will generally be subject to limitation under Section 382. The
Bank believes this NUBIL does not exceed $10 million. As a result, a de minimis
exception will apply, and the recognition of this NUBIL in the future will not
be subject to limitation under Section 382.
Fidelity and its subsidiaries' taxable loss for the period ended August 4,
1994 was included in Citadel's consolidated federal income tax return for the
year ended December 31, 1994. The NOL carryover generated by this return was
allocated to the respective companies in proportion to their individual company
taxable losses in accordance with the Code and applicable Treasury Regulations
thereunder. Citadel's taxable loss did not have a material impact on the NOL
carryover allocated to Fidelity and its subsidiaries.
Fidelity and its subsidiaries incurred an NOL for the period August 5, 1994
through December 31, 1994. This NOL can be used to offset taxable income in
subsequent years subject to limitation under Section 382 as a result of the 1995
change of ownership.
As a result of the 1995 Recapitalization, the Bank again underwent an
ownership change for purposes of Section 382. The Bank will incur an NOL for its
1995 taxable year that is subject to limitation under Section 382. Based on
current estimates, the Bank had a NUBIL at the time of the 1995 change of
ownership. Any portion of the NUBIL recognized during the 5-year period
following such change in ownership will be subject to limitation under Section
382. If the NUBIL does not exceed $10 million, a de minimis exception will
apply, and the recognition of this NUBIL in the future will not be subject to
limitation under Section 382. These limitations are inclusive of the limitations
imposed by the 1994 change of ownership.
F-31
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
At December 31, 1995, the Bank had an estimated NOL carryover for federal
income tax purpose of $69.1 million, of which $19.1 million is subject to annual
utilization limitations as a result of the 1994 change of ownership and expires
by year 2008, $20.1 million expires by year 2009 and $29.9 million expires by
year 2010 (all of which are subject to annual and aggregate utilization
limitations as a result of the 1995 change of ownership), if not utilized. For
California franchise tax purposes, there was an estimated NOL carryover of $22.2
million, of which $5.0 million expires by year 1997 and $0.9 million expires by
year 1998 (both of which are subject to annual utilization limitations as a
result of the 1994 change of ownership), $15.8 million expires by year 1999 and
$0.5 million expires by year 2000 (all of which are subject to annual and
aggregate utilization limitations as a result of the 1995 change of ownership)
if not utilized. The deferred tax assets related to these NOLs have been
recorded with a corresponding valuation allowance in an equal amount under SFAS
No. 109.
Savings institutions are allowed a bad debt deduction for federal income tax
purposes based on either 8% of taxable income or the savings institution's
actual loss experience. The Bank's bad debt deductions for all years presented
were based on actual loss experience.
Under the provisions of SFAS No. 109, a deferred tax liability has not been
provided for tax bad debt and loan loss reserves which arose in tax years prior
to December 31, 1987. The Bank had $34.7 million of such reserves at December
31, 1995, for which $12.2 million of taxes have not been provided. If these
reserves are used for any purpose other than to absorb bad debt losses, federal
taxes would have to be provided at the then current income tax rate. It is not
contemplated that the accumulated reserves will be used in a manner that will
create a tax liability.
NOTE 13--COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank and certain of its subsidiaries had
a number of lawsuits and claims pending at December 31, 1995. The Bank's
management and its counsel believe that the lawsuits and claims are without
merit. There is a risk that the final outcome of one or more of these claims
could result in the payment of monetary damages which could be material in
relation to the financial condition or results of operations of the Bank. The
Bank does not believe that the likelihood of such a result is probable and has
not established any specific litigation reserves with respect to such lawsuits.
Fidelity enters into agreements to extend credit to customers on an ongoing
basis. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Most commitments are expected to be
drawn upon and, therefore, the total commitment amounts generally represent
future cash requirements. At December 31, 1995, the Bank had no commitments to
fund loans.
As of December 31, 1995, the Bank had certain loans with a gross principal
balance of $105.9 million, of which $88.2 million had been sold in the form of
mortgage pass-through certificates, over various periods of time, to four
investor financial institutions leaving a balance of $17.7 million retained by
the Bank. These mortgage pass-through certificates provide a credit enhancement
to the investor financial institutions in the form of the Bank's subordination
of its retained percentage interest to that of the investor
F-32
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
financial institutions. In this regard, the aggregate of $88.2 million held by
the investor financial institutions are deemed Senior Mortgage Pass-Through
Certificates and the $17.7 million held by the Bank are subordinated to the
Senior Mortgage Pass-Through Certificates in the event of borrower default. Full
recovery of the $17.7 million is subject to this contingent liability due to its
subordination. In 1993, the Bank repurchased one of the Senior Mortgage Pass-
Through Certificates with a face value of $38.3 million, from one of the
investor institutions. At December 31, 1995, the balance of the repurchased
certificate was $28.2 million and was included in the mortgage-backed securities
held for sale portfolio. The other Senior Mortgage Pass-Through Certificates
totaling $60.0 million at December 31, 1995 are owned by other investor
institutions. The Bank considers all the loans in this pool in determining its
allowance for loan losses and any estimated losses are reflected in the
provision for loan losses.
During 1992, the Bank also effected the securitization by FNMA of $114.3
million of multifamily mortgages wherein $114.3 million in whole loans were
swapped for Triple A rated mortgage-backed securities through FNMA's Alternative
Credit Enhancement Structure ("ACES") program. These mortgage-backed securities
were sold in December 1993 and the current outstanding balance as of December
31, 1995 of $84.6 million is serviced by the Bank.
As part of a credit enhancement to absorb losses relating to the ACES
transaction, the Bank has pledged and placed in a trust account, as of December
31, 1995, $12.5 million, comprised of $5.3 million in cash and $7.2 million in
U.S. Treasury securities at book value. The Bank shall absorb losses, if any,
which may be incurred on the securitized multifamily loans to the extent of
$12.5 million. FNMA is responsible for any losses in excess of the $12.5
million. The corresponding contingent liability for credit losses secured by the
trust assets was $3.8 million and $4.8 million at the end of 1995 and 1994,
respectively, and is included in other liabilities.
