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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, 1998
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 12, 1999, was $91,933,905.
As of March 12, 1999, Registrant had outstanding 19,408,449 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
1999 Annual Meeting of Stockholders are incorporated by reference in Part III
hereof.
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BANK PLUS CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
Glossary of Defined Terms...................................... ii
PART I
Item 1. Business....................................................... 1
General........................................................ 1
Recent Developments............................................ 1
Retail Financial Services...................................... 4
Lending Activities............................................. 5
Loan Servicing................................................. 6
Credit Administration.......................................... 8
Investments.................................................... 9
Borrowings..................................................... 9
Competition.................................................... 10
Employees...................................................... 11
Regulation and Supervision..................................... 11
Item 2. Properties..................................................... 22
Item 3. Legal Proceedings.............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............ 25
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 26
Item 6. Selected Financial Data........................................ 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 28
Forward-looking Statements..................................... 29
Results of Operations.......................................... 29
Net Interest Income............................................ 30
Provision for Estimated Loan Losses............................ 32
Noninterest Income (Expense)................................... 32
Operating Expenses............................................. 33
Income Taxes................................................... 34
Financial Condition............................................ 36
Asset Quality.................................................. 42
Regulatory Capital Compliance.................................. 54
Liquidity...................................................... 55
Asset/Liability Management and Market Risk..................... 59
Year 2000...................................................... 64
Recent Accounting Pronouncements............................... 66
Item 8. Financial Statements and Supplementary Data.................... 66
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant............. 67
Item 11. Executive Compensation......................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management. 67
Item 13. Certain Relationships and Related Transactions................. 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 68
Signatures..................................................... 72
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
Acquisition Shares.......... Bank Plus Common Stock
ADC......................... American Direct Credit, LLC
AFS......................... available for sale
ALCO........................ Asset Liability Committee
ALLL........................ allowance for loan and lease losses
Americash................... Americash, L.L.C.
ARMs........................ adjustable rate mortgages
ATM......................... automated teller machine
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 deposits
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
the Company................. Bank Plus, Fidelity, Gateway and BPCS
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
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
FTB......................... California Franchise Tax Board
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 on customer checking accounts
IRC......................... Internal Revenue Code
LGS......................... loan grading system
LIBOR....................... London Interbank Offered Rate
MBS......................... mortgage-backed securities
MD&A........................ Management's Discussion and Analysis of Financial Condition and
Results of Operations
MMG......................... MMG Direct, Inc.
MOA......................... Mall of America
MTN......................... 8.50% mortgage-backed medium-term note, Series A, due April 15, 1997
NASD........................ National Association of Securities Dealers, Inc.
Nasdaq...................... Nasdaq National Market
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
the Plan.................... Accelerated Asset Resolution Plan
PCA......................... Prompt Corrective Action
QTL......................... Qualified Thrift Lender
Renzi....................... Renzi Co. LLC
REO......................... real estate owned
SAIF........................ Savings Association Insurance Fund
SEC......................... Securities and Exchange Commission
Senior Notes................ Bank Plus' 12% Senior Notes due July 18, 2007
Preferred Stock............. Fidelity's 12% Noncumulative Exchangeable Perpetual Preferred Stock,
Series A
the Service................. Internal Revenue Service
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
VA.......................... Veterans Administration
Y2K......................... Year 2000
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"), Gateway Investment Services, Inc.
("Gateway") and Bank Plus Credit Services Corporation ("BPCS") (collectively,
the "Company"), offers a broad range of consumer financial services, including
demand and term deposits and loans to consumers. In addition, through Gateway, a
National Association of Securities Dealers, Inc. ("NASD") registered
broker/dealer, the Bank provides customers with uninsured investment products,
including mutual funds and annuities. Fidelity operates through 38 full-service
branches, 37 of which are located in southern California, principally in Los
Angeles and Orange counties, and one of which is located at the Mall of America
("MOA") in Bloomington, Minnesota.
The Company derives its income primarily from the interest it receives on
loans and investment securities and, to a lesser extent, from fees received from
the sale of uninsured investment products and in connection with loans and
deposit services, as well as other services. Its major expenses are the interest
it pays on deposits and on borrowings, provisions for estimated credit losses,
and general operating expenses. The Company's operations, like those of other
financial institutions, are significantly influenced by general economic
conditions, by the strength of the real estate market, by the monetary, fiscal
and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities.
Fidelity's deposits are highly concentrated in Los Angeles and Orange
counties. The retail branches held total deposits of approximately $2.9 billion
at December 31, 1998. The Bank's loan portfolio consists of mortgage loans and
consumer loans. At December 31, 1998, the Bank's gross mortgage loan portfolio
aggregated approximately $2.4 billion, 60.7% of which was secured by residential
properties containing 5 or more units, 31.8% of which was secured by single
family and multifamily residential properties containing 2 to 4 units and 7.5%
of which was secured by commercial and other property. At that same date, 94.8%
of the Bank's mortgage loans consisted of adjustable-rate mortgages. At December
31, 1998, the Bank's consumer loan portfolio consisted of $350.1 million of
credit card loans, $17.7 million of automobile loans and $12.2 million of other
consumer loans.
Over the past 18 months, the Company has been actively addressing its Year
2000 ("Y2K") compliance objective. A detailed discussion of the current status
of the Company's compliance objectives is in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A") section of
this report on form 10-K.
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
1998 FINANCIAL RESULTS
The Company reported a net loss of $56.3 million for the year ended
December 31, 1998, as compared to net earnings of $12.7 million for the year
ended December 31, 1997. During 1998, the Company recorded a provision for
estimated loan losses of $73.0 million and incurred operating expenses of $105.0
million. Increasing delinquencies and charge-offs in the credit card loan
portfolio were the primary causes for the significant increase in the provision
for estimated loan losses. Operating expenses, which increased $41.9 million for
the year as compared to the corresponding 1997 period, were higher primarily due
to costs associated with the Bank's credit card programs and other business
initiatives including the financial education program for members of the
California Public Employees Retirement Systems ("CalPERS"), electronic commerce
activities, a planned name change, the indirect auto loan program and its MOA
branch.
1
CREDIT CARD OPERATIONS
During 1998, the Bank significantly increased its primarily sub-prime
credit card portfolio. Beginning in the third quarter of 1998, the Bank
experienced increases in delinquencies and charge-offs in excess of prior
expectations. To mitigate the deterioration of credit quality in the credit card
portfolio and to address operational problems encountered in the MMG Direct,
Inc. ("MMG") program the Bank, in October 1998, terminated its agreement with
MMG. American Direct Credit, LLC ("ADC") and the Bank entered into a settlement
agreement in November 1998 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 MMG program since August 1998. During the fourth quarter of
1998, the Bank also ceased originating credit cards under the First Alliance
Mortgage Company ("FAMCO") and Renzi Co., LLC ("Renzi") programs. Currently, the
Bank is only originating credit card accounts under the Direct Furniture, Inc.
("Direct Furniture") program.
Under the Bank's agreement with ADC, the Bank stopped originating new
accounts under the ADC program in the first quarter of 1999, ADC was relieved of
its obligations to pay for further credit losses, the Bank received all of the
revenues from the ADC program beginning November 1, 1998 and the remaining
balances in the cash reserve account were transferred to the Bank. In addition,
ADC continued to provide collection services for the portfolio through March 31,
1999 and ADC or its nominee had the right to purchase all outstanding balances
and accounts at a formula price through March 31, 1999.
During the second quarter of 1998, the Bank's new credit processing center
located in Beaverton, Oregon began providing customer service and collection
services for portions of the Bank's credit card programs, services that would
otherwise be provided by third parties. This new processing center is operated
by BPCS. Through December 31, 1998, Bank Plus had contributed $4.5 million to
BPCS to support start-up costs and the acquisition of fixtures and equipment.
CHANGES IN EXECUTIVE MANAGEMENT
On October 28, 1998, Mark K. Mason was appointed President and Chief
Executive Officer of the Company, replacing Richard M. Greenwood, who had
resigned in September 1998. Additionally, senior lending management was changed
in late 1998, with the resignations of W. C. Taylor III, Chief Lending Officer
of the Bank and President of BPCS and Jeff Hug, Senior Vice President of credit
card operations. In November 1998, John M. Michel was appointed Executive Vice
President and Chief Financial Officer of the Company, Godfrey B. Evans was
promoted to Chief Administrative Officer and Richard Villa was promoted to
Director of Finance-Treasurer. During the first quarter of 1999, Robert Condon
and Steven Austin, Executive Vice Presidents, resigned from the Company.
CHANGES IN THE COMPANY'S STRATEGY
Bank Plus has revised its strategic plan in view of the disappointing
results of its previous business plan, and has significantly curtailed the
origination of new credit card accounts and discontinued its indirect auto loan
program, electronic commerce activities and a planned name change. The Company's
business plan for 1999 provides for, among other things:
o Conforming and non-conforming single family mortgage loan originations
and purchases
o Reduction of the operating expenses of the core bank, to below 1997
levels
o Expansion of its net interest margin
o Becoming well capitalized in 1999
o An improvement in credit quality in the credit card portfolio through
seasoning and increased collection efforts
While the Company believes that it can achieve the business plan adopted,
there can be no assurance that these objectives will be achieved. The reduction
in operating expenses excludes the effect of increases in Federal Deposit
Insurance Corporation ("FDIC") insurance premiums and higher regulatory costs
associated with the Bank's regulatory status and capital category as well as
increased legal costs associated with the wind down of credit card programs. The
Company will continue to provide all necessary resources to the Year 2000
("Y2K") project.
2
The Company is engaged in negotiations with a third party to sell its MOA
branch and certain intellectual property assets. No assurance can be given that
a sale of the MOA branch will be consummated.
In March 1999, the Company sold $10.5 million or 64% of its auto loan
portfolio. Under the sales agreement, the buyer of the portfolio has a 90 day
option to purchase an additional $3.2 million of the portfolio. The Buyer will
also service the portfolio still owned by the Company. The gain or loss from the
sale of this portfolio is not expected to be material.
In January 1999, the Company transferred its financial education program
for the members of the California Public Employee's Retirement System
("CalPERS") to a new limited liability company which has assumed responsibility
for funding all financial requirements of the CalPERS program. The Company owns
a minority interest in the new limited liability company, and will be entitled
to all profits from future CalPERS program operations until it is reimbursed for
its investment in the program of $2.0 million.
In November 1998, Americash, L.L.C. ("Americash") completed the sale of its
operations to a third party, and in connection with the sale all amounts owed by
Americash to the Bank were paid. The ATM cash services provided by the Bank were
terminated effective March 10, 1999, which will result in a reduction in fee
income for cash services to the Bank. Revenues recorded by the Company related
to the ATM cash services program were $3.4 million and $1.0 million in 1998 and
1997, respectively.
During the third quarter of 1998, the Company engaged a financial advisor
to assist in the pursuit of strategic objectives. At the end of the 1998 fourth
quarter the company, with the help of its financial advisors, initiated a
process to explore a potential sale with parties interested in an acquisition of
(1) the Company and/or (2) the bank's credit card portfolio and operations.
Subject to confidentiality agreements, Bank Plus distributed information on the
company and has received indications of interest from several parties. Due
diligence reviews have been completed by some of the parties. As of March 31,
1999, no definitive offers to acquire the company have been made. There can be
no assurance that any offers will be made in the future or that the terms of any
offers received by the company would be considered adequate.
