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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
COMMISSION FILE NUMBER 0-28292
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BANK PLUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4571410
(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) 549-3116
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 23, 2000, was $37,065,689.
As of March 23, 2000, Registrant had outstanding 19,441,886 shares of
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's
2000 Annual Meeting of Stockholders are incorporated by reference in Part III
hereof.
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BANK PLUS CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
Glossary of Defined Terms.................................................................. ii
PART I
Item 1. Business................................................................................... 1
General.................................................................................... 1
Recent Developments........................................................................ 2
Retail Financial Services - Core Bank Operations........................................... 6
Lending Activities......................................................................... 7
Loan Servicing............................................................................. 8
Credit Administration...................................................................... 10
Investments................................................................................ 11
Borrowings................................................................................. 11
Competition................................................................................ 12
Employees.................................................................................. 12
Regulation and Supervision................................................................. 13
Item 2. Properties................................................................................. 24
Item 3. Legal Proceedings.......................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders........................................ 29
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 29
Item 6. Selected Financial Data.................................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 33
Forward-looking Statements................................................................. 33
Results of Operations...................................................................... 33
Net Interest Income........................................................................ 37
Income Taxes............................................................................... 38
Financial Condition........................................................................ 40
Regulatory Capital Compliance.............................................................. 57
Liquidity.................................................................................. 58
Asset/Liability Management and Market Risk................................................. 62
Year 2000.................................................................................. 66
Recent Accounting Pronouncements........................................................... 67
Item 8. Financial Statements and Supplementary Data................................................ 67
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure........ 67
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 68
Item 11. Executive Compensation..................................................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 68
Item 13. Certain Relationships and Related Transactions............................................. 68
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 69
Signatures................................................................................. 71
i
BANK PLUS CORPORATION
GLOSSARY OF DEFINED TERMS
The following defined terms are used throughout the Company's Annual Report on
Form 10-K:
DEFINED TERM DESCRIPTION
- ------------------------------ ----------------------------------------------------------------------
ACES........................ FNMA's Alternative Credit Enhancement Structure
Acquisition S-4............. Registration Statement on Form S-4
ADC......................... American Direct Credit, LLC
AFS......................... available for sale
ALCO........................ Asset Liability Committee
ALLL........................ allowance for loan and lease losses
ARMs........................ adjustable rate mortgages
ATM......................... automated teller machine
BHCA........................ Bank Holding Company Act
Bank Plus................... Bank Plus Corporation
BIF......................... Bank Insurance Fund
BPCS........................ Bank Plus Credit Services Corporation
CalPERS..................... California Public Employee's Retirement System
CDs......................... certificates of deposit
CERCLA...................... Comprehensive Environmental Response, Compensation and Liability Act
of 1980
Citadel..................... Citadel Holding Corporation
CMO......................... collateralized mortgage obligation
Coast....................... Coast Federal Bank, FSB
COFI........................ Eleventh District Cost of Funds Index
Company..................... Bank Plus, Fidelity and Gateway
CRA......................... Community Reinvestment Act
Direct Furniture............ Direct Furniture, Inc.
EGRPRA...................... Economic Growth and Regulatory Paperwork Reduction Act
EPS......................... earnings per share
Exchange Offer.............. Exchange offer of Bank Plus Senior Notes for Fidelity's Series A
Preferred Stock, as consummated on July 18, 1997
FAMCO....................... First Alliance Mortgage Company
FASB........................ Financial Accounting Standards Board
FDIA........................ Federal Deposit Insurance Act
FDIC........................ Federal Deposit Insurance Corporation
FDICIA...................... Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC....................... Federal Financial Institutions Examinations Council
FHA......................... Federal Housing Administration
FHLB........................ Federal Home Loan Bank
FHLB advances............... ARMs and variable rate borrowings from the FHLB system
FHLMC....................... Federal Home Loan Mortgage Corporation
FICO........................ Fair Isaac Company
FICO Debt................... Financing Corporation debt obligations
Fidelity or the Bank........ collectively, Fidelity Federal Bank, A Federal Savings Bank and its
subsidiaries
Financial Services
Modernization Act......... Gramm-Leach-Bliley Act of 1999
FIRREA...................... Financial Institutions Reform, Recovery, and Enforcement Act of 1989
FNMA........................ Federal National Mortgage Association
(CONTINUED)
ii
GLOSSARY OF DEFINED TERMS--(CONTINUED)
DEFINED TERM DESCRIPTION
- ------------------------------ ----------------------------------------------------------------------
FRB......................... Board of Governors of the Federal Reserve System
FSLIC....................... Federal Savings and Loan Insurance Corporation
FTEs........................ full-time equivalent employees
GAAP........................ Generally Accepted Accounting Principles
Gateway..................... Gateway Investment Services, Inc.
GNMA........................ Government National Mortgage Association
Hancock..................... Hancock Savings Bank, FSB
HOLA........................ Home Owners' Loan Act of 1933, as amended
IMCR........................ Individual Minimum Capital Requirement
Instant Reserve............. overdraft protection for checking account customers
IRC......................... Internal Revenue Code
LGS......................... loan grading system
LIBOR....................... London Interbank Offered Rate
MBS......................... mortgage-backed securities
MMG......................... MMG Direct, Inc.
NASD........................ National Association of Securities Dealers, Inc.
Nasdaq...................... Nasdaq National Market
Nationwide.................. Nationwide Capital Company, L.L.C.
NOL......................... net operating loss
NPAs........................ nonperforming assets
NPLs........................ Nonaccruing loans
NPV......................... Net portfolio value
OACFV....................... Option adjusted cash flow valuation
OTS......................... Office of Thrift Supervision
Plan........................ Accelerated Asset Resolution Plan
Program..................... agreements with FAMCO and its affiliates to establish a secured
credit card program
PCA......................... Prompt Corrective Action
QTL......................... Qualified Thrift Lender
Renzi....................... Renzi Co. LLC
REO......................... Real estate owned
RICO........................ Racketeer Influenced and Corrupt Organizations Act
SAIF........................ Savings Association Insurance Fund
SEC......................... Securities and Exchange Commission
Senior Notes................ Bank Plus' 12% Senior Notes due July 18, 2007
SLUSA....................... Security Litigation Reform Standards Act of 1998
Preferred Stock............. Fidelity's 12% Noncumulative Exchangeable Perpetual Preferred Stock,
Series A
SFAS........................ Statement of Financial Accounting Standards
Stock Option Plan........... Stock Option and Equity Incentive Plan
SVAs........................ Specific valuation allowances
Systems..................... Computer software programs, systems and devices
TDR......................... troubled debt restructuring
TFR......................... Thrift Financial Report
2000 Proxy Statement........ the Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders
iii
PART I
ITEM 1. BUSINESS
BANK PLUS CORPORATION
GENERAL
Bank Plus Corporation ("Bank Plus"), through its wholly-owned subsidiaries,
Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries
(collectively "Fidelity" or the "Bank"), and Gateway Investment Services, Inc.
("Gateway") a National Association of Securities Dealers, Inc. ("NASD")
registered broker/dealer, (collectively, the "Company"), offers a broad range of
consumer financial services, including demand and term deposits, uninsured
investment products, including mutual funds, and annuities and loans. Fidelity
operates through 36 full-service branches, 35 of which are located in Southern
California, principally in Los Angeles and Orange counties.
Certain statements included in this Annual Report on Form 10-K, including
without limitation statements containing the words "believes", "anticipates",
"intends", "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of Bank Plus and Fidelity to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. A number of other factors may have a material adverse effect on the
Company's financial performance. These factors include a national or regional
economic slowdown or recession which increases the risk of defaults and credit
losses; movements in market interest rates that reduce our margins or the fair
value of the financial instruments we hold; restrictions imposed on the Bank's
operations by regulators such as a prohibition on the payment of dividends to
Bank Plus; failure of regulatory authorities to issue approvals or non-objection
to material transactions involving the Bank; actions by the Bank's regulators
that could adversely affect the Bank's capital levels; an increase in the number
of customers seeking protection under the bankruptcy laws which increases the
amount of charge-offs; the effects of fraud or other contract breaches by third
parties or customers; the effectiveness of the Company's collection efforts; the
outcome of pending and future litigation; the inability to achieve the financial
goals in Bank Plus' strategic plan; the inability to successfully implement
planned systems conversions and the inability to use the operating loss
carryforwards of the Company. Given these uncertainties, undue reliance should
not be placed on such forward-looking statements. Bank Plus disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements included herein to reflect
future events or developments.
The Company views its business as consisting of two reportable segments;
core bank operations and credit card operations. Each of these operations, like
those of other financial institutions, are significantly influenced by general
economic conditions and interest rates, by the monetary, fiscal and regulatory
policies of the federal government and by the policies of financial institution
regulatory authorities. The core bank operations are also significantly
influenced by the relative strength of the California real estate market.
Core Bank Operations: The principal business activities of this segment are
attracting deposit funds from the general public and other institutions,
originating and investing in investment securities and real estate related
assets, including mortgage loan and mortgage-backed securities, and selling
uninsured investment products. This segment's primary sources of revenue are
interest income earned on real estate related assets, investment securities and
funding provided to the credit card operations, fees earned in connection with
loans and deposits and fees earned from the sale of uninsured investment
products. This segment's major expenses are interest incurred on deposits and
borrowings, provisions for estimated loan losses, retail branch system costs,
mortgage servicing and origination costs and executive and administrative
expenses.
Deposits of the core bank operations are highly concentrated in Los Angeles
and Orange counties. The retail branches held total deposits of $2.5 billion at
December 31, 1999. At December 31, 1999, the core bank operation's gross
mortgage loan portfolio aggregated $2.0 billion, 66% of which was secured by
residential properties containing 5 or more units, 28% of which was secured by
residential properties containing 1 to 4 units and 6% of which was secured by
commercial and other property. At that same date, 94% of the Bank's mortgage
1
loans consisted of adjustable-rate mortgages. The investment portfolio of the
core bank operations, which primarily consisted of mortgage-backed securities,
totaled $0.3 billion at December 31, 1999.
Credit card operations: The principal business activities of this segment
are servicing the outstanding credit card accounts and managing the credit risk
associated with the credit card portfolio. Since the first quarter of 1999,
there have been no material new originations of credit card accounts. This
segment's primary sources of revenue are interest income earned on the credit
card balances and fees earned on credit card accounts, including acceptance and
annual fees, late fees and interchange fees. This segment's principal expenses
are interest expense from funding provided by the core bank operations,
provisions for estimated loan losses and costs of servicing the portfolio,
including third party processing charges.
The credit card operation's credit card portfolio totaled $210.6 million at
December 31, 1999. Funding for the credit card operations is provided by the
core bank operations.
The principal executive offices of Bank Plus and Fidelity are located at
4565 Colorado Boulevard, Los Angeles, California 90039, telephone number (818)
549-3116.
RECENT DEVELOPMENTS
1999 FINANCIAL RESULTS
In 1999, the Company's net losses of $24.9 million consisted of $59.7
million of net losses from the credit card operations offset by $34.8 million of
net earnings from the core bank operations. The net losses from the credit card
operations were primarily due to provisions for estimated loan losses resulting
from the high delinquency levels and charge-offs in the credit card loan
portfolio. The net earnings from the core bank operations, which more than
doubled from the 1998 net earnings of $16.2 million, benefited from a $10.5
million reduction in operating expenses and a $5.9 million gain on sale of two
branches during the third quarter of 1999. The $10.5 million decrease in
operating expenses was the result of the implementation of the revised strategic
plan in 1999.
CORE BANK OPERATIONS
During 1997 and 1998, a number of business initiatives outside of the
existing retail branch system were pursued. These included a financial education
program for members of the California Public Employee's Retirement System
("CalPERS"), electronic commerce activities, a planned name change, an indirect
auto lending program and a mall branch strategy. As a result of the
disappointing results of these programs and of the credit card operations,
changes were made in the Company's executive management and in the core bank
operations strategic plan during the fourth quarter of 1998.
Under this strategic plan, the core bank operations are focused on the
retail branch system and the establishment of mortgage origination operations.
As a consequence of the Bank's efforts to augment its regulatory capital ratios,
the core bank operations total assets decreased by $1.3 billion from June 30,
1998 to December 31, 1999. This reduction in total assets was achieved by
utilizing the proceeds from scheduled and unscheduled principal payments in the
mortgage loan and securities portfolios and from the sale of $120 million in
mortgage loans to payoff Federal Home Loan Bank ("FHLB") advances and fund the
sale of $125 million of deposits. In addition, a deposit repricing and
conversion program was implemented in the fourth quarter of 1998 to reduce the
amount of high balance certificates of deposit ("CDs") (accounts with balances
greater than $100,000) and reduce the overall cost of deposits. Since September
30, 1998, high balance CDs have decreased by $244.2 million and the cost of
deposits decreased from 4.78% at September 30, 1998 to 4.21% at December 31,
1999. During the 1999 third quarter, as a consequence of the deposit repricing
2
and conversion program and the payoff of FHLB advances, the Bank's total cost of
funds fell below the Eleventh District Cost of Funds Index ("COFI"), for the
first time since the index was created. At December 31, 1999, the Bank's overall
cost of funds of 4.40% was 45 basis points below COFI.
CREDIT CARD OPERATIONS
The Company's credit card operations began in 1997. During 1998, the Bank
significantly increased its credit card portfolio. Beginning in the third
quarter of 1998, the Bank experienced increases in delinquencies and charge-offs
in excess of prior expectations. As a result of the deterioration of credit
quality in the credit card portfolio and operational problems encountered with
the Bank's third party marketers, the following actions were taken with respect
to each of the significant credit card programs:
o In October 1998, the Bank terminated its agreement with MMG Direct,
Inc. ("MMG") and no new accounts have been originated under the MMG
program since August 1998. In September 1999, the arbitrator in the
Bank's arbitration proceedings with MMG confirmed the termination of
the credit card marketing agreement with MMG and terminated MMG's
rights and interests in the MMG credit card portfolio.
o In November 1998, the Bank and American Direct Credit, LLC ("ADC")
entered into a settlement agreement in which they agreed to wind down
originations under the ADC program and terminate the related
agreement. Under the terms of the settlement agreement, all of ADC's
rights and interests in the ADC credit card portfolio were terminated.
No new accounts have been originated under the ADC program since the
first quarter of 1999.
o In December 1999, the Bank sold to Direct Furniture, Inc. ("Direct
Furniture") a 100% participation in the outstanding receivables under
the Direct Furniture program. The Bank will continue to issue new
accounts with Direct Furniture obligated to fund any future net
advances under the program. The Direct Furniture agreement will
terminate on the earlier of December 31, 2000 or such time that Direct
Furniture or its designee purchases the program from the Bank.
o In January 1999, First Alliance Corporation, the parent company of
First Alliance Mortgage Company ("FAMCO"), announced the
discontinuation of originations under its program with the Bank
primarily due to results that were lower than initially anticipated.
As a result, no new accounts have been originated under the program
since December 1998. On February 24, 2000, the term of the FAMCO
program agreements expired and the Bank notified FAMCO that it would
not be extending the term of the agreements. Under the terms of the
agreements, upon termination FAMCO or its designee is required to
purchase the outstanding accounts and receivables. FAMCO contends that
it has no obligation to purchase, or cause a designee to purchase all
of the outstanding accounts and receivables under the FAMCO program.
On March 23, 2000, First Alliance Corporation and its subsidiaries
(collectively "FACO") announced that they had filed voluntary
petitions under Chapter 11 of the United States Bankruptcy Code. It is
uncertain what effect the filing of the petition for bankruptcy will
have on FACO's obligations under the program agreements. If FACO does
not perform its obligations under the agreement, the Company may be
required to record a loss to the extent that estimated charge-offs
exceed the cash reserves held by the Company. As of February 29, 2000,
the balance of accounts and related cash reserves of this program were
$16.4 million and $2.7 million, respectively.
Even though the Company no longer originates new credit card accounts, it
continues to treat the credit card operations as an operating segment. As such,
the credit card balances are carried at their historical cost basis and loan
loss reserves have been established at a level equal to estimated charge-offs of
current account balances over the next twelve months. The carrying value of the
credit card balances less any established loan loss reserves is not intended to
represent the fair market value or liquidation value of the credit card
portfolios. Given the significant historical delinquencies and losses sustained
by these portfolios, the Company believes their liquidation value may be
significantly less than their net carrying value. In addition, the established
loan loss reserves do not include charge-offs that may occur after the next
twelve months nor charge-offs that may occur that relate to account activity
(e.g. purchases, interest and fees) that occurs subsequent to the current date.
3
As part of its credit card operations, the Company opened a new credit card
processing center in Beaverton, Oregon in 1998 to provide customer service and
collections services for the Bank's credit card programs, services that would
otherwise be provided by third parties.
As a result of the high levels of delinquencies and charge-offs, it is
anticipated that, without a change in strategy, losses from the credit card
operations would continue to result in the Company reporting quarterly net
losses on a consolidated basis throughout 2000.
THE COMPANY'S BUSINESS PLAN
The Company has adopted a business plan for 2000 which seeks to resolve the
credit risk and litigation contingencies of the credit card operations, enhance
the profitability and value of the core bank operations and return the Company
to profitability on an overall basis. This business plan contains the following
main elements:
o proactive pursuit of the resolution of outstanding litigation
o the sale of up to $600 million in deposits
o utilization of the capital created from the deposit sales to mitigate
future credit card operating losses
o development of the commercial and residential mortgage lending
platforms
o enhancing the value of the Bank's retail deposit franchise
This business plan accelerates the Company's return to overall
profitability by utilizing capital raised from the sale of approximately
one-fourth of the Company's deposit base and retail branch system to mitigate
the impact of anticipated losses from the credit card operations on the
Company's future results of operations.
The Company created its business plan with guidance from the Office of
Thrift Supervision (the "OTS") regarding the extent of deposit sales which may
be approved by the OTS to facilitate the mitigation of future credit card
operating losses. The OTS has initially expressed no objections to the plan, but
the plan has not yet been formally submitted to the OTS for approval.
While the Company believes that it can achieve the objectives of the
business plan adopted, there are significant execution risks related to the
various transactions comprising the business plan. Accordingly there can be no
assurance that these objectives will be achieved.
PROACTIVE PURSUIT OF THE RESOLUTION OF OUTSTANDING LITIGATION
The business plan calls for management to aggressively defend outstanding
consumer and other litigation while at the same time proactively seeking to
resolve such matters on a basis consistent with the objective of increasing
shareholder value through the accelerated resolution of such litigation. The
Company continues to seek a settlement in its consumer litigation in the hope of
settling such claims at a cost which is attractive relative to the contingencies
and in a structure that will limit the assertion of future similar claims in
existing and other jurisdictions. There can be no assurances that such a
resolution will be reached.
SALE OF DEPOSITS
Fidelity has signed definitive agreements with First Federal Bank of
California and Jackson Federal Bank to sell a total of five of Fidelity's branch
offices with approximately $350 million in deposits. The branches to be
purchased by First Federal are located in Culver City and West Hollywood and
those to be purchased by Jackson Federal are located in Big Bear, Blue Jay and
Fullerton. The Company expects to fund the deposit sales with approximately $250
million in multifamily loans and the remainder in cash. The Bank has received
approval from the OTS for these transactions. The Bank anticipates that these
transactions will be completed in the first and second quarters of 2000.
4
Fidelity is in the process of negotiating the sales of additional branches
with up to $250 million in deposits.
UTILIZATION OF CAPITAL TO MITIGATE FUTURE CREDIT CARD OPERATING LOSSES
The Company continues to evaluate options and negotiate potential
transactions to mitigate future credit card operating losses. The business plan
adopted by the Board contemplates the possibility of the sale of the MMG
portfolio and the designation of the ADC portfolio as held for sale. Based upon
indications from interested parties, the Company believes that the ADC portfolio
may not be saleable until the outstanding consumer litigation related to that
portfolio is satisfactorily resolved. The implementation of this strategy would
require the writedown of these portfolios to their actual and/or estimated
liquidation value which, based on indications of value received by the Company,
would require a significant charge against earnings. The sale of either of the
credit card portfolios is subject to the approval of the OTS. The OTS had
indicated to the Bank that they would not approve the sale of the credit card
portfolios if they did not consider the level of capital remaining after the
sale of either or both of the credit card portfolios to be appropriate.
The business plan anticipates that as a result of the proposed deposit sale
and credit card portfolio sale strategy, the Bank would become categorized as
"adequately capitalized" for regulatory capital purposes in 2000 as compared to
"well capitalized" as of the 1999 year-end, returning to the "well capitalized"
category in 2001.
DEVELOPMENT OF THE COMMERCIAL AND RESIDENTIAL MORTGAGE LENDING PLATFORMS
In 2000, the recently established major loan division will offer both
multifamily and commercial mortgage loans. The Company expects the majority of
originations will be held in portfolio to offset the ongoing run-off from the
existing mortgage portfolio and the balance will be sold into the secondary
market.
In addition to conforming loans, the residential loan division will offer A
minus and jumbo mortgage loans. In order to provide a full product line to its
customers, subprime mortgage loans, which will be originated exclusively for
sale into the secondary market, will also be offered. Subprime mortgage loans
will be originated and sold subject to a maximum warehouse of loans pending sale
of $10 million.
While the Company is satisfied with the performance of its existing
nonconforming mortgage portfolio, additions of subprime mortgage loans to that
portfolio have been discontinued due to the possibility of increased regulatory
capital requirements for these assets and the uncertainty of interest in these
assets by potential future acquirers of the Company.
ENHANCING THE VALUE OF THE BANK'S RETAIL DEPOSIT FRANCHISE
The value of the Bank's retail deposit franchise is derived from its
customer base, the location of its branches in the Los Angeles and Orange County
markets, the cost of its deposits, the existing and potential revenue streams
and its operating cost structure.
The business plan provides for the enhancement of the value of this
franchise through:
o Continued emphasis on quality customer service to retain current
customers and attract new customers who have either recently moved
into the Bank's market area or are dissatisfied with the service
provided by other institutions.
o Continuance of the current deposit pricing strategy which is expected
to maintain a differential between the Bank's cost of funds and COFI.
o Providing a broad array of deposit, investment, insurance and lending
products to customers while maintaining investment product sales
penetration rates that are among the highest in the nation.
o Implementing new core bank information systems and restructuring back
office functions. At the maturity of the Bank's current facilities
5
management agreement covering its banking information systems, the
Bank will convert to systems provided by Aurum Technology, which was
formerly the financial services division of Electronic Data Systems
Corporation. This conversion, which will cost approximately $2.0
million and is expected to result in annual savings of approximately
$4.0 million beginning in the third quarter of 2000.
RETURN OF THE COMPANY TO PROFITABILITY ON AN OVERALL BASIS
The mitigation of future credit card operating losses and the improvement
in operating efficiency discussed above contribute to a business plan that,
while it projects a significant overall loss for the 2000 fiscal year, does
anticipate a return to overall profitability starting in the third quarter of
2000 with significantly reduced overall credit risk.
RETAIL FINANCIAL SERVICES -- CORE BANK OPERATIONS
Fidelity operates in Southern California through a network of 35
full-service branches which are located throughout three counties, but are
concentrated in Los Angeles and Orange counties. Average deposits at the Bank's
Southern California branches are $71.1 million. Deposits at 17 of the branches
exceed $60 million, with five of these branches having deposits in excess of
$100 million.
DEPOSITS
As is typical for a thrift, the Bank has relied heavily on CDs to provide
the bulk of its funding. At December 31, 1999, the composition of deposits are
19% transaction accounts and 81% CDs. All of the deposits were gathered through
the branch system as the Bank has no brokered deposits.
The Bank's transaction accounts consist of basic checking and savings
accounts, including money market accounts. The basic checking accounts are
primarily non-interest bearing accounts that charge monthly service fees. The
Bank's saving accounts bear interest at rates ranging from 2.00% to 4.00%. The
Bank offers CDs with maturities ranging from 1 month to 5 years generally
bearing interest rates at levels consistent with the Bank's primary competitors.
Historically, the Bank has offered CDs with higher interest rates and less
restrictive withdrawal and deposit features to increase its deposits. From time
to time, the Bank has also matched competitor's rates to retain maturing CDs.
During the fourth quarter of 1998, as part of the Bank's efforts to reduce its
overall funding costs and increase its regulatory capital ratios through the
reduction of its assets and liabilities, the Bank reduced the rates on selected
CDs to levels below that of its competitors. The greatest disparity in interest
rates from that of its competitors was for deposits in excess of $100,000. This
strategy resulted in a reduction in total deposits during the fourth quarter of
1998 and the first two quarters of 1999 of $413 million, 63% of which was in CDs
in excess of $100,000. This strategy and the lower level of general interest
rates during early 1999 also resulted in a reduction of the Bank's cost of
deposits from 4.78% at September 30, 1998 to 4.21% at December 31, 1999.
OTHER FINANCIAL SERVICES/INTEGRATED PLATFORM
The Company offers credit, investment and insurance products to its
customers through an "integrated platform" retail delivery strategy. This
strategy is designed to integrate the sales of investment products with
traditional banking products through a single sales force. Sales of investment,
credit and CD products take place in areas that are appropriately separated from
the deposit-taking areas of the branches. Employees offering alternative
investment products carry all appropriate NASD registrations and insurance
licenses. The Company has extensive disclosure policies in place to minimize any
possible confusion between the Federal Deposit Insurance Corporation (the
"FDIC") insured and non-insured products.
6
Gateway is responsible for providing the retail bank distribution system
with a variety of investment products, such as mutual funds and fixed and
variable annuities. Insurance products are offered through Fidelity's insurance
agency subsidiary. Through Gateway, the Company has developed strategic
relationships with nationally known providers of investment and insurance
products. The use of these products serves to shift market acceptance risk from
the Company and to enhance product and name recognition through relationships
with nationally known entities, which also provide marketing support. For the
five years ended December 31, 1999 total sales of investment products through
the retail branch system were $164.9 million, $180.7 million, $159.8 million,
$118.1 million and $89.8 million, respectively.
LENDING ACTIVITIES
Historically, the Bank's lending activities consisted primarily of single
family and multifamily mortgage loan originations. In the third quarter of 1994,
the Bank closed its wholesale correspondent single family origination network
and its multifamily origination operations. Because of the efforts required to
resolve credit problems in its multifamily loan portfolio, to recapitalize the
Bank in 1995 and to reduce its operating expenses, no significant lending
activities occurred in 1995 and 1996. Beginning in 1997, and continuing through
1998, the Bank's lending activity was focused on consumer loan products, such as
credit cards and auto loans. In the third quarter of 1998, the Bank began
operations to acquire or originate nonconforming mortgage loans. In the fourth
quarter of 1999, the Bank began operations to originate multifamily and
commercial loans.
CORE BANK OPERATIONS
During the third quarter of 1998, the Bank established a nonconforming
mortgage loan division to acquire and originate nonconforming mortgage loans. In
the first quarter of 1999, Fidelity began offering its own conforming and
nonconforming mortgage loan products while continuing to offer the products of
third parties.
At December 31, 1999, the Bank's portfolio of nonconforming mortgage loans
totaled $96 million. These loans are expected to experience higher levels of
delinquencies and credit losses than the Bank's conforming single family
residential mortgage loan portfolio; however, these loans are expected to
provide a higher risk adjusted yield.
In the fourth quarter of 1999, the Bank established a new division to
originate multifamily and commercial real estate loans. The management team for
this division recently joined Fidelity from IMPAC Commercial Capital
Corporation, a subsidiary of IMPAC Commercial Holdings, Inc., where over an
eighteen month period they originated over $700 million in multifamily and
commercial mortgage loans which were securitized or sold into the secondary
market. It is anticipated that the loans originated by this division will either
be held in the Bank's portfolio to replace the ongoing runoff of its existing
mortgage portfolio or sold into the secondary market.
In the fourth quarter of 1999, the Bank restructured its nonconforming
mortgage loan program and consolidated its residential mortgage lending
operations. As a result, a residential lending division was created which offers
conforming, A minus, jumbo loans and second mortgages through the Bank's retail
branches and selected brokers. In order to provide a full product line to its
customers, subprime mortgage loans, which will be exclusively originated for
sale into the secondary market, will also be offered. Subprime mortgage loans
will be originated and sold subject to a maximum warehouse of loans pending sale
of $10 million.
The Bank offers overdraft protection for checking account customers through
its "Instant Reserve" personal line of credit. The Instant Reserve account
offers average credit limits of $1,500 and is available to new and existing
checking customers.
7
CREDIT CARD OPERATIONS
All of the Bank's credit card programs were developed with marketers who
were responsible for marketing and processing applications. The Bank served as
issuer and owner of the credit card accounts, and was responsible for the risk
management associated with the extension of credit. The Bank developed and
implemented the underwriting standards as well as the supporting risk management
systems. Underwriting was primarily based on Fair Isaac Company ("FICO") credit
scoring methodology and projected loss rates.
The Bank entered into credit enhancement credit card programs with ADC,
FAMCO and Direct Furniture. Under the credit enhancement program, the marketer
provides credit enhancements to guarantee and support full repayment of the
Bank's outstanding receivables in the event of cardholder defaults, and, in
exchange, has the right to purchase outstanding receivables at par and receives
all revenues, net of expenses and funding costs paid to the Bank, from the
program. The Bank is paid a funding cost based on a contractual spread over the
Bank's cost of funds or the one month London Interbank Offered Rate ("LIBOR").
The marketer is required to fund a cash reserve account as part of the credit
enhancement.
The Bank entered into shared risk programs with MMG and Renzi Co. LLC
("Renzi"). Under the shared risk programs, the Bank and the marketer shared
equally the net earnings or loss of the program. The net earnings or loss
included estimated loan loss provisions, fees paid to the marketer for
originating the accounts and a yield paid to the Bank for funding the credit
card balances.
The Bank's credit card programs offered cards with credit limits ranging
from $100 to $5,000. One of the programs, which was marketed to individuals at
the lower end of the credit spectrum, had credit limits of $350 or $500 and
charged origination fees of $249 and annual fees of $50 at the time of issuance.
Two of the other programs provided credit cards to customers who utilized the
cards to finance purchases from the marketers or from direct sales organizations
with which the marketer had a contractual relationship. Credit limits for these
cards were based on the amount of the purchase and the customers' credit.
No new accounts have been originated under the MMG program since August
1998 and the Bank terminated its agreement with MMG in October 1998.
Additionally, ADC and the Bank entered into a settlement agreement in which they
agreed to wind down originations under the ADC program and terminate the related
agreement. No new accounts have been originated under the ADC program since the
first quarter of 1999. During the fourth quarter of 1998, originations of new
accounts under the FAMCO and Renzi programs ceased. Currently, the Bank is only
originating credit card accounts under the Direct Furniture program for which
Direct Furniture is obligated to fund any net advances.
LOAN SERVICING
Servicing of the Bank's loan portfolio is performed by the Company or
contract servicers. The Bank services substantially all of the multifamily
mortgage loan portfolio, which is almost exclusively located in California,
almost all of the conforming single family mortgage portfolio, the commercial
and industrial mortgage loan portfolio and the nonconforming residential
mortgage portfolio. The Bank's credit card portfolio is serviced by the Bank or
the credit card marketers. The Bank contracts with outside companies for
servicing of the Bank's other consumer loan portfolios. In 1999, the Bank
repurchased the servicing rights to substantially all of the single family loans
which had been sold in 1996. This repurchase is expected to increase the
efficiency of the Bank's existing servicing operations and give the Bank greater
control over the performance of the related mortgages. In the future, servicing
of new originations are expected to be retained by the Bank.