Congress has discussed proposing legislation to address the disparity in bank
and thrift deposit insurance premiums. The proposed legislation would, among
other things, impose a requirement on all SAIF member institutions to fully
recapitalize the SAIF by paying a one-time special assessment of approximately
80 basis points on all assessable deposits as of a certain date.
While the outcome of the proposed legislation cannot be predicted with
certainty, it is possible that some kind of legislative or regulatory action
will be taken that will impact the Bank's insured deposits. A one-time special
assessment of 80 basis points would result in the Bank paying approximately $22
million in additional SAIF premiums, gross of related tax benefits, if any. The
enactment of such legislation may have the effect of immediately reducing the
regulatory capital of SAIF member institutions by the amount of the fee,
although provisions are included in the legislation that could exempt a savings
association from paying the assessment in a lump sum if the payment would result
in the association becoming undercapitalized. As of December 31, 1995, after
giving effect to the payment and deduction of an 80 basis point assessment, the
Bank's core and risk-based capital ratios would have been approximately 6.29%
and 11.35%, respectively, and the Bank would have been considered well
capitalized under the PCA regulations.
Due to the uncertainty of the legislative process generally, management cannot
predict whether legislation reducing SAIF premiums and/or imposing a special
one-time assessment will be adopted, or, if adopted, the amount of the
assessment, if any, that would be imposed on the Bank.
F-33
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Bank conducts portions of its operations from leased facilities. All of
the Bank's leases are operating leases. At December 31, 1995, aggregate minimum
rental commitments on operating leases with noncancelable terms in excess of one
year were as follows:
YEAR OF COMMITMENT AMOUNT
------------------ ----------------------
(DOLLARS IN THOUSANDS)
1996............ $ 4,621
1997............ 4,619
1998............ 4,625
1999............ 4,221
2000............ 3,707
Thereafter...... 19,083
-------
$40,876
=======
Operating expense includes rent expense of $3.1 million in 1995, $2.9 million
in 1994 and $3.0 million in 1993.
The bulk sale agreements associated with the 1994 Restructuring and
Recapitalization include certain representations and warranties relating to the
assets transferred. For a period of time ranging from 60 to 180 days after the
related closings, the purchasers of the assets under the bulk sale agreements
have the right to require Fidelity, at Fidelity's option, either to repurchase
bulk sale assets as to which representations and warranties are discovered to be
inaccurate or to cure such breach. The repurchase price for each bulk sale
asset repurchased is equal to the allocated purchase price paid plus amounts
expended by the purchaser post-closing, minus amounts received by the purchasers
post-closing with respect to such asset.
The Bank has received approximately $18.3 million in claims of which $3.9
million relate to claims of environmental or structural defects and were
required to be made from one bulk sale purchaser within 60 days after closing.
Under the Stockholders' Agreement between the Bank and Citadel, Citadel must
reimburse the Bank in an amount not to exceed $4 million for certain losses
incurred by the Bank in either repurchasing Bulk Sale Assets in the event of
breached environmental or structural representations and warranties or curing
such breaches. The $3.9 million of claims made with respect to environmental or
structural defects are subject to a cure threshold resulting in net claims of
$2.8 million. There can be no assurance that Citadel will have sufficient
liquid assets to satisfy any reimbursement obligations.
The remaining $14.4 million of claims were received within the 180-day period
for filing claims of breach of general representations and warranties and are
not subject to reimbursement by Citadel. The same purchaser has also made a
general claim in an unspecified amount of misrepresentation and concealment of
material facts.
The Bank has evaluated these claims and believes that such claims are without
merit.
F-34
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 14--RECAPITALIZATION
1995 Recapitalization
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity through the sale of 2,070,000 of Series A Preferred Stock and
47,000,000 of Class A Common Stock. As part of the 1995 Recapitalization,
Fidelity adopted the Accelerated Asset Resolution Plan which is designed to
aggressively dispose of, resolve or otherwise manage a pool of multifamily
loans. As a result, the Bank recorded a $45.0 million loan portfolio charge
which represents the estimated additional losses expected to be incurred.
The 1995 Recapitalization expenses of $2.6 million were charged directly
against equity while the $45.0 million loan portfolio restructuring charge is
reflected in the statement of operations.
1994 Restructuring and Recapitalization
During 1994, Fidelity and Citadel completed the 1994 Restructuring and
Recapitalization pursuant to which (a) Fidelity raised approximately $109
million in net new equity, and Citadel's ownership interest in Fidelity was
reduced to 16.2% of the then outstanding common stock and was retroactively
reclassified into 4,202,243 shares of Class A Common Stock; (b) Fidelity
purchased Gateway Investment Services, Inc. ("Gateway") from Citadel; (c)
Citadel, through a wholly-owned subsidiary, purchased certain real properties
from Fidelity, a portion of which was financed by Fidelity; (d) Citadel received
from Fidelity, by way of dividend, options to acquire, at the then net book
value, certain real properties utilized in the operations of the Bank, portions
of which would be leased back; (e) Fidelity redeemed its $60 million of
subordinated notes; (f) Fidelity consummated the Branch Sales; and (g) Fidelity
consummated the Bulk Sales, including certain assets sold to Citadel (see item
(c) above), of nonperforming and other primarily problem assets with an
aggregate gross book value of $563.3 million.
The 1994 Restructuring and Recapitalization charges as reflected in the
statement of operations are comprised of the following:
Provisions for estimated Bulk Sale losses............. $(56,296)
1994 Restructuring and Recapitalization charges
and expenses........................................ (14,146)
Gain on the Branch Sales.............................. 5,048
--------
$(65,394)
========
See Note 13 regarding representations and warranties made by the Bank in
connection with the Bulk Sales.