REGULATORY CAPITAL AND SUPERVISION
As a result of the net loss recorded for 1998, the Bank was categorized as
"adequately capitalized" as of December 31, 1998 for regulatory capital purposes
as compared to "well capitalized" as of December 31, 1997. The Bank's core and
risk-based capital ratios as of December 31, 1998 were 4.36% and 8.95%,
respectively. The core capital to adjusted total assets ratio, which had the
smallest excess of all the capital ratio measurements at December 31, 1998 had
an excess of $13.5 million above the minimum level required to be considered
"adequately capitalized".
The Company plans to reduce total assets in the near future to improve its
regulatory capital ratios. This reduction in assets is expected to be
accomplished through reductions in cash equivalents and mortgage-backed
securities ("MBS"). The cash generated by these asset sales will be used to
reduce liabilities of the Bank, which may include sales of deposits, reductions
of deposits through repricing and the prepayment of Federal Home Loan Bank
("FHLB") advances. Because the Company earns a spread on its interest-earning
assets over its interest-bearing liabilities, a reduction in the level of assets
will reduce the Company's net interest income.
The Office of Thrift Supervision ("OTS") completed its safety and soundness
examination during the third quarter of 1998. As a result of the OTS' findings,
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. The Bank has responded to criticisms from the OTS, including
providing the OTS with a business plan that demonstrates the Bank's ability to
provide future earnings and return to the status of a well capitalized
institution for regulatory capital purposes.
As a result of the changes in the Bank's regulatory capital levels and
status, the Bank's FDIC insurance premium increased to an annual rate of 0.30%
of deposits beginning in the first quarter of 1999 from its prior level of 0.09%
and its supervisory audit costs will increase by approximately $200,000 in 1999.
3
RETAIL FINANCIAL SERVICES
Fidelity operates in Southern California through a network of 37
full-service branches which are located throughout three counties, but are
concentrated in Los Angeles and Orange counties. Fidelity also maintains one
full-service branch located in Bloomington, Minnesota in the MOA. Average
deposits at the Bank's Southern California branches are $80 million. Deposits at
22 of the branches exceed $60 million, with seven of these branches having
deposits in excess of $100 million.
DEPOSITS
As is typical for a thrift, the Bank has relied heavily on certificates of
deposit ("CDs") to provide the bulk of its funding. At December 31, 1998, the
composition of deposits are 17% transaction accounts and 83% CDs. All the $2.9
billion of deposits were gathered through the branch system as the Bank has no
brokered CDs.
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 1% to 5%. 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 of $108 million, 98% of which were in CDs in excess of $100,000. This also
resulted in a reduction of the Bank's cost of deposits from 4.78% at September
30, 1998 to 4.53% at December 31, 1998. During 1999, the Bank intends to
continue to employ its various pricing strategies to meet its deposit level
goals.
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 certificate of deposit 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 FDIC-insured and
non-insured products. Additionally, the Company conducts a needs assessment of
each client to determine the appropriate product solution for his or her
particular requirements.
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, 1998, total sales of investment products were
$180.7 million, $159.8 million, $118.1 million, $89.8 million and $112.4
million, respectively.
During the fourth quarter, the Bank replaced the 37 branch automated teller
machines ("ATMs") with the latest release of Diebold 1072ix machines. The Bank
currently processes over 1.2 million ATM transactions per year and approximately
30% of these transactions are for non-deposit customers of Fidelity.
4
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 card and auto loans. In the third quarter of 1998, the Bank also began
operations to acquire or originate non-conforming mortgage loans.
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
support systems. Underwriting was primarily based on Fair Isaac Company ("FICO")
credit scoring methodology. At December 31, 1998 and 1997, the Banks portfolio
of credit card loans totaled $350.1 million and $50.8 million, respectively.
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 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. 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.
In October 1998, the Bank terminated its agreement with MMG and no new
accounts have been originated under the MMG program since August 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. During the fourth quarter of 1998, the Bank also ceased originating
credit cards under the FAMCO and Renzi programs. Currently, the Bank is only
originating credit card accounts under the Direct Furniture program.
5
Under the Bank's agreement with ADC, the Bank stopped originating new
accounts under the ADC program in the first quarter of 1999, ADC was relieved of
its obligations to pay for further credit losses, the Bank received all of the
revenues from the ADC program beginning November 1, 1998 and the remaining
balances in the cash reserve account were transferred to the Bank. In addition,
ADC continued to provide collection services for the portfolio through March 31,
1999 and ADC or its nominee had the right to purchase all outstanding balances
and accounts at a formula price through March 31, 1999. Because the Bank will
now receive all of the interest income from the ADC credit card portfolio, the
Bank's yield on the ADC credit card portfolio is expected to increase s
ignificantly in 1999.
During the third quarter of 1998, the Bank established a non-conforming
mortgage loan division to acquire and originate non-conforming mortgage loans.
In the first quarter of 1999, Fidelity began offering its own conforming and
non-conforming mortgage loan products while continuing to offer the products of
third parties. At this time, Fidelity's mortgage loan products consist of fixed
rate fully amortizing 15 and 30 year first mortgages. The Bank anticipates
offering its own adjustable rate first mortgages and fixed and adjustable rate
second mortgages and home equity lines of credit in the future.
At December 31, 1999 the Bank's portfolio of non-conforming mortgage loans
totaled $40 million. These loans are expected to experience higher levels of
delinquencies and credit losses than the Bank's current mortgage loan portfolio;
however, these loans are expected to provide a higher risk adjusted yield.
Beginning in the fourth quarter of 1997, the Bank started a program which
utilized a marketer to generate applications for an auto loan program. Theses
loans were primarily used to finance the purchase of used autos from auto
dealers. During the fourth quarter of 1998, the Bank discontinued the auto loan
program.
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.
LOAN SERVICING
Servicing of the Bank's loan portfolio is performed by the Company or
contract servicers. The Bank services the multifamily mortgage loan portfolio,
which is almost exclusively located in California, the commercial and industrial
mortgage loan portfolio and the nonconforming residential mortgage portfolio.
The Bank's credit card portfolio is serviced by BPCS, the credit card marketers
or unaffiliated credit card servicers. The Bank contracts with outside companies
for servicing of the Bank's conforming single family mortgage loan portfolio,
home equity loans and auto loans. In 1996, the Bank sold the servicing rights to
substantially all of the then existing single family and 2 to 4 unit loans. In
the future, servicing of new originations may be retained by the Bank.
MORTGAGE LOAN PORTFOLIO
The Bank's Loan Servicing Department is responsible for collecting payments
from borrowers, accounting of principal and interest, contacting delinquent
borrowers, and conducting foreclosure proceedings. The Bank tracks and 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 place insurance on the property in the event the borrower's coverage
lapses.
6
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 computer-based 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, cashiering,
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,
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.
CONSUMER LOAN PORTFOLIO
The Bank's credit card portfolios are serviced by BPCS, the related
marketers or unaffiliated third party processors. BPCS, which operates the
Company's credit card servicing center located in Beaverton, Oregon, began
operations during the second quarter of 1998. BPCS currently provides customer
service for the MMG, Direct Furniture and Renzi credit card portfolios, and
provides collection services for the MMG and Renzi credit card portfolios.
Collection services for the ADC and Direct Furniture credit card portfolios are
performed by the related marketer. An unaffiliated third party servicer provides
customer service for the ADC credit card portfolio. FAMCO provides both customer
service and collection services for the FAMCO credit card portfolio. Beginning
April 1, 1999, BPCS will provide customer service and collection services for
the ADC credit card portfolio.
7
The Bank's auto loans and home equity loans are serviced by companies with
specialized expertise in servicing these loan products. These servicers are
responsible for customer and collection services, repossession or foreclosure
actions and the disposition of repossessed autos or foreclosed property. These
servicers remit collections to the Bank and provide periodic reporting on the
related portfolios.
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 and to isolate potential problem areas that may
exhibit adverse trends.
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 relevant laws and
regulations.
The Bank considers such risk factors as payment history, collateral value,
income property cash flow, property condition, and the borrower's financial
capacity and property management experience in its monitoring and risk grading
process.
LOAN GRADING SYSTEM
The Bank has a loan grading policy which is implemented through a loan
grading system ("LGS"). The evaluation of each loan is based on four key risk
attributes: (1) ability of income from the property to act as the primary source
of repayment, (2) value of the collateral if a sale is required, (3) 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.
Credit risk is graded based on the Bank's internal asset review policies
and procedures, and individual loans are categorized as Pass, Special Mention,
Substandard, Doubtful or Loss depending on the risk characteristics of each
loan. All such grading requires the application of 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.
8
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
reserve is not warranted. A Loss classification does not mean that an asset has
absolutely no recovery or salvage value; rather it means that it is not
practical or desirable to defer establishing a specific allowance for a
basically worthless asset even though partial recovery may be effected in the
future. The Bank will generally classify as Loss the portion of assets
identified as exceeding the asset's fair market value and a specific reserve is
established for such excess.
INVESTMENTS
The Company's investment activities have 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. Securities held in a trading portfolio consist
primarily of agency 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, 1998, 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 agency MBS, treasuries
and collateralized mortgage obligations ("CMO"). At December 31, 1998, the
Company had $494.9 million in its AFS and held to maturity portfolios.
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 agency MBS, treasuries, federal funds sold and whole loan investment
repurchase agreements. At December 31, 1998, the Company had cash and cash
equivalents of $ 380.5 million.
BORROWINGS
In addition to retail deposits, the Company obtains funding from Federal
Home Loan Bank ("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.
9
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 20% of total assets. Based on the total collateral pledged as of
December 31, 1998, Fidelity's remaining available FHLB line of credit was $77.0
million.
The Company has previously utilized the capital markets to obtain funds for
its operations. The only such borrowing outstanding during 1997 was an 8.50%
mortgage-backed medium-term note, Series A, due April 15, 1997 (the "MTN"). The
Bank retired its $100 million mortgage-backed bonds on April 15, 1997. The funds
were replaced with FHLB advances.
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 Stock, Series A
(the "Preferred Stock") issued by Fidelity in 1995. Holders of approximately
11,000 shares of the Series A Preferred Stock 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, 1998 and 1997.
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. There
were no reverse repurchase agreements outstanding at December 31, 1998 or 1997.
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 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 multi-family residences. In
both 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. Partly because of the competition
in Southern California and in lending to customers with higher credit quality,
the Company has expanded its origination activities beyond its local market and
to customers with lower credit quality. This has put the Company in competition
with local, regional and national companies for lending opportunities. 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 certificates of deposit 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 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.
10
EMPLOYEES
At December 31, 1998, the Company had 876 employees (including both
full-time and part-time employees) with 722 average full-time equivalent
employees ("FTEs") for the 1998 year and 820 FTEs for the month of December
1998, 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 relations with
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.
REGULATION AND SUPERVISION
GENERAL
Bank Plus is a savings and loan holding company and, as such, is subject to
the Office of Thrift Supervision (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 Federal Deposit Insurance Corporation (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, additional insurance premium assessments to recapitalize the SAIF or
the application of the risk-based insurance premium system to Fidelity, may
increase Fidelity's operating expenses in future periods and may have a material
adverse impact on Fidelity's capital levels and results of operations.
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. See
"--Fidelity Regulation--Activities Regulation Not Related to Capital
Compliance."
11
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.
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.
12
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.