CORE BANK OPERATIONS
The Bank's Loan Servicing Department is responsible for collecting payments
from borrowers, contacting delinquent borrowers, and conducting foreclosure
proceedings. The Bank tracks and, in some cases, maintains impound accounts for
taxes and insurance and provides annual analysis of each account. In addition,
the Bank monitors active hazard and flood insurance and will force place
insurance on the property in the event the borrower's coverage lapses.
8
In addition to servicing its own assets, the Bank provides servicing on
mortgage loans previously sold by the Bank to over 30 investors. Fidelity is an
approved originator and servicer for the Federal National Mortgage Association
(the "FNMA"), the Federal Home Loan Mortgage Corporation (the "FHLMC") and the
Federal Housing Administration (the "FHA").
The Bank has a sophisticated loan servicing system that enables it to
provide effective and efficient processing of loans. The system, which is able
to service fixed and adjustable rate loans as well as loans with staggered due
dates, provides the Bank with payment processing, collection and reporting
capabilities.
Collection activity commences upon the expiration of the grace period. A
series of two notices are mailed to delinquent borrowers over a period of 30
days and telephone calls are made on a weekly basis. Upon commencing foreclosure
action, the borrower is informed of the foreclosure status and the reinstatement
period. Property inspections are obtained to observe the condition of the
property and to determine whether changes in the value have occurred since the
date of origination. The Bank forecloses as quickly as state regulations allow.
The process may be extended in the event the borrower files bankruptcy or the
Bank enters into negotiations with the borrower for a loan restructure or
workout.
Regulation and practices regarding the foreclosure of properties and the
rights of the borrower in default vary greatly from jurisdiction to
jurisdiction. Loans originated by the Bank are secured by mortgages, deeds of
trust, security deeds or deeds to secure debt, based upon the prevailing
practice in the state in which the property securing the loan is located.
Depending upon local law, foreclosure is effected by judicial action and
or/non-judicial sale, and is subject to various notice and filing requirements.
In California, where the majority of the Bank's collateral is located,
non-bankruptcy foreclosure proceedings usually take the form of a nonjudicial
foreclosure, which is typically a four month process. Upon completion, the Bank
obtains title to the collateral but is left generally without recourse against
the borrower for any deficiency from the difference between the value of the
collateral and the loan amount.
Properties are managed prior to and post foreclosure sale with the
objective of maximizing the return on each individual asset. This strategy
includes loan modifications, short sales, deeds in lieu of foreclosure and
rehabilitation of certain properties when the investment significantly increases
the net yield on the asset. The Bank may agree to restructure the loan if 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 additional 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.
The outside servicers that provide servicing for certain of the Bank's
mortgage loans perform their customer services, collection, foreclosure and
asset disposition services in a manner similar to that performed by the Bank.
These servicers are also responsible for remitting collections and providing
detailed activity reporting on a monthly basis. The Bank's loan servicing
department is responsible for monitoring the performance of these outside
servicers.
The Bank's consumer loans other than credit card loans are serviced by
companies with specialized expertise in servicing the related loan products.
These servicers are responsible for customer and collection services,
repossession or foreclosure actions and the disposition of repossessed assets or
foreclosed property. These servicers remit collections to the Bank and provide
periodic reporting on the related portfolios.
CREDIT CARD OPERATIONS
The Bank's credit card portfolios are serviced by the Bank through its
Beaverton, Oregon operations or by the related marketers. The Company's credit
card servicing center located in Beaverton, Oregon, began operations during the
second quarter of 1998, and currently provides customer service for the ADC,
MMG, Direct Furniture and Renzi credit card portfolios, and provides collection
services for the ADC, MMG and Renzi credit card portfolios. Collection services
for the Direct Furniture credit card portfolio is performed by the related
marketer. FAMCO provides both customer service and collection services for the
FAMCO credit card portfolio. In February 2000, the Bank notified FAMCO that it
is terminating its servicing agreement with FAMCO, subject to a contractual
notice period of 180 days. At the end of this notice period the Bank intends to
provide, directly, both customer and collection services for the FAMCO credit
card portfolio.
9
CREDIT ADMINISTRATION
The credit administration function is responsible for monitoring and
assessing the credit risk in the Bank's loan portfolio. This includes the
identification, measurement and establishment of credit loss reserves, including
the allowance for loan and lease losses ("ALLL") and specific valuation
allowances ("SVAs").
LOAN MONITORING
The Bank has a loan review system that is designed to meet the following
objectives:
o 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.
o To project relevant trends that affect the collectibility of the loan
portfolio.
o To provide essential information to assess the adequacy of the
allowance for loan losses and to identify and recognize in a timely
manner estimated specific loan losses.
o To assess the adequacy of and adherence to the Bank's internal credit
policies and loan administration procedures and to monitor compliance
with the foregoing and with related 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.
LOAN GRADING SYSTEM
The Bank has a loan grading policy which for larger multifamily and
commercial mortgages loans is implemented through a loan grading system ("LGS").
The evaluation of each loan is based on four key risk attributes: (1) the
ability of income from the property to act as the primary source of repayment,
(2) the value of the collateral if a sale is required, (3) the ability and
willingness of the borrower to pay, and (4) market trends in the area around the
property. Grading loans involves assessing various risk indicators related to
the borrower. For income properties, the primary source of repayment is cash
flow from the operation of the property. The adequacy of the property's cash
flow is the primary determinant of the risk grade. The borrowers' historical
payment performance, including loan payments, tax payments, insurance payments
and property maintenance, is also reviewed when determining a loan grade. The
absence of borrower performance indicates a lack of capacity and possible
downgrade of the loan. The value of the collateral is considered a secondary
source of repayment which becomes more important when the primary sources become
weaker. The collateral value can influence the primary repayment source by
motivating the borrower to continue supporting the property or impacting the
borrower's ability to refinance the loan. Loan grading for other loans is
primarily based on payment performance.
Credit risk for all loans 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
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 Substandard 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.
10
An asset designated as SPECIAL MENTION does not currently expose the
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.
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
Valuation Allowance ("SVA") 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 SVA 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 estimated fair market value and a SVA is
established for such excess.
INVESTMENTS
The Company's investment activities have historically consisted of trading,
available for sale ("AFS") and held to maturity portfolios as well as short term
liquidity investing.
An investment trading portfolio is used to generate gains from the
purchases and sale of securities. Historically, securities held in a trading
portfolio consist primarily of mortgage-backed securities ("MBS") which allows
the Company to earn interest during the period which these securities are held.
During the third quarter of 1998, the Company liquidated its investment trading
portfolio and at December 31, 1999, the Company did not have an investment
trading portfolio.
The Company's AFS and held to maturity investment portfolios are used to
generate interest income for funds not invested in loans. The AFS portfolio
provides flexibility to the Company in managing its balance sheet as these
assets are generally more marketable than loans. Investments in the Company's
AFS and held to maturity portfolios primarily consists of MBS, treasuries and
collateralized mortgage obligations ("CMO"). At December 31, 1999, the Company
had $320.2 million in its AFS portfolio.
The Company is required to maintain a certain level of liquidity in the
form of cash or cash equivalents. In addition, the Company may have additional
liquidity as a result of its balance sheet management. This liquidity is
invested in MBS, treasuries, federal funds sold and whole loan investment
repurchase agreements. At December 31, 1999, the Company had cash and cash
equivalents of $89.5 million.
BORROWINGS
In addition to retail deposits, the Company obtains funding from FHLB
advances, securities sold under agreements to repurchase, and other short-term
and long-term borrowings. The Company may, from time to time, utilize 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.
11
The Company 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. 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 U.S. 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 five 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. 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 15% of total assets.
On July 18, 1997, the Company issued approximately $51.5 million of its 12%
Senior Notes due July 18, 2007 (the "Senior Notes") in exchange for the
outstanding shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock,
Series A (the "Preferred Stock") issued by Fidelity in 1995. Holders of
approximately 11,000 shares of the majority interest elected not to exchange
their stock for Senior Notes and these shares are reflected as preferred stock
issued by consolidated subsidiary on the Statement of Financial Condition as of
December 31, 1999 and 1998.
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). The Company 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.
COMPETITION
As a thrift institution, the Company's most significant revenue source is
its loan portfolio and its primary source of funding is from deposits.
During 1999, the Company primarily originated mortgage loans on single
family residential properties. During 1997 and 1998, the Company focused it loan
origination activities on consumer loans. Prior to 1994, the Company primarily
originated mortgage loans, including a substantial amount of loans secured by
multifamily residences. In each of these areas, the Company faces significant
competition from thrifts, commercial banks, mortgage bankers and others.
Competition is based primarily on pricing, credit access and customer service. A
number of these competitors have significantly more resources than the Company,
including larger asset bases, more equity, more locations and more employees.
The Company has an established retail branch system in Southern California
upon which it relies for its deposits. Because these deposits are heavily
concentrated in CDs rather than transaction accounts, the Company's deposit base
is more sensitive to changes in interest rates. Historically, because of expense
constraints, the Company has not spent significant amounts in advertising its
deposit products. Competition for customers' deposits is generally based on
interest rates paid, perceived credit risk, account flexibility, costs and
customer service. The Company faces significant competition in attracting funds
from other thrifts, commercial banks, mutual funds, insurance companies, credit
unions, investment banks, investment brokerage firms, pension funds and others.
A number of competitors are significantly larger than the Company, maintain a
better credit standing and are able to pay higher rates of return to customers.
In addition, most of the Company's competitors spend more on advertising.
EMPLOYEES
The Company had 767 average full-time equivalent employees ("FTEs") for the
1999 year with 835 employees at December 31, 1999 (including both full-time and
part-time employees) 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 Company considers employee relations to be satisfactory. However,
the Company's disappointing results of operations and publicly disclosed
intentions to consider the sale of the Company have adversely impacted its
ability to retain employees. The Company has taken certain measures to retain
key employees, including the granting of stock options and the execution of
severance and change-in-control agreements. However, no assurances can be given
that these measures will be sufficient to retain key employees.
12
REGULATION AND SUPERVISION
GENERAL
Bank Plus is a savings and loan holding company and, as such, is subject to
the OTS regulation, examination, supervision and reporting requirements.
Fidelity is a federally chartered savings bank, a member of the FHLB of San
Francisco, and its deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF") to the maximum extent permitted by law.
Fidelity is subject to extensive regulation by the OTS, as its chartering
agency, and by the FDIC, as its deposit insurer. In addition to the statutes and
regulations discussed below, Fidelity must undergo 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. 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 also impose assessments on Fidelity to
cover the cost of FDIC examinations. Finally, Fidelity is subject to regulation
by the Board of Governors of the Federal Reserve System ("FRB") with respect to
certain aspects of its business.
Changes in legislation and regulatory policy and the interpretations
thereof have materially affected the business of the Company and other financial
institutions in the past and are likely to do so in the future. 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 or other
distributions by Fidelity, which may, in turn, adversely affect the ability of
Bank Plus to pay its obligations as they become due. In addition, certain
regulatory actions, including general increases in federal deposit insurance
premiums, 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.
BANK PLUS REGULATION
Bank Plus is a unitary savings and loan holding company within the meaning
of the Home Owners' Loan Act of 1933, as amended ("HOLA"). As such, Bank Plus is
required to be registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. Among other things, the
OTS has enforcement authority which permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
savings institution subsidiary of such a holding company fails to meet the
qualified thrift lender ("QTL") test, then such unitary holding company also
will become subject to the activities restrictions applicable to multiple
savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, will have to register as, and
become subject to the restrictions applicable to, a bank holding company.
If Bank Plus were to acquire control of another savings institution, other
than through merger or other business combination with Fidelity, Bank Plus would
thereupon become a multiple savings and loan holding company. Except under
limited circumstances, the activities of Bank Plus and any of its subsidiaries
(other than Fidelity or other subsidiary savings institutions) would thereafter
be subject to further extensive limitations. In general, such holding company
would be limited primarily to activities permissible for bank holding companies
under the Bank Holding Company Act and other activities in which multiple
savings and loan companies were authorized by regulation to engage as of March
5, 1987.
13
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof, or
(ii) more than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired by the state-chartered institutions or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
FIDELITY REGULATION--CAPITAL REQUIREMENTS AND CAPITAL CATEGORIES
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
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 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, has a high amount of nonperforming loans, has a high
degree of exposure to concentration of credit risk or risks arising from
nontraditional activities, or fails 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 TANGIBLE ASSETS. Tangible
capital is composed of (1) common stockholders' equity, noncumulative perpetual
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 certain purchased or originated mortgage servicing rights, (b)
equity and debt investments in subsidiaries engaged in activities not
permissible for a national bank (except as otherwise provided), and (c) the
amount by which investments in subsidiaries engaged as principal in activities
not permissible for national banks exceeds the amount of such investments as of
April 12, 1989, and the lesser of the institution's investments in and
extensions of credit to such subsidiaries, 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 tangible assets equal the institution's consolidated tangible assets,
minus any assets that are deducted in calculating capital.
CORE CAPITAL OF AT LEAST 3% OF ADJUSTED TANGIBLE ASSETS (THE "LEVERAGE
LIMIT"). Core capital consists of tangible capital plus (1) qualifying goodwill
resulting from pre-April 12, 1989 acquisitions of troubled savings institutions,
and (2) certain qualifying intangible assets and mortgage servicing rights.
Certain deferred tax assets must also be deducted from 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.
14
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 0% for
cash and government securities to 100% for assets (including past-due loans and
real estate owned ("REO")) 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, 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.
Under the 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 whose interest
rate risk exposure (measured as set forth in the rule) exceeded 2.0% 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 2.0% 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.
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. The OTS has 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, 1999 had the rule been
in effect at that time.
FDICIA PROMPT CORRECTION ACTION 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
Prompt Corrective Action ("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 tangible 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
tangible assets (leverage ratio) is at least 4.0% (3.0% if the institution
receives the highest rating on the OTS financial institutions rating system).
15
An institution whose capital does not meet the amounts required 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 tangible 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
perpetual preferred stock minus intangible assets other than supervisory
goodwill and certain originated and purchased mortgage servicing rights) to
adjusted tangible assets is equal to or less than 2.0%.
MANDATORY RESTRICTIONS ON UNDERCAPITALIZED INSTITUTIONS. There are numerous
mandatory restrictions on the activities of undercapitalized institutions. An
institution that is undercapitalized must submit a capital restoration plan to
the OTS that the OTS may approve only if it 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
institution's performance under the plan must be guaranteed by every company
that controls the institution, up to specified limits. An institution that is
undercapitalized may not acquire an interest in any company, open a new branch
office or engage in a new line of business without OTS or FDIC approval. An
undercapitalized institution also may not increase its average total assets
during any quarter except in accordance with an approved capital restoration
plan. An undercapitalized savings institution generally may not pay any
dividends or make other capital distributions. Undercapitalized institutions
also may not pay management fees to any company or individual that controls the
institution. 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.
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 generally prohibited from making
payments of principal or interest on subordinated debt beginning 60 days after
the institution becomes critically undercapitalized. 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.
DISCRETIONARY SANCTIONS. With respect to an undercapitalized institution,
the OTS, under certain circumstances, has the authority, among other things, to
order the institution to recapitalize by selling shares of capital stock or
other securities, order the institution to agree to be acquired by another
depository institution holding company or combine with another depository
institution, restrict transactions with affiliates, 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, require the institution to divest
any subsidiary or the institution's holding company to divest the institution or
any other subsidiary or 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. With respect to significantly undercapitalized
institutions and certain undercapitalized institutions, the OTS must take
certain of the above mentioned actions.
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 undercapitalized institution if it (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.
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Finally, 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 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.
FIDELITY REGULATION--ACTIVITIES REGULATION NOT RELATED TO CAPITAL COMPLIANCE
SAFETY AND SOUNDNESS STANDARDS. 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.
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 PCA. 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.
The OTS has adopted guidelines for 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.
As a result of the OTS' findings during their 1998 safety and soundness
examination, the Bank 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 senior 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 the Bank and its
affiliates.
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 the OTS. Such
institutions 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.
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QUALIFIED THRIFT LENDER TEST. The 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. In 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("EGRPRA") was adopted, amending the QTL requirements to allow
educational loans, small business loans and credit card loans to count as
qualified thrift assets without limit and to allow loans for personal, family or
household purposes to count as qualified thrift assets in the category limited
to 20% of portfolio assets. The previous limit for loans for personal, family or
household purposes was also 10% of portfolio assets. Finally, EGRPRA provided
that as an alternative to the QTL test, thrifts may choose to comply with the
Internal Revenue Service's domestic building and loan tax code test.
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 certain limitations and
deductions from regulatory capital. 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.
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 unimproved 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 unit residential property should not
exceed 30% of risk-based capital.
NOTIFICATION OF NEW OFFICERS AND DIRECTORS. A federal savings bank that
does not comply with all minimum capital requirements under part 567 of the OTS
regulations is deemed to be in "troubled condition" by the OTS, or that has been
notified by the OTS in connection with the review of a capital restriction plan,
or otherwise, that a notice must be provided 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.
PAYMENT OF DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The payment of
dividends, stock repurchases, and other capital distributions by Fidelity to
Bank Plus is subject to regulation by the OTS.
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The OTS recently amended the capital distribution rule to conform to the
PCA system. Under the rule, an institution is able to make a capital
distribution (i) without prior notice to the OTS if it is not owned by a savings
and loan holding company and, after the proposed capital distribution, will
remain at least "adequately capitalized," the distribution would not reduce the
amount of common or preferred stock or retire debt that is included in capital,
and the distribution would not otherwise violate any statutory regulatory or
other prohibition; (ii) without an application if the institution has a
composite rating of "1" or "2", is otherwise eligible for expedited treatment
and the distribution does not exceed a specified amount; and (iii) without
notice or application if all of the conditions specified above are met. Fidelity
is still required to obtain OTS approval prior to making a capital distribution.
REQUIRED LIQUIDITY. OTS regulations require savings institutions to
maintain, for each calendar quarter, an average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances, certain
mortgage-related securities, certain loans secured by first liens on residential
property, 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 4% of either (i) the prior
quarter end balance of its net withdrawable accounts due in one year or less
plus borrowings due in one year or less (the "liquidity base") or (ii) the
average daily balance of the liquidity base during the prior calendar quarter.
In addition, savings institutions must comply with a general non-quantitative
requirement to maintain a safe and sound level of liquidity. 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. Monetary penalties may be imposed for
failure to meet liquidity ratio requirements.
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.
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 SVAs equal to the amount classified as loss or charge off such
amount.
FIDELITY REGULATION--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 Bank Insurance Fund ("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 Federal Savings and Loan Insurance Corporation ("FSLIC")
prior to FIRREA.
INSURANCE PREMIUM ASSESSMENTS. The FDICIA directed the FDIC to establish a
risk-based system for setting deposit insurance premium 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.
19
Legislation was enacted on September 30, 1996, to address the disparity in
bank and thrift deposit insurance premiums. This 1996 legislation altered the
obligation with respect to the payment of interest on the debt obligations
issued by the Financing Corporation ("FICO Debt") and separated the assessments
levied by the FDIC for deposit insurance coverage from assessments to make such
FICO Debt interest payments. Although the risk-based assessment system for BIF
members and for SAIF members, such as Fidelity, provides for the same assessment
rates for similarly rated institutions, Federal law provides for different
assessment rates for purposes of the FICO Debt interest payments to be paid on
SAIF and BIF deposits until December 31, 1999. Under these provisions, SAIF
deposits were assessed at five times the rate at which BIF deposits will be
assessed. In 1999, the SAIF assessment for purposes of paying FICO Debt interest
is 0.0610%. Effective January 1, 2000, this rate decreased to .0212%.
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.
FIDELITY AFFILIATES REGULATION
AFFILIATE AND INSIDER TRANSACTIONS. The ability of Bank Plus and its
non-depository subsidiaries 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 HOLA, 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 OTS regulatory limitations, loans by Fidelity to directors, executive
officers and 10% stockholders of Fidelity, Bank Plus, and Bank Plus'
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 unimpaired
capital and unimpaired surplus. 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.
20
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 about, participating in, counseling, or aiding and abetting a violation
of law or unsafe or unsound practice by a savings institution.
FIDELITY REGULATION--COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("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.
Performance is assessed on the basis of 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 connection with its assessment of CRA performance,
the OTS assigns a rating of "outstanding," "satisfactory," "needs improvement"
or "substantial noncompliance." Based on its most recent examination, Fidelity
was rated "satisfactory."
FIDELITY REGULATION--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, 1999, Fidelity was in compliance with this requirement with an
investment in the stock of the FHLB of San Francisco of $31.1 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.
FIDELITY REGULATION--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, 1999, Fidelity was required
to maintain $8.4 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.
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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.
NON-BANKING REGULATION
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 the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("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 a bank's
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.
22
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit a holding company system to engage in a
full range of financial activities through a new entity known as a Financial
Holding Company. "Financial activities" is broadly defined to include not only
banking, insurance, and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding
companies;
o Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer
information;
o Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the FHLB system;
o Modifies the laws governing the implementation of the CRA, and
o Addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the
FDIA governing subsidiaries of state banks that engage in "activities as
principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries.
23
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Company and the
Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Company and the Bank.
GATEWAY REGULATION
Gateway has been an NASD registered broker/dealer since October 1993 and
offers securities products, such as mutual funds and variable annuities, to
customers of the Bank and others. Fixed annuities are offered through the Bank's
insurance agency, Citadel Service Corporation, dba Fidelity Insurance Agency of
Glendale. 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 federally
insured financial institutions. The interagency guidelines require that, among
other things, customers be 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 Securities and
Exchange Commission ("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 August of 1998, Gateway was audited by the NASD and
in 1994 by the SEC and the State of California Department of Corporations.
Effective February 15, 1998, the NASD modified its Conduct Rules governing
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 new rules is to minimize confusion by retail customers. The new
rules cover the location setting, networking and brokerage affiliate agreements,
customer disclosure and written acknowledgment, communications with the public
and notifications of terminations.
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 annual reports with the NASD and SEC containing
detailed financial information with respect to its broker/dealer operation.
ITEM 2. PROPERTIES
The executive offices of Fidelity are located at 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. The Bank also leases administrative offices in an adjacent building at
4563 Colorado Boulevard (15,500 square feet), in Beaverton, Oregon
(approximately 45,000 square feet) and in Irvine, California (approximately
20,000 square feet).
On December 31, 1999, Fidelity owned 8 of its branch facilities and leased
the remaining 28 of its branch facilities under leases with terms (including
optional extension periods) expiring from 2000 through 2030. All owned and
leased office facilities are located in Southern California with the exceptions
of the credit processing center located in Beaverton, Oregon and a branch office
located in Bloomington, Minnesota. The amount of office space, either leased or
owned, is sufficient to meet the Company's anticipated facilities requirements
for the foreseeable future.
24
ITEM 3. LEGAL PROCEEDINGS
MMG CREDIT CARD LITIGATION
In November 1997, the Bank entered into a credit card marketing
relationship with MMG pursuant to which MMG was to solicit members of certain
agreed-upon affinity groups to become credit card holders. The Bank was to
contract for the provision of or provide credit card servicing and other related
functions. MMG and the Bank were to share equally in program profits and losses.
In late summer and fall of 1998, disputes arose between the parties.
On September 8, 1998, the Bank instituted an arbitration proceeding in Los
Angeles based upon such claims, entitled IN THE MATTER OF ARBITRATION BETWEEN
FIDELITY FEDERAL BANK AND MMG DIRECT, INC., American Arbitration Association No.
72 147 01072 98. In October 1998, the Bank reasserted MMG's defaults and
terminated the MMG contract. MMG instituted three proceedings against the Bank
in Texas seeking to litigate, rather than arbitrate, the disputes between the
parties claiming large sums in compensatory and punitive damages against the
Bank. Ultimately, after filing a proceeding to compel arbitration, the Bank was
successful in enforcing the arbitration provision in its contract with MMG and
the matter was arbitrated during spring and early summer of 1999 with MMG and
the Bank each asserting their claims.
The arbitrator issued his award of arbitration on September 15, 1999. In
that award, the arbitrator (i) terminated the marketing agreements between the
parties, as requested by the Bank and excused the parties from any existing or
future obligations; (ii) gave the Bank the right to sell or otherwise dispose of
the credit card portfolio generated under the marketing agreements; (iii)
ordered the Bank to pay MMG certain fees owed by the Bank to MMG which were not
disputed but which the Bank withheld during the course of the dispute as a
prejudgment offset; (iv) ordered the Bank to pay MMG's legal fees in the amount
of $1.0 million; and (v) ordered the Bank to pay MMG for its share of the
arbitration costs. The award declared that it constituted a full and final
settlement of all claims and counterclaims between the parties as set forth in
their arbitration pleadings.
The arbitrator's award was confirmed into a judgment at the joint request
of the parties and the Bank has satisfied all obligations under the judgment.
Disputes arose between the Bank and MMG with respect to certain matters not
clearly disposed of by the arbitrator's award, which generated a further legal
proceeding instituted by MMG in Texas. In late November of 1999, the parties
resolved those disputes and executed a settlement agreement releasing any and
all claims held by either party. As a part of the settlement agreement, MMG was
obligated to dismiss the Texas proceeding it brought following the arbitrator's
award, but to date has failed to do so, giving rise to a claim by the Bank
against MMG and others that there has been a breach of the settlement agreement.
NATIONWIDE CAPITAL COMPANY LLC CREDIT CARD LITIGATION
As a part of the affinity credit card marketing program with MMG, the Bank
entered into an agreement with Nationwide Capital Company, L.L.C.
("Nationwide"), which purported to have arrangements with automobile dealers
through which dealer-branded credit cards would be issued to customers of the
dealers. The Nationwide contract expressly provided that it could be terminated
upon termination of the Bank's contract with MMG.
On November 30, 1999, Nationwide filed a plea in intervention against the
Bank in the District Court, 116th Judicial District, Dallas County, Texas, Cause
No. DV-99-01269, entitled NATIONWIDE CAPITAL COMPANY, L.L.C.,
PLAINTIFF/INTERVENOR v. FIDELITY FEDERAL BANK, F.S.B., THIRD PARTY DEFENDANT. In
that action, Nationwide alleges that the Bank wrongfully interfered with
Nationwide's contracts with MMG and with certain automobile dealers. Nationwide
seeks unspecified actual and exemplary damages.
25
The Bank filed a motion to strike the plea in intervention and to compel
Nationwide to arbitrate its disputes with the Bank pursuant to the terms of its
contract with the Bank. That motion was denied by the Texas Court on March 23,
2000. The Bank intends to appeal the Texas Court's denial of the Bank's motion.
The Bank has also filed an action against Nationwide in the Federal District
Court for the Central District of California styled FIDELITY FEDERAL BANK, A
FEDERAL SAVINGS BANK, PETITIONER v. NATIONWIDE CAPITAL CO., L.L.C., RESPONDENT,
Case No. 99-13428AHM, seeking to compel Nationwide to arbitrate its disputes
with the Bank. The Bank believes that Nationwide's claims against it are without
merit and the Bank intends to defend itself vigorously.
PURPORTED CLASS ACTION LITIGATION
On October 19, 1998, a purported class action was filed against the Company
and its current and immediately preceding chief executive officers. The case was
originally entitled HOWARD GUNTY PROFIT SHARING PLAN, BOTH INDIVIDUALLY AND ON
BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS v. RICHARD M. GREENWOOD,
MARK K. MASON, BANK PLUS CORPORATION, AND DOES 1 THROUGH 50, INCLUSIVE,
DEFENDANTS, Los Angeles Superior Court, Central Judicial District, Case No.
BC199336 ("Gunty I"). This action originally alleged that the Company failed to
make adequate public disclosure concerning losses in the Bank's credit card
operations during the period from August 14, 1998 (when the Company filed its
quarterly report on Form l0-Q for the second quarter) through September 22, 1998
(when the Company issued a press release concerning its credit card losses). An
amended complaint was filed in the Los Angeles Superior Court, Central Judicial
District, Case No. BC199336, entitled HOWARD GUNTY PROFIT SHARING PLAN AND
ROBERT E. YELIN, BOTH INDIVIDUALLY AND ON BEHALF OF THE YELIN FAMILY TRUST U/A,
BOTH INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS, v.
RICHARD M. GREENWOOD, MARK K. MASON, BANK PLUS CORPORATION, AND DOES 1 THROUGH
50, INCLUSIVE ("Gunty II"). The amended complaint purports to expand the class
period to extend from March 30, 1998 through September 22, 1998. The complaint
includes claims for negligent misrepresentation, common law fraud, statutory
fraud and violations of the California Corporations Code.
On September 20, 1999, a second purported class action was filed against
the Company and its current and immediately preceding chief executive officers.
The case is entitled GARY FELDMAN AND PETER WACHTEL, EACH INDIVIDUALLY AND ALSO
ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS v. BANK PLUS CORPORATION,
RICHARD M. GREENWOOD, MARK K. MASON AND DOES 1 THROUGH 50 INCLUSIVE, DEFENDANTS,
Superior Court of the State of California, County of Los Angeles, Case No. BC
217063. Except for the named individual plaintiffs' dates of purchase and
certain other minor variations, the FELDMAN complaint is virtually identical to
the Gunty II complaint and was filed by the same plaintiffs' counsel. The
Company believes the claims in FELDMAN are barred by the Security Litigation
Reform Standards Act of 1998 ("SLUSA"), which requires securities fraud actions
commenced after the date of SLUSA's enactment to be brought in federal court
under federal law. The Company removed the FELDMAN case to the Federal District
Court preparatory to seeking a dismissal on the merits under SLUSA, but
plaintiffs voluntarily dismissed their case before such a motion could be heard.
Plaintiffs have not sought to refile the FELDMAN suit.
Plaintiffs have recently filed a motion for class certification in the
GUNTY II case. The Bank and the individual defendants have filed an opposition
raising substantial issues as to the suitability of the proposed representative
plaintiff to act as such and further asserting that all claims aside from those
on file in the original GUNTY II complaint are preempted under SLUSA. If any
class is certified, the Bank believes that it has significant defenses and it
intends to defend vigorously against plaintiffs' claims.
ADC CREDIT CARD LITIGATION
Approximately 100 lawsuits, on behalf of approximately 200 individual
plaintiffs, and two purported class actions, are pending in state and federal
courts in the State of Alabama against Fidelity and, in most instances, ADC,
Bank Plus, and various manufacturers and distributors of consumer appliances. In
addition, the Bank and Bank Plus have been sued in three cases in state court in
the State of Mississippi on behalf of 62 individual plaintiffs (the Mississippi
cases have been removed to Federal Court in that state), and the Bank has been
sued in a state court in the State of West Virginia on behalf of one individual
plaintiff (the West Virginia case has been removed to a Federal Court in that
state). All of these cases arise out of the affinity credit card program between
the Bank and ADC in which independent third-party direct marketers sold consumer
appliances and concurrently offered consumers an opportunity to apply for a
credit card arranged by ADC and issued by the Bank which was then used to pay
for the appliance.
26
During the past several years, the press has widely reported certain
industry related concerns which may affect us. Some of these involve the amount
of litigation instituted against banks, finance companies and insurance
companies who have operated in the State of Alabama and the large punitive
awards obtained from juries in that state. Like other companies in this
industry, we are involved in a number of lawsuits in Alabama, many of which
relate to the financing of consumer products, primarily vacuum cleaners, under
the ADC program. The Bank discontinued financing such consumer products under
the ADC program in early 1999. The judicial climate in Alabama is such that the
outcome of all of these cases is unpredictable.
The plaintiffs in the litigation are cardholders who allege, generally,
that misrepresentations were made to them by the sales people in connection with
their purchases of the consumer appliances and applications for credit card
accounts, including misrepresentations with respect to the nature and cost of
financing such purchases through credit cards issued by the Bank. The Bank
believes that it has substantial legal and factual defenses to these claims in
that it did not control, direct, or otherwise have any dealings with the sales
people who allegedly made such misrepresentations, and the financing and other
terms of the credit cards were disclosed in writing to cardholders by the Bank.