F-35
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the OTS to implement a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe, the lower the institution's capital. Under FDICIA, the OTS issued
regulations establishing specific capital ratios for five separate capital
categories. The five categories of ratios are:
CORE CAPITAL TO
ADJUSTED TOTAL CORE CAPITAL TO TOTAL CAPITAL TO
ASSETS RISK-WEIGHTED RISK-WEIGHTED
CAPITAL CATEGORIES: (LEVERAGE RATIO) ASSETS RATIO ASSETS RATIO
- ------------------- ---------------- ---------------- ----------------
Well capitalized................. 5% or above 6% or above 10% or above
Adequately capitalized........... 4% or above 4% or above 8% or above
Undercapitalized................. Under 4% Under 4% Under 8%
Significantly undercapitalized... Under 3% Under 3% Under 6%
Critically undercapitalized...... Ratio of tangible equity to adjusted total
assets of 2% or less
The following table summarizes the minimum required capital ratios of the well
capitalized category and Fidelity's regulatory capital at December 31, 1995 as
compared to such ratios. As indicated in the table, Fidelity's capital levels
exceeded the four minimum capital ratios of the well capitalized category.
TANGIBLE CAPITAL TO CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO
ADJUSTED ADJUSTED TOTAL ASSETS RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS (LEVERAGE RATIO) ASSETS RATIO ASSETS RATIO
--------------------- --------------------- ---------------------- ----------------------------
BALANCE % BALANCE % BALANCE % BALANCE %
----------- ------- ----------- ------- ----------- -------- ----------- --------------
(DOLLARS IN THOUSANDS)
Regulatory capital... $ 227,800 6.91% $ 228,100 6.92% $ 228,100 11.16% $ 254,000 12.43%
Well capitalized
requirement......... 98,900 3.00 164,900 5.00 122,600 6.00 204,400 10.00
---------- ----- ---------- ----- ---------- ------ ---------- ------
Excess capital....... $ 128,900 3.91% $ 63,200 1.92% $ 105,500 5.16% $ 49,600 2.43%
========== ===== ========== ===== ========== ====== ========== ======
Adjusted assets(1)... $3,297,500 $3,297,900 $2,044,100 $2,044,100
========== ========== ========== ==========
- --------------
(1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. Section 567.1(bb) for purposes of risk-based capital
requirements.
As of December 31, 1995, after giving effect to the payment and deduction of
an 80 basis point additional SAIF premium of approximately $22 million, the
Bank's tangible capital ratio to adjusted total assets would have been 6.28%,
core capital to adjusted total assets (leverage ratio) 6.29%, core capital to
risk-weighted assets ratio 10.09% and total capital to risk-weighted assets
ratio 11.35%. See "Note 13--Commitments and Contingencies."
F-36
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The OTS capital regulations, as required by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") include three separate minimum
capital requirements for the savings institution industry-- a "tangible capital
requirement," a "leverage limit" and a "risk-based capital requirement." These
capital standards must be no less stringent than the capital standards
applicable to national banks. The OTS also has the authority, after giving the
affected institution notice and an opportunity to respond, to establish
individual minimum capital requirements ("IMCR") for a savings institution which
are higher than the industry minimum requirements, upon a determination that an
IMCR is necessary or appropriate in light of the institution's particular
circumstances, such as if the institution is expected to have losses resulting
in capital inadequacy, has a high degree of exposure to credit risk, or has a
high amount of nonperforming loans. The OTS has promulgated a regulation that
adds to the list of circumstances in which an IMCR may be appropriate for a
savings association the following: a high degree of exposure to concentration of
credit risk or risks arising from nontraditional activities, or failure to
adequately monitor and control the risks presented by concentration of credit
and nontraditional activities.
Under FDICIA, the OTS was required to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities. The OTS
added an interest rate risk capital component to its risk-based capital
requirement originally effective September 30, 1994. However, the OTS has
temporarily postponed the implementation of the rule implementing the interest
rate risk capital component until the OTS has collected sufficient data to
determine whether the rule is effective in monitoring and managing interest rate
risk. This capital component will require institutions deemed to have above
normal interest rate risk to hold additional capital equal to 50% of the excess
risk. No interest rate risk component would have been required to be added to
the Bank's risk-based capital requirement at December 31, 1995 had the rule been
in effect at that time.
Effective January 17, 1995, the OTS amended the risk-based capital standards
by explicitly identifying concentration of credit risk and the risks arising
from non-traditional activities, as well as an institution's ability to manage
those risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The Bank does not believe
that this final rule will have a material impact on the Bank's capital
requirements.
F-37
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The following table summarizes the fully phased-in regulatory capital
requirements for Fidelity under FIRREA at December 31, 1995. As indicated in the
table, Fidelity's capital levels exceed all three of the currently applicable
minimum FIRREA capital requirements.
DECEMBER 31, 1995
-------------------------------------------------------------------------
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------------- ---------------------- -----------------------
BALANCE % BALANCE % BALANCE %
------------ ------- ------------ ------- ------------ --------
(DOLLARS IN THOUSANDS)
Stockholder's Equity(1).......... $ 229,000 $ 229,000 $ 229,000
Unrealized loss on securities.... (800) (800) (800)
Adjustments:
Intangible assets.............. (300) -- --
Nonincludable subsidiaries..... (100) (100) (100)
General valuation allowances... -- -- 25,900
---------- ---------- ----------
Regulatory capital(2)............ 227,800 6.91% 228,100 6.92% 254,000 12.43%
Required minimum................. 49,500 1.50 98,900 3.00 163,500 8.00
---------- ------ ---------- ------ ---------- -------
Excess capital................... $ 178,300 5.41% $ 129,200 3.92% $ 90,500 4.43%
========== ====== ========== ====== ========== =======
Adjusted assets(3)............... $3,297,500 $3,297,900 $2,044,100
========== ========== ==========
- --------------
(1) Fidelity's total stockholder's equity, calculated in accordance with
generally accepted accounting principles, was 6.94% of its total assets at
December 31, 1995.