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, which recently have been decreasing generally, will
continue to affect the risk-weighting of such grandfathered multifamily loans
unless such loans qualify for 50% risk-weighting under the criteria of the new
rule, which criteria do not include an occupancy requirement.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the OTS was required to revise its risk-based capital standards to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and risks of nontraditional activities. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
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% would be
required to deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2% multiplied by the estimated economic value of the
bank's assets. That dollar amount would be deducted from a bank's total capital
in calculating compliance with its risk-based capital requirement. Under the
rule, there is a lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that data.
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, 1998 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.
13
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).
An institution whose capital does not meet the amounts required in order to
be adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0% total capital
to risk-weighted assets, 3.0% core capital to risk-weighted assets, or 3.0% core
capital to adjusted 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%. At December 31, 1998,
the Bank was adequately capitalized. See Item 7. "MD&A--Regulatory Capital
Compliance."
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.
14
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.
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.
15
In addition, 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.
During the third quarter of 1998, the OTS completed its annual safety and
soundness examination and the Company has addressed the OTS' recommendations.
See Item 7. "MD&A--Recent Developments--Regulatory Capital and Supervision."
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.
16
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 family 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. Currently, 30 days' prior notice
to the OTS of any capital distribution is required.
The OTS has promulgated a "safe-harbor" regulation that permits capital
distributions of certain amounts after providing notice to the OTS, but without
prior approval. Institutions can distribute amounts in excess of the safe harbor
only with the prior approval of the OTS. For institutions ("Tier 1
institutions") that meet their fully phased-in capital requirements (the
requirements that will apply when the phase-out of supervisory goodwill and
investments in certain subsidiaries from capital is complete), the safe harbor
amount is the greater of (a) 75% of net income for the prior four quarters, or
(b) the sum of (1) the current year's net income and (2) the amount that would
reduce the excess of the institution's total capital to risk-weighted assets
ratio over 8% to one-half of such excess at the beginning of the year in which
the dividend is paid. For institutions that meet their current minimum capital
requirements but do not meet their fully phased-in requirements ("Tier 2
institutions"), the safe harbor distribution is 75% of net income for the prior
four quarters reduced by prior distributions during the period. Savings
institutions that do not meet their current minimum capital requirements before,
or on a pro forma basis after giving effect to a proposed distribution, ("Tier 3
institutions") may not make any capital distributions, with certain exceptions.
At December 31, 1998, Fidelity was a Tier 2 institution.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the
distribution would constitute an unsafe or unsound practice. The OTS also may
reclassify a Tier 1 institution as a Tier 2 or Tier 3 institution by notifying
the institution that it is in need of more than normal supervision. Further, an
adequately capitalized institution may not make a capital distribution if such
payment would cause the institution to become undercapitalized.
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.
17
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. Fidelity's average regulatory
liquidity ratio for the fourth quarter of 1998 was 18.40%, and accordingly
Fidelity was in compliance with the liquidity requirement. 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. See "--Credit Administration--Loan Monitoring."
Assets are classified as "pass", "special mention", "substandard",
"doubtful" or "loss." An asset which possesses no apparent weakness or
deficiency is designated "satisfactory". An asset which possesses weaknesses or
deficiencies deserving close attention is designated as "special mention". An
asset, or a portion thereof, is generally classified as "substandard" if it
possesses a well-defined weakness which could jeopardize the timely liquidation
of the asset or realization of the collateral at the asset's book value. Thus,
these assets are characterized by the possibility that the institution will
sustain some loss if the deficiencies are not corrected. An asset, or portion
thereof, is classified as "doubtful" if a probable loss of principal and/or
interest exists but the amount of the loss, if any, is subject to the outcome of
future events which are indeterminable at the time of classification. If an
asset, or portion thereof, is classified as "loss", the institution must either
establish SVAs equal to the amount classified as loss or charge off such amount.
FIDELITY--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.
18
Legislation was enacted on September 30, 1996 to address the disparity in
bank and thrift deposit insurance premiums. Such legislation imposed a
requirement on all SAIF member institutions to fully recapitalize the SAIF by
paying a one-time special assessment of approximately 65.7 basis points on all
assessable deposits as of March 31, 1995. This one-time special assessment of
65.7 basis points resulted in the Bank recording $18.0 million in additional
SAIF premiums. This 1996 legislation also 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 Bank Insurance Fund
("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 or, if earlier, the date
on which the last Federal Savings Association ceases to exist. Under these
provisions, SAIF deposits will be assessed at five times the rate at which BIF
deposits will be assessed. Currently, the SAIF assessment for purposes of paying
FICO Debt interest is 0.0610%. The issue of whether to extend the December 31,
1999, date for an additional three years has been raised in connection with
pending federal banking legislation. It is not possible to predict what federal
legislation, if any, may be enacted on this, or any other, subject affecting the
Bank, Bank Plus, or any affiliate thereof. As of December 31, 1998, the Bank's
core and risk-based capital ratios are 4.36% and 8.95%, respectively, and the
Bank is adequately capitalized under the PCA regulations.
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.
REGULATION OF FIDELITY AFFILIATES
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.
19
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.
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.
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."
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, 1998, Fidelity was in compliance with this requirement with an
investment in the stock of the FHLB of San Francisco of $65.4 million. Long-term
FHLB advances may be obtained only for the purpose of providing funds for
residential housing finance and all FHLB advances must be secured by specific
types of collateral.
20
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, 1998, Fidelity was required
to maintain $8.9 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.
As a creditor and a financial institution, Fidelity is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation B
(Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including Fidelity, may be subject to
potential liability under various statutes and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property. See "--Non-Banking Regulation."
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.
21
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.
GATEWAY
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).
22
On December 31, 1998, Fidelity owned 13 of its branch facilities and leased
the remaining 25 of its branch facilities under leases with terms (including
optional extension periods) expiring from 1999 through 2030. All owned and
leased office facilities are located in southern California with the exception
of the leased space for the a branch located in Bloomington, Minnesota and the
credit processing center located in Beaverton, Oregon. The amount of office
space, either leased or owned, is sufficient to meet the Company's anticipated
facilities requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Bank's previously reported litigation with ADC entitled AMERICAN DIRECT
CREDIT, LLC, A NEVADA LIMITED LIABILITY COMPANY, PLAINTIFF v. FIDELITY FEDERAL
BANK, A FEDERAL SAVINGS BANK, DEFENDANT, in the United States District Court,
for the District of Idaho, Civil Case No. 98-0391-BLW was settled as of October
30, 1998 by providing for an orderly termination of the contract between the
Bank and ADC. All documents necessary to effect this settlement between the Bank
and ADC have been executed by the parties and a dismissal with prejudice of
ADC's case was entered by the Court on March 9, 1999.
Under the settlement, ADC was permitted a limited right for a litmited time
to originate further credit card accounts, subject to more stringent credit
underwriting standards, after which no further credit cards would be issued. The
settlement agreement further provided that ADC could purchase the existing
credit card portfolio through March 31, 1999 based upon a specified formula
price. Until March 31, 1999, ADC would provide certain collection services. By
March 31, 1999 all continuing relationships with ADC will be terminated, except
for certain defined obligations to indemnify against third-party claims. To date
ADC has not presented a purchase offer for the portfolio.
Included in ADC's indemnification undertakings is its obligation to provide
a defense to the Bank and Bank Plus in a series of consumer lawsuits pending in
the State of Alabama, including two purported class actions, and to indemnify
the Bank and Bank Plus for any adverse judgment flowing from the same. The
plaintiffs in the Alabama litigation allege, generally, that misrepresentations
were made to them in connection with their purchases of various appliances and
other consumer items, including misrepresentations with respect to the nature
and cost of financing the same through credit cards issued by the Bank. The Bank
believes that it has substantial legal defenses to these claims inasmuch as it
did not control, direct or otherwise have any dealings with the sales people who
supposedly made such misrepresentations. While ADC is currently performing upon
its contractual obligations to provide a defense to the Bank in this litigation,
uncertainty exists as to its financial ability to continue to do so through the
course of the Alabama litigation and to perform upon its indemnification
obligations, if needed, in light of the termination of the agreement between the
Bank and ADC and ADC's apparent inability to date to enter into a similar
agreement with another financial institution.
In November 1997, the Bank entered into a credit card marketing
relationship with MMG. MMG was to solicit members of certain agreed-upon
affinity groups to become credit card holders. The Bank was to provide servicing
and other related functions. MMG and the Bank were to share equally in program
profits and losses. In late summer of 1998, disputes arose between the parties.
The Bank asserted that MMG had improperly induced it to enter into the contract
relationship by material misrepresentation to market to that group. The Bank
further asserted that MMG had breached its contract by, among other things,
engaging in regulatory violations and by engaging in conduct which violated
certain rules pertaining to MasterCard issuance.
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, and in October 1998 the Bank reasserted MMG's defaults and
terminated the MMG contract. Thereafter, MMG filed an Original Petition and
Request for Injunctive Relief in the County Court at Law No. 5, Dallas County,
Texas entitled MMG DIRECT, INC., PLAINTIFF v. FIDELITY FEDERAL BANK, FSB,
DEFENDANT, Case No. 98-10086-E (the "MMG DIRECT, INC. case"). This lawsuit
purports to state a number of claims, including fraud in the inducement, breach
of contract, common law fraud, negligent misrepresentation, accounting and
constructive trust and seeks injunctive relief and damages based upon various
asserted misrepresentations and omissions and failures to perform and breaches
of contract attributed to the Bank. The Bank removed this case to the United
States District Court and filed a motion to dismiss. Recently, following certain
discovery requested by MMG, the Bank renewed its motion to dismiss and filed, in
the alternative, a motion to stay. Briefing has not yet been concluded and the
Court has not ruled on the Bank's renewed motion to dismiss or alternate motion
to stay.
23
Thereafter, MMG filed a third-party claim against the Bank in a case
brought by one of its purported creditors. That suit is entitled TIM MCCARTHY
ADVERTISING, INC., PLAINTIFF v. MMG DIRECT, INC., DEFENDANT; MMG DIRECT, INC.
THIRD-PARTY PLAINTIFF v. FIDELITY FEDERAL BANK, FSB, THIRD-PARTY DEFENDANT, No.
98-11717-E in the County Court at Law No. 5, Dallas County, Texas (the "MCCARTHY
case"). In this lawsuit MMG asserted that the Bank was obligated to indemnify
MMG against McCarthy's claims under partnership and other theories. The Bank
moved to stay MMG's third-party complaint pending arbitration. The Court granted
the Bank's stay motion. MMG moved for reconsideration and its motion was denied
by the Court on March 24, 1999.
In light of MMG's attempts to avoid arbitration, and to instead litigate in
the Texas courts, the Bank filed a petition to compel arbitration and an
accompanying motion to compel arbitration. The petition and motion were filed in
the United States District Court, Central District of California, Western
Division, Case No. 99-00589-TJH(SHx), under the caption FIDELITY FEDERAL BANK,
FSB, A CALIFORNIA FEDERAL SAVINGS BANK, PLAINTIFF v. MMG DIRECT, INC., A
DELAWARE CORPORATION, DEFENDANT (the "FIDELITY FEDERAL case"). MMG opposed and
filed a motion to dismiss. On March 18, 1999 the Court denied MMG's motion to
dismiss and granted the Bank's motion to compel arbitration.
On March 15, 1999 MMG filed a third-party petition against the Bank filed
in the District Court, 116th Judicial district, Dallas County, Texas, Cause No.