The Bank also believes that the majority of the plaintiffs claims are subject to
adjudication under Federal laws. Most of the cases are in discovery. Although
our counsel believes the Bank has substantive legal defenses to these claims and
are prepared to defend each case vigorously, no assurances can be given that the
cases can be settled or otherwise resolved on terms that are not material in
relation to the financial condition or result of operations of the Company.
The Bank is a beneficiary of agreements in which ADC and the distributors
of the consumer appliances covenanted to indemnify and defend the Bank against
potential claims relating to the program. The Bank believes that the claims of
the plaintiffs are within the scope of the indemnity and defense covenants, and
the Bank has demanded that ADC and the distributors indemnify the Bank and
provide a defense. Since the commencement of these cases ADC has performed its
obligation to provide a defense to the Bank. However, so far as is known, ADC is
no longer actively in business, and uncertainty exists as to ADC's financial
ability to indemnify or continue to provide a defense to the Bank. Thus far the
distributors have either not responded to the Bank's demands for indemnity and
defense, denied such demands, or declined to respond until such time as the
distributors have had additional opportunity to investigate the claims.
DURGA MA ARBITRATION
In April 1998, the Bank entered into two Private Label Credit Card
Agreements with Durga Ma, a New Jersey corporation, doing business as Diamond
Way International. One of those agreements contemplated issuing credit cards to
Durga Ma's jewelry customers; the other contemplated issuing cards to customers
of independent jewelry retailers selected by Durga Ma. According to the
agreements, the Bank would issue credit cards to customers whose applications
were approved by the Bank. The Bank would have the exclusive right to issue
credit cards bearing the name of Durga Ma or Diamond Way International to
qualified customers. The agreements provided that Bank would own the cards and
pay to Durga Ma 2.0% of finance charges collected. Durga Ma would be responsible
for developing, printing and distributing marketing materials. The agreements
call for binding arbitration in the event of disputes.
In October 1999, Durga Ma invoked binding arbitration subsequent to Bank's
decision to issue no credit cards under the agreement. Durga Ma alleges "breach
of contract and fraud" and claims damages in the amount of $5.0 million. The
Bank intends to defend itself vigorously in the arbitration.
27
INTERNET CASINO LITIGATION
The Bank and Mastercard International, Inc. have been named as defendants
in a purported class action filed July 27, 1999 in the United States District
Court for the Middle District of Alabama, entitled EVELYN L. BROWN, ON BEHALF OF
HERSELF AND ALL OTHERS SIMILARLY SITUATED vs. MASTERCARD INTERNATIONAL, INC. AND
FIDELITY FEDERAL BANK, Civil Action Case No. CV 99-A-788-N. The plaintiff
alleges that she placed bets through a gambling site on the internet. The
internet site instructed her to open an account by entering her credit card
number. By this means, the plaintiff's gambling expenses incurred on the
internet site were charged to a Mastercard issued to the plaintiff by the Bank.
The plaintiff alleges that, in allowing its credit card to be used for illegal
gambling, the Bank violated a variety of Federal and State statutes, including
the Wire Act (18 U.S.C. Section 1084(a)), the Travel Act (18 U.S.C. Section
1952), a Federal statute that specifically prohibits conducing an illegal
gambling business (18 U.S.C. Section 1955), the Racketeer Influenced and Corrupt
Organizations Act ("RICO")(18 U.S.C. Section 1962(c) and 1964(a)), and a number
of Alabama statutes. The plaintiff seeks certification of a class, declaratory
relief voiding her credit card charges, unspecified compensatory damages, triple
exemplary damages under RICO, punitive damages, and attorneys fees and costs.
The Bank and Mastercard have filed motions to dismiss the case. The Bank
believes that it should not have liability and has substantial legal defenses to
the lawsuit and the Bank intends to defend itself vigorously.
This lawsuit is substantially similar to a number of lawsuits filed around
the country against credit card issuers, Mastercard, and Visa. The plaintiff
sought to have the lawsuit consolidated with similar lawsuits in a Federal court
in New York. On March 1, 2000, the Judicial Panel on Multidistrict Litigation
consolidated the case with four others and ordered that all five of the cases be
transferred to the U.S. District Court for the Eastern District of Louisiana.
FIRST ALLIANCE MORTGAGE COMPANY
In 1997, Fidelity entered into a series of agreements with FAMCO and its
affiliates to establish a secured credit card program (the "Program"). Under the
agreements, Fidelity serves as issuer and owner of the Program accounts and is
responsible for the risk management associated with the extension of credit.
FAMCO is responsible for marketing and processing applications and servicing the
accounts originated under the Program. FAMCO also provides credit enhancements
to guarantee full repayment of the Program receivables in the event of
cardholder defaults and, in exchange, has the right to purchase the outstanding
receivables at par and receives all revenues, net of expenses and funding costs
paid to Fidelity, from the Program. FAMCO is required to fund a cash collateral
account as part of the credit enhancement. As of February 29, 2000, total
receivables outstanding under the Program were $16.4 million and the balance of
the cash collateral account was $2.7 million.
On February 25, 2000, Fidelity delivered to FAMCO formal notice that the
agreements pertaining to the Program have expired, and a demand that FAMCO
fulfill all of its obligations under the agreements upon and after termination,
including an obligation to purchase, or cause a designee to purchase, from
Fidelity, at par, all of the outstanding accounts and related receivables
generated under the Program.
Also on February 25, 2000, Fidelity filed with the American Arbitration
Association in Los Angeles, California a formal demand for arbitration. The
arbitration proceeding is designated FIDELITY FEDERAL BANK, FSB v. FIRST
ALLIANCE ACCEPTANCE CORP. AND FIRST ALLIANCE MORTGAGE CORP., File No. 72 148 226
00. The arbitration demand alleges that a dispute exists between the parties
because FAMCO contends that it has no obligation to comply with Fidelity's
demand that FAMCO purchase, or cause a designee to purchase, from Fidelity, at
par, all of the outstanding accounts and related receivables generated under the
Program.
On February 23, 2000, FAMCO filed a complaint in the Superior Court of the
State of California for the County of Orange entitled FIRST ALLIANCE MORTGAGE
COMPANY v. FIDELITY FEDERAL BANK, FSB, Case No. 00CC02476. The complaint seeks a
temporary restraining order and preliminary and permanent injunctions enjoining
Fidelity from disrupting the status quo under the Program and from converting
any funds in the cash collateral account for any purpose other than as expressly
authorized in the Program agreements. The complaint also seeks a release and
turn over to FAMCO of all funds in the cash collateral account. A hearing was
held on FAMCO's application for a temporary restraining order with regard to
such relief and the court denied FAMCO's application. No hearing was set for
FAMCO's application for a preliminary injunction.
Fidelity believes that its demand that FAMCO or its designee purchase at
par the outstanding accounts and receivables generated by the Program is
meritorious, and intends to proceed diligently with arbitration to enforce its
rights with respect thereto. Fidelity believes that the claims asserted by FAMCO
in its lawsuit against Fidelity are without merit, and Fidelity intends to
defend itself diligently against FAMCO's claims.
28
OTHER MATTERS
In the course of its current compliance examination of the Bank, the OTS
has raised concerns regarding the Bank's credit card operations, principally
with respect to the credit card origination, servicing and collection activities
of third parties under contracts that have been terminated or are in the process
of winding down. While these third parties were required to satisfy regulatory
requirements applicable to their respective functions, it is possible that the
Bank may be held responsible for violations by these third parties. The Bank has
responded to preliminary issues raised by the OTS, but the OTS has not issued
its final report. The Bank is therefore, uncertain as to the OTS' ultimate
determinations on these issues, and possible resulting regulatory actions or
sanctions may have a material adverse effect on the financial condition or
results of operations of the Company.
The legal responsibility and financial exposure with respect to some of the
foregoing claims and other matters presently cannot be reasonably ascertained
and, accordingly, there is a risk that the outcome of one or more of these
outstanding claims or matters could result in a material adverse effect on the
financial condition or results of operations of the Company.
In the normal course of business, the Company and certain of its
subsidiaries have a number of other lawsuits and claims pending. Although there
can be no assurance, the Company believes that none of these other lawsuits or
claims will have a material adverse effect on the financial condition or
business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is listed and quoted on the Nasdaq National
Market ("Nasdaq").
The following table sets forth the high and low daily closing sales prices
of the Common Stock on Nasdaq for each of the following quarters.
HIGH LOW
1999: ----------- -----------
Fourth quarter.................................... $ 4.25 $ 2.69
Third quarter..................................... 6.38 3.13
Second quarter.................................... 6.38 4.06
First quarter..................................... 5.13 3.94
1998:
Fourth quarter.................................... $ 4.94 $ 2.28
Third quarter..................................... 12.63 4.13
Second quarter.................................... 16.13 12.13
First quarter..................................... 15.63 11.63
29
DIVIDENDS
Bank Plus has paid no dividends on the Common Stock since its formation in
May 1996. Prior thereto, Fidelity had not paid dividends on its Common Stock
since August 1994. Bank Plus currently has no plans to pay dividends on the
Common Stock. Bank Plus is a holding company with no significant assets other
than its investment in the Bank and Gateway, and is substantially dependent on
dividends from such subsidiaries to meet its cash requirements, including its
interest obligations on the Senior Notes. The ability of the Bank to pay
dividends or to make certain loans or advances to Bank Plus is subject to
significant regulatory restrictions.
30
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
The table below sets forth certain historical financial data regarding the
Company. This information is derived in part from, and should be read in
conjunction with, the Company's consolidated financial statements and notes
thereto.
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Total assets............................... $ 2,683,452 $ 3,712,059 $ 4,167,806 $ 3,330,290 $ 3,299,444
Mortgage loans............................. 1,962,201 2,417,042 2,819,230 2,757,807 3,028,291
Credit card loans.......................... 207,180 350,078 50,828 -- --
Deposits................................... 2,501,246 2,922,531 2,891,801 2,495,933 2,600,869
FHLB advances (1).......................... 20,000 585,000 1,009,960 449,851 292,700
Senior Notes (2)........................... 51,478 51,478 51,478 -- --
Other borrowings........................... -- -- -- 140,000 150,000
Preferred stock (2)........................ 272 272 272 51,750 51,750
Common stockholders' equity................ 96,176 127,388 181,345 161,657 177,293
Stockholders' equity per common share (3).. 4.94 6.55 9.36 8.86 9.72
Common shares outstanding (3).............. 19,463,343 19,434,043 19,367,215 18,245,265 18,242,465
OPERATING DATA:
Interest income............................ $ 250,691 $ 300,347 $ 255,007 $ 237,913 $ 246,477
Interest expense........................... 143,973 209,204 174,009 152,623 174,836
Net interest income........................ 106,718 91,143 80,998 85,290 71,641
Provision for estimated loan losses (4).... 78,800 73,032 13,004 15,610 69,724
Noninterest income (expense) (5)........... 49,360 34,418 3,890 2,246 11,062
Operating expense (6)...................... 102,140 104,959 63,096 82,451 81,954
(Loss) earnings before income taxes........ (24,862) (52,430) 8,788 (10,525) (68,975)
Net (loss) earnings........................ (24,890) (56,328) 12,653 (14,089) (68,979)
Net (loss) earnings available for common
Stockholders............................. (24,890) (56,328) 12,653 (15,642) (68,979)
(Loss) Earnings Per Share (3):
Basic.................................... (1.28) (2.90) 0.67 (0.86) (8.84)
Diluted.................................. (1.28) (2.90) 0.66 (0.86) (8.84)
Weighted Average Common Shares Outstanding (3):
Basic.................................... 19,460,941 19,395,337 18,794,887 18,242,887 7,807,201
Diluted.................................. 19,460,941 19,395,337 19,143,233 18,242,887 7,807,201
SELECTED OPERATING RATIOS:
(Loss) return on average assets............ (0.76)% (1.32)% 0.35% (0.42)% (1.92)%
(Loss) return on average equity............ (21.19)% (33.71)% 7.43% (7.01)% (42.31)%
Average equity divided by average assets... 3.59% 3.92% 4.67% 6.71% 4.54%
Ending equity divided by ending assets..... 3.58% 3.43% 4.35% 4.85% 6.94%
Operating expense to average assets (7).... 3.12% 2.46% 1.73% 1.94% 2.28%
Efficiency ratio (8)....................... 67.14% 76.10% 67.46% 67.77% 89.81%
Yield on interest-earning assets........... 7.86% 7.30% 7.16% 7.29% 7.04%
Cost of interest bearing liabilities....... 4.59% 5.16% 5.11% 4.98% 5.15%
Net yield on interest-earning assets....... 3.36% 2.22% 2.27% 2.63% 2.05%
ASSET QUALITY DATA:
Nonperforming assets ("NPAs") (9).......... $ 9,396 $ 23,304 $ 25,367 $ 60,788 $ 71,431
NPAs to total assets....................... 0.35% 0.63% 0.61% 1.83% 2.16%
Nonaccruing loans ("NPLs")................. $ 6,945 $ 14,372 $ 13,074 $ 36,125 $ 51,910
NPLs to total loans, net................... 0.32% 0.54% 0.46% 1.34% 1.77%
Classified assets.......................... $ 82,110 $ 133,085 $ 153,502 $ 174,096 219,077
Classified assets to total assets.......... 3.06% 3.59% 3.68% 5.23% 6.64%
Total allowance for estimated losses....... $ 63,608 $ 109,198 $ 55,993 $ 59,589 $ 92,927
Total allowance for estimated losses to
net classified assets.................... 77.47% 82.05% 36.48% 34.23% 42.42%
(CONTINUED)
31
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REGULATORY CAPITAL RATIOS:
Tangible capital ratio..................... 5.22% 4.36% 5.26% 6.28% 6.91%
Core capital ratio......................... 5.22% 4.36% 5.26% 6.29% 6.92%
Risk-based capital ratio................... 10.09% 8.95% 11.57% 11.85% 12.43%
OTHER DATA:
Sales of investment products............... $ 164,921 $ 180,660 $ 159,791 $ 118,061 $ 89,824
Real estate loans funded, net.............. $ 93,274 $ 138,991 $ 233,107 $ 13,859 $ 19,396
Number of:
Real estate loan accounts (in thousands). 9 11 12 11 12
Deposit accounts (in thousands).......... 177 198 205 194 207
- --------------
(1) In 1999 and 1998, as part of its program to improve its regulatory capital
status, the Bank prepaid $290.0 million and $375.0 million, respectively,
of FHLB advances.
(2) On July 18, 1997, the Company completed an exchange offer (the "Exchange
Offer") of the Company's Senior Notes for the outstanding shares of the
Preferred Stock issued by Fidelity in 1995. The Company accepted 2,059,120
shares of Preferred Stock in exchange for approximately $51.5 million
principal amount of Senior Notes. Holders of approximately 11,000 shares of
the Preferred Stock elected not to participate in the Exchange Offer and
these shares are reflected as minority interest on the statement of
financial condition.
(3) On February 9, 1996, the Bank's stockholders approved a one for four
reverse stock split. All per share data and weighted average common shares
outstanding have been retroactively adjusted to reflect this change.
(4) Provision for estimated loan losses in 1995 include significant provisions
related to the resolution of assets in the Bank's multifamily loan
portfolio. In 1999 and 1998, the provision for estimated loan losses
increased significantly due to credit losses in the Bank's credit card loan
portfolio.
(5) In 1999 and 1998, noninterest income increased significantly related to the
growth of the credit card programs. Credit card fees were $29.7 million and
$21.4 million in 1999 and 1998, respectively.
(6) Operating expenses in 1996 included a payment of $18.0 million SAIF special
assessment. In 1999 and 1998, operating expenses of the credit card
operations were $33.0 million and $25.3 million, respectively.
(7) Excludes the impact of the 1996 SAIF special assessment.
(8) 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 and writedown of securities.
(9) NPAs include NPLs and foreclosed real estate, net of SVAs and REO valuation
allowances, if any.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K, including
without limitation statements containing the words "believes", "anticipates",
"intends", "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of Bank Plus and Fidelity to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. A number of other factors may have a material adverse effect on the
Company's financial performance. These factors include a national or regional
economic slowdown or recession which increases the risk of defaults and credit
losses; movements in market interest rates that reduce our margins or the fair
value of the financial instruments we hold; restrictions imposed on the Bank's
operations by regulators such as a prohibition on the payment of dividends to
Bank Plus; failure of regulatory authorities to issue approvals or non-objection
to material transactions involving the Bank; actions by the Bank's regulators
that could adversely affect the Bank's capital levels; an increase in the number
of customers seeking protection under the bankruptcy laws which increases the
amount of charge-offs; the effects of fraud or other contract breaches by third
parties or customers; the effectiveness of the Company's collection efforts; the
outcome of pending and future litigation; the inability to achieve the financial
goals in Bank Plus' strategic plan; the inability to successfully implement
planned systems conversions and the inability to use the operating loss
carryforwards of the Company. Given these uncertainties, undue reliance should
not be placed on such forward-looking statements. Bank Plus disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements included herein to reflect
future events or developments.
RESULTS OF OPERATIONS
SUMMARY
The Company reported net losses of $24.9 million for the year ended
December 31, 1999, as compared to net losses of $56.3 million for the year ended
December 31, 1998. The decrease in losses of $31.4 million in 1999 as compared
to 1998 is due to an increase in earnings in the core bank operations of $18.6
million and a decrease in losses of $12.8 million in the credit card operations.
The increase in earnings of the core bank operations was primarily the
result of decreased operating expenses of $10.5 million due to the elimination
of a number of business initiatives, increased noninterest income of $6.7
million primarily due to a gain on the sale of two branches, and lower income
tax expense. These positive variances were offset by lower net interest income
of $3.3 million due to a reduction in interest earning assets in 1999.
The decrease in losses of the credit card operations was primarily the
result of an increase in net interest income of $18.9 million due to both higher
balances of credit cards outstanding and a higher net interest margin and an
increase in noninterest income of $8.3 million due, also, to higher balances of
credit cards outstanding. These positive variances were offset by increases in
provisions for estimated loan losses due to higher delinquencies and charge-offs
and increased operating expenses due to the increase in the average number of
credit cards serviced.
33
The decrease in earnings of $69.0 million in 1998, as compared to 1997 is
primarily due to the $72.5 million of losses incurred in the credit card
operations in 1998, as compared to earnings of $1.1 million in 1997 offset by a
$4.2 million decrease in minority interest in 1998. The credit card operations
losses were primarily the result of a $86.4 million increase in provisions for
estimated loan losses due to higher delinquencies and charge-offs. Net interest
income and noninterest income net of operating expenses were $12.9 million
higher in 1998 than in 1997 due to the significant increase in the number and
balance of credit cards outstanding.
BUSINESS SEGMENTS
The following table shows the net income or loss for the core bank
operations and the credit card operations for the periods indicated. In
computing net interest income, funding costs are charged to the credit card
operations based on a rolling twelve-month average of one-year fixed rate FHLB
advances. All indirect general and administrative expense not specifically
identifiable with either of the two business segments are allocated on the basis
of direct operating expenses. Indirect general and administrative expenses
subject to allocation were $10.5 million and $11.9 million for 1999 and 1998,
respectively, with no corresponding amount in 1997.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
CORE BANK OPERATIONS:
Net interest income...................................... $ 69,931 $ 73,253 $ 79,976
Provision for estimated loan losses (1).................. (14,300) (13,413) 13,004
Noninterest income....................................... 13,753 13,003 3,845
Gain on sale of branches................................. 5,914 -- --
Operating expense........................................ 69,101 79,620 63,096
Income tax expense (benefit)............................. -- 3,870 (8,100)
------------- ------------- -------------
Net earnings (2)....................................... $ 34,797 $ 16,179 $ 15,821
============= ============= =============
Operating Ratios:
Net interest margin.................................... 2.26% 1.81% 2.05%
Efficiency ratio....................................... 80.68% 88.33% 67.46%
Return on average assets............................... 1.09% 0.38% 0.35%
Return on average equity............................... 37.46% 10.86% 7.43%
Selected Average Balance Sheet Components:
Loans.................................................. $ 2,240,849 $ 2,665,050 $ 2,797,556
Earning assets......................................... 3,108,536 4,057,172 3,545,741
Total assets........................................... 3,192,646 4,204,914 3,633,695
Deposits............................................... 2,638,472 2,994,618 2,642,560
CREDIT CARD OPERATIONS:
Net interest income...................................... $ 36,787 $ 17,890 $ 1,022
Provision for estimated loan losses...................... 93,100 86,445 --
Noninterest income....................................... 29,693 21,415 45
Operating expense........................................ 33,039 25,339 --
------------- ------------- -------------
Net loss (2)........................................... $ (59,659) $ (72,479) $ 1,067
============= ============= =============
Operating Ratios:
Net interest margin.................................... 12.95% 8.69% 8.10%
Efficiency ratio....................................... 49.70% 64.47% N/A
Selected Average Balance Sheet Components:
Credit card loans...................................... $ 283,435 $ 205,921 $ 12,637
Total assets........................................... 228,688 168,610 12,802
- ----------------
(1) Negative amounts represent recoveries of previously established allowance
for loan losses.
(2) The segment earnings reported in the table do not include preferred
dividends paid to holders of the preferred stock issued by Fidelity Federal
Bank. These dividends are reported as minority interest in subsidiary in
the consolidated financial statements and were $28,000 in 1999 and 1998 and
$4.2 million in 1997.
34
CORE BANK OPERATIONS
During 1997 and 1998, a number of business initiatives outside of the
existing retail branch system were undertaken in the core bank operations. These
included a financial education program for members of CalPERS, electronic
commerce activities, a planned name change, an indirect auto lending program and
a mall branch strategy. As a result of the disappointing results of these
programs and of the credit card operations, changes were made in the Company's
executive management and in the core bank operations strategic plan during the
fourth quarter of 1998.
Under the revised strategic plan, the core bank operations are focused on
the retail branch system and the establishment of mortgage origination
operations. In addition, as a consequence of its efforts to augment the Bank's
regulatory capital ratios, the core bank operations total assets decreased by
$1.3 billion from June 30, 1998 to December 31, 1999.
Net interest income for 1999 was $69.9 million as compared to $73.3 million
for 1998. Decreases in average interest earning assets of 26% were for the most
part offset by improvements in the interest margin produced by the Bank's
deposit repricing strategy and decreases in wholesale borrowings, which
increased the net yield on interest earning assets to 2.26% for 1999 from 1.81%
for 1998.
The negative provisions for loan losses of $14.3 million and $13.4 million
in 1999 and 1998, respectively, represent net recoveries of specific valuation
reserves and reduced estimates of future loan losses resulting from the
continuing improvement in the asset quality of the Bank's mortgage loan
portfolio.
Operating expenses decreased to $69.1 million in 1999 from $79.6 million in
1998 primarily due to changes in the Bank's strategic plan in 1998 which
resulted in the discontinuance of a number of business initiatives including
electronic commerce activities, as well as other expense reduction efforts.
These decreases were offset by a $4.6 million increase in SAIF assessments in
1999.
The $6.7 million decrease in net interest income between 1998 and 1997
reflects the decrease in the net yield to 1.81% from 2.05% offset by a 10.2%
increase in the average balance of interest-earning assets. The net yield
decreased due to the use of higher costing CDs and FHLB advances to fund the
increase in interest-earning assets, higher prepayments on the MBS portfolio
causing an increased amortization of the purchase premiums and the amortization
of losses incurred in the second quarter of 1998 on the hedging program for
fixed rate MBS. These were partially offset by a lower average balance of NPLs.
The increases in the average balances of interest-earning assets are due to
increases in MBS and the short-term investment portfolios.
The negative provision for loan losses of $13.4 million in 1998 as compared
to the provision for loan losses of $13.0 million represents net recoveries of
specific valuation reserves and reduced estimates of loan losses in 1998
resulting from the significant improvement in the asset quality of the Bank's
mortgage loan portfolio.
Noninterest income increased by $9.2 million to $13.0 million for 1998 from
$3.8 million for 1997. Components of the increase in noninterest income in 1998
from 1997 include (a) an increase in automated teller machine ("ATM") cash
services income of $2.3 million, which was due to higher cash balances
outstanding for the period based on a higher number of ATMs serviced; (b)
decreased real estate operations costs of $3.8 million primarily due to improved
execution of REO sales and a lower volume of foreclosed properties; (c) an
increase in investment products and loan fee income of $2.2 million due to a
higher sales volumes; and (d) lower losses on securities activities of $1.3
million, which represented hedge losses on the MBS portfolio of $4.0 million
offset by gains on the sale of securities and recoveries related to past loan
securitizations. These favorable variances were offset by $1.3 million in
prepayment expenses on the early repayment of FHLB advances related to the
Bank's efforts to augment the Bank's regulatory capital ratios by reducing
assets.
Operating expenses increased by $16.5 million to $79.6 million for 1998
compared to $63.1 for 1997. The increase in expenses was due primarily to costs
associated with new business initiatives. The CalPERS, mall branch strategy,
Internet bank and other projects contributed $11.5 million to the increase in
operating expenses for 1998.
35
CREDIT CARD OPERATIONS
Cards issued and balances outstanding under the credit card programs, which
the Bank began in 1997, grew rapidly in the second and third quarters of 1998
after which the Bank curtailed the origination of new accounts due to the very
disappointing performance of the credit card portfolio. Since that time the
Company has concentrated on reducing the operating losses from the credit card
operations, which decreased to $59.7 million in 1999 from $72.5 million in 1998.
Net interest income for 1999 increased to $36.8 million from $17.9 million
in 1998 primarily due to higher average earning asset balances of $283.4 million
in 1999 compared to $205.9 million in the prior year, and an increase in the
interest margin to 13.0% in 1999 from 8.7% in 1998. As a result of the
termination of the agreement with ADC in November 1998, the Bank became entitled
to all of the interest from the related portfolio which increased the gross
yield for that portfolio. This change along with a change in the composition of
the balances of the respective credit card programs resulted in the increase in
net yield in 1999.
The increase in the provision for estimated loan losses to $93.1 million
for 1999 from $86.4 million in 1998 was primarily a result of increases in
delinquencies in the ADC portfolio in the second quarter of 1999, the impact of
which more than offset both the decrease in total balances outstanding and the
improving delinquency trends in the other programs in the portfolio.
Credit card fees increased to $29.7 million in 1999 from $21.4 million in
the prior year due to an increase in the average number of accounts outstanding.
Included in credit card fees are origination fees net of origination costs and
annual fees, which are deferred and amortized into income over a 12 month
period, interchange fees, late payment fees and other ancillary fees. Credit
card origination costs represented marketing fees paid to MMG to originate cards
under the MMG credit card program. During 1999 and 1998, the Company recognized
$9.0 million and $6.4 million of net origination fees. At December 31, 1999,
there were no deferred net origination fees to be amortized into income.
Operating expenses increased to $33.0 million in 1999 from $25.3 million in
1998, primarily reflecting higher servicing costs due to the higher average
number of accounts serviced in 1999 due in part to the transfer of servicing of
the ADC portfolio to the Bank at the beginning of 1999.
The change in all earnings components for 1998 as compared to 1997 reflects
the increase in the average balance of credit cards outstanding, which increased
from $12.6 million in 1997 when the credit card portfolio was started to $205.9
million in 1998. In addition, the credit cards originated in 1997 were under the
credit enhancement programs, where the credit card marketers received all credit
card revenues and were responsible for credit losses and operating expenses,
including a cost of funds charge paid to the Bank.
The increase in provisions for estimated loan losses of $86.4 million for
1998 as compared to 1997, was primarily due to increasing delinquencies and
charge-offs in the rapidly growing credit card portfolio. Credit card balances
were $350.1 million as compared to $50.8 million, and delinquencies were 21.36%
as compared to 10.65% at December 31, 1998 and December 31, 1997, respectively.
Credit card charge-offs were $35.2 million in 1998, including $25.7 million of
loans purchased by marketers of the credit enhancement credit card programs,
with no comparable amounts in 1997.
36
NET INTEREST INCOME
The following tables present the primary determinants of net interest
income for the periods indicated. For the purpose of this analysis, nonaccruing
mortgage loans are included in the average balances, and delinquent interest on
such loans has been deducted from interest income.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- --------------------------------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans...................... $2,240,849 $ 164,917 7.36% $2,665,050 $ 198,724 7.46% $2,797,556 $ 204,252 7.30%
Credit card loans.......... 283,435 47,538 16.77 205,921 26,305 12.77 12,637 1,023 8.10
MBS........................ 373,225 22,669 6.07 701,961 43,305 6.17 429,483 29,435 6.85
Investment securities...... 247,754 13,351 5.39 477,965 28,313 5.92 263,573 16,822 6.38
Investment in FHLB stock... 43,508 2,216 5.09 62,985 3,700 5.87 55,129 3,475 6.30
----------- ---------- ----------- ---------- ----------- ----------
Total interest-earning
assets................. 3,188,771 250,691 7.86 4,113,882 300,347 7.30 3,558,378 255,007 7.16
---------- ---------- ----------
Noninterest-earning assets... 87,110 144,742 88,119
----------- ----------- -----------
Total assets................. $3,275,881 $4,258,624 $3,646,497
=========== =========== ===========
Interest-bearing
liabilities:
Deposits:
Demand deposits.......... $ 374,719 4,683 1.25 $ 351,250 4,161 1.18 $ 282,886 3,451 1.22
Savings deposits......... 113,824 3,247 2.84 122,662 3,630 2.96 112,904 3,678 3.26
Time deposits............ 2,149,929 105,226 4.81 2,520,706 137,229 5.39 2,246,770 119,588 5.29
----------- ---------- ----------- ---------- ----------- ----------
Total deposits......... 2,638,472 113,156 4.28 2,994,618 145,020 4.84 2,642,560 126,717 4.80
Borrowings................. 486,855 30,817 6.31 1,056,866 64,184 6.07 764,350 47,292 6.19
----------- ---------- ----------- ---------- ----------- ----------
Total interest-bearing
liabilities............ 3,125,327 143,973 4.59 4,051,484 209,204 5.16 3,406,910 174,009 5.11
---------- ---------- ----------
Noninterest-bearing
liabilities................ 32,824 39,793 40,621
Preferred stock issued by
consolidated subsidiary.... 272 272 28,640
Stockholders' equity......... 117,458 167,075 170,326
----------- ----------- -----------
Total liabilities and equity. $3,275,881 $4,258,624 $3,646,497
=========== =========== ===========
Net interest income; interest
rate spread................ $ 106,718 3.27% $ 91,143 2.14% $ 80,998 2.05%
========== ======= ========== ======= ========== =======
Net yield on interest
earning assets............. 3.36% 2.22% 2.27%
========== ======= =======
Net interest income is primarily affected by (a) the average volume and
repricing characteristics of the Company's interest-earning assets and
interest-bearing liabilities, (b) the level and volatility of market interest
rates, (c) the level of NPLs, and (d) the interest rate spread between the
yields earned and the rates paid.
37
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, 1999 DECEMBER 31, 1998
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
---------------------------------- -----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest income:
Loans.................................... $ (31,181) $ (2,626) $ (33,807) $ (9,899) $ 4,371 $ (5,528)
Credit card loans........................ 11,589 9,644 21,233 24,364 918 25,282
MBS...................................... (19,946) (690) (20,636) 17,044 (3,174) 13,870
Investment securities.................... (12,617) (2,345) (14,962) 12,782 (1,291) 11,491
Investment in FHLB stock................. (1,038) (446) (1,484) 473 (248) 225
---------- ---------- ---------- ---------- ---------- ----------
Total interest income.................. (53,193) 3,537 (49,656) 44,764 576 45,340
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits:
Demand deposits........................ (276) (246) (522) (824) 114 (710)
Savings deposits....................... 245 138 383 (305) 353 48
Time deposits.......................... 18,482 13,521 32,003 (15,273) (2,368) (17,641)
---------- ---------- ---------- ---------- ---------- ----------
Total deposits...................... 18,451 13,413 31,864 (16,402) (1,901) (18,303)
Borrowings............................... 35,814 (2,447) 33,367 (17,823) 931 (16,892)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense................. 54,265 10,966 65,231 (34,225) (970) (35,195)
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net interest income.. $ 1,072 $ 14,503 $ 15,575 $ 10,539 $ (394) $ 10,145
========== ========== ========== ========== ========== ==========
INCOME TAXES
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 11.0%.