(2) At periodic intervals, both the OTS and the FDIC routinely examine the Bank
as part of their legally prescribed oversight of the industry. Based on
their examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
(3) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. Section 567.1(a) for purposes of tangible and core
capital requirements, and for purposes of risk-based capital requirements,
refers to the term "risk-weighted assets" as defined in 12 C.F.R. Section
567.1(bb).
As of December 31, 1995, after giving effect to the payment and deduction of
an 80 basis point additional SAIF premium of approximately $22 million, the
Bank's tangible capital ratio would have been 6.28%, core capital ratio 6.29%
and risk-based capital ratio 11.35%. See "Note 13--Commitments and
Contingencies."
OTS Examinations and OTS Supervisory Agreement
In April 1995, the Bank received the report of the safety and soundness
examination completed by the OTS in March 1995. Areas of regulatory concern
principally related to the Bank's capital levels, operating losses, interest
rate risk, asset quality relative to peer thrifts, and internal asset review
administration. While the Bank believes that the corrective actions it has
taken will address OTS concerns, there can be no assurance that the OTS will
agree that the corrective actions fully satisfy its requirements in every
aspect.
F-38
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
On June 28, 1995, as a result of findings in the OTS' March 1995 report of
examination, the Bank entered into a supervisory agreement (the "Supervisory
Agreement") with the OTS. Among other things, the Supervisory Agreement
required the Bank to develop and adopt a three-year business plan (i) to
increase the Bank's capital levels to those meeting the criteria for a well-
capitalized institution pursuant to the PCA regulations, (ii) to improve
earnings and (iii) that would include a schedule to reduce, within a twelve
month period, classified assets to less than 50% of the sum of tangible capital
and the GVA. In addition, the Supervisory Agreement required the Bank to
enhance its internal asset review policy and system to address issues raised in
the report of examination.
Upon the successful completion of the 1995 Recapitalization the OTS agreed to
terminate the Supervisory Agreement. Notwithstanding the termination of the
Supervisory Agreement, the Bank remains committed to resolving the various
regulatory concerns expressed by the OTS in the recent examination.
Capitalized Software Costs
The Bank was notified by the OTS West Regional Office in April 1995 by a
written directive that certain computer software implementation or enhancement
related costs capitalized in accordance with GAAP are required to be immediately
expensed in the Bank's TFR and deducted from regulatory capital as required in
the instructions to the TFR and by OTS policy. In June 1995 the Bank filed an
appeal with the OTS Director of Supervision requesting that the directive to
immediately expense capitalized software costs be rescinded and that the Bank be
permitted to capitalize the costs in question in accordance with its existing
practice. Alternatively, the Bank requested the OTS address the issue of
whether software costs should be expensed or capitalized through the notice and
comment rulemaking process. The Bank also asked that it be relieved of any
obligation to comply with the directive during the pendency of the appeal. The
OTS granted the Bank's request for a stay of the effectiveness of the letter
directive while it considered the Bank's appeal. In February 1996 the Bank was
orally advised that the appeal was denied. As of December 31, 1995, the full
amount in question, approximately $4.3 million, was reserved.
Stock Option Plans
On December 11, 1995, the Board of Directors of the Bank adopted, subject to
stockholder approval, a stock option plan (the "1996 Stock Option Plan") which
replaced the then existing stock option plan of the Bank. On February 9, 1996
(the "Plan Effective Date"), the Bank's stockholders approved the 1996 Stock
Option Plan which provides that a maximum of 1,375,000 shares (after giving
effect to the Reverse Stock Split) of the Bank's Class A Common Stock be
reserved for awards granted under the 1996 Stock Option Plan to key employees
and the Bank's non-employee directors, subject to adjustment as set forth in the
1996 Stock Option Plan. The 1996 Stock Option Plan is administered by the
Compensation/Stock Option Committee of the Board of Directors, which is
authorized to select award recipients, establish award terms and conditions, and
make other related administrative determinations in accordance with the
provisions of the 1996 Stock Option Plan. Unexercised options granted under the
1996 Stock Option Plan expire on the earlier of the tenth anniversary of the
Plan Effective Date or 90 days following the effective date of a recipient's
termination of employment or Board service for reasons other than cause. In the
event of an optionee's termination for cause, all outstanding options are
cancelled as of the effective date of such termination.
F-39
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The options were granted by the Board on December 11, 1995 at an exercise
price of $2.10 ($8.35 after giving effect to the Reverse Stock Split), at which
time the market value of the underlying Class A Common Stock was $2.00 per share
($8.00 after giving effect to the Reverse Stock Split). The options vest at a
rate of 10 percent at February 14, 1996 and, thereafter, 30 percent per year
over the next three years at the anniversary of the Plan Effective Date. Of the
total options granted, 1,025,000 were granted to six executives of the Bank,
87,500 were granted to other key employees of the Bank and 184,000 were granted
to the seven non-employee directors of the Bank, leaving 78,500 shares for which
options may be granted in the future.
No options have been exercised as of December 31, 1995.
NOTE 16--RELATED PARTY TRANSACTIONS
Citadel Indemnity
Fidelity agreed to cooperate with Citadel and certain related persons in the
defense of any claim or action that may be brought by any stockholder of
Fidelity against Citadel or any such persons arising out of or in any way
related to the 1994 Restructuring and Recapitalization. Except in certain
circumstances, if Fidelity is also a party to such claim or action, Fidelity
will provide Citadel and such persons with the defense thereof, with counsel
reasonably acceptable to Citadel.
Administrative and Operational Services
Pursuant to the terms of a Service Agreement between Fidelity and Citadel
until the consummation of the 1994 Restructuring and Recapitalization, Fidelity
provided Citadel with all payroll, marketing, legal, management information
services, accounts payable, human resources and general administrative services
for a fee equal to a pro rata share of Fidelity's overhead costs and expenses
associated with Bank employees who render such services to Citadel plus a 10%
profit margin. Citadel paid Fidelity $0.9 million and $1.6 million under this
Service Agreement in 1994 and 1993, respectively. No such costs were paid to
Fidelity in 1995.