DV-99-01269, entitled REVELATION CORPORATION OF AMERICA, PLAINTIFF V. MMG
DIRECT, INC., DEFENDANT AND THIRD PARTY PLAINTIFF V. FIDELITY FEDERAL BANK, FSB,
THIRD PARTY DEFENDANT (the "REVELATION case"). The allegations in MMG's
third-party petition in this action mirror many of the allegations and claims in
the MMG DIRECT, INC. case, although several of those allegations have been
modified and expanded.
The Bank has recently amended its original arbitration petition to update
and more comprehensively state its claims against MMG. The Bank believes that
MMG's attempts to avoid arbitration are lacking in merit, because those attempts
have been rejected in the McCARTHY case via both the granting by the Court of
the Bank's motion to stay and the denial by the Court of MMG's motion for
reconsideration and in the FIDELITY FEDERAL case through the denial of MMG's
motion to dismiss and the granting of the Bank's motion to compel arbitration.
The Bank believes that the actions of these two Courts should be helpful to the
Bank in persuading the Court in the MMG DIRECT, INC. case and the REVELATION
case that MMG is obligated to arbitrate any claims against the Bank in Los
Angeles, California and may not escape its obligation to do so. The Bank intends
to vigorously pursue its claims against MMG and further believes that the claims
asserted by MMG against the Bank in the Texas litigations and any further such
claims as MMG may assert in any forum, including arbitration, are without merit.
The Bank's contract claims against MMG currently exceed $18 million and are
expected to increase with the passage of time.
The Company believes that all of the litigation instituted in the Texas
courts by MMG violates MMG's obligation to arbitrate.
On March 12, 1999, an action, Case No. BC206945, was filed against the Bank
in the Superior Court of the State of California for the County of Los Angeles.
The case is entitled CHOICE ONE FINANCE CORP., PLAINTIFF, v. FIDELITY FEDERAL
BANK, FSB, AND DOES 1 THROUGH 50 INCLUSIVE, DEFENDANTS. This action alleges that
the Bank breached its contract with the plaintiff and negligently interfered
with contracts that the plaintiff had entered into with third parties. In
addition the complaint has a claim for negligent misrepresentation. The
complaint has not yet been served on the Bank. The Bank disputes the claims set
forth in the complaint. The Bank intends to defend vigorously the asserted
claims.
24
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. 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 10-Q for the second quarter) through September 22, 1998
(when the Company issued a press release concerning its credit card losses).
Recently, 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,. 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. The
complaint has not yet been served on the Company. It is the Company's view that
certain of the claims asserted in the complaint are legally deficient and that
none of the claims asserted by the plaintiff are well grounded factually. The
Company believes that the claims are meritless and intends to vigorously defend
itself.
The Bank was named a defendant in several individual and class actions
brought by several borrowers which raise claims with respect to the manner in
which the Bank serviced certain adjustable rate mortgages which were originated
during the period 1983 through 1988. Six actions were filed between July 1992
and February 1995, one in Federal District Court and five in California Superior
Court. In the federal case the Bank won a summary judgment in the District
Court. This judgment was appealed and the Ninth Circuit Court of Appeals
affirmed in part, reversed in part and remanded back to the District Court for
further proceedings. The District Court has ruled in favor of certifying a class
in that action. Three of the California Superior Court cases resulted in final
judgments in favor of the Bank, after the plaintiffs unsuccessfully appealed the
trial court judgments in favor of the Bank. The other two cases have been
dismissed. The plaintiffs' principal claim in these actions is that the Bank
selected an inappropriate review date to consult the index upon which the rate
adjustment is based that was one or two months earlier than what was required
under the notes. In a declining interest rate environment, the lag effect of an
earlier review date defers the benefit to the borrower of such decline, and the
reverse would be true in a rising interest rate environment. The Bank strongly
disputes these contentions and is vigorously defending the remaining suit. The
parties are in settlement negotiations but no assurances can be given regarding
the outcome of such negotiations.
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.
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's management and its counsel believe 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
25
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
--------- ---------
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
1997:
Fourth quarter..............................$ 13.69 $ 11.06
Third quarter............................... 13.25 10.75
Second quarter.............................. 11.50 9.63
First quarter .............................. 13.75 10.38
HOLDERS OF RECORD
The number of holders of record of the Company's Common Stock at March 12,
1999 was 811.
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 restrictions. See "Business--Regulation and Supervision--Fidelity
Regulation--Activities Regulation Not Related to Capital Compliance" and
"--Regulation of Fidelity Affiliates."
26
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,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Total assets............................... $ 3,712,059 $ 4,167,806 $ 3,330,290 $ 3,299,444 $ 3,709,838
Total loans, net........................... 2,665,576 2,823,577 2,691,931 2,935,116 3,288,303
Deposits................................... 2,922,531 2,891,801 2,495,933 2,600,869 2,697,272
FHLB advances.............................. 585,000 1,009,960 449,851 292,700 332,700
Senior Notes............................... 51,478 51,478 -- -- --
Other borrowings........................... -- -- 140,000 150,000 500,000
Preferred stock............................ 272 272 51,750 51,750 --
Common stockholders' equity................ 127,388 181,345 161,657 177,293 156,547
Stockholders' equity per common share (1).. 6.55 9.36 8.86 9.72 24.11
Common shares outstanding (1).............. 19,434,043 19,367,215 18,245,265 18,242,465 6,492,465
OPERATING DATA:
Interest income............................ $ 300,347 $ 255,007 $ 237,913 $ 246,477 $ 241,465
Interest expense........................... 209,204 174,009 152,623 174,836 155,828
Net interest income........................ 91,143 80,998 85,290 71,641 85,637
Provision for estimated loan losses (3).... 73,032 13,004 15,610 69,724 65,559
Noninterest income (expense)............... 34,418 3,890 2,246 11,062 (7,793)
Operating expense (4)...................... 104,959 63,096 82,451 81,954 157,253
(Loss) earnings before income taxes........ (52,430) 8,788 (10,525) (68,975) (144,968)
Net (loss) earnings........................ (56,328) 12,653 (14,089) (68,979) (128,444)
Net (loss) earnings available for common
Stockholders (56,328) 12,653 (15,642) (68,979) (128,444)
(Loss) Earnings Per Share (1)(2):
Basic.................................... (2.90) 0.67 (0.86) (8.84) (39.08)
Diluted.................................. (2.90) 0.66 (0.86) (8.84) (39.08)
Weighted Average Common Shares Outstanding
(1) (2):
Basic.................................... 19,395,337 18,794,887 18,242,887 7,807,201 3,286,960
Diluted.................................. 19,395,337 19,143,233 18,242,887 7,807,201 3,286,960
SELECTED OPERATING RATIOS:
(Loss) return on average assets............ (1.32)% 0.35% (0.42)% (1.92)% (3.17)%
(Loss) return on average equity............ (33.71)% 7.43% (7.01)% (42.31)% (83.00)%
Average equity divided by average assets... 3.92% 4.67% 6.71% 4.54% 3.82%
Ending equity divided by ending assets..... 3.43% 4.35% 4.85% 6.94% 4.22%
Operating expense to average assets (5).... 2.46% 1.73% 1.94% 2.28% 2.27%
Efficiency ratio (6)....................... 76.10% 67.46% 67.77% 89.81% 97.58%
Yield on interest-earning assets........... 7.30% 7.16% 7.29% 7.04% 6.27%
Cost of interest bearing liabilities....... 5.16% 5.11% 4.98% 5.15% 4.03%
Net yield on interest-earning assets....... 2.22% 2.27% 2.63% 2.05% 2.22%
ASSET QUALITY DATA:
NPAs (7)................................... $ 23,304 $ 25,367 $ 60,788 $ 71,431 $ 85,729
NPAs to total assets....................... 0.63% 0.61% 1.83% 2.16% 2.31%
Nonaccruing loans ("NPLs")................. $ 14,372 $ 13,074 $ 36,125 $ 51,910 $ 71,614
NPLs to total loans, net................... 0.54% 0.46% 1.34% 1.77% 2.18%
Classified assets.......................... $ 133,085 $ 153,502 $ 174,096 219,077 $ 141,536
Classified assets to total assets.......... 3.59% 3.68% 5.23% 6.64% 3.82%
Total allowance for estimated losses....... $ 109,198 $ 55,993 $ 59,589 $ 92,927 $ 69,520
Total allowance for estimated losses to
net classified assets.................... 82.05% 36.48% 34.23% 42.42% 49.12%
(CONTINUED)
27
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
REGULATORY CAPITAL RATIOS:
Tangible capital ratio..................... 4.36% 5.26% 6.28% 6.91% 4.28%
Core capital ratio......................... 4.36% 5.26% 6.29% 6.92% 4.29%
Risk-based capital ratio................... 8.95% 11.57% 11.85% 12.43% 8.28%
OTHER DATA:
Sales of investment products............... $ 180,660 $ 159,791 $ 118,061 $ 89,824 $ 112,430
Real estate loans funded................... $ 138,991 $ 233,107 $ 13,859 $ 19,396 $ 521,580
Number of:
Real estate loan accounts (in thousands). 11 12 11 12 14
Deposit accounts (in thousands).......... 198 205 194 207 216
(1) On February 9, 1996, the Bank's stockholders approved a four-for-one
reverse stock split. All per share data and weighted average common shares
outstanding have been retroactively adjusted to reflect this change.
(2) For the periods prior to August 4, 1994, Fidelity's one share owned by
Citadel Holding Corporation ("Citadel"), its former holding company and
sole stockholder, has been retroactively reclassified into 1,050,561 shares
of Common Stock.
(3) Provision for estimated loan losses in 1994 and 1995 include significant
provisions related to the resolution of assets in the Bank's multifamily
loan portfolio. In 1998, the provision for estimated loan losses increased
significantly due to credit losses in the Bank's credit card loan
portfolio.
(4) Operating expenses in 1995 included a restructuring and recapitalization
charge of $65.4 million. In 1996, the Bank paid a $18.0 million SAIF
special assessment. In 1998, the Company incurred $20.2 million of
operating expenses related to the servicing of the credit card portfolio.
(5) Excludes the impact of the 1996 SAIF special assessment and the 1994
restructuring and recapitalization charges.
(6) The efficiency ratio is computed by dividing total operating expense by net
interest income and noninterest income, excluding infrequent items,
provisions for estimated loan and real estate losses, direct costs of real
estate operations and gains/losses on the sale and writedown of securities.
(7) Nonperforming assets ("NPAs") include NPLs and foreclosed real estate, net
of SVAs and REO valuation allowances, if any.
28
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", "plans" 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 its subsidiaries 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;
restrictions imposed on the Bank's operations by regulators such as a
prohibition on the payment of dividends to Bank Plus; an increase in the number
of customers seeking protection under the bankruptcy laws which increases the
amount of charge-offs; the effects of fraud by third parties or customers; the
effectiveness of the Company's credit card collection efforts; and the outcome
of pending and future litigation. 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 a net loss of $56.3 million for the year ended
December 31, 1998, as compared to net earnings of $12.7 million for the year
ended December 31, 1997. During 1998, the Company recorded a provision for
estimated loan losses of $73.0 million and incurred operating expenses of $105.0
million. Increasing delinquencies and charge-offs in the credit card loan
portfolio were the primary causes for the significant increase in the provision
for estimated loan losses. Operating expenses, which increased $41.9 million for
the year as compared to the corresponding 1997 period, were higher primarily due
to costs associated with the Bank's credit card programs and other business
initiatives.