The Company's combined federal and state statutory tax rate is 42.0% of
earnings before income taxes. For 1999, the Company's actual effective income
tax rate was zero. This rate differs from the statutory rate primarily due to
the establishment of additional valuation allowances. The 1998 effective tax
expense rate of 7.4% reflects the federal and state tax expense attributable to
the payment of alternative minimum tax, the establishment of valuation
allowances and the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), limitations on the recognition of
deferred tax assets.
38
Under SFAS No. 109, the recognition of a deferred tax asset is dependent
upon a "more likely than not" expectation of realization of the deferred tax
asset, based upon the analysis of available evidence. A valuation allowance is
required to sufficiently reduce the deferred tax asset to the amount that is
expected to be realized on a "more likely than not" basis. The analysis of
available evidence is performed each quarter utilizing the "more likely than
not" criteria to determine the amount, if any, of the deferred tax asset to be
realized. Adjustments to the valuation allowance are made accordingly. There can
be no assurance that the Company will recognize additional portions of the
deferred tax asset in future periods or that additional valuation allowances may
not be recorded in future periods.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), certain securities were classified as
AFS during the year. Under SFAS No. 115, adjustments to the fair market value of
securities held as AFS are reflected through an adjustment to stockholders'
equity. No associated deferred tax asset was recorded in stockholder's equity as
of December 31, 1999 and 1998.
The Internal Revenue Service is currently examining the federal income tax
returns for the short year ended December 31, 1994, and the calendar years 1995,
1996 and 1997. The Company does not expect the results of this audit to have a
material adverse effect on the consolidated financial statements of the Company.
Internal Revenue Code ("IRC") Sections 382 and 383 and the Treasury
Regulations thereunder generally provide for limitations on the ability of a
corporation to utilize net operating loss ("NOL") or credit carryforwards to
offset taxable income or reduce its tax liability in taxable years following a
change of control. In addition, the rules restrict the ability of a corporation
to recognize certain losses during the first five years after a change of
control if the losses existed, but were not recognized, as of the date of the
change of control. In general, the annual limitation with respect to these items
is determined by computing the product of the fair market value of the
corporation immediately prior to the change of control and the federal long-term
tax exempt interest rate in effect at that time, as prescribed by the IRS.
As of December 31, 1999, the Bank had an estimated NOL carryover for
federal income tax purposes of $99.7 million expiring in years 2008 through
2019. Of this amount, $59.8 million is subject to annual utilization limitations
imposed by IRC Section 382. For California franchise tax purposes, the Bank had
an estimated NOL carryover of $45.4 million. Of the estimated California NOL
carryover, $41.8 million expires in years 2000 through 2004, and $3.6 million
expires in years 2000 through 2009. Of the total $45.4 million California NOL,
$15.7 million is subject to annual utilization limitations imposed by IRC
Section 382.
Under the provisions of SFAS No. 109, a deferred tax liability has not been
provided for the tax bad debt and loan loss reserves that arose in years prior
to 1988. The Bank had an adjusted pre-1988 total loan loss reserve balance of
$26.3 million at December 31, 1999, for which no income taxes have been
provided. The remaining adjusted pre-1988 total loan loss reserve will be
recaptured into taxable income in the event Fidelity (1) ceases to be a "bank"
or "thrift", (2) makes distributions to shareholders in excess of current or
accumulated post-1951 earnings and profits, or (3) makes distributions to
shareholders in a partial or complete redemption or liquidation. The Bank does
not intend to enter into a transaction that would result in a recapture of
pre-1988 reserves if such recapture would create an additional tax liability.
39
FINANCIAL CONDITION
As with most thrifts, a significant portion of the Company's revenue is
derived from net interest income earned on its assets. The Company's interest
earning assets are primarily loans and investment securities.
LOAN PORTFOLIO
The Company's loan portfolio consists of single family and multifamily
mortgage loans, commercial mortgage loans, credit card loans and other consumer
loans. The following table sets forth the composition of the total loans at the
dates indicated:
DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
LOANS BY TYPE
Residential loans:
Single family (1 to 4 units).......... $ 550,840 $ 768,824 $ 960,848 $ 836,569 $ 939,903
Multifamily:
5 to 36 units....................... 1,125,304 1,220,585 1,343,597 1,408,317 1,521,056
37 units and over................... 201,644 247,638 308,473 307,741 329,916
------------- ------------- ------------- ------------- -------------
Total multifamily................. 1,326,948 1,468,223 1,652,070 1,716,058 1,850,972
------------- ------------- ------------- ------------- -------------
Total residential loans................. 1,877,788 2,237,047 2,612,918 2,552,627 2,790,875
------------- ------------- ------------- ------------- -------------
Other real estate loans:
Commercial & industrial............... 125,379 179,956 204,656 203,510 234,384
Land and land improvements............ 38 39 1,656 1,670 3,032
------------- ------------- ------------- ------------- -------------
Total other real estate loans........... 125,417 179,995 206,312 205,180 237,416
------------- ------------- ------------- ------------- -------------
Gross mortgage loans.................... 2,003,205 2,417,042 2,819,230 2,757,807 3,028,291
------------- ------------- ------------- ------------- -------------
Credit card loans:
MMG................................... 95,879 170,922 229 -- --
ADC................................... 96,498 147,344 50,467 -- --
Other................................. 18,266 31,812 132 -- --
------------- ------------- ------------- ------------- -------------
Total credit card loans................. 210,643 350,078 50,828 -- --
------------- ------------- ------------- ------------- -------------
Other loans............................. 14,259 29,884 12,084 6,373 6,040
------------- ------------- ------------- ------------- -------------
Total loans, gross...................... 2,228,107 2,797,004 2,882,142 2,764,180 3,034,331
------------- ------------- ------------- ------------- -------------
Less:
Undisbursed loan funds................ -- 42 1,710 -- --
Unearned (premiums) discounts, net.... (8,163) (4,227) (2,722) 1,974 2,463
Deferred loan fees.................... 6,611 29,442 9,039 12,767 7,317
Allowances for estimated loan losses.. 60,278 106,171 50,538 57,508 89,435
------------- ------------- ------------- ------------- -------------
Total............................... 58,726 131,428 58,565 72,249 99,215
------------- ------------- ------------- ------------- -------------
Total loans, net........................ $ 2,169,381 $ 2,665,576 $ 2,823,577 $ 2,691,931 $ 2,935,116
============= ============= ============= ============= =============
The Bank has experienced a decreasing mortgage loan portfolio since 1994
when any substantive mortgage loan origination operations ceased. The increases
in the deferred loan fees and allowances for estimated loan losses in 1998
primarily relate to the credit card portfolio which the Bank began originating
in 1997.
40
The following table details the activity in the gross loan portfolio for
the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Principal balance at beginning of period. $ 2,797,004 $ 2,882,142 $ 2,764,180 $ 3,034,331 $ 3,364,965
Total real estate loans funded........... 93,274 138,991 233,107 13,859 19,396
Loans sold, net.......................... (125,812) (97,452) (6,674) 2,069 (113,230)
Amortization and prepayments............. (361,973) (418,322) (236,389) (208,992) (143,989)
Foreclosures............................. (14,343) (27,774) (75,385) (77,585) (92,661)
Hancock Savings Bank, FSB ("Hancock")
loans acquired........................ -- -- 146,802 -- --
(Decrease) increase in credit card loans. (139,434) 299,249 50,828 -- --
Other (decrease) increase in total
loans, net............................ (20,609) 20,170 5,673 498 (150)
------------- ------------- ------------- ------------- -------------
Principal balance at end of period....... $ 2,228,107 $ 2,797,004 $ 2,882,142 $ 2,764,180 $ 3,034,331
============= ============= ============= ============= =============
REAL ESTATE LOANS FUNDED
Loans originated:
Single family (1 to 4 units)........ $ 19,697 $ 2,558 $ 836 $ -- $ 3,926
Multifamily:
5 to 36 units.................... 2,627 192 7,373 1,673 4,743
37 units and over................ 3,232 18 1,144 3,628 3,207
------------- ------------- ------------- ------------- -------------
Total multifamily.............. 5,859 210 8,517 5,301 7,950
Commercial & industrial............. 805 5,324 2,150 533 6,586
------------- ------------- ------------- ------------- -------------
Total real estate loans
originated.................... 26,361 8,092 11,503 5,834 18,462
------------- ------------- ------------- ------------- -------------
Loans purchased:
Single family (1 to 4 units) (1).... 66,486 130,699 219,082 7,763 (1,237)
Multifamily:
5 to 36 units.................... -- 50 338 -- --
37 units and over................ 427 150 2,184 -- --
------------- ------------- ------------- ------------- -------------
Total multifamily.............. 427 200 2,522 -- --
Commercial & industrial............. -- -- -- 262 2,171
------------- ------------- ------------- ------------- -------------
Total real estate loans
purchased..................... 66,913 130,899 221,604 8,025 934
------------- ------------- ------------- ------------- -------------
Total real estate loans funded........... $ 93,274 $ 138,991 $ 233,107 $ 13,859 $ 19,396
============= ============= ============= ============= =============
LOANS SOLD
Whole loans........................... $ 133,002 $ 99,964 $ 13,516 $ 4,508 $ 123,080
Repurchases........................... (7,190) (2,512) (6,842) (6,577) (9,850)
------------- ------------- ------------- ------------- -------------
Loans sold (repurchased), net ........... $ 125,812 $ 97,452 $ 6,674 $ (2,069) $ 113,230
============= ============= ============= ============= =============
- ----------------
(1) Net of repurchases.
Beginning in 1994, the Bank entered into agreements with established
providers of consumer credit products pursuant to which all mortgage products
made available to retail branch customers were referred to and underwritten,
funded and serviced by third parties. In 1999, the Bank began a loan origination
operation to return to the single family loan origination business. A total of
$26.4 million in loans were originated in 1999, of which $11.5 million were sold
and $14.9 were held in the portfolio. Another $66.5 million in single family
loans were purchased in 1999 related to the nonconforming loan division of the
Bank that was established in the third quarter of 1998. In the first quarter of
2000, the Bank began originating commercial and multifamily mortgages.
Of the $361.9 million in amortization and prepayments of mortgage loans in
1999, approximately $295 million was due to prepayments. Prepayments increased
in 1999 and 1998 due to lower market interest rates and improving real estate
prices in Southern California. During the third quarter of 1999, as part of the
efforts to augment the Bank's regulatory capital ratios, $120 million in single
family loans were sold.
41
The decrease in credit card loans was due to decreases of $50.8 million and
$75.0 million in the ADC and MMG credit card portfolios, respectively, primarily
related to charge-offs. As a result of the discontinuance of originations under
the ADC, MMG and FAMCO programs, credit card loan balances are expected to
continue to decrease in 2000.
The following table presents gross mortgage loans by type and location as
of December 31, 1999:
COMMERCIAL
MULTIFAMILY & INDUSTRIAL
------------------------ ------------------------
SINGLE 5 TO 36 37 UNITS HOTEL/ OTHER
FAMILY UNITS AND OVER MOTEL C&I TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles............................. $ 206,838 $ 826,122 $ 133,796 $ 7,010 $ 66,073 $1,239,839
Orange.................................. 87,043 123,679 18,369 982 23,317 253,390
San Diego............................... 21,548 60,039 19,707 -- 1,183 102,477
San Bernardino.......................... 25,793 22,823 8,726 -- 5,296 62,638
Riverside............................... 18,811 15,262 4,222 -- 6,129 44,424
Ventura................................. 16,997 22,705 2,722 -- 3,236 45,660
Other................................... 13,983 19,625 3,275 2,296 2,430 41,609
----------- ----------- ----------- ----------- ----------- -----------
Total Southern California counties..... 391,013 1,090,255 190,817 10,288 107,664 1,790,037
Northern California counties............. 89,199 35,049 9,716 1,102 4,157 139,223
----------- ----------- ----------- ----------- ----------- -----------
Total California........................ 480,212 1,125,304 200,533 11,390 111,821 1,929,260
Other states.............................. 70,628 -- 1,111 1,538 668 73,945
----------- ----------- ----------- ----------- ----------- -----------
Gross mortgage loans...................... $ 550,840 $1,125,304 $ 201,644 $ 12,928 $ 112,489 $2,003,205
=========== =========== =========== =========== =========== ===========
The following table sets forth, by contractual maturity and loan type, the
loan portfolio at December 31, 1999. The table does not consider the prepayment
experience of the loan portfolio when scheduling the maturities of loans.
MATURES IN
---------------------------------------------------
TOTAL LOANS 2001- AFTER
RECEIVABLE 2000 2006 2006
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
Residential loans:
Single family (1 to 4 units)....... $ 550,840 $ 5,553 $ 10,704 $ 534,583
Multifamily:
5 to 36 units.................... 1,125,304 24,854 254,951 845,499
37 units and over................ 201,644 1,611 59,570 140,463
--------------- --------------- --------------- ---------------
Total multifamily.............. 1,326,948 26,465 314,521 985,962
--------------- --------------- --------------- ---------------
Total residential loans........ 1,877,788 32,018 325,225 1,520,545
--------------- --------------- --------------- ---------------
Other real estate loans:
Commercial and industrial.......... 125,379 16,768 92,493 16,118
Land & land improvements........... 38 -- -- 38
--------------- --------------- --------------- ---------------
Total other real estate loans.... 125,417 16,768 92,493 16,156
--------------- --------------- --------------- ---------------
Gross mortgage loans................. 2,003,205 48,786 417,718 1,536,701
--------------- --------------- --------------- ---------------
Credit card loans.................... 210,643 210,643 -- --
Other loans.......................... 14,259 4,346 3,090 6,823
--------------- --------------- --------------- ---------------
Total loans, gross................... $ 2,228,107 $ 263,775 $ 420,808 $ 1,543,524
=============== =============== =============== ===============
42
The following table sets forth, by contractual maturity and interest rate,
the fixed rate and adjustable rate mortgage loan portfolios at December 31,
1999. The table does not consider the prepayment experience of the loan
portfolio when scheduling the maturities of loans.
MATURITIES
GREATER WEIGHTED
MORTGAGE LOANS MATURES THAN AVERAGE
RECEIVABLE IN 2000 ONE YEAR SPREAD
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Adjustable rate loans:
COFI-- 1 month.................. $ 1,390,712 $ 41,116 $ 1,349,596 2.47%
COFI-- 6 month.................. 322,420 5,564 316,856 2.34
COFI-- other.................... 8,983 189 8,794 1.89
Treasury Bill-- 12 months....... 43,050 -- 43,050 2.98
Treasury Bill-- other........... 18,846 1,353 17,493 2.95
Other........................... 98,055 151 97,904 5.04
-------------- -------------- --------------
Total adjustable rate loans.... 1,882,066 48,373 1,833,693
Fixed rate loans.................... 121,139 413 120,726
-------------- -------------- --------------
Total mortgage loans, gross......... $ 2,003,205 $ 48,786 $ 1,954,419
============== ============== ==============
At December 31, 1999, 45.8% of the credit card portfolio is fixed rate,
45.5% adjusts with the Wall Street prime rate and 8.7% adjusts with LIBOR.
During 1999, the actual rate charged on the credit card accounts ranged from 13%
to 25%.
INVESTMENT PORTFOLIO
The following table reconciles the amortized cost and aggregate fair value
of the investment securities and MBS AFS portfolios at December 31, 1999:
AMORTIZED UNREALIZED AGGREGATE
COST LOSSES FAIR VALUE
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
MBS:
FHLMC.................................................. $ 2,334 $ (46) $ 2,288
FNMA................................................... 135,621 (5,854) 129,767
Government National Mortgage Association ("GNMA")...... 62,992 (1,946) 61,046
Fidelity participation certificates.................... 21,508 -- 21,508
CMO:
FNMA................................................. 37,983 (1,187) 36,796
Residential Asset Securitization Trust............... 5,834 (72) 5,762
Saxon Mortgage Securities Corp....................... 1,596 (47) 1,549
-------------- -------------- --------------
Total CMO.......................................... 45,413 (1,306) 44,107
-------------- -------------- --------------
Bear Stearns asset backed security..................... 22,056 (95) 21,961
Structured Asset Securities Corp. mortgage-backed note. 39,581 (25) 39,556
-------------- -------------- --------------
Total MBS AFS............................................. $ 329,505 $ (9,272) $ 320,233
============== ============== ==============
43
The Company has in the past employed various derivative financial
instruments to hedge valuation fluctuations in its trading and AFS fixed rate
securities portfolios. Realized gains and losses on termination of such hedge
instruments are amortized into interest income or expense over the expected
remaining life of the hedged asset. Realized losses related to a hedging program
for the fixed rate MBS AFS portfolio are recorded as adjustments to the cost
basis of the securities being hedged and are being amortized over the life of
the securities as a yield adjustment. During 1999, $0.7 million was amortized as
a reduction of interest income and the remaining balance of the realized hedge
losses was $2.5 million at December 31, 1999. As of December 31, 1999, the
Company had no derivative financial instruments outstanding.
The securities portfolio consisted of the following at the dates indicated:
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ -------- ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
Whole loan investment repurchase
agreements.............................. $ -- --% $ -- --% $ 28,000 7.19%
Federal funds sold........................ -- -- 220,000 4.36 -- --
------------ ------------ ------------
Total cash equivalents.................. -- -- 220,000 4.36 28,000 7.19
------------ ------------ ------------
Investment securities:
AFS:
U.S. Government and agency
obligations......................... -- -- -- -- 100,837 5.53
Other investments..................... -- -- 28,797 5.55 -- --
------------ ------------ ------------
Total AFS........................... -- -- 28,797 5.55 100,837 5.53
------------ ------------ ------------
Held to maturity:
Other investments..................... -- -- 1,084 6.19 3,189 6.00
------------ ------------ ------------
Total investment securities............... -- -- 29,881 5.57 104,026 5.54
------------ ------------ ------------
MBS:
AFS:
FHLMC................................. 2,288 7.21 3,791 6.00 10,275 6.35
FNMA.................................. 129,767 7.14 169,986 7.12 230,509 6.96
GNMA.................................. 61,046 7.15 86,556 7.00 222,808 6.98
Participation certificates............ 21,508 6.85 23,055 6.04 24,860 6.04
CMO................................... 44,107 8.32 88,672 7.10 343,212 7.22
LIBOR Asset Trust..................... -- -- -- -- 20,940 7.47
Financing note trust ................. -- -- 47,752 5.78 -- --
Asset backed security................. 21,961 6.61 -- -- -- --
Mortgage-backed note.................. 39,556 5.68 45,198 5.97 -- --
------------ ------------ ------------
Total AFS............................. 320,233 7.07 465,010 6.79 852,604 7.05
------------ ------------ ------------
Trading:
GNMA.................................. -- -- -- -- 41,050 6.66
------------ ------------ ------------
Total MBS................................. 320,233 7.07 465,010 6.79 893,654 7.03
------------ ------------ ------------
FHLB stock................................ 31,142 5.36 65,358 5.76 60,498 6.10
------------ ------------ ------------
Total securities portfolio.............. $ 351,375 6.92 $ 780,249 5.97 $ 1,086,178 6.85
============ ============ ============
44
The following table summarizes the maturity and weighted average yield of
investment securities at December 31, 1999:
MATURES IN
-------------------------------------------------
TOTAL 2000 AFTER 2010
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ ----- ------------ ----- ------------ -----
(DOLLARS IN THOUSANDS)
MBS, AFS............................ $ 320,233 7.07% $ 84,445 6.29% $ 235,788 7.35%
FHLB stock.......................... 31,142 5.36 31,142 5.36 -- --
------------ ------------ ------------
Total securities portfolio........ $ 351,375 6.92 $ 115,587 6.04 $ 235,788 7.35
============ ============ ============
ASSET QUALITY
The Company's mortgage loan portfolio is primarily secured by assets
located in Southern California and is comprised principally of single family and
multifamily residential loans. At December 31, 1999, 24.0% of Fidelity's real
estate loan portfolio consisted of California single family residences (1 to 4
units), while 66.2% consisted of California multifamily dwellings of 5 or more
units.
Because 89.4% of the Company's mortgage loan portfolio is secured by
properties located in Southern California, the performance of the Company's
loans are particularly susceptible to the potential for 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 single family, multifamily and commercial properties. In addition,
the possibility that borrowers may abandon properties or seek bankruptcy
protection with respect to income properties experiencing negative cash flow,
particularly where such properties are not cross-collateralized by other
performing assets, can also adversely affect portfolio performance.
During 1998, the Company significantly increased its credit card portfolio.
The performance of the Bank's credit card portfolio may be adversely affected by
a number of factors, including a national or regional economic slowdown or
recession, an increase in the number of customers seeking protection under the
bankruptcy laws, the effectiveness of the Company's collection efforts, and
fraud or breaches of contracts by third parties or customers. In addition,
because the portfolio is primarily sub-prime, the Bank may experience
significantly higher delinquencies and charge-offs than those experienced by
other credit card issuers whose portfolio's are not sub-prime.
45
DELINQUENT LOANS
The following tables present net delinquent loans at the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1999 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Mortgage loan delinquencies by number of days:
30 to 59 days............................ $ 5,210 $ 6,641 $ 6,087 $ 5,026 $ 6,556
60 to 89 days............................ 3,871 2,633 2,264 4,001 4,936
90 days and over......................... 4,989 6,128 5,905 12,962 13,841
------------ ------------ ------------ ------------ ------------
Total....................................... $ 14,070 $ 15,402 $ 14,256 $ 21,989 $ 25,333
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days............................ 0.26% 0.31% 0.27% 0.21% 0.27%
60 to 89 days............................ 0.19 0.13 0.10 0.17 0.21
90 days and over......................... 0.25 0.30 0.26 0.55 0.57
------------ ------------ ------------ ------------ ------------
Total....................................... 0.70% 0.74% 0.63% 0.93% 1.05%
============ ============ ============ ============ ============
Credit card loan delinquencies by number of days:
30 to 59 days............................ $ 11,157 $ 13,397 $ 15,666 $ 12,801 $ 19,609
60 to 89 days............................ 8,438 10,040 13,940 10,485 15,391
90 to 119 days........................... 7,596 9,877 12,075 11,101 17,969
120 to 149 days.......................... 7,213 9,443 8,460 11,148 17,363
150 days and over........................ 5,706 8,734 6,963 6,670 4,460
------------ ------------ ------------ ------------ ------------
Total....................................... $ 40,110 $ 51,491 $ 57,104 $ 52,205 $ 74,792
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days............................ 5.30% 5.34% 5.60% 4.12% 5.60%
60 to 89 days............................ 4.00 4.00 4.98 3.38 4.40
90 to 119 days........................... 3.61 3.94 4.31 3.57 5.13
120 to 149 days.......................... 3.42 3.76 3.02 3.59 4.96
150 days and over........................ 2.71 3.48 2.49 2.15 1.27
------------ ------------ ------------ ------------ ------------
Total....................................... 19.04% 20.52% 20.40% 16.81% 21.36%
============ ============ ============ ============ ============
Other loan delinquencies by number of days:
30 to 59 days............................ $ 735 $ 745 $ 742 $ 1,002 $ 2,079
60 to 89 days............................ 234 379 364 182 533
90 days and over......................... 148 123 160 175 414
------------ ------------ ------------ ------------ ------------
Total....................................... $ 1,117 $ 1,247 $ 1,266 $ 1,359 $ 3,026
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days............................ 7.49% 6.99% 6.07% 9.39% 8.48%
60 to 89 days............................ 2.38 3.56 2.98 1.71 2.18
90 days and over......................... 1.51 1.16 1.31 1.64 1.69
------------ ------------ ------------ ------------ ------------
Total....................................... 11.38% 11.71% 10.36% 12.74% 12.35%
============ ============ ============ ============ ============
The quality of the mortgage loan portfolio continued to improve during 1999
as evidenced by historically low levels of delinquencies, NPLs and REO. At
December 31, 1999, mortgage delinquencies, NPLs and REO balances were 0.70%,
$6.9 million and $2.4 million, respectively.
46
Credit card delinquencies decreased $34.7 million as of December 31, 1999
as compared to December 31, 1998. The decrease in the amount of delinquencies in
the credit card portfolio is due to the significant decline in credit card
balances.
The following table presents the credit card loan portfolio by program at
the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1999 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
MMG outstanding balances:
Current.................................. $ 78,510 $ 87,141 $ 95,145 $ 105,133 $ 116,431
Delinquencies:
30 to 59 days.......................... 4,407 5,344 6,291 6,064 11,810
60 to 89 days.......................... 3,617 4,107 5,260 5,765 10,089
90 to 119 days......................... 3,359 4,234 4,796 6,390 13,472
120 to 149 days........................ 3,425 4,163 3,942 7,689 14,660
150 days and over...................... 2,561 3,534 3,837 6,670 4,460
------------ ------------ ------------ ------------ ------------
Total delinquencies................. 17,369 21,382 24,126 32,578 54,491
------------ ------------ ------------ ------------ ------------
Total....................................... $ 95,879 $ 108,523 $ 119,271 $ 137,711 $ 170,922
============ ============ ============ ============ ============
As a percentage of outstanding
balances:
30 to 59 days............................ 4.60% 4.92% 5.27% 4.40% 6.91%
60 to 89 days............................ 3.77 3.78 4.41 4.19 5.90
90 to 119 days........................... 3.50 3.90 4.02 4.64 7.88
120 to 149 days.......................... 3.57 3.84 3.30 5.58 8.58
150 days and over........................ 2.67 3.25 3.22 4.84 2.61
------------ ------------ ------------ ------------ ------------
Total....................................... 18.11% 19.69% 20.22% 23.65% 31.88%
============ ============ ============ ============ ============
ADC outstanding balances:
Current.................................. $ 76,625 $ 85,914 $ 98,701 $ 122,989 $ 129,450
Delinquencies:
30 to 59 days.......................... 5,187 6,219 8,212 5,529 6,603
60 to 89 days.......................... 4,076 5,073 8,113 4,012 4,633
90 to 119 days......................... 3,677 5,075 6,764 4,245 3,959
120 to 149 days........................ 3,788 5,281 4,487 3,431 2,699
150 days and over...................... 3,145 5,198 3,121 -- --
------------ ------------ ------------ ------------ ------------
Total delinquencies................. 19,873 26,846 30,697 17,217 17,894
------------ ------------ ------------ ------------ ------------
Total....................................... $ 96,498 $ 112,760 $ 129,398 $ 140,206 $ 147,344
============ ============ ============ ============ ============
As a percentage of outstanding
balances:
30 to 59 days............................ 5.38% 5.52% 6.35% 3.94% 4.48%
60 to 89 days............................ 4.22 4.50 6.27 2.86 3.14
90 to 119 days........................... 3.81 4.50 5.23 3.03 2.69
120 to 149 days.......................... 3.93 4.68 3.47 2.45 1.83
150 days and over........................ 3.26 4.61 2.41 -- --
------------ ------------ ------------ ------------ ------------
Total....................................... 20.60% 23.81% 23.73% 12.28% 12.14%
============ ============ ============ ============ ============
(continued)
47
(continued)
QUARTERS ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1999 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Other credit card loans outstanding balances:
Current.................................. $ 15,398 $ 26,276 $ 28,959 $ 30,273 $ 29,405
Delinquencies:
30 to 59 days.......................... 1,563 1,834 1,163 1,208 1,196
60 to 89 days.......................... 745 860 567 708 669
90 to 119 days......................... 560 568 515 466 538
120 to 149 days........................ -- -- 31 28 4
150 days and over...................... -- 2 5 -- --
------------ ------------ ------------ ------------ ------------
Total delinquencies................. 2,868 3,264 2,281 2,410 2,407
------------ ------------ ------------ ------------ ------------
Total....................................... $ 18,266 $ 29,540 $ 31,240 $ 32,683 $ 31,812
============ ============ ============ ============ ============
As a percentage of outstanding
balances:
30 to 59 days............................ 8.56% 6.21% 3.72% 3.70% 3.76%
60 to 89 days............................ 4.08 2.91 1.81 2.17 2.10
90 to 119 days........................... 3.06 1.92 1.65 1.43 1.69
120 to 149 days.......................... -- -- 0.10 0.08 0.01
150 days and over........................ -- 0.01 0.01 -- --
------------ ------------ ------------ ------------ ------------
Total....................................... 15.70% 11.05% 7.29% 7.38% 7.56%
============ ============ ============ ============ ============
At April 1, 1999, collection services for the ADC credit card portfolio
were transferred from ADC to the Bank in accordance with the settlement
agreement between the Bank and ADC. As a result of a number of factors,
including conforming the contractual charge-off policy for the ADC portfolio to
the Bank's charge-off policy, which increased the charge-off period from 150 to
180 days, the rise in delinquencies expected upon the cessation of originations
under the program in February 1999 and transitional difficulties associated with
the transfer of the servicing of accounts from ADC to the Bank, delinquencies in
the ADC credit card portfolio increased from the 12.3% level at March 31, 1999
to 23.7% at June 30, 1999. Subsequently, the delinquencies in the ADC portfolio
have declined to 20.60% at December 31, 1999.
The available credit on credit cards outstanding at December 31, 1999 was
$17.3 million, $23.6 million and $3.1 million for MMG, ADC and other card
programs, respectively.
48
The following table presents the MMG and ADC credit card portfolios by
geographic location at December 31, 1999:
PERCENT OF
AMOUNT TOTAL
---------------- ----------------
(DOLLARS IN THOUSANDS)
State:
Florida............................................. $ 26,608 13.83%
Texas............................................... 15,190 7.90
California.......................................... 15,118 7.86
Alabama............................................. 10,715 5.57
North Carolina...................................... 10,494 5.45
Georgia............................................. 8,427 4.38
New York............................................ 7,407 3.85
South Carolina...................................... 6,829 3.55
Ohio................................................ 6,672 3.47
Mississippi......................................... 6,291 3.27
Michigan............................................ 6,109 3.18
Pennsylvania........................................ 5,771 3.00
Tennessee........................................... 5,600 2.91
Louisiana........................................... 5,179 2.69
Indiana............................................. 4,311 2.24
Arkansas............................................ 3,969 2.06
Other states (states with less than 2%)............. 47,687 24.79
---------------- ----------------
Total.................................................. $ 192,377 100.00%
================ ================
NONACCRUING LOANS
The Bank places a loan, other than a credit card 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 of the collateral
securing the loan.
The following table presents net NPLs at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Single family (1 to 4 units).............. $ 4,455 $ 8,958 $ 5,169 $ 13,978 $ 13,897
Multifamily:
5 to 36 units........................ 1,733 3,568 4,753 18,071 14,312
37 units and over.................... -- 562 2,090 2,671 3,190
------------- ------------- ------------- ------------- -------------
Total multifamily................. 1,733 4,130 6,843 20,742 17,502
Commercial & industrial................... 641 1,127 1,062 1,405 20,511
Other loans............................... 116 157 -- -- --
------------- ------------- ------------- ------------- -------------
Total.................................. $ 6,945 $ 14,372 $ 13,074 $ 36,125 $ 51,910
============= ============= ============= ============= =============
It is the Bank's policy to reserve all earned but unpaid interest on
mortgage and other loans placed on nonaccrual status. The reduction in income
related to such reserves, net of interest recognized on cured delinquencies, was
$0.4 million, $1.9 million and $3.9 million for 1999, 1998 and 1997,
respectively.