Tax Sharing
The tax sharing agreement between Citadel and Fidelity was terminated prior to
the closing of the 1994 Restructuring and Recapitalization on August 4, 1994
(the "Closing"). In connection with such termination, Citadel and Fidelity
agreed that certain amounts, estimated to be approximately $3.2 million, that
would otherwise become payable by Citadel to Fidelity under the terms of such
agreement as a result of losses recognized by Fidelity during the second quarter
of 1994, would not be payable.
Citadel and Fidelity entered into a tax disaffiliation agreement (the "Tax
Disaffiliation Agreement") which sets forth each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state, local or
foreign taxes for periods before and after the Closing and related matters such
as the filing of tax returns and the conduct of Internal Revenue Service and
other examinations.
F-40
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
In general, under the Tax Disaffiliation Agreement, Fidelity is responsible
for (a) all adjustments to the tax liability of Fidelity and its subsidiaries
for periods before the Closing relating to operations of Fidelity, (b) any tax
liability of Fidelity and its subsidiaries for the taxable year that begins
before and ends after the Closing in respect to that part of the taxable year
through the date of the Closing, and (c) any tax liability of Fidelity and its
subsidiaries for periods after the Closing. For this purpose, any liability for
taxes for periods ending on or before the Closing shall be measured by
Fidelity's actual liability for taxes after applying tax benefits attributable
to periods prior to the Closing otherwise available to Fidelity. With certain
exceptions, the Bank is entitled to any refunds relating to those liabilities.
In general, Citadel is responsible for all tax liabilities of Citadel and its
subsidiaries (other than Fidelity and its subsidiaries) for all periods. Citadel
is entitled to any refunds relating to those liabilities.
Purchase of Gateway Capital Stock
In connection with the 1994 Restructuring and Recapitalization, Fidelity
purchased from Citadel all the outstanding capital stock of Gateway for a
purchase price equal to approximately $1 million in cash, the book value of such
capital stock at the Closing. As a result, Gateway became a wholly-owned
subsidiary of Fidelity.
Citadel Building Purchase Option
As part of the 1994 Restructuring and Recapitalization, Fidelity transferred
to Citadel, by way of dividend, one-year transferable options to acquire two
office buildings used in the operations of Fidelity (its headquarters building
and another office building which houses a branch) for an aggregate exercise
price of $9.3 million (the approximate net book value at June 30, 1994).
Citadel Realty, Inc. ("CRI"), a subsidiary of Citadel, exercised both options on
February 2, 1995.
The acquisition of the headquarters building closed in May 1995. At the
closing, CRI and Fidelity entered into a 10-year, full-service gross lease for
four of the six floors. The rental rate for the first five years of the lease
term will be approximately $26,600 per month including parking for the ground
floor and approximately $75,000 per month including parking for the fourth,
fifth, and sixth floors. This lease would provide for annual rental increases at
the lower of the increase in the Consumer Price Index ("CPI") or 3%. After the
first five years of the lease term, the rental rate in the sixth year of the
lease will be adjusted to the then current market rate in accordance the lease
terms. Fidelity has the option to extend the lease of the ground floor for two
consecutive five-year terms at a market rental rate and the option to purchase
the headquarters building at market value at the expiration of the lease term,
provided that CRI then owns the building. The lease also permits Fidelity to
sublease the building, subject to certain approval by CRI.
In the first quarter of 1995, an assignee of CRI purchased the other office
building from Fidelity which includes a branch office and two additional floors.
Upon the sale of the building, Fidelity and the new owner entered into a seven-
year, triple net, master lease pursuant to which Fidelity will pay approximately
$29,950 per month in rent, including parking. The rent will increase each year
at the lower of the increase in the CPI or 3%. At the expiration of the master
lease term, Fidelity will have the option to enter into a lease of the ground
floor branch space for two consecutive five-year terms at a market rental rate.
F-41
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
Sale and Financing of Certain REO Properties
In connection with the 1994 Restructuring and Recapitalization, the Bank sold
to CRI assets with a net book value of $23.2 million at June 30, 1994 (prior to
the reserve for bulk sale losses), for a price of $19.8 million. Fidelity
financed $13.9 million of the purchase price of three of the four Citadel Sale
Assets by making three separate loans to CRI at Fidelity's standard market rates
secured by the respective properties. With respect to each of the two Citadel
Sale Assets consisting of multifamily properties, Fidelity made a ten-year loan,
amortized over 30 years, at an adjustable rate of interest tied to the one-year
Treasury rate plus approximately 3.75% per annum, with an initial interest rate
of 7.25%. The loan secured by the third Citadel Sale Asset, which is a
commercial office building has a seven-year term, amortizes over 25 years, and
has an adjustable rate of interest tied to the six-month LIBOR rate plus 4.50%
per annum, with an initial interest rate of 9.25% per annum. The loans have
other standard features commensurate with the respective properties and loan
program types, including loan fees paid to Fidelity. At December 31, 1994, one
of the loans secured by multifamily properties was paid and as a result the
outstanding balance of the remaining two loans totaled to $10.2 million.
F-42
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Bank using available market information and appropriate
valuation methodologies. However, considerable judgement is required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Bank could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents.............. $ 94,444 $ 94,444 $ 74,065 $ 74,065
Investment securities available
for sale.............................. 94,655 94,655 24,158 24,158
Investment securities held to maturity. -- -- 125,233 128,437
Mortgage-backed securities available
for sale.............................. 31,733 31,733 46,028 46,028
Loans held for sale.................... -- -- 48,315 48,315
Loans receivable....................... 2,935,116 2,921,478 3,239,988 3,199,442
Interest receivable.................... 20,162 20,162 20,256 20,256
Investment in FHLB stock............... 49,425 49,425 47,017 47,017
Mortgage servicing rights.............. 4,632 4,632 4,072 4,072
FINANCIAL LIABILITIES:
Deposits............................... 2,600,869 2,612,197 2,697,272 2,666,200
FHLB advances.......................... 292,700 293,370 332,700 324,000
Commercial paper....................... 50,000 50,113 400,000 401,100
Mortgage-backed notes.................. 100,000 105,294 100,000 100,900
Interest payable....................... 9,438 9,438 1,421 1,421
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Interest rate swap contracts........... -- (29,400)
Interest rate floor contracts.......... -- (3,100)
Interest rate options sold............. -- 355
F-43
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following is a summary of the notional amounts of the Bank's financial
instruments with off-balance-sheet risk as of the dates indicated.