For the year ended December 31, 1997, the Company reported net earnings of
$12.7 million as compared to a net loss of $15.6 million for the year ended
December 31, 1996. During 1997, the Company incurred operating expenses of $63.1
million, a $19.4 million reduction from 1996, and recorded $8.1 million of
income tax benefits. The reduction in operating expenses primarily related to
lower FDIC insurance costs resulting from the special one-time SAIF
recapitalization payment of $18.0 million in the third quarter of 1996.
29
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.
CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
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...................... $2,665,050 $198,724 7.46% $2,797,556 $ 204,252 7.30% $2,901,908 $ 213,013 7.34%
Credit card loans.......... 205,921 26,305 12.77 12,637 1,023 8.10 -- -- --
MBS........................ 701,961 43,305 6.17 429,483 29,435 6.85 78,242 5,772 7.38
Investment securities...... 477,965 28,313 5.92 263,573 16,822 6.38 233,797 16,056 6.87
Investment in FHLB stock... 62,985 3,700 5.87 55,129 3,475 6.30 50,976 3,072 6.03
----------- ---------- ----------- ---------- ----------- ----------
Total interest-earning
assets................. 4,113,882 300,347 7.30 3,558,378 255,007 7.16 3,264,923 237,913 7.29
---------- ---------- ----------
Noninterest-earning assets... 144,742 88,119 57,351
----------- ----------- -----------
Total assets................. $4,258,624 $3,646,497 $3,322,274
=========== =========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits.......... $ 351,250 4,161 1.18 $ 282,886 3,451 1.22 $ 298,287 3,098 1.04
Savings deposits......... 122,662 3,630 2.96 112,904 3,678 3.26 137,885 3,743 2.71
Time deposits............ 2,520,706 137,229 5.39 2,246,770 119,588 5.29 2,103,369 113,424 5.38
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total deposits......... 2,994,618 145,020 4.84 2,642,560 126,717 4.80 2,539,541 120,265 4.72
Borrowings................. 1,056,866 64,184 6.07 764,350 47,292 6.19 515,435 32,358 6.26
----------- ---------- ----------- ---------- ----------- ----------
Total interest-bearing
liabilities............ 4,051,484 209,204 5.16 3,406,910 174,009 5.11 3,054,976 152,623 4.98
---------- ---------- ----------
Noninterest-bearing
liabilities................ 39,793 40,621 44,251
Preferred stock issued by
consolidated subsidiary.... 272 28,640 51,750
Stockholders' equity......... 167,075 170,326 171,297
----------- ----------- -----------
Total liabilities and equity. $4,258,624 $3,646,497 $3,322,274
=========== =========== ===========
Net interest income;
interest rate spread....... $ 91,143 2.14% $ 80,998 2.05% $ 85,290 2.31%
========== ======= ========== ======= ========== =======
Net yield on interest
earning assets............. 2.22% 2.27% 2.63%
======= ======= =======
Average NPL balance included
in average loan balance.... $ 21,495 $ 43,117 $ 60,364
=========== ========== ===========
Net delinquent interest removed
from interest income....... $ 1,899 $ 3,909 $ 6,018
========== ========== ==========
Reduction in net yield on
interest-earning assets
due to delinquent interest. 0.05% 0.11% 0.18%
======= ======= =======
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.
30
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, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
---------------------------------- -----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest income:
Loans.................................... $ (9,899) $ 4,371 $ (5,528) $ (7,608) $ (1,153) $ (8,761)
Credit card loans........................ 24,364 918 25,282 512 511 1,023
MBS...................................... 17,044 (3,174) 13,870 24,107 (444) 23,663
Investment securities.................... 12,782 (1,291) 11,491 1,926 (1,160) 766
Investment in FHLB stock................. 473 (248) 225 254 149 403
---------- ---------- ---------- ---------- ---------- ----------
Total interest income.................. 44,764 576 45,340 19,191 (2,097) 17,094
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits:
Demand deposits........................ (824) 114 (710) 166 (519) (353)
Savings deposits....................... (305) 353 48 746 (681) 65
Time deposits.......................... (15,273) (2,368) (17,641) (7,990) 1,826 (6,164)
---------- ---------- ---------- ---------- ---------- ----------
Total deposits...................... (16,402) (1,901) (18,303) (7,078) 626 (6,452)
Borrowings............................... (17,823) 931 (16,892) (15,301) 367 (14,934)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense................. (34,225) (970) (35,195) (22,379) 993 (21,386)
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net interest income.. $ 10,539 $ (394) $ 10,145 $ (3,188) $ (1,104) $ (4,292)
========== ========== ========== ========== ========== ==========
The $10.1 million increase in net interest income between the year ended
December 31, 1998 and the year ended December 31, 1997 reflects the 15.6%
increase in the average balance of interest-earning assets, offset by a decrease
in the net yield to 2.22% from 2.27%. The increases in the average balances of
interest-earning assets are due to increases in credit card loans and increases
in MBS and the short-term investment portfolios, which is in line with the
Company's prior plans to leverage excess capital. 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
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 and an
increase in the average balance of higher yielding credit card loans.
The $4.3 million decrease in net interest income between 1997 and 1996 was
primarily due to decreased rates on average interest-earning assets combined
with an increase in the average balance of higher cost of FHLB advances. This
was partially offset by an increase in the level of interest-earning assets and
a reduction in the cost of CDs.
The Company's net interest income, interest rate margin and operating
results have been negatively affected by the level of loans on nonaccrual
status. Gross balances of NPLs averaged $21.5 million, $43.1 million, and $60.4
million in 1998, 1997, and 1996, respectively. As a result, the Company's net
interest rate margin was decreased by 0.05%, 0.11%, and 0.18% in those years,
respectively.
31
PROVISION FOR ESTIMATED LOAN LOSSES
The increase in provisions for estimated loan losses of $60.0 million for
the year ended December 31, 1998, as compared to the corresponding period in
1997, was primarily due to increasing delinquencies and charge-offs in a rapidly
growing sub-prime credit card portfolio. Gross 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.
The decrease in provisions for estimated loan losses of $2.6 million for
the year ended December 31, 1997, as compared to the corresponding period in
1996, was primarily due to decreased mortgage loan delinquencies and lower NPAs.
While the Bank believes that the actions it has taken to significantly
reduce credit card originations will reduce future credit losses in the credit
card portfolio, no assurances can be given that these actions will have that
result. In addition, a number of other factors could have a material adverse
effect on the financial results of the credit card programs and the Company's
overall financial performance. These factors include a national or regional
economic slowdown or recession which increases the risk of defaults and credit
losses; an increase in the number of customers seeking protection under the
bankruptcy laws which increases the amount of charge-offs; the effects of fraud
by third parties or customers; the effectiveness of the Company's collection
efforts; and the financial performance of the Bank's remaining credit card
marketers, which may impact their ability to fulfill their contractual financial
obligations which may result in increased losses to the Bank.
NONINTEREST INCOME (EXPENSE)
The following table presents noninterest income (expense) for the periods
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
(Dollars in thousands)
Loan fee income........................................... $ 3,255 $ 2,076 $ 2,295
Credit card fees.......................................... 21,414 45 --
Fee income from the sale of uninsured investment products. 7,019 5,959 4,456
Fee income from deposits and other fee income............. 3,331 3,365 3,044
(Losses) gains on securities and trading activities, net.. (860) (2,168) 1,336
Fee income on ATM cash services........................... 3,375 1,049 --
Other income (expense).................................... (481) 37 22
Real estate operations, net............................... (2,635) (6,473) (8,907)
----------- ----------- ----------
Total noninterest income................................ $ 34,418 $ 3,890 $ 2,246
=========== =========== ==========
Noninterest income increased by $30.5 million to $34.4 million for the year
ended December 31, 1998 from $3.9 million for the year ended December 31, 1997.
Included in credit card fees, which increased $21.4 million in 1998, are
origination and annual fees net of origination costs which are deferred and
amortized into income over a 12 month period, interchange fees, late payment
fees and other ancillary fees. Credit card origination cost represent marketing
fees paid to MMG to originate cards under the MMG credit card program. Of the
marketing fees paid to MMG during 1998, the Bank was entitled to reimbursement
of $8.2 million related to the cancellation of previously opened credit card
accounts. However, due to the uncertainty regarding the collectibility of these
amounts, the Bank wrote off the $8.2 million against credit card fee income. In
1997 substantially all credit card fees were passed through to the credit card
marketers under the credit enhancement programs.
32
The loss on securities was $0.9 million in 1998 as compared to $2.2 million
for 1997. The 1998 activity included a loss of $4.0 million related to a hedging
program for the fixed rate MBS portfolio. 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. As a result, the $4.0 million loss was recorded,
which represented the extent to which the futures results had not been offset by
the effects of price changes on the MBS. The $4.0 million loss was offset by
gains on the sale of securities and recoveries related to past loan
securitizations.
Other components of the increase in noninterest income in 1998 from 1997
include (a) an increase in ATM cash services income of $2.3 million, which is
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; and (c) an increase in investment products and loan fee
income of $2.2 million due to a higher volume of sales of investment and loan
products for the year, $0.8 million of which were related to the CalPERS
program. 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 reduce assets for regulatory capital purposes.
Noninterest income increased by $1.7 million from $2.2 million in 1996 to
$3.9 million in 1997. The major component of this increase are (a) fee income
from sale of uninsured investment products increased by $1.5 million as a result
of increased sales, (b) fee income on deposits and other income increased by
$0.3 million primarily as a result of a higher average volume of deposit
balances in 1997 as compared to 1996, (c) net gains on securities activities in
1997 increased by $1.3 million from 1996 primarily due to increased sales, (d)
fee income on Americash increased $1.0 million as a result of cash services fees
received in 1997, with no comparable amounts in 1996 and (e) decreased real
estate operations of $2.4 million primarily due to improved execution on sales
of foreclosed properties. These favorable variances were partially offset by the
writedown of securities of $4.8 million. The writedown was based on the
significant deterioration in the credit worthiness of the borrowers of the
underlying loans collateralizing the securities.
OPERATING EXPENSES
The following table presents operating expenses for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- ----------
(Dollars in thousands)
Personnel and benefits......... $ 46,040 $ 29,564 $ 27,022
Occupancy...................... 14,591 11,647 10,353
FDIC insurance................. 2,637 2,563 24,936
Professional services.......... 16,901 11,054 11,156
Credit card servicing.......... 10,848 -- --
Office-related expenses........ 6,759 3,819 3,552
Other.......................... 7,183 4,449 5,432
----------- ----------- ----------
Total operating expense...... $ 104,959 $ 63,096 $ 82,451
=========== =========== ==========
Operating expenses increased by $41.9 million to $105.0 million for the
year ended December 31, 1998 compared to $63.1 million for the year ended
December 31, 1997. The increase in expenses was due primarily to costs
associated with the Bank's credit card programs and other business initiatives.
Servicing of the Bank's credit card programs, which is performed by third
party servicers and BPCS, increased $21.7 million in 1998 as compared to 1997.
This increase was due to the significant increase in the Bank's credit card
portfolio in 1998 and the increasing delinquencies and charge-offs in the credit
card portfolio. One of the most significant costs in servicing credit card
accounts is the collection efforts expended on delinquent accounts.