49
ACCRUING DELINQUENT LOANS
Credit card loans accrue interest up to the date of charge-off. Finance
charges are included in the principal balance of the credit card loan and are
charged to the ALLL when the credit card balance is charged-off.
The following table presents accruing loans delinquent 90 days or greater
at the dates indicated:
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
90 to 119 days......................... $ 7,596 $ 17,969
120 to 149 days........................ 7,213 17,363
150 days and over...................... 5,706 4,460
------------- -------------
Total............................... $ 20,515 $ 39,792
============= =============
RESTRUCTURED LOANS
The Bank will consider modifying the terms of a mortgage 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.
According to SFAS No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring," a troubled debt restructuring ("TDR") 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 TDR 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.
The following table presents TDRs by property type at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Property type:
Single family (1 to 4 units)............... $ 1,044 $ 2,728 $ 3,862 $ 5,438 $ 3,759
Multifamily:
5 to 36 units........................... 15,319 15,694 14,972 11,647 15,189
37 units and over....................... 9,543 8,156 6,485 5,805 9,109
------------- ------------- ------------- ------------- -------------
Total multifamily..................... 24,862 23,850 21,457 17,452 24,298
Commercial and industrial.................. 4,945 21,440 18,674 22,306 3,688
Land....................................... -- -- -- -- 946
------------- ------------- ------------- ------------- -------------
Total TDRs............................ $ 30,851 $ 48,018 $ 43,993 $ 45,196 $ 32,691
============= ============= ============= ============= =============
50
ACCELERATED ASSET RESOLUTION PLAN
In the fourth quarter of 1995, the Bank adopted the Accelerated Asset
Resolution Plan (the "Plan"), which was designed to aggressively dispose of,
resolve or otherwise manage a pool of primarily multifamily loans and REO that
at that time were considered by the Bank to have higher risk of future
nonperformance or impairment relative to the remainder of the Bank's multifamily
loan portfolio.
The Plan was terminated as of June 30, 1998, based on the minimal remaining
assets and the determination that the resolution of these assets would be
conducted in a similar manner as the Bank's regular portfolio. As of June 30,
1998, the remaining 30 assets with a book balance, net of SVA and writedowns, of
$9.4 million, comprised of accruing and nonaccruing multifamily real estate
loans totaling approximately $4.8 million and REO properties totaling
approximately $4.6 million. The $1.6 million of unallocated ALLL remaining as of
June 30, 1998 from the original $50.8 million reserves established for the Plan
was included in the Bank's ALLL at June 30, 1998.
CLASSIFIED ASSETS
The following table summarizes classified assets net of SVAs and writedowns
at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Performing classified loans:
Single family (1 to 4 units)........... $ 6,812 $ 6,164 $ 7,792 $ 10,585 $ 12,665
Multifamily:
5 to 36 units........................ 27,360 39,570 63,777 60,785 85,581
Over 37 units........................ 9,979 17,027 22,704 10,375 39,301
------------- ------------- ------------- ------------- -------------
Total multifamily................. 37,339 56,597 86,481 71,160 124,882
Commercial and industrial.............. 7,046 5,802 10,412 29,503 10,099
Credit card and other loans............ 20,677 39,792 -- -- --
------------- ------------- ------------- ------------- -------------
Total performing classified loans.... 71,874 108,355 104,685 111,248 147,646
------------- ------------- ------------- ------------- -------------
NPAs:
NPLs................................... 6,945 14,372 13,074 36,125 51,910
REO.................................... 2,422 8,397 12,293 24,663 19,521
Other repossessed assets............... 29 535 -- -- --
------------- ------------- ------------- ------------- -------------
Total NPAs........................... 9,396 23,304 25,367 60,788 71,431
------------- ------------- ------------- ------------- -------------
Other classified assets................... 840 1,426 23,450 2,060 --
------------- ------------- ------------- ------------- -------------
Total classified assets................... $ 82,110 $ 133,085 $ 153,502 $ 174,096 $ 219,077
============= ============= ============= ============= =============
Classified asset ratios:
NPLs to total assets................... 0.26% 0.39% 0.31% 1.08% 1.57%
NPLs to total loans.................... 0.32% 0.54% 0.46% 1.34% 1.77%
NPAs to total assets................... 0.35% 0.63% 0.61% 1.83% 2.16%
TDRs to total assets................... 1.15% 1.29% 1.06% 1.36% 0.99%
NPAs and TDRs to total assets.......... 1.50% 1.92% 1.66% 3.18% 3.16%
Classified assets to total assets...... 3.06% 3.59% 3.68% 5.23% 6.64%
REO to NPAs............................ 25.78% 36.03% 48.46% 40.57% 27.33%
NPLs to NPAs........................... 73.91% 61.67% 51.54% 59.43% 72.67%
Total classified assets decreased $51.0 million or 38.3% from December 31,
1998, to $82.1 million at December 31, 1999. This decrease was due to a $31.3
million decrease in classified mortgage loans and a $19.3 million decrease in
classified credit card loans. The decrease in classified mortgage loans reflects
the improving performance of the underlying income properties and increases in
property values in Southern California. The decrease in classified credit card
loans reflects the decrease in outstanding credit card balances.
51
REO
The following table presents REO by property type and information about the
change in the book value and the number of properties owned and foreclosed for
the periods indicated:
DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Single family (1 to 4 units)............... $ 1,307 $ 3,734 $ 3,702 $ 6,595 $ 5,550
Multifamily:
5 to 36 units.......................... 414 1,735 5,318 13,574 8,421
37 units and over...................... -- 1,844 3,149 1,844 --
------------- ------------- ------------- ------------- -------------
Total multifamily...................... 414 3,579 8,467 15,418 8,421
Commercial and industrial.................. 801 1,584 624 3,950 7,850
Valuation allowances....................... (100) (500) (500) (1,300) (2,300)
------------- ------------- ------------- ------------- -------------
Total net REO.......................... $ 2,422 $ 8,397 $ 12,293 $ 24,663 $ 19,521
============= ============= ============= ============= =============
Properties foreclosed during the period:
Number................................. 67 62 88 131 109
Gross book value....................... $ 14,495 $ 27,774 $ 75,385 $ 77,585 $ 92,661
Average book value..................... $ 216 $ 231 $ 294 $ 343 $ 343
ALLOWANCE FOR ESTIMATED LOAN AND REO LOSSES
The following table summarizes the activity in the allowance for estimated
loan and REO losses for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period............. $ 109,198 $ 55,993 $ 59,589 $ 92,927 $ 69,520
------------- ------------- ------------- ------------- -------------
Charge-offs............................. (131,568) (25,624) (44,000) (55,471) (52,636)
Recoveries.............................. 5,100 5,085 9,118 3,304 2,953
------------- ------------- ------------- ------------- -------------
Net charge-offs....................... (126,468) (20,539) (34,882) (52,167) (49,683)
Provision:
Estimated loan losses................. 78,800 73,032 13,004 15,610 69,724
REO................................... 185 251 1,060 3,219 3,366
Net change in cash reserves (2)......... 1,893 461 4,332 -- --
Allowances related to acquisition (1)... -- -- 12,890 -- --
------------- ------------- ------------- ------------- -------------
Balance at end of period................... $ 63,608 $ 109,198 $ 55,993 $ 59,589 $ 92,927
============= ============= ============= ============= =============
Ratio of net charge-offs during the period
to average loans outstanding............ 5.0% 0.8% 1.2% 1.8% 1.6%
- ----------------
(1) Represents the estimated loan losses included in the acquisition of Hancock.
(2) Net change in cash reserves includes fundings, repurchases and transfers
from credit card marketers.
52
The following table presents loan and REO charge-offs and recoveries for
the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Charge-offs:
Single family (1 to 4 units)............ $ 1,245 $ 2,633 $ 9,649 $ 10,587 $ 7,868
Multifamily loans:
5 to 36 units......................... 1,834 8,384 28,664 33,083 33,948
37 units and over..................... 275 3,515 3,548 6,043 8,179
------------- ------------- ------------- ------------- -------------
Total multifamily.................. 2,109 11,899 32,212 39,126 42,127
Commercial and industrial............... 1,407 529 2,139 5,758 2,641
Credit card loans....................... 123,325 9,502 -- -- --
Other loans............................. 3,482 1,061 -- -- --
------------- ------------- ------------- ------------- -------------
Total charge-offs.......................... $ 131,568 $ 25,624 $ 44,000 $ 55,471 $ 52,636
============= ============= ============= ============= =============
Recoveries:
Single family (1 to 4 units)............ $ 1,050 $ 2,143 $ 3,485 $ 948 $ 119
Multifamily loans:
5 to 36 units......................... 564 2,286 4,611 1,144 1,781
37 units and over..................... 550 511 247 491 829
------------- ------------- ------------- ------------- -------------
Total multifamily.................. 1,114 2,797 4,858 1,635 2,610
Commercial and industrial............... 607 63 775 721 224
Credit card loans....................... 2,129 -- -- -- --
Other loans............................. 200 82 -- -- --
------------- ------------- ------------- ------------- -------------
Total recoveries........................... $ 5,100 $ 5,085 $ 9,118 $ 3,304 $ 2,953
============= ============= ============= ============= =============
In addition to reserves established by the Bank, cash reserves have been
provided by credit card affinity marketers under the credit enhancement programs
which are utilized to purchase accounts from the Bank after the accounts reach a
certain delinquent status. At December 31, 1999 and 1998, cash reserves were
$2.7 million and $1.9 million, respectively, and were recorded as deposits on
the Company's statements of financial condition. Accounts purchased from cash
reserves during 1999 and 1998 totaled $2.7 million and $25.7 million,
respectively, and are not included in the above table.
53
The following table sets forth the allowance for estimated loan and REO
losses at the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1999 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Loans:
ALLL ...................................... $ 56,376 $ 65,550 $ 75,414 $ 70,606 $ 98,229
SVA........................................ 3,902 5,040 5,681 7,292 7,942
------------ ------------ ------------ ------------ ------------
Total ALLL and SVA....................... 60,278 70,590 81,095 77,898 106,171
Cash reserves.............................. 2,672 3,357 2,467 1,915 1,888
------------ ------------ ------------ ------------ ------------
Total allowances and cash reserves....... 62,950 73,947 83,562 79,813 108,059
REO valuation allowances...................... 658 620 1,068 998 1,139
------------ ------------ ------------ ------------ ------------
Total allowances and cash reserves............ $ 63,608 $ 74,567 $ 84,630 $ 80,811 $ 109,198
============ ============ ============ ============ ============
Selected ratios:
Total allowances to net loans and REO...... 2.85% 3.18% 3.33% 3.03% 3.86%
Total ALLL and cash reserves to:
Net loans................................ 2.65% 2.95% 3.08% 2.73% 3.62%
Net NPLs................................. 850.35% 969.43% 1214.61% 552.04% 696.61%
Net loans and REO........................ 2.65% 2.95% 3.09% 2.74% 3.63%
Net NPAs................................. 629.57% 536.39% 584.41% 333.61% 431.75%
Total assets............................. 2.20% 2.33% 2.38% 2.06% 2.71%
Credit losses are inherent in the business of originating and retaining
loans. The Company maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. These allowances consist of SVAs and an ALLL
which are based on ongoing, quarterly assessments of the probable estimated
losses inherent in the loan portfolio. In addition, the Company's allowances
incorporate the results of measuring impaired loans as provided in:
o SFAS No. 5, "Accounting for Contingencies"
o SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,"
and
o SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income
recognition and disclosures concerning impaired loans.
An SVA is established where management has identified significant
conditions or circumstances related to a specific loan that management believes
indicate the probability that a loss has been incurred.
The ALLL is established to provide for credit losses inherent in the loan
portfolio other than those provided for in SVAs. The ALLL is computed utilizing
several models and methodologies which are based upon a number of factors,
including historical delinquency and loss experience, the level of nonperforming
and internally classified loans, the composition of the loan portfolio,
estimated remaining lives of the various types of loans within the portfolio,
prevailing and forecasted economic conditions and management's judgment. For
small-dollar-value homogeneous loans (such as consumer installment loans,
residential mortgages and credit card loans), the Company utilizes computations
based on various factors, including past loss experience, recent economic events
and current conditions and portfolio delinquency rates. For loans or groups of
loans for which the Company has little or no loss experience of its own, the
Company utilizes the loss experience for similar types of loans of other
enterprises.
54
The Company's methodology for assessing the appropriateness of the ALLL
consists of:
o a calculated component, and
o a judgmental component
The calculated component of the ALLL at December 31, 1999, was determined
as follows:
o SINGLE FAMILY MORTGAGE LOANS (1-4 UNITS): Delinquency migration
models were utilized which apply delinquency and loss factors to
the outstanding portfolio segregated by delinquency status. The
delinquency and loss factors are based on delinquency migration
results of the Company's single family loan portfolio for the most
recent twelve months, or, in the case of nonconforming mortgage
loans, are based on the delinquency and loss experience for
similar types of loans of other enterprises. Estimated charge-offs
in 2000 are expected to be $1.0 million.
o MULTIFAMILY MORTGAGE LOANS AND COMMERCIAL AND INDUSTRIAL REAL
ESTATE LOANS GRADED PASS OR SPECIAL MENTION: Loss factors were
applied to outstanding loan balances based on the internal risk
grade of those loans or pools of loans. These loss factors are
based on the Company's historical loss experience over the last
two years derived from the classification migration model.
Estimated charge-offs in 2000 are expected to be $3.2 million.
o MULTIFAMILY AND COMMERCIAL & INDUSTRIAL REAL ESTATE LOANS GRADED
SUBSTANDARD: An estimated allowance was computed for each loan
based on the estimated value of the underlying collateral of each
loan as compared to its carrying value. Estimated charge-offs in
2000 are expected to be $1.1 million.
o CREDIT CARD LOANS ORIGINATED UNDER THE ADC AND MMG AGREEMENTS: The
Company utilized a delinquency migration model that applies
delinquency migration factors to the outstanding portfolio
segregated by delinquency status. The delinquency migration model
assumes the continuation of historical delinquency patterns from
current accounts to charge-off. Estimated charge-offs in 2000 are
expected to be $49.3 million.
o CREDIT CARD LOANS ORIGINATED UNDER OTHER PROGRAMS: Delinquency
migration models based on the related credit card portfolios'
specific experience were utilized. Estimated charge-offs in 2000
are expected to be $2.5 million and are expected to be covered by
the cash deposits and guarantees of credit enhanced credit card
program marketers.
o ALL OTHER LOANS: Loss factors were applied to the outstanding loan
balances. These loss factors were based on the Company's
historical experience or the loss experience for similar types of
loans of other enterprises. Estimated charge-offs in 2000 are
expected to be $1.1 million.
Loans with SVAs are excluded from the computation of ALLL.
The judgmental component is based upon management's evaluation of various
conditions, the effects of which are not directly measured in determining SVA or
the calculated component. The evaluation of the inherent loss regarding these
conditions involves a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments. The conditions
evaluated in connection with the judgmental component include the following
conditions:
o level of inherent uncertainty in the precision of the calculated
component,
o general economic and business conditions affecting key lending
areas,
55
o credit quality trends, including trends in nonperforming loans
expected to result from existing conditions,
o recent trends in collateral values,
o loan volumes and concentrations,
o seasoning of the loan portfolios,
o specific industry conditions within portfolio segments,
o recent loss experience in particular segments of the portfolio,
o duration of the current business cycle, and
o quality of loan review and credit oversight systems
o experience of lending personnel
Executive management reviews these conditions quarterly. If any of these
conditions is evidenced by a specifically identifiable problem credit as of the
evaluation date, management's estimate of the effect of this condition may be
reflected as a specific allowance applicable to this credit. Where any of these
conditions are not evidenced by a specifically identifiable problem credit as of
the evaluation date, management's evaluation of the probable loss concerning
this condition is reflected in the judgmental component.
The credit enhanced credit card programs require the marketing agent, as
part of their contractual obligation to reimburse Fidelity for credit losses, to
maintain cash deposits with Fidelity. These cash deposits are deducted from the
computed amount of estimated future credit losses in determining the required
levels of ALLL and are considered part of the reserves available to cover future
credit losses. In addition, the Bank does not provide for estimated credit
losses in excess of cash deposits for the credit enhanced credit card programs
if a determination is made that the Bank can rely on the marketer for payment of
future credit losses.
The Company's allowance for credit losses is based upon estimates of
probable losses inherent in the loan portfolio. The amount of losses actually
incurred can vary significantly from the estimated amounts. The Company's
methodology includes several features that are intended to reduce the difference
between estimated and actual losses. The migration models that are used are
designed to be self-correcting by taking into account the Company's recent
delinquency and loss experience. Pooled loan loss factors are adjusted quarterly
based upon the level of net charge-offs expected by management in the next
twelve months. Furthermore, the Company's methodology permits adjustments to any
loss factor used in the computation of the formula allowance in the event that,
in management's judgment, significant factors that affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, the Company is able to adjust specific and inherent loss
estimates based upon any more recent information that has become available.
The Company believes its policies and procedures for establishing the
allowance for credit losses and for providing provisions for estimated loan
losses are in accordance with generally accepted accounting principles ("GAAP"),
including SFAS No. 5, SFAS No. 114, SFAS No. 118 and regulatory standards
established by the OTS.
The allowance for loan losses does not represent the amount of 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.
56
REGULATORY CAPITAL COMPLIANCE
The OTS capital regulations, as required by 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 Bank's actual and required capital are as follows at the dates
indicated:
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENT ACTION PROVISION
---------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total capital (to risk-weighted
assets)................................. $ 159,952 10.09% $ 126,796 8.00% $ 158,495 10.00%
Core capital (to adjusted tangible
assets)................................. 139,689 5.22 80,306 3.00 133,843 5.00
Tangible capital (to tangible assets)..... 139,689 5.22 40,153 1.50 N/A 5.00
Core capital (to risk-weighted
assets)................................. 139,689 8.81 N/A 95,097 6.00
AS OF DECEMBER 31, 1998:
Total capital (to risk-weighted
assets)................................. $ 188,746 8.95% $ 168,656 8.00% $ 210,820 10.00%
Core capital (to adjusted tangible
assets)................................. 161,506 4.36 111,028 3.00 185,046 5.00
Tangible capital (to tangible assets)..... 161,506 4.36 55,514 1.50 N/A
Core capital (to risk-weighted
assets)................................. 161,506 7.66 N/A 126,492 6.00
57
The following table reconciles the Company's stockholders' equity and the
Bank's capital in accordance with GAAP to the Bank's tangible, core and
risk-based capital at the dates indicated:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Consolidated stockholders' equity................. $ 96,176 $ 96,176 $ 96,176
Adjustments:
Fidelity's Preferred Stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (1,250) (1,250) (1,250)
------------ ------------ ------------
Fidelity's stockholders' equity................... 146,676 146,676 146,676
Accumulated other comprehensive loss.............. 9,272 9,272 9,272
Adjustments:
Intangible assets............................... (12,352) (12,352) (12,352)
Nonincludable subsidiaries...................... (1) (1) (1)
Excess ALLL..................................... -- -- 20,263
Net deferred tax assets......................... (3,906) (3,906) (3,906)
------------ ------------ ------------
Regulatory capital.................................. $ 139,689 $ 139,689 $ 159,952
============ ============ ============
AS OF DECEMBER 31, 1998:
Consolidated stockholders' equity................. $ 127,388 $ 127,388 $ 127,388
Adjustments:
Fidelity's Preferred Stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (6,152) (6,152) (6,152)
------------ ------------ ------------
Fidelity's stockholders' equity................... 172,986 172,986 172,986
Accumulated other comprehensive loss.............. 2,795 2,795 2,795
Adjustments:
Intangible assets............................... (14,268) (14,268) (14,268)
Nonincludable subsidiaries...................... (7) (7) (7)
Excess ALLL..................................... -- -- 27,240
------------ ------------ ------------
Regulatory capital.................................. $ 161,506 $ 161,506 $ 188,746
============ ============ ============
As of December 31, 1999, the Bank was "well capitalized" under the PCA
regulations adopted by the OTS pursuant to FDICIA. As of December 31, 1999, the
most constraining of the capital ratio measurements was risk-based capital to
risk-weighted assets which had an excess of $1.5 million above the minimum level
required to be considered well capitalized. The Bank's capital amounts and
classification are subject to review by federal regulators about components,
risk-weightings and other factors. Due to the expectation of continuing losses
in the credit card operations, or a significant write-down in the carrying value
of the credit card portfolios as a result of the adoption of alternative
strategies, the Bank expects to be adequately capitalized in 2000.
LIQUIDITY
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.
58
DEPOSITS
The largest source of funds for the Company is deposits. Customer deposits
are insured by the FDIC to the maximum amount permitted by law up to $100,000
per account. The Company has several types of deposit accounts designed to
attract both short-term and long-term deposits.
At December 31, 1999, the Company had deposits of $2.5 billion. The
following table presents the distribution of deposit accounts at the dates
indicated:
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
(DOLLARS IN THOUSANDS)
Passbook accounts............................. $ 49,973 $ 56,836
Checking accounts............................. 369,071 380,292
Money market savings accounts................. 50,428 56,451
------------ -------------
Total transaction accounts............... 469,472 493,579
CDs........................................... 2,031,774 2,428,952
------------ -------------
Total deposits........................... $ 2,501,246 $ 2,922,531
============ =============
There were no brokered deposits outstanding at December 31, 1999 and 1998.
The following table summarizes CDs by remaining maturity and weighted
average rate at December 31, 1999:
REMAINING TERM TO MATURITY
-----------------------------------------------------------------------------
GREATER
LESS THAN 3 TO 6 6 TO 12 THAN
3 MONTHS MONTHS MONTHS 12 MONTHS TOTAL
------------- -------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
CDs:
Less than $100,000.................... $ 409,071 $ 306,464 $ 496,042 $ 210,726 $ 1,422,303
Greater than $100,000................. 189,391 83,955 227,029 109,096 609,471
------------- -------------- ------------- ------------- -------------
Total CDs................................. $ 598,462 $ 390,419 $ 723,071 $ 319,822 $ 2,031,774
============= ============== ============= ============= =============
Weighted average yield:
Less than $100,000.................... 4.58% 4.59% 4.88% 4.72% 4.71%
Greater than $100,000................. 4.92% 4.74% 5.19% 4.91% 4.99%
Total weighted average yield on CDs....... 4.69% 4.62% 4.97% 4.78% 4.79%
The following table provides information with regards to the Bank's most
recent quarterly experience in the levels of and pricing of CDs for the period
indicated:
WEIGHTED AVERAGE RATE
--------------------------
NET NEW OR NET NEW OR
WITHDRAWALS RENEWED NET CHANGE WITHDRAWALS RENEWED
------------- ------------- ------------ ------------- ---------
(DOLLARS IN THOUSANDS)
CDs maturing in quarter ended:
December 31, 1998................. $ 579,887 $ 436,875 $ (143,012) 5.43% 4.30%
March 31, 1999.................... 695,261 532,999 (162,262) 5.15 4.18
June 30, 1999..................... 584,454 452,263 (132,191) 5.08 4.33
September 30, 1999................ 577,716 561,375 (16,341) 4.90 4.79
December 31, 1999................. 482,455 494,889 12,434 4.55 4.96
59
The distribution of certificate accounts by date of maturity is an
important indicator of the relative stability of a major source of funds. Longer
term certificate accounts generally provide greater stability as a source of
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, 1999:
WEIGHTED
PERCENT OF TOTAL AVERAGE
MATURES IN QUARTER ENDED: AMOUNT DEPOSITS RATE
- ------------------------- ------------- ---------------- ---------
(DOLLARS IN THOUSANDS)
March 31, 2000..................................................... $ 598,462 23.9% 4.69%
June 30, 2000.................................................... 390,419 15.6 4.62
September 30, 2000............................................... 385,910 15.4 4.96
December 31, 2000................................................ 337,161 13.5 4.99
March 31, 2001................................................... 105,794 4.2 4.42
June 30, 2001.................................................... 77,643 3.1 4.57
September 30, 2001............................................... 19,420 0.8 5.66
December 31, 2001 and after...................................... 116,965 4.7 5.11
------------- ------
Total CDs..................................................... $ 2,031,774 81.2% 4.79
============= ======
BORROWINGS
The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated:
DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
FHLB advances:
Fixed rate advances........................................... $ 20,000 $ 585,000 $ 835,000
Floating rate advances........................................ -- -- 174,960
------------- ------------- -------------
Total FHLB advances.......................................... 20,000 585,000 1,009,960
Other borrowings:
Senior Notes.................................................. 51,478 51,478 51,478
------------- ------------- -------------
Total borrowings................................................. $ 71,478 $ 636,478 $ 1,061,438
============= ============= =============
Weighted average interest rate on all borrowings................. 11.05% 6.20% 6.13%
Percent of total borrowings to total liabilities and
stockholders' equity........................................... 2.66% 17.15% 25.46%
The $20 million in FHLB advances outstanding at December 31, 1999, matured
and was paid-off in February 2000.
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
December 31, 1999 include (a) available credit faculties with the FHLB of $382.3
million, (b) $284.2 million in unpledged securities available to be placed in
reverse repurchase agreements or sold, (c) available credit facilities at the
Federal Reserve Bank of $100 million and the ability under Federal Regulations
to borrow $125 million through the use of brokered CDs.
60
CONTINGENT OR POTENTIAL USES OF FUNDS
The Bank had $3.4 million of unfunded loans at December 31, 1999.
Additionally, unused lines of credit related to credit card loans and other
loans totaled $44.0 million and $39.8 million, respectively, at December 31,
1999.
LIQUIDITY
The regulatory required average daily balance of liquid assets is 4% of the
liquidity base, which is based on a quarterly average. The Bank's quarterly
average regulatory liquidity ratio was 12.83%, 18.40% and 22.75% at December 31,
1999, 1998 and 1997, respectively.
HOLDING COMPANY LIQUIDITY
At December, 1999 and 1998, Bank Plus had cash and cash equivalents of $0.6
million and $0.7 million, respectively. Bank Plus has no material potential cash
producing operations or assets other than its investments in Fidelity and
Gateway. Accordingly, Bank Plus is substantially dependent on dividends from
Fidelity and Gateway in order to fund its cash needs, including its payment
obligations on its $51.5 million principal amount of the Senior Notes issued in
exchange for Fidelity's Preferred Stock. The quarterly 1999 senior note interest
payments were funded by preferred stock dividends from Fidelity and cash on hand
at Bank Plus.
The liquidity for the interest payments in 2000 is expected to be provided
by preferred stock dividends from the Bank and currently projected liquidity at
the holding company. The Bank has an understanding with the OTS which permits
the payment of dividends on the Bank's preferred stock so long as the Bank
remains at least adequately capitalized for regulatory purposes. The
understanding with the OTS does not constrain the OTS from restricting future
dividend payments based on safety and soundness considerations or future
examination findings, and no assurance can therefore be given that the OTS will
permit future dividend payments by Fidelity to Bank Plus. The Bank has received
no indication from the OTS that it will object to the continued payment of
preferred dividends.
COMMITMENTS AND CONTINGENCIES
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, 1999, the Company had $3.4 million in
commitments to fund loans. In addition, the Company has extended lines of credit
in the form of credit cards and other totaling $304.8 million. At December 31,
1999, the unused and available portion of the credit lines extended included
$44.0 million related to credit cards and $39.8 million related to overdraft
reserve lines on checking accounts and other credit lines.
As of December 31, 1999, the Company had certain mortgage loans with a
gross principal balance of $73.5 million, of which $61.4 million had been put
into the form of mortgage pass-through certificates, over various periods of
time, leaving a balance of $12.1 million in loans retained by the Company. These
mortgage pass-through certificates provide a credit enhancement to the investors
in the form of the Company's subordination of its retained percentage interest
to that of the investors. In this regard, the aggregate of $61.4 million are
deemed Senior Mortgage Pass-Through Certificates and the $12.1 million in loans
held by the Company are subordinated to the Senior Mortgage Pass-Through
Certificates in the event of borrower default. Full recovery of the $12.1
million is subject to this contingent liability due to its subordination. In
1993, the Bank repurchased a portion of the mortgage pass-through certificates,
and at December 31, 1999, the balance of the repurchased certificate was $21.6
million and was included in the MBS AFS portfolio and accounted for in
accordance with SFAS No. 115. The other Senior Mortgage Pass-Through
Certificates totaling $39.8 million at December 31, 1999 are owned by other
investor institutions. The contingent liability for credit losses on these
mortgage pass-through certificates was $0.5 million and $0.9 million at December
31, 1999 and 1998, respectively, and is included in other liabilities.
61
The Company also effected the securitization by FNMA of multifamily
mortgages wherein whole loans were swapped for Triple A rated MBS through FNMA's
Alternative Credit Enhancement Structure ("ACES") program. These MBS were later
sold and the current outstanding balance as of December 31, 1999 of $79.6
million is serviced by the Company, including commitments assumed as a result of
the Hancock acquisition. As part of a credit enhancement to absorb losses
relating to the ACES transaction, the Company has pledged and placed in a trust
account, as of December 31, 1999, $17.4 million, comprised of $13.3 million in
cash and $4.1 million in U.S. Agency securities. The Company shall absorb
losses, if any, which may be incurred on the securitized multifamily loans to
the extent of $13.9 million. FNMA is responsible for any losses in excess of
$13.9 million. The corresponding contingent liability for credit losses was $1.3
million and $2.3 million at December 31, 1999 and 1998, respectively, and is
included in other liabilities.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The objective of asset/liability management is to maximize the net income
of the Company 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.
62
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of December 31,
1999. "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 other
financial instruments as applicable, and based on certain assumptions, including
those stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1999
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 and cash equivalents.............. $ 15,138 $ -- $ -- $ -- $ -- $ 15,138
FHLB stock (1) ....................... 31,142 -- -- -- -- 31,142
MBS (1)................................ 83,709 736 -- -- 235,788 320,233
Loans receivable:
ARMs (2)............................. 1,587,557 351,271 56,792 7,860 1,169 2,004,649
Fixed rate loans..................... 27,688 72,728 3,376 10,847 108,819 223,458
----------- ----------- ----------- ----------- ----------- -----------
Total gross loans receivable....... 1,615,245 423,999 60,168 18,707 109,988 2,228,107
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets............ 1,745,234 424,735 60,168 18,707 345,776 $2,594,620
----------- ----------- ----------- ----------- ----------- ===========
Interest-bearing liabilities:
Deposits:
Checking and savings accounts (3).... 419,044 -- -- -- -- $ 419,044
Money market accounts (3)............ 50,428 -- -- -- -- 50,428
Fixed maturity deposits:
Retail customers................... 598,462 1,113,491 315,156 4,406 259 2,031,774
Wholesale customers................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total deposits................... 1,067,934 1,113,491 315,156 4,406 259 2,501,246
----------- ----------- ----------- ----------- ----------- -----------
Borrowings:
FHLB advances ....................... 20,000 -- -- -- -- 20,000
Other................................ -- -- -- 51,478 -- 51,478
----------- ----------- ----------- ----------- ----------- -----------
Total borrowings................... 20,000 -- -- 51,478 -- 71,478
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities....... 1,087,934 1,113,491 315,156 55,884 259 $2,572,724
----------- ----------- ----------- ----------- ----------- ===========
Repricing Gap............................ $ 657,300 $ (688,756) $ (254,988) $ (37,177) $ 345,517
=========== =========== =========== =========== ===========
Gap to total assets...................... 24.49% (25.67)% (9.50)% (1.39)% 12.88%
Cumulative Gap to Total Assets........... 24.49% (1.18)% (10.68)% (12.07)% 0.81%
- ----------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Adjustable rate mortgages ("ARMs") are primarily in the shorter categories
as they are subject to interest rate adjustments.