DECEMBER 31,
------------------------
1995 1994
-------- -------------
(DOLLARS IN THOUSANDS)
Interest rate swap contracts.... $ -- $1,100,000
Interest rate floor contracts... -- 100,000
Interest rate options sold...... -- 223,500
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash and Cash Equivalents
The book value amounts reported in the statement of financial condition for
cash and cash equivalents approximate the fair value of such assets, because of
the short maturity of such investments.
Investment Securities and Mortgage-backed Securities
Estimated fair values for investment and mortgage-backed securities are based
on quoted market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of comparable
instruments.
Loans
The estimated fair values of real estate loans held for sale are based on
quoted market prices. The estimated fair values of loans receivable are based on
an option adjusted cash flow valuation ("OACFV"). The OACFV includes forward
interest rate simulations and the credit quality of performing and nonperforming
loans. Such valuations may not be indicative of the value derived upon a sale of
all or part of the portfolio. The book value of accrued interest approximates
its fair value.
Investment in FHLB Stock
The book value reported in the statement of financial condition for the
investment in FHLB stock approximates fair value as the stock may be sold back
to the Federal Home Loan Bank at face value.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand. The fair value of fixed rate
certificates of deposits is estimated by using an OACFV analysis.
F-44
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Borrowings (Including FHLB Advances and Other Borrowings)
The estimated fair value is based on an OACFV model.
Off-balance sheet instruments, which include interest rate swaps, floors and
options
The estimated fair value for the Bank's off-balance sheet instruments are
based on quoted market prices, when available, or an OACFV analysis.
The fair value of demand deposits is the amount payable on demand at the
reporting date. Although SFAS No. 107 specifically prohibits including a
deposit-based intangible element as part of the fair value disclosure for
deposit liabilities, it does allow supplemental disclosure, which is unaudited.
The core deposit intangible is the excess of the fair value of demand deposits
over recorded amounts and represents the benefit of retaining these deposits for
an expected period of time. The core deposit intangible is estimated based upon
the premium received in the Branch Sales, to be $55 million and $50 million at
December 31, 1995 and 1994, respectively, and is not included in the above fair
values or recorded as an asset in the statement of financial condition.
F-45
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 18--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995:
Interest income....................... $ 60,570 $ 62,521 $ 61,700 $ 61,686 $ 246,477
Interest expense...................... 42,641 45,625 43,618 42,952 174,836
Provision for estimated loan losses... 4,020 11,131 8,773 45,800 69,724
Provision for estimated real estate
losses............................... 391 1,153 1,229 593 3,366
(Losses) of gains on loan sales, net.. (292) 938 15 (139) 522
Gains on sales of securities, net..... 939 3,159 -- -- 4,098
Operating expense..................... 19,151 19,035 20,466 23,302 81,954
Net earnings (loss)................... 1,049 (9,027) (10,579) (50,422) (68,979)
Net earnings (loss) per share......... 0.16 (1.39) (1.63) (4.31) (8.84)
Weighted average common shares
outstanding......................... 6,492,465 6,492,465 6,492,465 11,708,539 7,807,201
Market prices of common stock:
High.................................. 20.00 18.00 11.50 9.25 20.00
Low................................... 16.00 11.00 6.00 5.50 5.50
1994 (1):
Interest income....................... $ 64,074 $ 60,610 $ 57,400 $ 59,381 $ 241,465
Interest expense...................... 38,668 38,127 39,190 39,843 155,828
Provision for estimated loan losses... 15,600 25,012 3,000 21,947 65,559
Provision for estimated real estate
losses.............................. 4,300 2,067 1,459 942 8,768
(Losses) gains on loan sales, net..... (2,804) (1,528) 566 (197) (3,963)
(Losses) gains on sales of
securities, net...................... (292) 40 (681) 2,063 1,130
Operating expense (2)................. 24,179 24,597 23,428 19,655 91,859
Net (loss) earnings................... (14,151) (91,226) (8,232) (14,835) (128,444)
Net (loss) earnings per share......... (13.47) (86.84) (1.84) (2.28) (39.08)
Weighted average
common shares outstanding........... 1,050,561 1,050,561 4,481,327 6,492,465 3,286,960
Market prices of common stock (2):
High.................................. NA NA 23.50 23.00 23.50
Low................................... NA NA 21.00 17.00 17.00
1993:
Interest income....................... $ 78,187 $ 73,591 $ 69,098 $ 68,455 $ 289,331
Interest expense...................... 49,407 46,818 43,782 48,487 188,494
Provision for estimated loan losses... 7,500 14,500 19,500 23,600 65,100
Provision for estimated real estate
losses............................... 1,000 16,000 4,000 9,200 30,200
Gains (losses) on loan sales, net..... 395 225 (34) (392) 194
Gains (losses) on sales of
securities, net...................... -- 3,489 934 (3,119) 1,304
Operating expense..................... 19,687 20,594 22,120 36,331 98,732
Net earnings (loss)................... 206 (14,734) (14,357) (37,002) (65,887)
Net earnings (loss) per share......... .20 (14.02) (13.67) (35.22) (62.72)
Weighted average common shares
outstanding......................... 1,050,561 1,050,561 1,050,561 1,050,561 1,050,561
- --------------
NA--Not applicable
(1) Excludes net 1994 Restructuring and Recapitalization charges.