33
Several business initiatives were started late in 1997 or early 1998, which
contributed to the increase in operating expenses in 1998. The CalPERS, MOA,
Internet bank and other projects contributed $11.5 million to the increase in
operating expenses for 1998. In addition, the Year 2000 compliance project
activities and represented $3.8 million of the $5.8 million increase in 1998 in
professional services expense.
Increases in personnel and benefits, occupancy and office related expenses
were due to acquisitions, in the third quarter of 1997, of Hancock Savings Bank,
FSB ("Hancock"), a five-branch savings association, and one branch from Coast
Federal Bank, FSB ("Coast"). Increased expenses related to such acquisitions
totaled $1.1 million.
The Company has taken steps to reduce operating expenses in 1999, including
a reduction in staffing, which, along with executive management changes,
resulted in $2.1 million in severance expense in 1998.
Although the Company is currently taking steps to reduce operating
expenses, most of these reductions will not be fully effective until sometime in
1999 and these reductions will be offset by higher FDIC insurance rates,
litigation costs and increased regulatory costs.
Operating expenses decreased by $19.4 million to $63.1 million for the year
ended December 31, 1997 compared to $82.5 million (including the SAIF special
assessment of $18.0 million) for the year ended December 31, 1996. The change
was primarily due to (a) a decrease of $22.4 million of FDIC insurance costs
resulting from the special one-time recapitalization payment of $18.0 million to
the SAIF in the third quarter of 1996 and an upgrade in the Bank's assessment
classification, (b) a decrease of $1.0 million in other expenses primarily due
to lower legal settlement costs related to certain litigation. These favorable
variances were partially offset by (a) a $2.5 million increase in personnel and
benefit expense due to a 23% increase of in FTEs during 1997 primarily due to
the Hancock acquisition and the start-up of new business initiatives; (b) an
increase of $1.3 million in occupancy costs primarily due to Hancock and Coast
branch acquisitions.
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 approximately 11%.
The Company's expected combined federal and state statutory tax rate is
approximately 42.0% of earnings before income taxes. For 1998, the Company's
actual effective income tax rate was an expense of 7.4% on losses before income
taxes. This tax expense differs from the expected statutory tax benefit
primarily due to federal and state tax expense attributable to the payment of
alternative minimum tax, the establishment of additional valuation allowances
and the Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", limitations on the recognition of the deferred
tax asset attributable to the current period book losses. The effective tax
benefit rate of 92.2% on earnings before income taxes for 1997 reflects the
federal and state tax benefit attributable to the utilization of net operating
loss ("NOL") carryforwards and the partial recognition of the deferred tax asset
based on anticipated future operations.
Under SFAS No. 109, 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. As of
December 31, 1997, the Company reflected a net deferred tax asset of $8.3
million. After consideration of the Company's recent earnings history and other
available evidence, management of the Company determined that under the criteria
of SFAS No. 109 it was appropriate to reduce the allowable net deferred tax
asset to $4.9 million as of December 31, 1998.
34
The analysis of available evidence is performed each quarter utilizing the
"more likely than not" criteria required by SFAS No. 109 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. Furthermore, the criteria of SFAS No. 109 could require the recording
of additional valuation allowances against the $4.9 million net deferred tax
asset through the recording of tax expense in future periods.
Various federal Form 1120Xs "Amended U.S. Corporation Income Tax Return"
were filed in 1996 for years 1986 through 1989, 1991, 1992 and 1994 to reflect
the 10-year loss carryback under Internal Revenue Code ("IRC") Section 172(f)
for qualifying deductions through August 4, 1994. These amended tax returns were
filed with the Bank's former parent company, Citadel. Fidelity recorded $1.1
million of tax benefit in 1996 with respect to these amended tax returns. The
Internal Revenue Service (the "Service") has completed its examination of the
federal income tax returns for 1992, 1993 and tax year ended August 4, 1994 and
review of the aforementioned carryback claim. A compromise of all unagreed
issues for these years has been reached and is currently under review by the
Service's Joint Committee on Taxation.
IRC Sections 382 and 383 and the Treasury Regulations thereunder generally
provide that following an ownership change of a corporation with an NOL, a net
unrealized built-in loss or tax credit carryovers, the amount of annual
post-ownership change taxable income that can be offset by pre-ownership change
NOLs or recognized built-in losses and the amount of post-ownership change tax
liability that can be offset by pre-ownership change tax credits, cannot exceed
a limitation prescribed by IRC Section 382. This annual limitation generally
equals the product of the fair market value of the equity of the corporation
immediately before the ownership change (subject to various adjustments) and the
long-term tax-exempt rate prescribed monthly by the Service.
As a result of the 1994 restructure and recapitalization, the Bank
underwent an ownership change, ceased to be a member of the Citadel consolidated
group, and became subject to the annual limitations under IRC Section 382. As a
result of the 1995 recapitalization, the Bank again underwent an ownership
change and became subject to additional annual limitations under IRC Section
382. The limitations imposed by the 1995 change of ownership are inclusive of
the limitations imposed by the 1994 change of ownership. The measurement of
whether a change in ownership has occurred is based on changes in the holdings
of significant shareholders and on the period of time in which any changes
occur. The Company has experienced substantial changes in ownership of its
significant shareholders and further changes may create a change in ownership as
defined by IRC Section 382. If this would occur, the Company would become
subject to a new annual limitation under IRC Section 382.
Hancock was merged with and into Fidelity as of June 30, 1997 in a tax-free
reorganization within the meaning of IRC Section 368(a)(1)(A), by reason of the
application of IRC Section 368(a)(2)(D). The total net deferred tax assets of
Hancock and the related valuation allowance are included in the balances of net
deferred taxes starting as of December 31, 1997. In accordance with SFAS No.
109, any subsequent reductions in the valuation allowance associated with the
deferred tax assets of Hancock will be reflected as an adjustment to any
remaining unamortized goodwill with respect to this acquisition.
As of December 31, 1998, the Bank had an estimated NOL carryover for
federal income tax purposes of $71.7 million expiring in years 2008 through
2011. Of this amount, $59.8 million is subject to annual utilization limitations
as a result of the Bank's 1994 and 1995 changes of ownership and Hancock's
change of ownership occurring as part of its 1997 acquisition by the Bank. For
California franchise tax purposes, the Bank had an estimated NOL carryover of
$30.2 million. Of the estimated California NOL carryover, $26.6 million relates
to the Bank's operations and expire in years 1999 through 2002, and $3.6 million
relates to Hancock's NOLs expiring in years 2000 through 2009. Of the total
$30.2 million California NOL, $16.3 million is subject to annual utilization
limitations as a result of the Bank's 1995 change of ownership and Hancock's
1997 change of ownership.
Effective for taxable years beginning after 1995, legislation enacted in
1996 has repealed for federal purposes the reserve method of accounting for bad
debts for thrift institutions. While thrifts qualifying as "small banks" may
continue to use the experience method, Fidelity, deemed a "large bank," is
required to use the specific charge-off method. In addition, this enacted
legislation contains certain income recapture provisions, which are discussed
below.
35
Thrift institutions deemed "large banks" are required to include into
income ratably over 6 years, beginning with the first taxable year beginning
after 1995, the institution's "applicable excess reserves." The applicable
excess reserves are the excess of (1) the balance of the institution's reserves
for losses on loans other than supplemental reserves at the close of its last
taxable year beginning before January 1, 1996, over (2) the adjusted balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. Fidelity's applicable excess reserves at December 31, 1995 were $14.6
million. This amount is being recognized into taxable income over six years at
the rate of $2.4 million per year starting with the taxable year ended December
31, 1996. In addition, $1.5 million in Hancock excess reserves were recorded as
part of its acquisition as of June 30, 1997. This excess reserve amount is to be
recognized into income over a four-year period. The remaining applicable excess
reserves at December 31, 1998 were $8.3 million.
The remaining adjusted pre-1988 total reserve balance of $26.3 million at
December 31, 1998, 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. Based on current estimates, Fidelity had current earnings and
profits at December 31, 1998 sufficient to cover 1998 distributions to
shareholders. As a result, Fidelity did not trigger any reserve recapture into
taxable income for 1998.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Company's mortgage loan portfolio is primarily secured by assets
located in southern California and is comprised principally of single family and
multifamily (2 units or more) residential loans. At December 31, 1998, 18.1% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 11.4% and 60.7% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively. At December 31,
1997, 22.2% of Fidelity's real estate loan portfolio consisted of California
single family residences, while another 11.2% and 57.3% consisted of California
multifamily dwellings of 2 to 4 units and 5 or more units, respectively.
The Company's credit card portfolio consists primarily of sub-prime credits
with revolving credit limits ranging from $100 to $5,000. The MMG credit card
program was marketed primarily to individuals at the lower end of the credit
spectrum and charged origination fees of $249 and annual fees of $50, which were
deferred and are being amortized over a 12 month period. At December 31, 1998,
outstanding balances in the Bank's credit card portfolio were $350.1 million.
The credit card program with MMG represented $170.9 million of the outstanding
balances and the program with ADC represented $147.3 million of the outstanding
balances. At year end, the MMG and ADC programs together accounted for 91% of
the total outstanding credit card balances. At December 31, 1998, 43% of the
credit card portfolio is fixed rate, 48% adjust with the Wall Street prime rate
and 9% adjust with to LIBOR. During 1998, the actual rate charged on the credit
card accounts ranged from 15% to 25%.
36
All presentations of the total loan portfolio include loans receivable and
loans held for sale unless stated otherwise. The following table sets forth the
composition of total loans at the dates indicated:
DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
LOANS BY TYPE (DOLLARS IN THOUSANDS)
Residential loans:
Single family......................... $ 486,864 $ 638,539 $ 517,288 $ 594,019 $ 755,253
Multifamily:
2 to 4 units........................ 281,960 322,309 319,281 345,884 393,943
5 to 36 units....................... 1,220,585 1,343,597 1,408,317 1,521,056 1,612,926
37 units and over................... 247,638 308,473 307,741 329,916 345,287
------------- ------------- ------------- ------------- -------------
Total multifamily................. 1,750,183 1,974,379 2,035,339 2,196,856 2,352,156
------------- ------------- ------------- ------------- -------------
Total residential loans................. 2,237,047 2,612,918 2,552,627 2,790,875 3,107,409
------------- ------------- ------------- ------------- -------------
Other real estate loans:
Commercial & industrial............... 179,956 204,656 203,510 234,384 248,255
Land and land improvements............ 39 1,656 1,670 3,032 2,050
------------- ------------- ------------- ------------- -------------
Total other real estate loans........... 179,995 206,312 205,180 237,416 250,305
------------- ------------- ------------- ------------- -------------
Gross mortgage loans.................... 2,417,042 2,819,230 2,757,807 3,028,291 3,357,714
Credit card loans....................... 350,078 50,828 -- -- --
Other loans............................. 29,884 12,084 6,373 6,040 7,251
------------- ------------- ------------- ------------- -------------
Total loans, gross...................... 2,797,004 2,882,142 2,764,180 3,034,331 3,364,965
------------- ------------- ------------- ------------- -------------
Less:
Undisbursed loan funds................ 42 1,710 -- -- 259
Unearned (premiums) discounts, net.... (4,227) (2,722) 1,974 2,463 1,980
Deferred loan fees.................... 29,442 9,039 12,767 7,317 7,221
Allowances for estimated loan losses.. 106,171 50,538 57,508 89,435 67,202
------------- ------------- ------------- ------------- -------------
Total............................... 131,428 58,565 72,249 99,215 76,662
------------- ------------- ------------- ------------- -------------
Total loans, net........................ $ 2,665,576 $ 2,823,577 $ 2,691,931 $ 2,935,116 $ 3,288,303
============= ============= ============= ============= =============
Since 1994, when the Bank ceased its mortgage loan origination operations,
the Bank has experienced a decreasing mortgage loan portfolio. Increases in
mortgage loans have primarily consisted of limited purchases of mortgages
secured by single family and multifamily 2 to 4 unit properties. Beginning in
1997, the Bank began originating credit card loans and other consumer loans. The
increases in the deferred loan fees and allowances for estimated loan losses in
1998 primarily relate to the Bank's credit card portfolio.