(3) These liabilities are subject to daily adjustments and are therefore
included in the "Within 3 Months" category.
The Company manages interest rate risk by, among other things, maintaining
a portfolio consisting primarily of ARM loans. ARM loans comprised 94% of the
total mortgage loan portfolio at December 31, 1999. The percentage of monthly
adjustable ARMs to total mortgage loans was 69% at December 31, 1999. Interest
sensitive assets provide the Company with a degree of long-term protection from
rising interest rates. At December 31, 1999, approximately 91% of Fidelity's
total mortgage loan portfolio consisted of loans which mature or reprice within
one year.
63
Over 90% of the Bank's ARM loans are indexed to COFI and do not reprice
until some time after the industry liabilities comprising COFI reprice. In the
Company's case this lag is approximately four months. Historically, because the
repricing of the Company's liabilities were generally consistent with the
repricing of COFI, the repricing of the Company's loans occurred after the
repricing of its liabilities. Thus, in a rising interest rate environment, the
Company's net interest income would be adversely affected until the majority of
its interest earning assets fully repriced. During 1999, as a result of the
Bank's deposit repricing and conversion program and the reduction in the level
of wholesale borrowings, the repricing of the Bank's liabilities have lagged the
repricing of COFI. As a result, the Bank's net yield on interest earning assets
increased in 1999 during a period of increasing interest rates. It is
anticipated that the repricing of the Bank's liabilities will continue to lag
the repricing of COFI primarily because the Bank has paid off all of its
wholesale borrowings. This may be negatively impacted by the Bank's future need
to utilize wholesale borrowings to fund the anticipated sale of deposits during
2000. Also, because of this lag in repricing of the Bank's liabilities to the
repricing of COFI, the Bank's net interest income may not be as positively
affected by falling interest rates as other financial institutions.
Analysis of the Gap provides only a static view of the Company's interest
rate sensitivity at a specific point in time. The actual impact of interest rate
movements on the Company'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.
The Company may employ interest rate swaps, caps and floors in the
management of interest rate risk. 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.
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 Company 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. 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
Company usually does not require collateral or other security from other parties
to these instruments. The Company manages its credit exposure to counterparties
through credit approvals, credit limits and other monitoring procedures. The
Company's Credit Policy Committee makes recommendations regarding counterparties
and credit limits which are subject to approval by the Board of Directors. There
were no derivative financial instruments outstanding at December 31, 1999 or
1998.
MARKET RISK
The Bank's Asset Liability Committee ("ALCO"), which includes senior
management representatives, monitors and considers methods of managing the rate
and sensitivity repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of changes in net portfolio value
("NPV") and net interest income. A primary purpose of the Company's
asset/liability management is to manage interest rate risk to effectively invest
the Company's capital and to preserve the value created by its core business
operations. As such, certain management monitoring processes are designed to
minimize the impact of sudden and sustained changes in interest rates on NPV and
net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in NPV in the event of hypothetical changes in interest rates
and interest rate sensitivity gap analysis is used to determine the repricing
characteristics of the Bank's assets and liabilities.
64
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV is equal to the estimated market
value of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained one hundred to
three hundred basis points increase or decrease in the market interest rates.
NPV is calculated by the Company pursuant to the guidelines established by the
OTS. The calculation is based on the net present value of estimated discounted
cash flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of
December 31, 1999, with adjustments made to reflect the shift in the treasury
yield curve as appropriate. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and deposits decay, and should
not be relied upon as indicative of actual results. Further, the computations do
not contemplate any actions the ALCO could undertake in response to changes in
interest rates.
The following table presents the Company's projected change in NPV for the
various rate shock levels at the dates indicated:
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------- -----------------------------
PERCENTAGE CHANGE IN PERCENTAGE CHANGE IN
CHANGE IN INTEREST RATES NET INTEREST NET PORTFOLIO NET INTEREST NET PORTFOLIO
(IN BASIS POINTS) INCOME (1) VALUE (2) INCOME (1) VALUE (2)
------------------------ ------------ ------------- ------------- -------------
+300 (2)% (25)% 1% --%
+200 (1) (16) 3 4
+100 -- (7) 4 5
Base Case -- -- -- --
-100 (1) 5 (6) (7)
-200 (4) 6 (13) (15)
-300 (10) 6 (19) (19)
- ----------------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the net interest income
in the various rate scenarios.
(2) The percentage change in this column represents the NPV of the Bank in a
stable interest rate environment versus the NPV in the various rate
scenarios.
65
The following table shows the Company's financial instruments that are
sensitive to change in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1999. This data differs from that in
the Gap table as it does not incorporate the repricing characteristics of assets
and liabilities. Rather, it only reflects contractual maturities adjusted for
anticipated prepayments. Market risk sensitive instruments are generally defined
as on and off balance sheet derivatives and other financial instruments.
DECEMBER 31,
EXPECTED MATURITY DATE AT DECEMBER 31, 1998 (1) 1998
----------------------------------------------------------------------------------------------- ----------
TOTAL FAIR FAIR
2000 2001 2002 2003 2004 THEREAFTER BALANCE VALUE (2) VALUE (2)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-sensitive
assets:
Investment securities. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 29,896
MBS AFS............... 83,652 37,979 30,663 25,073 20,960 121,906 320,233 320,233 465,010
Average coupon rate. 6.21% 7.04% 7.60% 7.40% 7.49% 7.37% 7.06%
Loans receivable...... 71,953 69,123 178,225 74,325 109,888 1,665,867 2,169,381 2,109,540 2,707,333
Average interest
rate............... 6.46% 9.22% 9.47% 6.79% 7.27% 7.23% 7.44%
Mortgage servicing
assets............... -- -- -- -- -- 1,186 1,186 5,733 5,368
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-
sensitive assets....... $ 155,605 $ 107,102 $ 208,888 $ 99,398 $ 130,848 $1,788,959 $2,490,800 $2,435,506 $3,207,607
=========== =========== =========== =========== =========== =========== =========== =========== ===========
Interest-sensitive
liabilities:
Deposits:
Transaction
accounts........... $ 326,846 $ 28,691 $ 28,691 $ 28,691 $ 28,691 $ 28,004 $ 469,614 $ 469,614 $ 493,579
Average interest
rate............. 1.78% 1.31% 1.39% 1.48% 1.49% 1.46% 1.67%
CDs................. 1,710,341 223,083 89,623 4,232 4,005 347 2,031,631 2,024,030 2,445,581
Average interest
rate............. 4.79% 4.57% 5.17% 5.54% 5.34% 5.38% 4.79%
Borrowings............ 20,000 -- -- -- -- 51,478 71,478 78,467 663,520
Average interest
rate............... 8.61% --% --% --% 5.60% 12.00% 11.05%
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-sensitive
liabilities........... $2,057,187 $ 251,774 $ 118,314 $ 32,923 $ 32,696 $ 79,829 $2,572,723 $2,572,111 $3,602,680
=========== =========== =========== =========== =========== =========== =========== =========== ===========
- ----------------
(1) The Company uses certain assumptions to estimate expected maturities. For
assets, expected maturities are based upon contractual maturity, projected
repayments and prepayments of principal. The prepayment experience
reflected herein is based on the Company's historical experience.
(2) The estimated fair values were computed as follows: a) investment and MBS
securities were based on quoted market prices, and b) loans, mortgage
servicing rights and all interest sensitive liabilities were based on an
option adjusted cash flow valuation ("OACFV"), which includes forward
interest rate simulations. There exists a high level of uncertainty related
to the future performance of the credit card portfolio because of the high
levels of delinquencies and charge-offs. As a result, the fair values
included above may not be indicative of the value derived upon a sale of
all or part of the credit card portfolios.
YEAR 2000
The Company utilizes computer software programs, systems and devices with
embedded microchips ("Systems") throughout the organization in order to support
its on-going operations. Corrective action was required for these Systems to
correctly interpret and process dates into 2000. The Company implemented and
completed a plan of corrective action including upgrading and testing all
Systems for Year 2000 compliance. As of the issuing of this report no
significant issues have resulted related to the Systems ability to correctly
interpret and process dates in 2000. The principle tasks remaining are to
perform tests of quarter-end processing and monitoring ongoing operations for
problems that may occur in the months ahead.
The total expense for Year 2000 project activities was $6.3 million. A
significant portion of this cost was for staffing of technology and support
personnel to implement the required modifications and upgrades. Additional
personnel were also required to perform the system testing, produce testing
documentation, and prepare contingency plans required by the Federal Financial
Insurance Examinations Council (the "FFIEC"). The Company had incurred Year 2000
related expenses of $2.5 million and $3.8 million in 1999 and 1998,
respectively.
66
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137. "Accounting for Derivative Instruments and Hedging
Activities -- Deferred at the Effective Date of FASB Statement No. 133",
effective for financial statements for periods beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires the Company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement allows
derivatives to be designated as hedges only if certain criteria are met, with
the resulting gain or loss on the derivative either charged to income or
reported as a part of other comprehensive income. At this time, the Company has
not determined whether the adoption of SFAS No. 133 will have a material impact
on its operations and financial position.
On March 31, 1999, the FASB issued an Exposure Draft, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK Compensation, which is expected to result
in a FASB Interpretation of certain practice issues related to the application
of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The FASB plans to issue a final Interpretation in the first quarter
of 2000. Among other things the Exposure Draft addressed the accounting for
changes to the exercise price or the number of shares to be issued under a stock
option grant that originally qualified as a fixed award. The FASB concluded if
the terms of a stock option, which was originally accounted for as a fixed
award, are modified during the option term to change the exercise price or the
number of shares to be issued, that option shall be accounted for as a variable
award, thereby, requiring the measurement of compensation cost from the date of
modification to the date of exercise. With the exceptions identified below, the
final Interpretation is expected to be effective on and after July 1, 2000, and
the effects of applying the Interpretation shall be recognized on a prospective
basis. With respect to the guidance regarding direct and indirect repricings and
new grants or awards for purposes of determining whether the grantee meets the
definition of an employee under Opinion No. 25 the effective date will be
December 15, 1998, however the effects of application can only be recognized
after June 30, 2000. Because the Company has in the past modified the exercise
price on certain options there maybe a negative effect on future operations
depending on the future movement of the Company's stock price.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMTARY DATA
See Index to Financial Statements on Page F-1.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None
67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
section entitled "DIRECTORS AND EXECUTIVE OFFICERS" contained in the Company's
Proxy Statement for its 2000 Annual Meeting of Stockholders (the "2000 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 2000 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 COMMON STOCK" contained in the 2000
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 2000 Proxy
Statement.
68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------
3.1 Certificate of Incorporation of Bank Plus Corporation
(Incorporated by reference to Exhibit 3.1 to the Form 8-B).*
3.2 Amended and Restated Bylaws of Bank Plus Corporation
(incorporated by reference to Exhibit 5 to the current report on
Form 8-K filed with the SEC on March 30, 1999).*
3.3 Certificate of Designations of Series C Junior Participating
Cumulative Preferred Stock (Par Value $.01 per share) of Bank
Plus Corporation (incorporated by reference to Exhibit 3.3 to
the annual report on Form 10-K for the year ended December 31,
1998).*
4.1 Specimen of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Form 8-B).*
4.2 Indenture dated as of July 18, 1997, between Bank Plus
Corporation and The Bank of New York, as trustee relating to the
12% Senior Notes due July 18, 2007, of Bank Plus Corporation
(incorporated by reference to Exhibit 4.4 of the Registration
Statement on Form S-8 of Bank Plus filed on September 4, 1997).*
4.3 Form of Amended and Restated Rights Agreement, dated as of March
26, 1999, between Bank Plus and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit 4
to the current report on Form 8-K filed with the SEC on March 30,
1999).*
10.1 Limited Liability Company Agreement of American General Gateway
Services, L.L.C. dated as of January 1, 1999 between VALIC and
Gateway (incorporated by reference to Exhibit 10.45 to the annual
report on Form 10-k for the year ended December 31, 1998).*
10.2 Form of 1999 Nonemployee Director Stock Option Agreement between
the Company and certain nonemployee directors.
10.3 Stock Option Agreement between the Company and James E. Stutz
dated July 28, 1999.
10.4 Service Agreement dated as of October 14, 1999 between Fidelity
and First Data Resources Inc.
10.5 Agreement for Information Technology Services dated as of
December 3, 1999 between Fidelity and Electronic Data Systems
Corporation and Electronic Data Systems Corporation Information
Services L.L.C.
10.6 Agreement to Purchase Assets and Assume Liabilities dated as of
February 7, 2000 by and between Fidelity and First Federal Bank
of California.
10.7 Mortgage Loan Purchase Agreement dated as of February 7, 2000 by
and between Fidelity and First Federal Bank of California.
10.8 Agreement to Purchase Assets and Assume Liabilities dated as of
February 3, 2000 by and between Fidelity and Jackson Federal
Bank.
11. Statement re Computation of Per Share Earnings.
12. Computation of Ratio of Earnings (Loss) to Combined Fixed Charges
and Preferred Stock Dividends.
21.1 List of Subsidiaries.
27. Financial Data Schedule.
- ----------------
* Indicates previously filed documents.
69
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements on page F-1. Financial Statement
Schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes, thereto.
REPORTS ON FORM 8-K
None
70
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
By: /s/ GORDON V. SMITH
------------------------
GORDON V. SMITH
CHAIRMAN OF THE BOARD
Date: March 27, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, 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/ GORDON V. SMITH Chairman of the Board of Directors March 27, 2000
- ------------------------------------
GORDON V. SMITH
/s/ MARK K. MASON President and Chief Executive Officer; Vice March 27, 2000
- ------------------------------------ Chairman of the Board
MARK K. MASON (Principal Executive Officer)
/s/ NORMAN BARKER, JR. Director March 27, 2000
- ------------------------------------
NORMAN BARKER, JR.
/s/ Irving R. Beimler Director March 27, 2000
- ------------------------------------
IRVING R. BEIMLER
/s/ WALDO H. BURNSIDE Director March 27, 2000
- ------------------------------------
WALDO H. BURNSIDE
/s/ VICTOR H. INDIEK Director March 27, 2000
- ------------------------------------
VICTOR H. INDIEK
/s/ LILLY V. LEE Director March 27, 2000
- ------------------------------------
LILLY V. LEE
/s/ ROBERT W. MEDEARIS Director March 27, 2000
- ------------------------------------
ROBERT W. MEDEARIS
/s/ JOHN M. MICHEL Executive Vice President, Chief Financial Officer March 27, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
JOHN M. MICHEL
71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT.............................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition........................ F-3
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Comprehensive Income....................... F-5
Consolidated Statements of Stockholders' Equity....................... F-6
Consolidated Statements of Cash Flows................................. F-7
Notes to Consolidated Financial Statements............................ F-9
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bank Plus Corporation
Los Angeles, California
We have audited the accompanying consolidated statements of financial
condition of Bank Plus Corporation and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company'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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 financial position of Bank Plus Corporation and
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 11, 2000, except for Note 21,
as to which the date is March 24, 2000
F-2
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
ASSETS:
Cash and cash equivalents....................................................... $ 89,541 $ 380,507
Investment securities available for sale ("AFS"), at fair value................. -- 28,797
Investment securities held to maturity, at amortized cost....................... -- 1,084
Mortgage-backed securities ("MBS") available for sale, at fair value............ 320,233 465,010
Loans receivable, net of allowances for estimated loan losses
of $60,278 and $106,171 at December 31, 1999 and 1998, respectively........... 2,169,381 2,665,576
Investment in Federal Home Loan Bank ("FHLB") stock............................. 31,142 65,358
Premises and equipment.......................................................... 33,441 39,042
Other assets.................................................................... 39,714 66,685
-------------- --------------
Total Assets....................................................................... $ 2,683,452 $ 3,712,059
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits...................................................................... $ 2,501,246 $ 2,922,531
FHLB advances................................................................. 20,000 585,000
Senior Notes.................................................................. 51,478 51,478
Other liabilities............................................................. 14,280 25,390
-------------- --------------
Total Liabilities.......................................................... 2,587,004 3,584,399
-------------- --------------
Commitments and contingencies
Minority interest............................................................... 272 272
Stockholders' equity:
Common stock:
Common stock, par value $.01 per share; 78,500,000 shares authorized;
19,463,343 and 19,434,043 shares outstanding
at December 31, 1999 and December 31, 1998, respectively................. 195 194
Paid-in capital............................................................... 275,285 275,131
Accumulated other comprehensive loss.......................................... (9,272) (2,795)
Accumulated deficit........................................................... (170,032) (145,142)
-------------- --------------
Total Stockholders' Equity................................................. 96,176 127,388
-------------- --------------
Total Liabilities and Stockholders' Equity......................................... $ 2,683,452 $ 3,712,059
============== ==============
See notes to consolidated financial statements.
F-3
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
INTEREST INCOME:
Loans........................................................ $ 212,455 $ 225,029 $ 205,275
MBS.......................................................... 22,669 43,305 29,435
Investment securities and other.............................. 15,567 32,013 20,297
-------------- -------------- --------------
Total interest income...................................... 250,691 300,347 255,007
-------------- -------------- --------------
INTEREST EXPENSE:
Deposits..................................................... 113,155 145,020 126,717
FHLB advances................................................ 24,525 57,992 40,807
Other borrowings............................................. 6,293 6,192 6,485
-------------- -------------- --------------
Total interest expense..................................... 143,973 209,204 174,009
-------------- -------------- --------------
Net interest income............................................. 106,718 91,143 80,998
Provision for estimated loan losses............................. 78,800 73,032 13,004
-------------- -------------- --------------
Net interest income after provision for estimated loan losses... 27,918 18,111 67,994
-------------- -------------- --------------
NONINTEREST INCOME (EXPENSE):
Loan fee income.............................................. 3,380 3,255 2,076
Credit card fees............................................. 29,693 21,414 45
Fee income from the sale of uninsured investment products.... 6,195 7,019 5,959
Fee income from deposits and other fee income................ 3,876 3,331 3,365
Losses on securities and trading activities.................. -- (860) (2,168)
Gain on sale of branches, net................................ 5,914 -- --
Fee income from ATM cash services............................ 1,314 3,375 1,049
Other (expense) income....................................... (293) (481) 37
Real estate operations, net.................................. (719) (2,635) (6,473)
-------------- -------------- --------------
Total noninterest income................................... 49,360 34,418 3,890
-------------- -------------- --------------
OPERATING EXPENSE:
Personnel and benefits....................................... 44,098 46,040 29,564
Occupancy.................................................... 15,555 14,591 11,647
Federal Deposit Insurance Corporation ("FDIC") insurance..... 7,286 2,637 2,563
Professional services........................................ 14,207 16,901 11,054
Credit card data processing.................................. 11,143 10,848 --
Office-related expenses...................................... 5,856 6,759 3,819
Other........................................................ 3,995 7,183 4,449
-------------- -------------- --------------
Total operating expense.................................... 102,140 104,959 63,096
-------------- -------------- --------------
(Loss) earnings before income taxes and minority
interest in subsidiary....................................... (24,862) (52,430) 8,788
Income tax expense (benefit).................................... -- 3,870 (8,100)
-------------- -------------- --------------
(Loss) earnings before minority interest in subsidiary.......... (24,862) (56,300) 16,888
Minority interest in subsidiary................................. 28 28 4,235
-------------- -------------- --------------
(Loss) earnings available for common stockholders............... $ (24,890) $ (56,328) $ 12,653
============== ============== ==============
(LOSS) EARNINGS PER SHARE:
Basic........................................................ $ (1.28) $ (2.90) $ 0.67
============== ============== ==============
Diluted...................................................... $ (1.28) $ (2.90) $ 0.66
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic........................................................ 19,460,941 19,395,337 18,794,887
============== ============== ==============
Diluted...................................................... 19,460,941 19,395,337 19,143,233
============== ============== ==============
See notes to consolidated financial statements.
F-4
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(Loss) earnings available for common stockholders............ $ (24,890) $ (56,328) $ 12,653
-------------- -------------- --------------
Other comprehensive (loss) earnings:
Investment and MBS AFS:
Unrealized holding losses arising during
the period, net....................................... (6,477) (2,565) (1,807)
Reclassification adjustment for (gains) losses
included in earnings/loss, net........................ -- (1,461) 2,355
-------------- -------------- --------------
Total............................................... (6,477) (4,026) 548
-------------- -------------- --------------
Derivative financial instruments:
Unrealized holding gains (losses) arising during
the period, net....................................... -- 1,376 (6,068)
Reclassification adjustment for losses
included in earnings/loss, net........................ -- 4,322 10
-------------- -------------- --------------
Total............................................... -- 5,698 (6,058)
-------------- -------------- --------------
Other comprehensive (loss) earnings....................... (6,477) 1,672 (5,510)
-------------- -------------- --------------
Comprehensive (loss) earnings................................ $ (31,367) $ (54,656) $ 7,143
============== ============== ==============
See notes to consolidated financial statements.
F-5
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL GAIN/(LOSS) DEFICIT EQUITY
------------- --------- ------------- ------------- ------------- -------------
Balance, January 1, 1997...................... 18,245,265 $ 182 $ 261,902 $ 1,043 $ (101,470) $ 161,657
Accumulated other comprehensive loss.......... -- -- -- (5,510) -- (5,510)
Minority interest in subsidiary............... -- -- -- -- 3 3
Acquisition of Hancock Savings Bank, FSB
("Hancock")................................ 1,058,575 11 12,001 -- -- 12,012
Exercise of stock options..................... 63,375 1 529 -- -- 530
Net earnings for 1997......................... -- -- -- -- 12,653 12,653
------------- --------- ------------- ------------- ------------- -------------
Balance, December 31, 1997.................... 19,367,215 194 274,432 (4,467) (88,814) 181,345
Accumulated other comprehensive
earnings................................... -- -- -- 1,672 -- 1,672
Exercise of stock options and other stock
activity................................... 66,828 -- 699 -- -- 699
Net loss for 1998............................. -- -- -- -- (56,328) (56,328)
------------- --------- ------------- ------------- ------------- -------------
Balance, December 31, 1998.................... 19,434,043 194 275,131 (2,795) (145,142) 127,388
Accumulated other comprehensive loss.......... -- -- -- (6,477) -- (6,477)
Exercise of stock options and other stock
activity................................... 29,300 1 154 -- -- 155
Net loss for 1999............................. -- -- -- -- (24,890) (24,890)
------------- --------- ------------- ------------- ------------- -------------
Balance, December 31, 1999.................... 19,463,343 $ 195 $ 275,285 $ (9,272) $ (170,032) $ 96,176
============= ========= ============= ============= ============= =============
See notes to consolidated financial statements.
F-6
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings................................................. $ (24,890) $ (56,328) $ 12,653
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Provisions for estimated loan and real estate losses........... 78,985 73,283 14,064
Net losses on sale of loans and securities..................... 552 10 2,131
FHLB stock dividends........................................... (2,216) (3,699) (3,473)
Depreciation and amortization.................................. 8,052 7,373 4,764
Accretion of premiums, net deferred loan fees and credit card
fees and amortization of discounts........................... (16,784) (6,382) 263
Deferred income tax (benefit) expense.......................... (56) 3,117 (8,353)
Issuance of stock and stock options............................ -- 460 --
Purchases of MBS held for trading................................... -- (48,978) (60,717)
Principal repayments of MBS held for trading........................ -- 2,829 2,405
Proceeds from sales of MBS held for trading......................... -- 86,481 31,915
Proceeds from redemption (purchases) of FHLB stock.................. 36,992 (1,250) (3,506)
Interest receivable decrease (increase)............................. 4,353 5,364 (2,795)
Other assets decrease............................................... 14,223 6,335 31,317
Interest payable (decrease) increase................................ (6,074) (4,383) 989
Other liabilities (decrease) increase............................... (4,134) 1,852 (5,681)
-------------- -------------- --------------
Net cash provided by operating activities......................... 89,003 66,084 15,976
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hancock acquisition................................................. -- -- 52,908
Coast Federal Bank, FSB ("Coast") deposit acquisition............... -- -- 47,489
Purchases of investment securities AFS.............................. -- (28,600) --
Maturities of investment securities AFS............................. 28,831 10,000 15,000
Proceeds from sales of investment securities AFS ................... -- 90,805 42,850
Maturities of investment securities held to maturity................ 1,143 2,280 2,286
Purchases of MBS AFS................................................ (135,478) (159,835) (945,191)
Principal repayments of MBS AFS..................................... 270,070 374,316 62,798
Proceeds from sales of MBS AFS...................................... -- 167,343 234,747
Principal repayments of MBS held to maturity........................ -- -- 3,037
Purchase of derivative securities................................... -- (5,322) (3,541)
Loans receivable, net decrease (increase)........................... 423,979 74,318 (52,292)
Proceeds from sale of real estate................................... 18,293 28,956 59,542
Purchases of premises and equipment................................. (535) (11,792) (3,768)
-------------- -------------- --------------
Net cash provided by (used in) investing activities............... 606,303 542,469 (484,135)
-------------- -------------- --------------
(CONTINUED ON FOLLOWING PAGE)
F-7
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net (decrease) increase.... $ (24,107) $ 34,156 $ (3,179)
Certificate accounts, net (decrease) increase.................... (397,178) (3,426) 146,518
Proceeds from FHLB advances...................................... 55,000 705,000 1,320,941
Repayments of FHLB advances...................................... (620,000) (1,129,960) (760,832)
Short-term borrowing decrease.................................... -- -- (40,000)
Repayments of long-term borrowings............................... -- -- (100,000)
Proceeds from exercise of stock options.......................... 13 239 530
-------------- -------------- --------------
Net cash (used in) provided by financing activities............ (986,272) (393,991) 563,978
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents................ (290,966) 214,562 95,819
Cash and cash equivalents at beginning of period.................... 380,507 165,945 70,126
-------------- -------------- --------------
Cash and cash equivalents at end of the period...................... $ 89,541 $ 380,507 $ 165,945
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other borrowings......... $ 148,548 $ 212,222 $ 171,811
Income tax (refunds) payments.................................... (1,768) 755 (493)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure......................... 14,620 25,500 53,214
Loans originated to finance sale of real estate owned ("REO").... 2,116 189 8,378
Transfers of MBS from held to maturity portfolio to AFS
portfolio...................................................... -- -- 26,998
Exchange of Preferred Stock for Senior Notes..................... -- -- 51,478
Stock awards and restricted stock issued......................... 142 -- --
DETAILS OF HANCOCK ACQUISITION:
Fair value of assets and core deposit intangibles................ -- -- 212,693
Goodwill......................................................... -- -- 6,589
Liabilities assumed.............................................. -- -- 207,270
Common stock issued.............................................. -- -- 12,012
Cash acquired.................................................... -- -- 52,908
See notes to consolidated financial statements.
F-8
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bank Plus
Corporation ("Bank Plus") and subsidiaries. Bank Plus is the holding company for
Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries (the "Bank"
or "Fidelity") and Gateway Investment Services, Inc. ("Gateway") a National
Association of Securities Dealers, Inc. ("NASD") registered broker/dealer
(collectively, the "Company"). The Company offers a broad range of consumer
financial services, including demand and term deposits, uninsured investment
products, including mutual funds and annuities and loans. Fidelity operates
through 36 full-service branches, 35 of which are located in Southern
California, principally in Los Angeles and Orange counties, and one of which is
located in Bloomington, Minnesota which is subject to a contract of sale. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1999 presentation.
On July 18, 1997, the Company completed an exchange offer (the "Exchange
Offer") of the Company's 12% Senior Notes due July 18, 2007 ("Senior Notes") for
the outstanding shares of 12% Noncumulative Exchangeable Perpetual Preferred
Stock, Series A (the "Preferred Stock") issued by Fidelity in 1995. The Company
accepted 2,059,120 shares of Preferred Stock in exchange for approximately $51.5
million principal amount of Senior Notes. Holders of approximately 11,000 shares
of the Preferred Stock elected not to participate in the Exchange Offer and
these shares are reflected as minority interest on the statement of financial
condition.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and whole loan
investment repurchase agreements. Generally, federal funds are sold for one-day
periods. There were no federal funds outstanding at December 31, 1999 and $220.0
million outstanding at December 31, 1998. There were no whole loan investment
repurchase agreements at December 31, 1999 and 1998. At December 31, 1999,
noninterest-earning cash reserves, maintained by Fidelity to meet requirements
of the Federal Reserve System, totaled $8.4 million.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company's securities principally consist of mortgage-backed securities
("MBS"). The Company classifies its securities as held to maturity, trading and
available for sale ("AFS"). Held to maturity securities are carried at amortized
cost, while trading and AFS securities are carried at fair value. Unrealized
gains or losses on trading securities are reflected currently in earnings.
Unrealized gains and losses on AFS securities are reflected as accumulated other
comprehensive earnings (loss) in stockholder's equity. Interest income is
recognized using the level yield method and gains or losses on sales are
recorded on a specific identification basis.
MORTGAGE LOANS
Loans are considered impaired when it is deemed probable that all principal
and interest amounts due according to the contracted terms of the loan agreement
will not be collected. The Company may measure impairment by discounting
expected future cash flows at the loan's effective interest rate, or by
F-9
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reference to an observable market price, or by determining the fair value of the
collateral for a collateral dependent asset. When a determination is made that
foreclosure is probable, the Company will measure impairment based on the fair
value of the collateral.
Interest on loans, including impaired loans, is credited to income as
earned and is accrued only if deemed collectible. Unpaid interest is reversed
when a loan becomes 90 days contractually delinquent or if management determines
it is warranted prior to becoming 90 days delinquent. While a loan is on
nonaccrual status, interest is recognized only as cash is received. Loan
origination fees, certain direct costs of originating loans and discounts and
premiums on purchased loans are deferred, classified with loans receivable on
the statement of financial condition, and are credited or charged to interest
income over the contractual or estimated life of the related loans using the
interest method. When a loan is sold the remaining unamortized origination fees,
origination costs, discounts or premiums are recognized as an adjustment to the
related gain or loss on sale. Other loan fees and charges, including prepayment
fees, late fees and other miscellaneous servicing fees, are recognized in income
when charged.
CREDIT CARD LOANS
Interest on credit card loans is recognized when charged to the customer.
The Company charges annual fees related to the renewal of its credit card
products and, prior to 1999, charged application fees related to the issuance of
certain credit card products. Credit card application fees, annual fees and
direct origination costs are deferred and amortized into income over twelve
months. Other fees, including late fees, cash advance fees and interchange fees,
are recognized as income when charged to the borrower or received from a
merchant.
ALLOWANCES FOR ESTIMATED LOAN LOSSES
The allowances for estimated loan losses represents the Company's estimate
of identified and unidentified credit losses in the Company's loan portfolios.
These estimates, while based upon historical loss experience and other relevant
data, are ultimately subjective and inherently uncertain. The Company
establishes specific valuation allowances ("SVAs") for estimated losses on loans
where a loss has been identified and an allowance for loan and lease losses
("ALLL") for the inherent risk in the loan portfolios which has yet to be
specifically identified. With the exception of credit card loans, SVAs are
allocated from the ALLL when, in the Company's judgment, a loan is impaired and
the loss is probable and estimable. When these estimated losses are determined
to be permanent, such as when a mortgage loan is foreclosed and the related
property is transferred to REO, the estimated loss is charged-off. Credit card
loans are charged off to the ALLL upon reaching 180 days delinquency or earlier
in certain circumstances. Amounts charged-off include uncollected principal,
finance charges, late fees and other fees.