(2) Prior to August 4, 1994, Fidelity was wholly owned by Citadel and its stock
was not traded. As a consequence of Fidelity's 1994 Restructuring and
Recapitalization, Citadel's ownership interest was reduced to 16.2% of the
then outstanding stock and was reclassified into 1,050,561 shares. All share
and per share amounts presented have been restated to retroactively reflect
the reclassification of Citadel's ownership interest in Fidelity.
F-46
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
sections entitled "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "DIRECTORS AND
EXECUTIVE OFFICERS" AND "BENEFICIAL OWNERSHIP OF FIDELITY COMMON STOCK"
contained in the Bank's Proxy Statement for its 1996 Annual Meeting of
Stockholders (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information set forth in the
section entitled "EXECUTIVE COMPENSATION" contained in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by this reference is the information set forth in the
section entitled "BENEFICIAL OWNERSHIP OF FIDELITY COMMON STOCK" contained in
the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by this reference is the information set forth in the
section entitled "RELATED PARTY TRANSACTIONS" contained in the 1996 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
DESCRIPTION PAGE NO.
----------- --------
Independent Auditor's Report...................................................................... F-2
Consolidated Statements of Financial Condition at December 31, 1995 and 1994...................... F-3
Consolidated Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1995.............................................................................. F-4
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended
December 31, 1995.............................................................................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 1995.............................................................................. F-6
Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended
December 31, 1995.............................................................................. F-8
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
(b) Reports on Form 8-K
None
II-1
(c) Exhibits.
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Amended and Restated Charter S of the Bank (incorporated by
reference to Exhibit 4.1 to the Form 10-K filed with the OTS for the
fiscal year ended December 31, 1994 (Docket No.. 5770) (the "Form
10-K")).
3.2 Amended and Restated Bylaws of the Bank, as amended (incorporated by
reference to Exhibit 3.2 of the Form OC of which the Offering
Circular dated November 9, 1995 is a part (Docket No. 5770) (the
"1995 Form OC")).
3.3 Form of Certificate of Resolutions adopting the First Supplemental
Section to Section 5(B) of the Amended and Restated Charter S of the
Bank relating to Series A Preferred Stock (incorporated by reference
to Exhibit 3.3 to the 1995 Form OC).
4.1 Specimen of Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Form OC of which the Offering
Circular dated July 12, 1994 is a part (Docket No. 5770) (the "1994
Form OC")).
4.2 Specimen of Class C Common Stock Certificate (incorporated by
reference to Exhibit 4.3 to the 1994 Form OC).
4.3 Specimen of Right to purchase Class A and Class C Common Stock
(incorporated by reference to Exhibit 4.3 of the 1995 Form OC).
4.4 Registration Rights Agreement dated as of June 30, 1994, between
Fidelity, Citadel and certain holders of Class C Common Stock of
Fidelity Federal Bank (incorporated by reference to Exhibit 4.3 to
the Form 10-Q filed with the OTS for the quarterly period ended on
June 30, 1994 (Docket No. 5770) (the "Form 10-Q")).
4.5 Stockholders Agreement, dated as of June 30, 1994, between Citadel
and Fidelity (incorporated by reference to Exhibit 4.4 to the Form
10-Q).
4.6 Form of Indenture relating to senior notes (incorporated by
reference to Exhibit 4.6 of the 1995 Form OC).
10.1 Settlement Agreement between Fidelity, Citadel and certain lenders,
dated as of June 3, 1994 (the "Letter Agreement") (incorporated by
reference to Exhibit 10.18 to the 1994 Form OC).
10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, 1994
(incorporated by reference to Exhibit 10.2 to the Form 10-Q).
10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994
(incorporated by reference to Exhibit 10.3 to the Form 10-Q).
10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994
(incorporated by reference to Exhibit 10.4 to the Form 10-Q).
10.5 Mutual Release, dated as of August 4, 1994, between Fidelity,
Citadel and certain lenders (incorporated by reference to Exhibit
10.5 to the Form 10-Q).
10.6 Mutual Release between Fidelity, Citadel and The Chase Manhattan
Bank, NA, dated June 17, 1994 (incorporated by reference to Exhibit
10.6 to the Form 10-Q).
10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13,
1994, between Fidelity and Colony Capital, Inc. (incorporated by
reference to Exhibit 10.7 to the Form 10-Q).
10.8 Real Estate Purchase Agreement, dated as of August 3, 1994, between
Fidelity and CRI (incorporated by reference to Exhibit 10.8 to the
Form 10-Q).
10.9 Loan and REO Purchase Agreement (Secondary), dated as of July 12,
1994, between Fidelity and EMC Mortgage Corporation (incorporated by
reference to Exhibit 10.9 to the Form 10-Q).
10.10 Loan and REO Purchase Agreement (Secondary), dated as of July 21,
1994, between Fidelity and International Nederlanden (US) Capital
Corporation, Farallon Capital Partners, L.P., Tinicum Partners, L.P.
and Essex Management Corporation (incorporated by reference to
Exhibit 10.10 to the Form 10-Q).
10.11 Purchase of Assets and Liability Assumption Agreement by and between
Home Savings of America, FSB and Fidelity, dated as of July 19, 1994
(incorporated by reference to Exhibit 10.11 to the Form 10-Q).
10.12 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity
and related loan documents (3943 Veselich Avenue) (incorporated by
reference to Exhibit 10.12 to the Form 10-Q).
10.13 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity
and related loan documents (23200 Western Avenue) (incorporated by
reference to Exhibit 10.13 to the Form 10-Q).
10.14 Promissory Note, dated August 3, 1994, by CRI in favor of Fidelity
and related loan documents (1661 Camelback Road) (incorporated by
reference to Exhibit 10.14 to the Form 10-Q).
10.15 Guaranty Agreement, dated August 3, 1994, by Citadel in favor of
Fidelity (incorporated by reference to Exhibit 10.15 to the Form 10-
Q).