37
The following table details the activity in the gross loan portfolio for
the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Principal balance at beginning of period. $ 2,882,142 $ 2,764,180 $ 3,034,331 $ 3,364,965 $ 3,807,232
Real estate loans originated:
Conventional:
Single family............................ 2,558 836 -- 3,411 238,944
Multifamily:
2 to 4 units.......................... -- -- -- 515 38,100
5 to 36 units......................... 192 7,373 1,673 4,743 68,862
37 units and over..................... 18 1,144 3,628 3,207 65,940
------------ ------------ ------------ ------------ ------------
Total multifamily................... 210 8,517 5,301 8,465 172,902
Commercial & industrial.................. 5,324 2,150 533 6,586 5,597
------------ ------------ ------------ ------------ ------------
Total real estate loans originated.... 8,092 11,503 5,834 18,462 417,443
------------ ------------ ------------ ------------ ------------
Real estate loans purchased:
Single family (1).......................... 118,955 195,333 7,444 (1,237) 100,756
Multifamily:
2 to 4 units............................. 11,744 23,749 319 -- 250
5 to 36 units............................ 50 338 -- -- 2,466
37 units and over........................ 150 2,184 -- -- 665
------------ ------------ ------------ ------------ ------------
Total multifamily..................... 11,944 26,271 319 -- 3,381
Commercial & industrial.................... -- -- 262 2,171 --
------------ ------------ ------------ ------------ ------------
Total real estate loans purchased........ 130,899 221,604 8,025 934 104,137
------------ ------------ ------------ ------------ ------------
Total real estate loans funded................ 138,991 233,107 13,859 19,396 521,580
------------ ------------ ------------ ------------ ------------
Loans sold or securitized:
Whole loans................................ (99,964) (13,516) (4,508) (123,080) (326,797)
Bulk sales................................. -- -- -- -- (341,432)
Repurchases................................ 2,512 6,842 6,577 9,850 9,072
------------ ------------ ------------ ------------ ------------
Total loans sold or securitized............... (97,452) (6,674) 2,069 (113,230) (659,157)
------------ ------------ ------------ ------------ ------------
Amortization and prepayments.................. (418,322) (236,389) (208,992) (143,989) (208,404)
Foreclosures.................................. (27,774) (75,385) (77,585) (92,661) (102,293)
Hancock loans acquired........................ -- 146,802 -- -- --
Increase in credit card loans................. 299,249 50,828 -- -- --
Other increase (decrease) in total loans, net. 20,170 5,673 498 (150) 6,007
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in total loans, net... (85,138) 117,962 (270,151) (330,634) (442,267)
------------ ------------ ------------ ------------ ------------
Principal balance at end of period............ $ 2,797,004 $ 2,882,142 $ 2,764,180 $ 3,034,331 $ 3,364,965
============ ============ ============ ============ ============
- ----------------
(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. Of the $130.9 million in net loan
purchases in 1998, $89.3 million were CRA qualifying product for which the Bank
is required to have minimum investments. Another $41.6 million in purchases
related to the nonconforming loan division of the Bank that was established in
the third quarter of 1998. Approximately $100 million in CRA product purchased
in 1997 and 1998 was sold at a gain of $0.8 million in the third quarter of
1998.
38
Of the $418.3 million in amortization and prepayments of mortgage loans in
1998, approximately $370 million was due to prepayments. Prepayments increased
in 1998 due to lower market interest rates and improving real estate prices in
Southern California.
The increase in credit card loans was primarily due to increases of $96.5
million and $170.9 million in the ADC and MMG credit card portfolios,
respectively. As a result of the discontinuance of originations under the ADC,
MMG and FAMCO programs, credit card loan balances are not expected to increase
in 1999.
The following table presents gross mortgage loans by type and location as
of December 31, 1998:
COMMERCIAL
MULTIFAMILY & INDUSTRIAL
------------------------------------- ------------------------
SINGLE 2 TO 4 5 TO 36 37 UNITS HOTEL/ OTHER
FAMILY UNITS UNITS AND OVER MOTEL C&I TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
California:
Southern California Counties:
Los Angeles.................. $ 199,825 $ 104,373 $ 886,352 $ 157,375 $ 8,444 $ 81,784 $1,438,153
Orange....................... 65,178 102,901 133,487 21,399 18,978 32,256 374,199
San Diego.................... 23,161 10,041 70,598 29,419 -- 2,527 135,746
San Bernardino/Riverside..... 41,587 18,226 43,766 17,309 -- 13,098 133,986
Ventura/other................ 34,090 12,839 47,419 9,677 2,371 7,458 113,854
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Southern California 363,841 248,380 1,181,622 235,179 29,793 137,123 2,195,938
counties........................
Northern California counties.. 72,600 27,167 38,963 11,297 1,136 5,050 156,213
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total California............. 436,441 275,547 1,220,585 246,476 30,929 142,173 2,352,151
Other states................... 50,423 6,413 -- 1,162 1,772 5,121 64,891
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross mortgage loans........... $ 486,864 $ 281,960 $1,220,585 $ 247,638 $ 32,701 $ 147,294 $2,417,042
=========== =========== =========== =========== =========== =========== ===========
The following table sets forth, by contractual maturity and loan type, the
loan portfolio at December 31, 1998. The table does not consider the prepayment
experience of the loan portfolio when scheduling the maturities of loans.
MATURES IN
---------------------------------------------------
TOTAL LOANS 2000- AFTER
RECEIVABLE 1999 2005 2005
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
Residential loans:
Single family...................... $ 486,864 $ 636 $ 5,690 $ 480,538
Multifamily:
2 to 4 units..................... 281,960 3 17,491 264,466
5 to 36 units.................... 1,220,585 868 223,792 995,925
37 units and over................ 247,638 1,045 61,433 185,160
--------------- --------------- --------------- ---------------
Total multifamily.............. 1,750,183 1,916 302,716 1,445,551
--------------- --------------- --------------- ---------------
Total residential loans........ 2,237,047 2,552 308,406 1,926,089
--------------- --------------- --------------- ---------------
Other real estate loans:
Commercial and industrial.......... 179,956 12,690 147,708 19,558
Land & land improvements........... 39 39 -- --
--------------- --------------- --------------- ---------------
Total other real estate loans.... 179,995 12,729 147,708 19,558
--------------- --------------- --------------- ---------------
Gross mortgage loans................. 2,417,042 15,281 456,114 1,945,647
--------------- --------------- --------------- ---------------
Credit card loans.................... 350,078 350,078 -- --
Other loans.......................... 29,884 4,800 17,915 7,169
--------------- --------------- --------------- ---------------
Total loans, gross................... $ 2,797,004 $ 370,159 $ 474,029 $ 1,952,816
=============== =============== =============== ===============
39
The following table sets forth, by contractual maturity and interest rate,
the fixed rate and adjustable rate mortgage loan portfolios at December 31,
1998. 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 1999 ONE YEAR SPREAD
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Adjustable rate loans:
COFI-- 1 month.................. $ 1,723,394 $ 4,666 $ 1,718,728 2.493%
COFI-- 6 month.................. 371,304 6,161 365,143 2.350%
COFI-- other.................... 9,862 203 9,659 1.897%
Treasury Bill-- 12 months....... 77,779 47 77,732 2.988%
Treasury Bill-- other........... 30,381 -- 30,381 3.126%
Other........................... 77,943 3,785 74,158 4.540%
-------------- -------------- --------------
Total adjustable rate loans.... 2,290,663 14,862 2,275,801
Fixed rate loans.................... 126,379 419 125,960
-------------- -------------- --------------
Total mortgage loans, gross......... $ 2,417,042 $ 15,281 $ 2,401,761
============== ============== ==============
TREASURY ACTIVITIES
The following table reconciles the amortized cost and aggregate fair value
of the investment securities and MBS AFS portfolios at December 31, 1998:
UNREALIZED
AMORTIZED ---------------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Investment securities:
Old Line Funding Corp. commercial paper......... $ 28,797 $ -- $ -- $ -- $ 28,797
------------ ------------ ------------ ------------ ------------
MBS:
FHLMC 3,843 -- (52) (52) 3,791
FNMA............................................ 170,506 232 (752) (520) 169,986
Government National Mortgage Association ("GNMA") 86,422 218 (84) 134 86,556
Fidelity participation certificates............. 23,055 -- -- -- 23,055
CMO:
FNMA 74,749 -- (1,998) (1,998) 72,751
Residential Funding Mortgage Securities....... 2,170 -- (91) (91) 2,079
Residential Asset Securitization Trust........ 10,237 119 -- 119 10,356
Saxon Mortgage Securities Corp................ 3,527 -- (41) (41) 3,486
------------ ------------ ------------ ------------ ------------
Total CMO................................... 90,683 119 (2,130) (2,011) 88,672
------------ ------------ ------------ ------------ ------------
Dynex financing note trust...................... 48,084 -- (332) (332) 47,752
Structured Asset Securities Corp. mortgage-backed
note 45,212 -- (14) (14) 45,198
------------ ------------ ------------ ------------ ------------
Total MBS..................................... 467,805 569 (3,364) (2,795) 465,010
------------ ------------ ------------ ------------ ------------
Total AFS.......................................... $ 496,602 $ 569 $ (3,364) $ (2,795) $ 493,807
============ ============ ============ ============ ============
The Company has in the past employed various derivative financial
instruments to hedge valuation fluctuations in its trading and AFS 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 of $3.3 million at December 31, 1998
related to the 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. Due to the
volatility of the correlation between futures on Treasury Notes and the cost of
40
a hedging program in relation to its benefits, the Company terminated this
hedging program in July 1998. As of December 31, 1998, the Company had no
derivative financial instruments outstanding.