The Company establishes the level of the ALLL utilizing several models and
methodologies which are based upon a number of factors, including historical
loss experience, the level of nonperforming and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and management's judgment. Additions to the ALLL, in the form of
provisions, are reflected in the results of current operations. Allocations of
SVAs and charge-offs of credit cards are deducted from the ALLL and recoveries
of previous allocations of SVAs or amounts previously charged-off are recorded
as additions to the ALLL.
F-10
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOAN SERVICING
Fidelity services mortgage loans in its own portfolio and mortgage loans
owned by investors. Fees earned for servicing loans owned by investors are
reported as income when the related loan payments are collected. Loan servicing
costs are charged to expense as incurred. The mortgage servicing rights are
amortized in proportion to and over the period of estimated net future servicing
fee income. The Company periodically evaluates capitalized mortgage servicing
rights for impairment, which represents the excess of unamortized cost over fair
value. Impairment, if identified, is recognized in a valuation allowance in the
period of impairment. At December 31, 1999, mortgage servicing rights were $1.2
million and no valuation allowance was required.
REAL ESTATE OWNED
REO is acquired when property collateralizing a loan is foreclosed upon or
otherwise acquired by the Company in satisfaction of the loan. REO 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 Company
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 Company may have to hold the property
before disposition. The holding costs through the expected date of sale and
estimated disposition costs are contemplated in the determination of the fair
value. Adjustments to the carrying value of the assets are made through SVAs and
charge-offs.
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 shorter of the lives of the respective
leases or the useful lives of the improvements.
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired in connection
with the acquisition of Hancock in 1997, which is included in other assets in
the consolidated statements of financial condition, is being amortized to
operations over fifteen years. The cost of core deposits purchased is being
amortized to interest expense over the average life of the deposits acquired,
generally five to ten years. At December 31, 1999, goodwill totaled $5.6 million
and had a remaining life of 13 years and the cost of core deposits purchased
totaled $6.5 million and had a remaining life of 5 years.
INCOME TAXES
Deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and tax basis of assets and liabilities
and are measured by applying enacted tax rates and laws to taxable years in
which such temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company employed various derivative financial instruments to hedge
valuation fluctuations in its trading and AFS securities portfolios in 1998 and
1997. Financial instruments entered into for trading purposes are carried at
fair value, with realized and unrealized changes in fair values recognized in
F-11
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earnings in the period in which the changes occur. Financial instruments used to
hedge the fluctuations in fair values of AFS securities are carried at fair
value, with realized and unrealized changes in fair value reflected as
accumulated other comprehensive earnings (loss) in stockholders' equity.
Realized gains and losses on termination of such hedge instruments are amortized
into interest income or expense over the expected remaining life of the hedged
asset. Management monitors the correlation of the changes in fair values between
the hedge instruments and the securities being hedged to ensure the hedge
remains highly effective. If the criteria for hedge accounting is not met, the
fair value adjustments of the derivative instruments are reported in current
earnings. As of December 31, 1999 and 1998, the Company had no derivative
financial instruments outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted ("GAAP") in the United States of America 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
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137.
"Accounting for Derivative instruments and Hedging Activities -- Deferred at the
Effective Date of SFAS Statement No. 133", effective for financial statements
for periods beginning after June 15, 2000. This statement establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires the Company to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement allows derivatives to be designated as hedges only
if certain criteria are met, with the resulting gain or loss on the derivative
either charged to income or reported as a part of other comprehensive income. At
this time, the Company has not determined whether the adoption of SFAS No.
133 will have a material impact on its operations and financial position.
On March 31, 1999, the FASB issued an Exposure Draft, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, which is expected to result
in a FASB Interpretation of certain practices issues related to the application
of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The FASB plans to issue a final Interpretation in the first quarter
of 2000. Among other things the Exposure Draft addressed the accounting for
changes to the exercise price or the number of shares to be issued under a stock
option grant that originally qualified as a fixed award. The FASB concluded if
the terms of a stock option, which was originally accounted for as a fixed
award, are modified during the option term to change the exercise price or the
number of shares to be issued, that option shall be accounted for as a variable
award, thereby, requiring the measurement of compensation cost from the date of
modification to the date of exercise. With the exceptions identified below, the
final Interpretation is expected to be effective on and after July 1, 2000, and
the effects of applying the Interpretation shall be recognized on a prospective
basis. With respect to the guidance regarding direct and indirect repricings and
new grants or awards for purposes of determining whether the grantee meets the
definition of an employee under Opinion No. 25 the effective date will be
December 15, 1998, however the effects of application can only be recognized
after June 30, 2000. Because the Company has in the past modified the exercise
price on certain options there maybe a negative affect on future operations
depending on the future movement of the Company's stock price.
F-12
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACQUISITIONS
On July 29, 1997, the Company completed the acquisition of all of the
outstanding common stock of Hancock, a Los Angeles-based financial institution
with five branches. The total consideration paid to Hancock stockholders was
1,058,575 shares of Bank Plus Common Stock valued at $12.0 million. The
acquisition of Hancock was accounted for as a purchase and was reflected in the
consolidated statements of financial condition of the Company as of June 30,
1997. The Company's consolidated statement of operations includes the revenues
and expenses of the acquired business beginning July 1, 1997. As a result of the
acquisition, the Company recorded goodwill of $6.6 million and a core deposit
intangible of $8.6 million.
On September 19, 1997, the Company purchased $48.6 million of deposits from
another financial institution branch located in Westwood, California and
recorded a core deposit intangible of $1.5 million.
NOTE 3--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The following table summarizes the debt securities AFS portfolio as of the
dates indicated:
UNREALIZED
AMORTIZED ---------------------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1999:
MBS:
Federal Home Loan Mortgage Corporation
("FHLMC")..................................... $ 2,334 $ -- $ (46) $ (46) $ 2,288
Federal National Mortgage Association
("FNMA")...................................... 135,621 -- (5,854) (5,854) 129,767
Government National Mortgage Association
("GNMA")...................................... 62,992 -- (1,946) (1,946) 61,046
Participation certificates...................... 21,508 -- -- -- 21,508
Collateralized mortgage obligations ("CMO")..... 45,413 -- (1,306) (1,306) 44,107
Asset backed security........................... 22,056 -- (95) (95) 21,961
Mortgage-backed note............................ 39,581 -- (25) (25) 39,556
-------------- -------------- -------------- -------------- --------------
Total securities AFS............................... $ 329,505 $ -- $ (9,272) $ (9,272) $ 320,233
============== ============== ============== ============== ==============
DECEMBER 31, 1998:
Investment securities:
Commercial paper................................ $ 28,797 $ -- $ -- $ -- $ 28,797
-------------- -------------- -------------- -------------- --------------
MBS:
FHLMC 3,843 -- (52) (52) 3,791
FNMA............................................ 170,506 232 (752) (520) 169,986
GNMA............................................ 86,422 218 (84) 134 86,556
Participation certificates...................... 23,055 -- -- -- 23,055
CMO 90,683 119 (2,130) (2,011) 88,672
Financing note trust............................ 48,084 -- (332) (332) 47,752
Mortgage-backed note............................ 45,212 -- (14) (14) 45,198
-------------- -------------- -------------- -------------- --------------
Total MBS..................................... 467,805 569 (3,364) (2,795) 465,010
-------------- -------------- -------------- -------------- --------------
Total securities AFS............................... $ 496,602 $ 569 $ (3,364) $ (2,795) $ 493,807
============== ============== ============== ============== ==============
F-13
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no securities held to maturity as of December 31, 1999. At
December 31, 1998 the Company's held to maturity portfolio consists of U. S.
Treasury securities which have been pledged as credit support to a
securitization of loans. The following table summarizes the debt securities held
to maturity portfolios:
AMORTIZED UNREALIZED AGGREGATE
COST GAINS FAIR VALUE
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998:
Investment securities................... $ 1,084 $ 15 $ 1,099
============== ============== ==============
The following table summarizes the weighted average yield of debt
securities as of the dates indicated:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
Investment securities:
AFS............................................................. --% 5.55%
Held to maturity................................................ -- 6.19
MBS:
AFS............................................................. 7.07 6.79
The following table presents the AFS portfolio at December 31, 1999 by
contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
AMORTIZED UNREALIZED AGGREGATE
COST LOSSES FAIR VALUE
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
AFS:
MBS:
Within 1 year.......................... $ 85,016 $ (571) $ 84,445
Greater than 10 years.................. 244,489 (8,701) 235,788
-------------- -------------- --------------
Total AFS................................... $ 329,505 $ (9,272) $ 320,233
============== ============== ==============
F-14
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes gains and losses realized on debt
securities, the costs of which were computed on a specific identification
method, during the periods indicated. No gains or losses were realized on debt
securities during 1999.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
(DOLLARS IN THOUSANDS)
Sales:
AFS.................................................... $ 258,148 $ 277,597
Trading................................................ 86,481 31,915
-------------- --------------
Total................................................ $ 344,629 $ 309,512
============== ==============
Gains (losses) on securities and trading activities, net:
AFS portfolio:
Gains................................................ $ 49 $ 2,483
Losses............................................... (368) --
-------------- --------------
Total.............................................. (319) 2,483
-------------- --------------
Trading portfolio:
Realized (losses) gains, net......................... (541) 187
Unrealized losses, net............................... -- --
-------------- --------------
Total.............................................. (541) 187
-------------- --------------
Losses on securities transferred to AFS portfolio...... -- (4,838)
-------------- --------------
Total..................................................... $ (860) $ (2,168)
============== ==============
At December 31, 1999 and 1998, interest receivable in the accompanying
statements of financial condition include accrued interest receivable on debt
securities of $2.8 million and $3.1 million, respectively.
In 1997, the Company transferred two securities from the held to maturity
portfolio to the AFS portfolio and recorded a loss of $4.8 million. The transfer
was the result of significant deterioration in the credit worthiness of the
borrowers of the underlying loans collateralizing the securities.
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
In 1998 and 1997, the Company employed various derivative financial
instruments to hedge valuation fluctuations in its trading and AFS securities
portfolios. During 1998, the Company used futures on Treasury Notes to hedge the
valuation fluctuations of its fixed rate MBS portfolio. Based on historical
performance, futures on Treasury Notes provided an expectation of high
correlation with the MBS. Based on the correlation analysis completed for the
period ended June 30, 1998, it was determined that high correlation in the
fluctuations of the fair values of the MBS and the hedge instruments had not
occurred. Due to the volatility of the correlation between futures on Treasury
Notes and the cost of a hedging program in relation to its benefits, the Company
terminated this hedging program in July 1998. As a result, the Company recorded
a loss of $4.0 million, which represented the extent to which the futures
results had not been offset by the effects of price changes on the MBS. The
remaining losses on the hedge program which totaled $5.0 million, were recorded
as adjustments to the cost basis of the securities being hedged and are being
amortized over the remaining life of the MBS as a yield adjustment. The
amoritization of the hedge loss was $0.7 million for both the years ended
December 31, 1999 and 1998, respectively. At December 31, 1999, the remaining
unamortized loss was $2.5 million.
F-15
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single family (1 to 4 units)..................................... $ 550,840 $ 768,824
Multifamily:
5 to 36 units................................................. 1,125,304 1,220,585
37 units and over............................................. 201,644 247,638
-------------- --------------
Total multifamily........................................... 1,326,948 1,468,223
Commercial and industrial........................................ 125,379 179,956
Land............................................................. 38 39
-------------- --------------
Total real estate loans..................................... 2,003,205 2,417,042
Credit card loans................................................... 210,643 350,078
Other............................................................... 14,259 29,884
-------------- --------------
Total loans, gross.................................................. 2,228,107 2,797,004
-------------- --------------
Less:
Undisbursed loan funds........................................... -- 42
Unearned (premiums) discounts, net............................... (8,163) (4,227)
Deferred loan fees and other..................................... 6,611 29,442
Allowances for estimated losses.................................. 60,278 106,171
-------------- --------------
Total ........................................................ 58,726 131,428
-------------- --------------
Total loans, net.................................................... $ 2,169,381 $ 2,665,576
============== ==============
Fidelity's portfolio of mortgage loans serviced for others amounted to
$241.2 million at December 31, 1999 and $278.3 million at December 31, 1998. The
Bank previously sold the servicing rights to substantially all of the single
family loans in the Bank's loan portfolio during the second quarter of 1996. The
servicing rights to $938.5 million in loans were transferred and the Company
realized a gain of $7.9 million. Such gains were accounted for as a reduction in
the carrying value of the loans based on the relative fair values of the
servicing sold and loans retained and was being accreted over the estimated life
of the loans. The related accretion totaled $0.3 million, $1.2 million and $2.2
million during 1999, 1998 and 1997, respectively. Fidelity repurchased the
servicing rights to $488 million currently in its mortgage portfolio in the
third quarter 1999. The remaining deferred servicing gain of $1.8 million was
offset against the premium paid for this transaction.
Fidelity's mortgage loan portfolio includes multifamily, commercial and
industrial loans 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. All of these loans are secured by property
within the State of California.
Fidelity's credit card loans, which were primarily marketed to customers
with lower credit quality, are generally unsecured open-end borrowings that have
experienced high levels of delinquency and defaults. At December 31, 1999 and
1998, $18.3 million and $26.1 million of the credit card loans were secured by
real estate. In the fourth quarter of 1999, Fidelity sold a 100% participation
F-16
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in one of the programs with outstanding receivables of $8.7 million. No gain or
loss was recognized on this transaction. During 1998, Fidelity terminated
programs with marketers of the two largest credit card programs which accounted
for 91% of the outstanding credit card balances at December 31, 1999. In
addition, the marketer of the real estate secured credit card program ceased
originating new accounts in 1998.
The Company has modified the terms of a number of its mortgage loans to
protect its investment by granting concessions to borrowers because of
borrowers' financial difficulties. These modifications take several forms,
including interest only payments for a limited time at current rates, a reduced
loan balance in exchange for a payment of the loan or other terms that the Bank
deems appropriate in the circumstances. Modifications 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.
Modifications are reported as Troubled Debt Restructurings ("TDRs") as defined
by SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings", and accounted for in accordance with SFAS No. 15 and SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". At December 31, 1999
and 1998, outstanding TDRs totaled $30.9 million and $48.0 million,
respectively.
For the years ended December 31, 1999, 1998 and 1997, interest income of
$2.3 million, $4.0 million and $3.4 million, respectively, was recorded on TDRs.
Total loans on nonaccrual status was $6.9 million and $14.4 million at
December 31, 1999 and 1998, respectively. The reduction in income related to
nonaccrual loans was $0.4 million, $1.9 million and $3.9 million for 1999, 1998
and 1997, respectively.
Of the total deferred loan fees at December 31, 1999, $4.0 million were
related to mortgage loans and $3.5 million were related to credit card loans.
Deferred loan fees on credit card loans represent annual fees charged to the
cardholder.
NOTE 6--REAL ESTATE OWNED
REO, which is included in other assets, consists of the following at the
dates indicated:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Real estate acquired through foreclosure........................... $ 3,080 $ 9,536
Allowance for estimated losses..................................... (658) (1,139)
-------------- --------------
Net........................................................... $ 2,422 $ 8,397
============== ==============
The following summarizes the results of REO operations for the periods
indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Expenses from:
Real estate operations......................... $ (534) $ (2,384) $ (5,413)
Provision for estimated real estate losses..... (185) (251) (1,060)
-------------- -------------- --------------
Net expense from real estate operations....... $ (719) $ (2,635) $ (6,473)
============== ============== ==============
F-17
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--ALLOWANCE FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES
The following summarizes the activity in the allowances for estimated loan
and real estate losses for the periods indicated:
REAL ESTATE
LOANS OWNED TOTAL
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1997......................... $ 57,508 2,081 59,589
Charge-offs..................................... (41,190) (2,810) (44,000)
Recoveries and other............................ 8,446 672 9,118
-------------- -------------- --------------
Net charge-offs............................... (32,744) (2,138) (34,882)
Provision for losses............................ 13,004 1,060 14,064
Allowances related to acquisition............... 12,770 120 12,890
-------------- -------------- --------------
Balance at December 31, 1997....................... 50,538 1,123 51,661
Charge-offs..................................... (25,366) (258) (25,624)
Recoveries and other............................ 5,062 23 5,085
-------------- -------------- --------------
Net charge-offs............................... (20,304) (235) (20,539)
Provision for losses............................ 73,032 251 73,283
Transfer to ALLL from cash reserves............. 2,905 -- 2,905
-------------- -------------- --------------
Balance at December 31, 1998....................... 106,171 1,139 107,310
Charge-offs..................................... (131,295) (274) (131,569)
Recoveries and other............................ 5,492 (392) 5,100
-------------- -------------- --------------
Net charge-offs............................... (125,803) (666) (126,469)
Provision for losses............................ 78,800 185 78,985
Transfer to ALLL from cash reserves............. 1,110 -- 1,110
-------------- -------------- --------------
Balance at December 31, 1999....................... $ 60,278 $ 658 $ 60,936
============== ============== ==============
At December 31, 1999 and 1998, the gross recorded investment in mortgage
loans that are considered to be impaired was $32.5 million, and $42.0 million,
respectively. Included in these amounts are impaired mortgage loans of $14.2
million and $22.5 million at December 31, 1999 and 1998, respectively, for which
SVAs have been established totaling $2.1 million and $6.2 million, respectively.
The average balance of impaired mortgage loans was $37.3 million and $41.4
million for the year ended December 31, 1999 and 1998, respectively. The amount
of interest income recognized on impaired mortgage loans was $2.5 million, $2.9
million and $2.1 million in 1999, 1998 and 1997, respectively.
In addition to reserves established by the Bank, cash reserves have been
provided by credit card affinity marketer under the credit enhancement programs
which are utilized to purchase accounts from the Bank after the accounts reach a
certain delinquent status. At December 31, 1999 and 1998, cash reserves were
$2.7 million and $1.9 million, respectively, and were recorded as deposits on
the Company's statements of financial condition. Accounts purchased from cash
reserves during 1999 and 1998 totaled $2.7 million and $25.7 million,
respectively, and are not included in the above table. During 1998, the Company
terminated its agreement with the marketer of the largest credit enhanced credit
card program, whereby the marketer was relieved of their obligation to reimburse
Fidelity for credit losses and Fidelity received any remaining cash reserves
from the program. As a result, $1.1 million and $2.9 million of cash reserves
were transferred into Fidelity's ALLL during 1999 and 1998, respectively.
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 during
the next 12 months that were inherent in the loan portfolio balances at December
31, 1999, based upon various assumptions as to economic and other conditions. As
F-18
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a significant adverse effect on the Bank's financial condition,
results of operations and levels of regulatory capital.
NOTE 8--DEPOSITS
Deposits consist of the following balances at the dates indicated:
DECEMBER 31,
------------------------------------------------
1999 1998
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
TYPE OF ACCOUNT:
Passbook.................................................. $ 49,973 2.00% $ 56,836 2.00%
Checking and money market checking........................ 369,071 1.34 380,292 1.24
Money market savings...................................... 50,428 3.75 56,451 3.68
----------- -----------
Total transaction accounts.............................. 469,472 1.67 493,579 1.61
----------- -----------
Certificates of deposit ("CDs"):
Less than $100,000...................................... 1,422,303 4.71 1,795,000 5.06
Greater than $100,000................................... 609,471 4.99 633,952 5.32
----------- -----------
Total CDs............................................. 2,031,774 4.79 2,428,952 5.12
----------- -----------
Total deposits............................................ $2,501,246 4.21 $2,922,531 4.53
=========== ===========
Fidelity had noninterest-bearing checking accounts of $105.3 million and
$111.5 million at December 31, 1999 and 1998, respectively. At December 31,
1999, CDs were scheduled to mature as follows:
AMOUNT
--------------
(DOLLARS IN
YEAR OF MATURITY THOUSANDS)
- ----------------
2000....................................................... $ 1,711,952
2001....................................................... 290,792
2002....................................................... 20,167
2003....................................................... 4,198
2004....................................................... 4,051
After 2004................................................. 614
--------------
Total................................................... $ 2,031,774
==============
F-19
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company may utilize 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. The Company did not use this funding
source in 1999 or 1998 and accordingly had no brokered deposits outstanding at
December 31, 1999 and 1998.
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Balance at year-end......................................... $ 20,000 $ 585,000 $ 1,009,960
Average amount outstanding during the year.................. 435,377 1,005,388 698,261
Maximum amount outstanding at any month-end................. 585,000 1,189,960 1,209,960
Weighted average interest rate during the year.............. 5.62% 5.77% 5.84%
Weighted average interest rate at year-end.................. 8.61% 5.69% 5.82%
Secured by:
FHLB Stock.............................................. $ 31,142 $ 65,358 $ 60,498
Mortgage loans.......................................... 148,872 413,192 1,315,389
Investment securities and MBS........................... 28,133 367,729 581,445
-------------- -------------- --------------
Total.................................................. $ 208,147 $ 846,279 $ 1,957,332
============== ============== ==============
The FHLB advance of $20.0 million outstanding at December 31, 1999 matured
on February 7, 2000, and was repaid through available funds.
NOTE 10--OTHER BORROWINGS
At December 31, 1999 and 1998, the Company's other borrowings consisted of
Senior Notes of $51.5 million. These Senior Notes bear interest at 12%, payable
quarterly, and mature in 2007. During 1999, Senior Note interest payments were
funded by the preferred stock dividend from Fidelity, cash on hand at Bank Plus,
and dividends from Gateway. Bank Plus holds $51.5 million of Preferred Stock of
Fidelity, which pays quarterly 10% dividends that are not subject to the prior
approval of the Office of Thrift Supervision (the "OTS") unless, among other
things, the Bank's regulatory capital falls below the level to be categorized as
adequately capitalized. No assurance can be given that funds will continue to be
available at Bank Plus to pay future interest payments, or that the OTS will
approve the preferred stock dividends in the future if the Bank's regulatory
capital falls below the level to be categorized as adequately capitalized or for
other safety and soundness considerations. If in the event of default by Bank
Plus, the holders of not less than 25% in principal amount of the Senior Notes
then outstanding may declare all the Senior Notes to be immediately due and
payable.
F-20
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--BENEFIT PLANS
RETIREMENT INCOME PLAN
In February 1994, the Board of Directors passed a resolution to amend the
retirement income 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. The Bank has funded the retirement
income plan such that the fair value of plan assets exceed the projected benefit
obligation. 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. Annual contributions to the plan and earnings on plan assets are
sufficient to satisfy legal funding requirements.
The components of net pension costs are as follows for the periods
indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Interest cost.............................................. $ 149 $ 163 $ 158
Actual return on plan assets............................... (272) (246) (207)
Net amortization and deferral.............................. (93) (69) (51)
Effect of partial settlements.............................. 28 120 55
-------------- -------------- --------------
Net pension revenues.................................... $ (188) $ (32) $ (45)
============== ============== ==============
The funded status of this plan was as follows as of the dates indicated:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Accumulated benefit obligation (all participants are vested)........ $ (1,953) $ (2,397)
Fair value of plan assets........................................... 3,237 3,126
-------------- --------------
Net plan assets over projected benefit obligation............... 1,284 729
Unrecognized net transition gain.................................... (212) --
Minimum liability adjustment........................................ -- 155
-------------- --------------
Prepaid pension cost............................................ $ 1,072 $ 884
============== ==============
Actuarial assumptions:
Discount rate................................................... 7.50% 6.50%
Expected long-term rate of return on plan assets................ 9.00% 9.00%
401(k) PLAN
The Company has a 401(k) defined contribution plan available to all
employees who have been with the Company for one year and have reached the age
of 21. Employees may generally contribute up to 15% of their salary each year,
and the Company matches 50% up to the first 6% contributed by the employee. The
Company's contribution expense was $0.5 million, $0.4 million and $0.1 million
in the years ended December 31, 1999, 1998 and 1997, respectively.
F-21
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS' RETIREMENT PLAN
The Directors' Retirement Plan provides for non-employee directors who have
at least three years of Board service and were board members prior to August,
1994.
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 Directors of any of the Company'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.
If a director's Board membership is terminated within two years following
the effective date of a change in control, then he/she 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 Company's accumulated benefit
obligation was $1.0 million and $0.9 million at December 31, 1999 and 1998, and
net pension costs were $0.1 million, $0.3 million and $0.3 million for 1999,
1998 and 1997, respectively.
F-22
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--INCOME TAXES
Income tax expense (benefit) was comprised of the following for the periods
indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Current income tax expense:
Federal................................................. $ 7 $ 716 $ 199
State................................................... 49 37 54
-------------- -------------- --------------
Total.................................................. 56 753 253
-------------- -------------- --------------
Deferred income tax expense (benefit):
Federal................................................. (35) 3,547 (7,425)
State................................................... (21) (430) (928)
-------------- -------------- --------------
Total.................................................. (56) 3,117 (8,353)
-------------- -------------- --------------
Total income tax expense (benefit).......................... $ -- $ 3,870 $ (8,100)
============== ============== ==============
Income tax asset (liability) was comprised of the following at the dates
indicated:
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Current income tax asset(liability):
Federal......................................................... $ -- $ 1,532
State........................................................... 90 382
-------------- --------------
Total....................................................... 90 1,914
-------------- --------------
Deferred income tax asset (liability):
Federal......................................................... 65,308 54,364
Valuation allowance--Federal.................................... (62,653) (51,744)
State........................................................... 15,726 13,496
Valuation allowance--State...................................... (14,481) (12,272)
-------------- --------------
Total....................................................... 3,900 3,844
-------------- --------------
Total income tax asset.............................................. $ 3,990 $ 5,758
============== ==============
F-23
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset (liability) are as follows at
the dates indicated:
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
FEDERAL:
Deferred tax assets:
Bad debt and loan loss deduction................................... $ 34,528 $ 28,587
Net operating loss carryover....................................... 34,891 25,081
Alternative minimum tax credit carryover........................... 3,663 3,624
Contingent liabilities............................................. 649 1,427
Debt modification gain............................................. 1,030 1,027
Depreciation....................................................... 1,778 1,139
Deferred fees on credit cards...................................... -- 7,614
Receivable from credit card marketer............................... -- 2,865
Unrealized loss on securities AFS.................................. 3,245 978
Core deposits intangible........................................... 3,602 3,614
Other.............................................................. 2,325 4,526
------------ ------------
Gross deferred tax assets............................................ 85,711 80,482
------------ ------------
Deferred tax liabilities:
Loan fees and interest............................................. (4,397) (5,370)
FHLB stock dividends............................................... (8,677) (16,402)
Mark to market adjustment.......................................... (3,245) (978)
Other.............................................................. (4,084) (3,368)
------------ ------------
Gross deferred tax liabilities....................................... (20,403) (26,118)
------------ ------------
Net deferred tax assets before valuation allowance................... 65,308 54,364
Valuation allowance.................................................. (62,653) (51,744)
------------ ------------
Net deferred tax asset............................................... $ 2,655 $ 2,620
============ ============
STATE:
Deferred tax assets:
Bad debt and loan loss deduction................................... $ 13,286 $ 11,021
Net operating loss carryover....................................... 4,919 3,269
Contingent liabilities............................................. 200 439
Depreciation....................................................... 747 583
Deferred fees on credit cards...................................... -- 2,342
Receivable from credit card marketer............................... -- 881
Alternative minimum tax credit carryover........................... 404 404
Core deposits intangible........................................... 305 310
Unrealized loss on securities AFS.................................. 998 303
Other.............................................................. 783 1,551
------------ ------------
Gross deferred tax assets............................................ 21,642 21,103
------------ ------------
Deferred tax liabilities:
Loan fees and interest............................................. (1,321) (1,620)
FHLB stock dividends............................................... (2,668) (5,044)
Mark to market adjustment.......................................... (1,042) (367)
Other.............................................................. (885) (576)
------------ ------------
Gross deferred tax liabilities....................................... (5,916) (7,607)
------------ ------------
Net deferred tax assets before valuation allowance................... 15,726 13,496
Valuation allowance.................................................. (14,481) (12,272)
------------ ------------
Net deferred tax asset............................................... $ 1,245 $ 1,224
============ ============
Combined total........................................................... $ 3,900 $ 3,844
============ ============
F-24
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS No. 109, "Accounting for Income Taxes", the recognition of a net
deferred tax asset is dependent upon a "more likely than not" expectation of
realization of the deferred tax asset, based upon the analysis of available
evidence. A valuation allowance is required to sufficiently reduce the deferred
tax asset to the amount that is expected to be realized on a "more likely than
not" basis. The analysis of available evidence is performed each quarter
utilizing the "more likely than not" criteria to determine the amount, if any,
of the deferred tax asset to be realized. Adjustments to the valuation allowance
are made accordingly. There can be no assurance that the Company will recognize
additional portions of the deferred tax asset in future periods or that
additional valuation allowances may not be recorded in future periods.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", certain securities were classified as AFS during
the year. Under SFAS No. 115, adjustments to the fair market value of securities
held as AFS are reflected through an adjustment to stockholders' equity. No
associated deferred tax asset was recorded in stockholder's equity as of
December 31, 1999 and 1998, in accordance with the deferred tax recognition
rules of SFAS No. 109.
A reconciliation from the consolidated statutory federal income tax expense
(benefit) to the consolidated effective income tax expense (benefit) follows for
the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Expected federal income tax (benefit) expense......... $ (8,702) $ (18,351) $ 3,075
Increases (reductions) in taxes resulting from:
Franchise tax (benefit) expense, net of federal
income tax and valuation allowance............... 18 (256) (568)
Addition (reduction) to valuation allowance....... 8,642 22,230 (9,973)
Goodwill amortization............................. 156 156 77
Other............................................. (114) 91 (711)
-------------- -------------- --------------
Income tax expense (benefit).......................... $ -- $ 3,870 $ (8,100)
============== ============== ==============
The Internal Revenue Service is currently examining the federal income tax
returns for the short year ended December 31, 1994 and the calendar years 1995,
1996 and 1997. The Company does not expect the results of this audit to have a
material adverse effect on the consolidated financial statements of the Company.
Internal Revenue Code ("IRC") Sections 382 and 383 and the Treasury
Regulations thereunder generally provide for limitations on the ability of a
corporation to utilize net operating loss ("NOL") or credit carryforwards to
offset taxable income or reduce its tax liability in taxable years following a
change of control. In addition, the rules restrict the ability of a corporation
to recognize certain losses during the first five years after a change of
control if the losses existed, but were not recognized, as of the date of the
change of control. In general, the annual limitation with respect to these items
is determined by computing the product of the fair market value of the
corporation immediately prior to the change of control and the federal long-term
tax exempt interest rate in effect at that time, as prescribed by the Internal
Revenue Service.
As of December 31, 1999, the Bank had an estimated NOL carryover for
federal income tax purposes of $99.7 million expiring in years 2008 through
2019. Of this amount, $59.8 million is subject to annual utilization limitations
imposed by IRC Section 382. For California franchise tax purposes, the Bank had
an estimated NOL carryover of $45.4 million. Of the estimated California NOL
F-25
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carryover, $41.8 million expires in years 2000 through 2004, and $3.6 million
expires in years 2000 through 2009. Of the total $45.4 million California NOL,
$15.7 million is subject to annual utilization limitations imposed by IRC
Section 382.
Under the provisions of SFAS No. 109, a deferred tax liability has not been
provided for the tax bad debt and loan loss reserves that arose in years prior
to 1988. The Bank had an adjusted pre-1988 total loan loss reserve balance of
$26.3 million at December 31, 1999, for which no income taxes have been
provided. The remaining adjusted pre-1988 total loan loss reserve will be
recaptured into taxable income in the event Fidelity (1) ceases to be a "bank"
or "thrift," (2) makes distributions to shareholders in excess of current or
accumulated post-1951 earnings and profits, or (3) makes distributions to
shareholders in a partial or complete redemption or liquidation. The Bank does
not intend to enter into a transaction that would result in a recapture of
pre-1988 reserves if such recapture would create an additional tax liability.