10.16 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and
between Citadel and Fidelity (incorporated by reference to Exhibit
10.16 to the Form 10-Q).
10.17 Option Agreement, dated as of August 4, 1994, by and between
Fidelity and Citadel (incorporated by reference to Exhibit 10.17 to
the Form 10-Q).
II-2
10.18 Executive Employment Agreement, dated as of June 2, 1995, between
Richard M. Greenwood and Fidelity (incorporated by reference to
Exhibit 10.18 to the 1995 Form OC).
10.19 Amended Service Agreement between Fidelity and Citadel dated as of
August 1, 1994 (incorporated by reference to Exhibit 10.19 to the
Form 10-Q).
10.20 Side letter, dated August 3, 1994, between Fidelity and CRI
(incorporated by reference to Exhibit 10.20 to the Form 10-Q).
10.21 Placement Agency Agreement, dated July 12, 1994, between Fidelity,
Citadel and J.P. Morgan Securities Inc. (incorporated by reference
to Exhibit 10.21 to the Form 10-Q).
10.22 Stock Purchase Agreement, dated as of August 3, 1994, between
Fidelity and Citadel (incorporated by reference to Exhibit 10.22 to
the Form 10-Q).
10.23 Litigation and Judgment Assignment and Assumption Agreement, dated
as of August 3, 1994, between Fidelity and Citadel (incorporated by
reference to Exhibit 10.23 to the Form 10-Q).
10.24 1995 Equity Incentive Plan (incorporated by reference to the Proxy
Statement filed with the OTS on December 16, 1994).
10.25 Retirement Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.26 to the Form 10-K).
10.26 Form of Severance Agreement between the Bank and each of Messrs.
Johnson and Osborne and Ms. Wulfe (incorporated by reference to
Exhibit 10.27 to the Form 10-K).
10.27 Form of Severance Agreement between the Bank and each of Messrs.
Condon, Evans, Mason, Stutz and Taylor (incorporated by reference to
Exhibit 10.27 to the 1995 Form OC).
10.28 Form of Severance Agreement between the Bank and each of Messrs.
Michel and Renstrom (incorporated by reference to Exhibit 10.28 to
the 1995 Form OC).
10.29 Form of Incentive Stock Option Agreement between the Bank and
certain officers (incorporated by reference to Exhibit 10.28 to the
Form 10-K).
10.30 Form of Non-Employee Director Stock Option Agreement between the
Bank and certain directors (incorporated by reference to Exhibit
10.29 to the Form 10-K).
10.31 Loan and REO Purchase Agreement, dated as of December 15, 1994
between Fidelity and Berkeley Federal Bank & Trust FSB (incorporated
by reference to Exhibit 10.30 to the Form 10-K).
10.32 Standard Office Lease-Net, dated July 15, 1994, between the Bank and
14455 Ventura Blvd., Inc. (incorporated by reference to Exhibit
10.31 to the Form 10-K).
10.33 Loan Servicing Purchase and Sale Agreement dated March 31, 1995
between the Bank and Western Financial Savings Bank, FSB
(incorporated by reference to Exhibit 10.32 to the Form 10-Q filed
with the OTS for the quarterly period ended March 31, 1995).
10.34 Supervisory Agreement dated June 28, 1995, between Fidelity and the
OTS (incorporated by reference to Exhibit 10.33 to the Form 10-Q
filed with the OTS for the quarterly period ended June 30, 1995).
10.35 Form of Indemnity Agreement between the Bank and its directors and
senior officers (incorporated by reference to Exhibit 10.35 to the
1995 Form OC).
10.36 Letter from the OTS to the Bank dated December 8, 1995, terminating
the Supervisory Agreement as of the date of the letter.
12.1 Statement re Computation of Ratios.
21.1 List of Subsidiaries of the Bank (incorporated by reference to
Exhibit 12.1 to the 1995 Form OC).
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF PART 563d.1 OF THE RULES AND REGULATIONS OF
THE OFFICE OF THRIFT SUPERVISION, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Fidelity Federal Bank, A Federal Savings Bank
By: /s/ NORMAN BARKER, JR.
------------------------------
NORMAN BARKER, JR.
Chairman of the Board
Date: March 20, 1996
PURSUANT TO THE REQUIREMENTS OF SECTION 563d.1 OF THE REGULATIONS OF THE
OFFICE OF THRIFT SUPERVISION, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ NORMAN BARKER, JR. Chairman of the Board of March 20, 1996
- ----------------------------- Directors
NORMAN BARKER, JR.
/s/ RICHARD M. GREENWOOD Director, President and March 20, 1996
- ----------------------------- Chief Operating Officer
RICHARD M. GREENWOOD (Principal Executive
Officer)
/s/ WALDO H. BURNSIDE Director March 20, 1996
- -----------------------------
WALDO H. BURNSIDE
/s/ GEORGE GIBBS, JR. Director March 20, 1996
- -----------------------------
GEORGE GIBBS, JR.
/s/ MEL GOLDSMITH Director March 20, 1996
- -----------------------------
MEL GOLDSMITH
/s/ LILLY V. LEE Director March 20, 1996
- -----------------------------
LILLY V. LEE
/s/ MARK K. MASON Director March 20, 1996
- -----------------------------
MARK K. MASON
/s/ RALPH B. PERRY III Director March 20, 1996
- -----------------------------
RALPH B. PERRY III
/s/ W. PENDLETON TUDOR Director March 20, 1996
- -----------------------------
W. PENDLETON TUDOR
/s/ WILLIAM L. SANDERS Executive Vice March 20, 1996
- ----------------------------- President, Chief
WILLIAM L. SANDERS Financial Officer
(Principal Financial
Officer)
/s/ SCOTT S. SPOONER Senior Vice President, March 20, 1996
- ----------------------------- Controller and
SCOTT S. SPOONER Chief Accounting Officer
(Principal Accounting
Officer)
II-4