NOTE 13--COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, significant litigation outstanding against the
Company included:
NATIONWIDE CAPITAL COMPANY CREDIT CARD LITIGATION. The plaintiff alleges
that it had relationships with various automobile dealers and a marketing
company, and that the Bank interfered with the relationships when the Bank
terminated an affinity credit card program with the marketing company under a
program involving those dealers. The plaintiff is seeking unspecified actual and
exemplary damages.
CLASS ACTION SECURITIES LITIGATION. Two purported class actions against the
Company and its current and former chief executive officers allege failure to
make adequate and timely disclosure of losses in the Bank's credit card
operations. One action has been voluntarily dismissed by the plaintiffs.
ADC CREDIT CARD LITIGATION. Approximately 100 lawsuits, and two purported
class actions, have been asserted against the Bank, primarily in Alabama, but
also in Mississippi and West Virginia. The litigation arises from a credit card
affinity program in which independent third party distributors sold consumer
appliances door-to-door, and concurrently offered the consumer an opportunity to
apply for a MasterCard credit card to be issued by the Bank which would be used
to pay for the appliance. The plaintiffs generally allege that the salespersons
misrepresented the terms of the credit cards.
DURGA MA ARBITRATION. The plaintiff had two signed agreements with the Bank
pertaining to proposed private label credit card programs under which cards
would be issued by the Bank to customers of jewelry retailers. The Bank did not
issue any cards, and the plaintiff commenced arbitration against the Bank for
"breach of contract and fraud".
INTERNET CASINO LITIGATION. The plaintiff, on behalf of a purported class,
contends that she placed bets through a gambling site on the Internet, and
charged her gambling expenses to a Fidelity MasterCard credit card. The
plaintiff alleges that the Bank, by allowing its credit card to be used as a
payment device for illegal gambling, violated a variety of federal and state
statutes.
The Company believes that it has significant defenses to the foregoing
claims or any claims for damages and intends to defend itself vigorously.
However, the legal responsibility and financial exposure with respect to
foregoing claims presently cannot be reasonably ascertained and, accordingly,
there is a risk that the outcome of one or more of these outstanding claims
could result in the payment of amounts which could be material in relation to
the financial condition or results of operations of the Bank.
F-26
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER MATTERS. In the course of its current compliance examination of the
Bank, the OTS has raised concerns regarding the Bank's credit card operations,
principally with respect to the credit card origination, servicing and
collection activities of third parties under contracts that have been terminated
or are in the process of winding down. While these third parties were required
to satisfy regulatory requirements applicable to their respective functions, it
is possible that the Bank may be held responsible for violations by these third
parties. The Bank has responded to preliminary issues raised by the OTS, but the
OTS has not issued its final report. The Bank is therefore, uncertain as to the
OTS' ultimate determinations on these issues, and possible resulting regulatory
actions or sanctions may have a material adverse effect on the financial
condition or results of operations of the Company.
The Company has a number of other lawsuits and claims pending arising in
the normal course of business. The Company'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 Company. The Company 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, 1999, the Company had $3.4 million in
commitments to fund loans. In addition, the Company has extended lines of credit
in the form of credit cards and other totaling $304.8 million. At December 31,
1999, the unused and available portion of the credit lines extended included
$44.0 million related to credit cards and 39.8 million related to overdraft
reserve lines on checking accounts and other credit lines.
As of December 31, 1999, the Company had certain mortgage loans with a
gross principal balance of $73.5 million, of which $61.4 million had been put
into the form of mortgage pass-through certificates, over various periods of
time, leaving a balance of $12.1 million in loans retained by the Company. These
mortgage pass-through certificates provide a credit enhancement to the investors
in the form of the Company's subordination of its retained percentage interest
to that of the investors. In this regard, the aggregate of $61.4 million are
deemed Senior Mortgage Pass-Through Certificates and the $12.1 million in loans
held by the Company are subordinated to the Senior Mortgage Pass-Through
Certificates in the event of borrower default. Full recovery of the $12.1
million is subject to this contingent liability due to its subordination. In
1993, the Bank repurchased a portion of the mortgage pass-through certificates,
and at December 31, 1999, the balance of the repurchased certificate was $21.6
million and was included in the MBS AFS portfolio and accounted for in
accordance with SFAS No. 115. The other Senior Mortgage Pass-Through
Certificates totaling $39.8 million at December 31, 1999, are owned by other
investor institutions. The contingent liability for credit losses on these
mortgage pass-through certificates was $0.5 million and $0.9 million at December
31, 1999 and 1998, respectively, and is included in other liabilities.
The Company also effected the securitization by FNMA of multifamily
mortgages wherein whole loans were swapped for Triple A rated MBS through FNMA's
Alternative Credit Enhancement Structure ("ACES") program. These MBS were later
sold and the current outstanding balance as of December 31, 1999, of $79.6
million is serviced by the Company, including commitments assumed as a result of
the Hancock acquisition. As part of a credit enhancement to absorb losses
relating to the ACES transaction, the Company has pledged and placed in a trust
account, as of December 31, 1999, $17.4 million, comprised of $13.3 million in
cash and $4.1 million in MBS. The Company shall absorb losses, if any, which may
be incurred on the securitized multifamily loans to the extent of $13.9 million.
F-27
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FNMA is responsible for any losses in excess of $13.9 million. The corresponding
contingent liability for credit losses was $1.3 million and $2.3 million at
December 31, 1999 and 1998, respectively, and is included in other liabilities.
The Company conducts portions of its operations from leased facilities. All
of the Company's leases are operating leases. At December 31, 1999, aggregate
minimum rental commitments on operating leases with noncancelable terms in
excess of one year were as follows:
AMOUNT
---------------
(DOLLARS IN
YEAR OF COMMITMENT THOUSANDS)
------------------
2000................................................... $ 4,500
2001................................................... 4,300
2002................................................... 3,200
2003................................................... 2,400
2004................................................... 2,000
Thereafter............................................. 5,700
---------------
Total................................................. $ 22,100
===============
Rental expenses were $4.1 million in 1999 and 1998, and $2.9 million in
1997.
F-28
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--REGULATORY MATTERS
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 "core capital" and a "risk-based capital requirement".
The Bank's actual and required capital are as follows at the dates
indicated:
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENT ACTION PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total capital (to risk-weighted
assets)........................ $ 159,952 10.09% $ 126,796 8.00% $ 158,495 10.00%
Core capital (to adjusted
tangible assets)............... 139,689 5.22 80,306 3.00 133,843 5.00
Tangible capital (to tangible 139,689 5.22 40,153 1.50 N/A
assets)........................
Tier I capital (to risk-
weighted assets)............... 139,689 8.81 N/A 95,097 6.00
MINIMUM TO BE
ADEQUATELY CAPITALIZED
UNDER PROMPT
MINIMUM CORRECTIVE ACTION
ACTUAL CAPITAL REQUIREMENT PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1998:
Total capital (to risk-weighted
assets)........................ $ 188,746 8.95% $ 168,656 8.00% $ 168,656 8.00%
Core capital (to adjusted
tangible assets)............... 161,506 4.36 111,028 3.00 148,037 4.00
Tangible capital (to tangible 161,506 4.36 55,514 1.50 N/A
assets)............................
Tier I capital (to risk-
weighted assets)............... 161,506 7.66 N/A 84,328 4.00
F-29
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the Company's capital in accordance with
GAAP to the Bank's tangible, core and risk-based capital at the dates indicated:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Consolidated stockholders' equity................ $ 96,176 $ 96,176 $ 96,176
Adjustments:
Fidelity's Preferred Stock..................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............ (1,250) (1,250) (1,250)
------------ ------------ ------------
Fidelity's stockholders' equity.................. 146,676 146,676 146,676
Accumulated other comprehensive loss............. 9,272 9,272 9,272
Adjustments:
Intangible assets.............................. (12,352) (12,352) (12,352)
Nonincludable subsidiaries..................... (1) (1) (1)
Excess ALLL.................................... -- -- 20,263
Net deferred tax assets........................ (3,906) (3,906) (3,906)
------------ ------------ ------------
Regulatory capital................................. $ 139,689 $ 139,689 $ 159,952
============ ============ ============
AS OF DECEMBER 31, 1998:
Consolidated stockholders' equity................ $ 127,388 $ 127,388 $ 127,388
Adjustments:
Fidelity's Preferred Stock..................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............ (6,152) (6,152) (6,152)
------------ ------------ ------------
Fidelity's stockholders' equity.................. 172,986 172,986 172,986
Accumulated other comprehensive loss............. 2,795 2,795 2,795
Adjustments:
Intangible assets.............................. (14,268) (14,268) (14,268)
Nonincludable subsidiaries..................... (7) (7) (7)
Excess ALLL.................................... -- -- 27,240
------------ ------------ ------------
Regulatory capital................................. $ 161,506 $ 161,506 $ 188,746
============ ============ ============
As of December 31, 1999 and 1998, the Bank was "well capitalized" and
"adequately capitalized", respectively, under the Prompt Corrective Action
("PCA") regulations adopted by the OTS pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). As of December 31, 1999, the
most constraining of the capital ratio measurements was risk-based capital to
risk-weighted assets which had an excess of $1.4 million above the minimum level
required to be considered well capitalized. The Bank's capital amounts and
classification are subject to review by federal regulators about components,
risk-weightings and other factors. Due to the expectation of continuing losses
in the credit card operations, or a significant write-down in the carrying value
of the credit card portfolios as a result of the adoption of alternative
strategies, the Bank expects to be adequately capitalized in 2000.
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% of total
capital to risk-weighted assets, 3.0% of core capital to risk-weighted assets,
or 3.0% of 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%.
F-30
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Thrift Financial Report ("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.
As a result of the OTS' findings during their 1998 safety and soundness
examination, the Bank 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 senior 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 the Bank and its
affiliates.
NOTE 15--EARNINGS PER SHARE
The reconciliation of the numerators and denominators used in basic and
diluted (loss) earnings per share ("EPS") follows for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Loss) earnings available for common stockholders..... $ (24,890) $ (56,328) $ 12,653
============== ============== ==============
Weighted average common shares outstanding:
Basic............................................. 19,460,941 19,395,337 18,794,887
Effect of dilutive securities-- stock options..... -- -- 348,152
Effect of dilutive securities-- deferred
stock awards.................................... -- -- 194
-------------- -------------- --------------
Diluted........................................... 19,460,941 19,395,337 19,143,233
============== ============== ==============
(Loss) earnings per share:
Basic............................................. $ (1.28) $ (2.90) $ 0.67
Effect of dilutive securities-- stock options..... -- -- (0.01)
Effect of dilutive securities-- deferred
stock awards.................................... -- -- --
-------------- -------------- --------------
Diluted........................................... $ (1.28) $ (2.90) $ 0.66
============== ============== ==============
For the years ended December 31, 1999 and 1998, there are no potentially
dilutive common shares included in the calculation of diluted EPS because
including them would have an anti-dilutive effect.
NOTE 16--STOCK OPTION PLANS
STOCK OPTION PLANS
F-31
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 26, 1997, the Board of Directors of the Company adopted a Stock
Option and Equity Incentive Plan (the "Stock Option Plan"). The Stock Option
Plan consists of certain amendments to, and a restatement of, the Bank's 1996
Stock Option Plan. The Stock Option Plan provides (1) the granting of stock
options, restricted stock and deferred stock units, (2) deferred stock awards in
lieu of cash compensation otherwise payable to directors, and (3) stock options,
restricted stock or deferred stock units in lieu of cash awards for senior
officers. 2,125,000 shares of the Bank's Common Stock are available for grants
under the Stock Option Plan. The Stock Option Plan provides for annual grants of
2,500 stock options to non-employee directors, which vest immediately. The Stock
Option Plan is administered by the Compensation/Stock Options 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 Stock Option Plan. Unexercised options
granted under the Stock Option Plan expire on the earlier of the tenth
anniversary of the date of grant or 90 days following the effective date of the
recipients termination of employment. In the event of an employees' termination
for cause, all outstanding options are cancelled as of the effective date of
such termination.
In conjunction with a restructuring of senior management, the Board of
Directors approved the following in November 1998: (1) the majority of
outstanding stock options granted, excluding options granted to directors, were
cancelled and replaced by new stock options issued at an exercise price of
$3.81, the closing stock price on November 19, 1998, (2) new and certain
continuing members of executive management received grants of stock options, (3)
all new stock options will vest based upon stock price performance (average
closing price of $4.00-10%, $5.00-25%, $6.00-40%, $7.00-55%, $8.00-70%,
$9.00-85%, and $10.00-100%) or 100% vesting upon a change-in-control or after a
7 year period from the date of grant, and (4) the Stock Option Plan was amended
to provide that the annual grant limit per employee has been increased from
100,000 to 750,000 shares. The options that had been granted prior to November
1998 and that were still outstanding at December 31, 1998 vest over a four year
period; 10% on the first anniversary of the date of grant and 30% on each
subsequent anniversary date.
The following is a summary of the Stock Option Plan for the periods
indicated:
AVERAGE
NUMBER OPTION
OF OPTIONS PRICE
------------- --------
Balance, January 1, 1997............................................ 1,279,200 $ 8.35
Granted........................................................... 122,500 10.96
Expired........................................................... (114,450) 8.35
Exercised......................................................... (63,375) 8.35
-------------
Balance, December 31, 1997.......................................... 1,223,875 8.61
Granted prior to November 1998.................................... 740,500 14.01
Granted during and after November 1998............................ 1,342,000 3.81
Cancelled and expired............................................. (1,396,625) 11.11
Exercised......................................................... (23,000) 10.39
-------------
Balance, December 31, 1998.......................................... 1,886,750 5.44
Granted........................................................... 555,000 5.15
Cancelled and expired............................................. (465,725) 8.46
Exercised......................................................... (3,400) 3.81
-------------
Balance, December 31, 1999.......................................... 1,972,625 4.65
=============
F-32
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the outstanding stock options at December 31, 1999 follows:
WEIGHTED AVERAGE
NUMBER REMAINING
EXERCISE PRICES OF OPTIONS CONTRACTUAL LIFE
----------------------------- ---------- ----------------
$ 3.81 1,248,500 8.9
$4.00--9.50 551,000 9.5
$ 8.35 138,125 5.9
$10.25 17,500 7.3
$14.06 17,500 8.3
----------
Total.......................... 1,972,625
==========
At December 31, 1999, 597,750 stock options were vested and exercisable.
The following is a summary of deferred stock awards granted to non-employee
directors in lieu of cash compensation for the periods indicated:
NUMBER
OF SHARES
-------------
Awards earned in 1997 and balance, December 31, 1997..... 6,982
Awards earned.......................................... 20,564
Stock issued........................................... (8,272)
-------------
Balance, December 31, 1998............................... 19,274
Awards earned.......................................... 58,436
-------------
Balance, December 31, 1999............................... 77,710
=============
At December 31, 1999, the Company had 40,016 shares of restricted stock
issued to senior officers. These grants vest 33.3% on January 1, 1999, 33.3% on
January 1, 2000 and 33.3% on January 1, 2001. In addition, during 1999, 12,559
grants vested upon termination of two senior officers. During 1998, 63,853 had
been granted in lieu of $0.5 million in cash bonuses and 23,837 of the grants
were cancelled.
Compensation expense recorded with regards to the deferred stock awards to
non-employee directors and restricted stock awards to senior officers was $0.1
million and less than $0.1 million in 1999 and 1998, respectively.
F-33
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted under the Stock Option Plan for 1999,
1998 and 1997 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for 1999, 1998 and
1997, respectively: no dividend yield, expected stock price volatility of 68%,
74% and 60% for 1999, 1998 and 1997, respectively, based on daily market prices
for the preceding five year period, average risk free interest rate equivalent
to the 10-year Treasury rate on the date of the grant of 6.42%, 4.68% and 5.74%
for 1999, 1998 and 1997, respectively, and an option contract life of 10 years.
The Company applied the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for its Stock Option Plan. Had compensation cost for the Company's
Stock Option Plan been determined based on the fair value at the grant dates for
awards under the Stock Option Plan consistent with the method of SFAS No. 123,
the Company's net earnings and EPS for the years ended December 31, 1999, 1998
and 1997 would have been changed to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net (loss) earnings to common stockholders:
As reported........................................ $ (24,890) $ (56,328) $ 12,653
Pro forma.......................................... (25,566) (57,061) 9,182
Basic net (loss) earnings per common share:
As reported........................................ (1.28) (2.90) 0.67
Pro forma.......................................... (1.31) (2.94) 0.49
Diluted net (loss) earnings per common share:
As reported........................................ (1.28) (2.90) 0.66
Pro forma.......................................... (1.31) (2.94) 0.48
Weighted-average fair value per share of
options granted...................................... 1.98 2.98 9.57
Not included above are 200,000 stock options issued to a third party in
exchange for consulting services. Included in consulting expense is $0.2 million
for the year ended December 31, 1998, related to the issuance of these options
which had an average option price of $12.66. Associated with the settlement of
obligations related to the termination of an executive officer, the Company
issued 35,556 shares of stock to the executive officer and recorded $0.3 million
of compensation expense in 1998.
F-34
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is the Company's disclosure of the estimated fair value of
financial instruments. The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment 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 Company 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, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Financial assets:
Investment securities AFS............... $ -- $ -- $ 28,797 $ 28,797
Investment securities held to maturity.. -- -- 1,084 1,099
MBS AFS................................. 320,233 320,233 465,010 465,010
Loans receivable........................ 2,169,381 2,109,540 2,665,576 2,707,333
Mortgage servicing rights............... 1,186 5,733 1,630 5,368
Financial liabilities:
Deposits................................ 2,501,246 2,493,644 2,922,531 2,939,723
FHLB advances........................... 20,000 20,137 585,000 596,293
Senior Notes............................ 51,478 58,330 51,478 67,227
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Estimated fair values for investment and MBS 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 RECEIVABLE
The estimated fair values of loans are based on an option adjusted cash
flow valuation ("OACFV"). The OACFV includes forward interest rate simulations
and uses a range of discount rates to adjust for the credit quality of loans.
Such valuations may not be indicative of the value derived upon a sale of all or
part of the portfolio. The credit card portfolio is relatively unseasoned and
was generally marketed to customers with lower credit quality. In addition,
there exists a high level of uncertainty related to the future performance of
the credit card portfolio because of the high levels of delinquencies and
charge-offs. As a result, the fair value of the credit card portfolio may be
significantly less than the carrying amount.
The fair value of loans other than mortgage loans or credit card loans is
equal to the carrying amount of the related loans.
F-35
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE SERVICING RIGHTS
The estimated fair values of mortgage servicing rights are based on an
OACFV analysis.
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
CDs is estimated by using an OACFV analysis.
BORROWINGS
The estimated fair value is based on an OACFV model.
OTHER FINANCIAL INSTRUMENTS
Financial instruments of the Bank as included in the consolidated
statements of financial condition for which fair value approximates the carrying
amount at December 31, 1999 and 1998 include "cash and cash equivalents",
"interest receivable", "investment in FHLB stock" and interest payable.
F-36
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FOURTH THIRD SECOND FIRST
YEAR QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999:
Interest income........................... $ 250,691 $ 54,498 $ 61,130 $ 66,660 $ 68,403
Interest expense.......................... 143,973 30,218 34,574 38,237 40,944
-------------- -------------- -------------- -------------- --------------
Net interest income..................... 106,718 24,280 26,556 28,423 27,459
Provision for estimated loan losses....... 78,800 16,500 17,500 31,800 13,000
-------------- -------------- -------------- -------------- --------------
Net interest income after provision for
estimated loan losses................ 27,918 7,780 9,056 (3,377) 14,459
Noninterest income........................ 49,360 7,823 14,383 12,777 14,377
Operating expense......................... 102,140 24,449 25,832 25,027 26,832
-------------- -------------- -------------- -------------- --------------
(Loss) earnings before income taxes and
minority interest in subsidiary......... (24,862) (8,846) (2,393) (15,627) 2,004
Income tax expense (benefit).............. -- -- -- -- --
Minority interest in subsidiary........... 28 7 7 7 7
-------------- -------------- -------------- -------------- --------------
(Loss) earnings available for common
stockholders............................ $ (24,890) $ (8,853) $ (2,400) $ (15,634) $ 1,997
============== ============== ============== ============== ==============
(Loss) earnings per share:
Basic................................... $ (1.28) $ (0.45) $ (0.12) $ (0.80) $ 0.10
Diluted................................. $ (1.28) $ (0.45) $ (0.12) $ (0.80) $ 0.10
Weighted average common shares outstanding:
Basic................................... 19,460,941 19,463,343 19,463,343 19,461,082 19,455,887
Diluted................................. 19,460,941 19,463,343 19,463,343 19,461,082 19,698,549
Market prices of common stock:
High ................................... $ 6.38 $ 4.25 $ 6.38 $ 6.38 $ 5.13
Low .................................... $ 2.69 $ 2.69 $ 3.13 $ 4.06 $ 3.94
1998:
Interest income........................... $ 300,347 $ 72,161 $ 78,276 $ 75,235 $ 74,675
Interest expense.......................... 209,204 45,591 54,834 55,113 53,666
-------------- -------------- -------------- -------------- --------------
Net interest income..................... 91,143 26,570 23,442 20,122 21,009
Provision for estimated loan losses....... 73,032 15,000 51,782 4,250 2,000
-------------- -------------- -------------- -------------- --------------
Net interest income after provision for
estimated loan losses................ 18,111 11,570 (28,340) 15,872 19,009
Noninterest income........................ 34,418 18,551 4,388 6,148 5,331
Operating expense......................... 104,959 29,016 31,962 23,819 20,162
-------------- -------------- -------------- -------------- --------------
(Loss) earnings before income taxes and
minority interest in subsidiary......... (52,430) 1,105 (55,914) (1,799) 4,178
Income tax expense (benefit).............. 3,870 -- 3,870 (630) 630
Minority interest in subsidiary........... 28 7 7 7 7
-------------- -------------- -------------- -------------- --------------
(Loss) earnings available for
common stockholders..................... $ (56,328) $ 1,098 $ (59,791) $ (1,176) $ 3,541
============== ============== ============== ============== ==============
(Loss) earnings per share:
Basic................................... $ (2.90) $ 0.06 $ (3.08) $ (0.06) $ 0.18
Diluted................................. $ (2.90) $ 0.06 $ (3.08) $ (0.06) $ 0.18
Weighted average common shares outstanding:
Basic................................... 19,395,337 19,430,896 19,395,952 19,385,946 19,369,326
Diluted................................. 19,395,337 19,500,227 19,395,952 19,385,946 19,817,279
Market prices of common stock:
High ................................... $ 16.13 $ 4.94 $ 12.63 $ 16.13 $ 15.63
Low .................................... $ 2.28 $ 2.28 $ 4.13 $ 12.13 $ 11.63
F-37
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19--BUSINESS SEGMENT REPORTING
The Company has analyzed overall business and operations, and views its
business as consisting of two reportable business segments; core bank operations
and credit card operations. The financial performance of these business segments
is measured by the Company's profitability reporting processes. The following
describes these two business segments:
CORE BANK OPERATIONS
The principal business activities of this segment are attracting funds from
the general public and other institutions, originating and investing in real
estate related assets, including mortgage loans and MBS, and investment
securities and selling uninsured investment products. This segment's primary
sources of revenue are interest income earned on real estate related assets,
investment securities and funding provided to the credit card operations, fees
earned in connection with loans and deposits and fees earned from the sale of
uninsured investment products. This segment's principal expenses are interest
incurred on interest-bearing liabilities, including deposits and borrowings,
provisions for estimated loan losses, retail branch system costs, mortgage
servicing and origination costs and executive and administrative expenses.
CREDIT CARD OPERATIONS
The principal business activities of this segment are servicing the
outstanding credit card accounts and managing the credit risk associated with
the credit card portfolio. Since the first quarter of 1999, there have been no
material new originations of credit card accounts. This segment's primary
sources of revenue are interest income earned on the credit card balances and
fees earned on credit card accounts, including acceptance and annual fees, late
fees and interchange fees. This segment's principal expenses are interest
expense from funding provided by the core bank operations, provisions for
estimated loan losses and costs of servicing the portfolio, including third
party processing charges.
F-38
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the net income or loss for the core bank
operations and the credit card operations for the periods indicated. In
computing net interest income, funding costs are charged to the credit card
operations based on a rolling twelve-month average of one-year fixed rate FHLB
advances. All indirect general and administrative expense not specifically
identifiable with either of the two business segments are allocated on the basis
of direct operating expenses. Indirect general and administrative expenses
subject to allocation were $10.5 million and $11.9 million for 1999 and 1998,
respectively, with no corresponding amount in 1997.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
CORE BANK OPERATIONS:
Net interest income................................. $ 69,931 $ 73,253 $ 79,976
Provision for estimated loan losses (1)............. (14,300) (13,413) 13,004
Noninterest income.................................. 13,753 13,003 3,845
Gain on sale of branches............................ 5,914 -- --
Operating expense................................... 69,101 79,620 63,096
Income tax expense (benefit)........................ -- 3,870 (8,100)
-------------- -------------- --------------
Net earnings (2).................................. $ 34,797 $ 16,179 $ 15,821
============== ============== ==============
Operating Ratios:
Net interest margin............................... 2.26% 1.81% 2.05%
Efficiency ratio.................................. 80.68% 88.33% 67.46%
Return on average assets.......................... 1.09% 0.38% 0.35%
Return on average equity.......................... 37.46% 10.86% 7.43%
Selected Average Balance Sheet Components:
Loans............................................. $ 2,240,849 $ 2,665,050 $ 2,797,556
, Earning assets.................................... 3,108,536 4,057,172 3,545,741
Total assets...................................... 3,192,646 4,204,914 3,633,695
Deposits.......................................... 2,638,472 2,994,618 2,642,560
CREDIT CARD OPERATIONS:
Net interest income................................. $ 36,787 $ 17,890 $ 1,022
Provision for estimated loan losses................. 93,100 86,445 --
Noninterest income.................................. 29,693 21,415 45
Operating expense................................... 33,039 25,339 --
-------------- -------------- --------------
Net loss (2)...................................... $ (59,659) $ (72,479) $ 1,067
============== ============== ==============
Operating Ratios:
Net interest margin............................... 12.95% 8.69% 8.10%
Efficiency ratio.................................. 49.70% 64.47% N/A
Selected Average Balance Sheet Components:
Credit card loans................................. $ 283,435 $ 205,921 $ 12,637
Total assets...................................... 228,688 168,610 12,802
- ------------------
(1) Negative amounts represent recoveries of previously established allowance
for loan losses.
(2) The segment earnings reported in the table do not include preferred
dividends paid to holders of the preferred stock issued by Fidelity Federal
Bank. These dividends are reported as minority interest in subsidiary in the
consolidated financial statements and were $28,000 in 1999 and 1998 and $4.2
million in 1997.
F-39
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20--PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements.
BANK PLUS CORPORATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and cash equivalents............................................. $ 649 $ 719
Loans receivable...................................................... 159 445
Investment in Preferred Stock of subsidiary........................... 51,478 51,478
Investment in subsidiaries............................................ 105,311 129,661
Other assets.......................................................... 418 251
------------ ------------
Total Assets............................................................. $ 158,015 $ 182,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Senior Notes........................................................ $ 51,478 $ 51,478
Other liabilities................................................... 1,089 893
------------ ------------
Total Liabilities................................................ 52,567 52,371
Stockholders' equity.................................................. 105,448 130,183
------------ ------------
Total Liabilities and Stockholders' Equity............................... $ 158,015 $ 182,554
============ ============
F-40
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PLUS CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
INCOME:
Interest income.................................... $ 20 $ 32 $ 49
Interest expense................................... 6,207 6,199 2,782
-------------- -------------- --------------
Net interest (expense) income......................... (6,187) (6,167) (2,733)
-------------- -------------- --------------
OPERATING EXPENSE:
Personnel and benefits............................. 59 3 --
Occupancy 268 150 257
Professional services.............................. 738 187 219
Intercompany expense allocation.................... 393 359 271
Write-off of investment............................ -- 558 --
Other.............................................. 218 49 93
-------------- -------------- --------------
Total operating expense.......................... 1,676 1,306 840
-------------- -------------- --------------
Loss before income taxes.............................. (7,863) (7,473) (3,573)
Income tax expense (benefit).......................... (1,458) 180 (384)
-------------- -------------- --------------
Loss before equity in undistributed (loss)
earnings and minority interest of subsidiaries..... (6,405) (7,653) (3,189)
Equity in undistributed net (loss) earnings
of subsidiaries.................................... (18,457) (48,647) 20,077
Minority interest in subsidiary....................... (28) (28) (4,235)
-------------- -------------- --------------
Net (loss) earnings................................... $ (24,890) $ (56,328) $ 12,653
============== ============== ==============
F-41
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PLUS CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings..................................... $ (24,890) $ (56,328) $ 12,653
Equity in undistributed net loss
(earnings) of subsidiaries............................ 18,457 48,647 (20,077)
Minority interest in subsidiary......................... 28 28 4,235
Amortization of exchange offer.......................... 29 22 22
Other assets (increase) decrease........................ (126) 234 (417)
Senior Notes interest payable, increase................. -- -- 790
Other liabilities (decrease) increase................... (240) (39) 12
-------------- -------------- --------------
Net cash used in operating activities................. (6,742) (7,436) (2,782)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Bank Plus Credit Services Corporation..... 2,226 (4,500) --
Investment in FFB....................................... (2,200) -- --
Loans receivable decrease............................... 444 120 144
-------------- -------------- --------------
Net cash provided by (used in) investment
activities.......................................... 470 (4,380) 144
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends from subsidiaries............................. 6,189 11,322 2,290
Proceeds from exercise of stock options................. 13 239 530
-------------- -------------- --------------
Net cash provided by financing activities............. 6,202 11,561 2,820
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents....... (70) (255) 182
Cash and cash equivalents at beginning of period........... 719 974 792
-------------- -------------- --------------
Cash and cash equivalents at the end of period............. $ 649 $ 719 $ 974
============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Preferred Stock for Senior Notes............ $ -- $ -- $ 51,478
Stock award and restricted stock issued................. $ 142 $ -- $ --
Bank Plus Credit Services dissolution and
contribution to Fidelity.............................. $ 3,612 $ -- $ --
NOTE 21--SUBSEQUENT EVENTS
Fidelity has signed definitive agreements with two separate institutions to
sell a total of five of Fidelity's branch offices with approximately $350
million in deposits. The Company expects to fund the deposit sales with
approximately $250 million in multifamily loans and the remainder in cash. The
Bank has received approval from the OTS for these transactions. The Bank
anticipates that these transactions will be completed in the first and second
quarters of 2000.
On March 23, 2000 First Alliance Corporation and its subsidiaries
(collectively "FACO"), the marketer of the real estate secured credit card
program, announced that they had filed voluntary petitions under Chapter 11 of
the United States Bankruptcy Code. Under the Bank's credit card program
agreement with FACO, FACO was (1) obligated to repurchase credit card accounts
F-42
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
when they became over 120 days delinquent and (2) upon termination of the
program, FACO or its designee was obligated to purchase all of the outstanding
accounts under the program. The term of the program agreements expired on
February 24, 2000 and the Bank made a demand upon FACO to purchase all of the
outstanding accounts of the program. It is uncertain what effect the filing of
the petition for bankruptcy will have on FACO's obligations under the program
agreements. If FACO does not perform its obligations under the agreement, the
Company may be required to record a loss to the extent that estimated
charge-offs exceed the cash reserves held by the Company. As of February 29,
2000, the balance of accounts and related cash reserves of this program were
$16.4 million and $2.7 million, respectively.
F-43