The securities portfolio consisted of the following at the dates indicated:
DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ------------------------
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 -- -- 29,000 7.00
------------ ------------ ------------
Total cash equivalents.................. 220,000 4.36 28,000 7.19 29,000 7.00
------------ ------------ ------------
Investment securities:
AFS:
U.S. Government and agency
obligations......................... -- -- 100,837 5.53 156,251 6.20
Other investments..................... 28,797 5.55 -- -- -- --
------------ ------------ ------------
Total AFS........................... 28,797 5.55 100,837 5.53 156,251 6.20
------------ ------------ ------------
Held to maturity:
Other investments..................... 1,084 6.19 3,189 6.00 5,178 5.77
------------ ------------ ------------
Total investment securities............... 29,881 5.57 104,026 5.54 161,429 6.19
------------ ------------ ------------
MBS:
AFS:
FHLMC................................. 3,791 6.00 10,275 6.35 62,362 7.87
FNMA.................................. 169,986 7.12 230,509 6.96 55,548 7.24
GNMA.................................. 86,556 7.00 222,808 6.98 35,680 6.54
Participation certificates............ 23,055 6.04 24,860 6.04 25,813 6.72
CMO................................... 88,672 7.10 343,212 7.22 -- --
LIBOR Asset Trust..................... -- -- 20,940 7.47 -- --
Financing note trust ................. 47,752 5.78 -- -- -- --
Mortgage-backed note.................. 45,198 5.97 -- -- -- --
------------ ------------ ------------
Total AFS............................. 465,010 6.79 852,604 7.05 179,403 7.51
------------ ------------ ------------
Held to maturity:
LIBOR Asset Trust..................... -- -- -- -- 30,024 7.52
------------ ------------ ------------
Trading:
GNMA.................................. -- -- 41,050 6.66 14,121 6.52
------------ ------------ ------------
Total MBS................................. 465,010 6.79 893,654 7.03 223,548 7.51
------------ ------------ ------------
FHLB stock................................ 65,358 5.76 60,498 6.10 52,330 6.00
------------ ------------ ------------
Total securities portfolio.............. $ 780,249 5.97 $ 1,086,178 6.85 $ 466,307 6.85
============ ============ ============
41
The following table summarizes the maturity and weighted average yield of
investment securities at December 31, 1998.
MATURES IN
-------------------------------------------------
TOTAL 1999 AFTER 2009
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ ----- ------------ ----- ------------ -----
(DOLLARS IN THOUSANDS)
Whole loan investment repurchase
agreements........................ $ 220,000 4.36% $ 220,000 4.36% $ -- --%
------------ ------------ ------------
Investment securities:
U.S. Government and
agency obligations:
Held to maturity................ 1,084 6.19 1,084 6.19 -- --
AFS............................. 28,797 5.55 28,797 5.55 -- --
------------ ------------ ------------
Total investment securities... 29,881 5.57 29,881 5.57 -- --
------------ ------------ ------------
MBS, AFS............................ 465,010 6.79 152,983 6.04 312,027 7.16
FHLB stock.......................... 65,358 5.76 65,358 5.76 -- --
------------ ------------ ------------
Total securities portfolio........ $ 780,249 5.97 $ 468,222 5.18 $ 312,027 7.16
============ ============ ============
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 (2 units or more) residential loans. At December 31, 1998, 18.1% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 11.4% and 60.7% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively.
The performance of the Company's loans secured by multifamily and
commercial properties has been affected by southern California economic
conditions. These portfolios 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 multifamily and commercial properties. In addition,
the possibility that investors may abandon properties or seek bankruptcy
protection with respect to properties experiencing negative cash flow,
particularly where such properties are not cross-collateralized by other
performing assets, can also adversely affect the multifamily loan portfolio.
During 1998, the Company significantly increased its primarily sub-prime
credit card portfolio. During the third quarter of 1998, the Bank experienced
increases in delinquencies and charge-offs in excess of prior expectations. 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 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
portfolios are not sub-prime.
42
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,
1998 1998 1998 1998 1997
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Mortgage loan delinquencies by number of days:
30 to 59 days......................... $ 6,556 $ 8,706 $ 6,401 $ 11,664 $ 9,433
60 to 89 days......................... 4,936 4,776 4,647 3,079 4,095
90 days and over...................... 13,841 15,551 18,338 16,420 13,074
------------ ------------ ------------ ------------ ------------
Total.................................... $ 25,333 $ 29,033 $ 29,386 $ 31,163 $ 26,602
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days......................... 0.27% 0.35% 0.24% 0.42% 0.34%
60 to 89 days......................... 0.21 0.19 0.17 0.11 0.14
90 days and over...................... 0.57 0.61 0.69 0.60 0.47
------------ ------------ ------------ ------------ ------------
Total.................................... 1.05% 1.15% 1.10% 1.13% 0.95%
============ ============ ============ ============ ============
Credit card loan delinquencies by number of days:
30 to 59 days......................... $ 19,609 $ 26,892 $ 9,187 $ 4,097 $ 2,472
60 to 89 days......................... 15,391 10,606 5,419 2,814 1,432
90 to 119 days........................ 17,969 5,983 3,691 2,190 705
120 to 149 days....................... 17,363 5,031 2,278 1,553 376
150 days and over..................... 4,460 1,420 1,206 1,003 428
------------ ------------ ------------ ------------ ------------
Total.................................... $ 74,792 $ 49,932 $ 21,781 $ 11,657 $ 5,413
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days......................... 5.60% 8.64% 4.73% 3.63% 4.86%
60 to 89 days......................... 4.40 3.41 2.79 2.50 2.82
90 to 119 days........................ 5.13 1.92 1.90 1.94 1.39
120 to 149 days....................... 4.96 1.62 1.17 1.38 0.74
150 days and over..................... 1.27 0.46 0.62 0.89 0.84
------------ ------------ ------------ ------------ ------------
Total.................................... 21.36% 16.05% 11.21% 10.34% 10.65%
============ ============ ============ ============ ============
Other loan delinquencies by number of days:
30 to 59 days......................... $ 2,079 $ 965 $ 284 $ 375 $ --
60 to 89 days......................... 533 227 155 -- 14
90 days and over...................... 414 294 349 137 70
------------ ------------ ------------ ------------ ------------
Total.................................... $ 3,026 $ 1,486 $ 788 $ 512 $ 84
============ ============ ============ ============ ============
As a percentage of outstanding balances:
30 to 59 days......................... 8.48% 3.69% 1.45% 2.41% --%
60 to 89 days......................... 2.18 0.87 0.79 -- 0.54
90 days and over...................... 1.69 1.12 1.78 0.88 2.71
------------ ------------ ------------ ------------ ------------
Total.................................... 12.35% 5.68% 4.02% 3.29% 3.25%
============ ============ ============ ============ ============
Of the $25.3 million in mortgage loan delinquencies at December 31, 1998,
$7.7 million are loans on single family residences which have Veterans
Administration ("VA") or FHA guarantees. As a result of the VA or FHA guarantees
no losses are expected from these loans.
Credit card delinquencies increased $69.4 million as of December 31, 1998
as compared to December 31, 1997. The increase in delinquencies in the credit
card portfolio is due to a significant increase in first payment defaults on new
cards originated during the third quarter and the continued seasoning of the
portfolio originated in prior periods. Of the total increase of $69.4 million in
credit card delinquencies, $54.5 million related to the MMG portfolio and $12.5
million related to the ADC portfolio. As a result of the Bank significantly
43
curbing new card originations and the attrition of accounts previously
outstanding, the overall delinquency percentage of the credit card portfolio is
expected to decrease in future periods.
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,
1998 1998 1998 1998 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
MMG outstanding balances:
Current........................... $ 116,431 $ 132,855 $ 78,446 $ 33,143 $ 229
Delinquencies:
30 to 59 days................... 11,810 19,486 4,419 934 --
60 to 89 days................... 10,089 6,257 1,589 4 --
90 to 119 days.................. 13,472 2,944 986 -- --
120 to 149 days................. 14,660 2,304 338 -- --
150 days and over............... 4,460 1,175 4 -- --
------------- ------------- ------------- ------------- -------------
Total delinquencies.......... 54,491 32,166 7,336 938 --
------------- ------------- ------------- ------------- -------------
Total................................ $ 170,922 $ 165,021 $ 85,782 $ 34,081 $ 229
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days..................... 6.91% 11.81% 5.15% 2.74% --%
60 to 89 days..................... 5.90 3.79 1.85 0.01 --
90 to 119 days.................... 7.88 1.78 1.15 -- --
120 to 149 days................... 8.58 1.40 0.40 -- --
150 days and over................. 2.61 0.71 -- -- --
------------- ------------- ------------- ------------- -------------
Total................................ 31.88% 19.49% 8.55% 2.75% --%
============= ============= ============= ============= =============
ADC outstanding balances:
Current........................... $ 129,450 $ 107,099 $ 82,506 $ 64,992 $ 45,054
Delinquencies:
30 to 59 days................... 6,603 6,755 4,610 3,153 2,472
60 to 89 days................... 4,633 3,973 3,687 2,810 1,432
90 to 119 days.................. 3,959 2,864 2,695 2,190 705
120 to 149 days................. 2,699 2,727 1,940 1,553 376
150 days and over............... -- 245 1,202 1,003 428
------------- ------------- ------------- ------------- -------------
Total delinquencies.......... 17,894 16,564 14,134 10,709 5,413
------------- ------------- ------------- ------------- -------------
Total................................ $ 147,344 $ 123,663 $ 96,640 $ 75,701 $ 50,467
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days..................... 4.48% 5.46% 4.77% 4.17% 4.90%
60 to 89 days..................... 3.14 3.21 3.82 3.71 2.84
90 to 119 days.................... 2.69 2.32 2.79 2.89 1.40
120 to 149 days................... 1.83 2.21 2.00 2.05 0.75
150 days and over................. -- 0.20 1.24 1.33 0.84
------------- ------------- ------------- ------------- -------------
Total................................ 12.14% 13.40% 14.62% 14.15% 10.73%
============= ============= ============= ============= =============
(CONTINUED)
44
(CONTINUED)
QUARTERS ENDED
---------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Other credit card loans outstanding balances:
Current........................... $ 29,405 $ 21,365 $ 11,590 $ 2,923 $ 132
Delinquencies:
30 to 59 days................... 1,196 651 158 10 --
60 to 89 days................... 669 376 143 -- --
90 to 119 days.................. 538 175 10 -- --
120 to 149 days................. 4 -- -- -- --
150 days and over............... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total delinquencies.......... 2,407 1,202 311 10 --
------------- ------------- ------------- ------------- -------------
Total................................ $ 31,812 $ 22,567 $ 11,901 $ 2,933 $ 132
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days..................... 3.76% 2.88% 1.33% 0.34% --%
60 to 89 days..................... 2.10 1.67 1.21 -- --
90 to 119 days.................... 1.69 0.77 0.08 -- --
120 to 149 days................... 0.01 -- -- -- --
150 days and over................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total................................ 7.56% 5.32% 2.62% 0.34% --%
============= ============= ============= ============= =============
The available credit on credit cards outstanding at December 31, 1998 was
$26.9 million, $31.1 million and $23.2 million for MMG, ADC and other card
programs, respectively.
The following table presents the credit card portfolio by geographic
location at December 31, 1998:
PERCENT OF
AMOUNT TOTAL
---------------- ----------------
(DOLLARS IN THOUSANDS)
State:
Alabama............................................. $ 19,244 5.50%
Arkansas............................................ 6,684 1.91
California.......................................... 35,434 10.12
Florida............................................. 46,208 13.20
Georgia............................................. 14,622 4.18
Illinois............................................ 9,178 2.62
Louisiana........................................... 9,426 2.69
Maryland............................................ 6,876 1.96
Michigan............................................ 9,748 2.78
Massachusetts....................................... 10,761 3.07
North Carolina...................................... 17,726 5.06
New York............................................ 20,258 5.79
Ohio................................................ 11,551 3.30
Pennsylvania........................................ 10,290 2.94
South Carolina...................................... 11,884 3.39
Tennessee........................................... 10,349 2.96
Texas............................................... 25,165 7.19
Virginia............................................ 6,498 1.86
Other states........................................ 68,176 19.48
---------------- ----------------
Total.................................................. $ 350,078 100.00%
================ ================
45
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 nonaccruing loans at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Single family............................. $ 6,349 $ 4,221 $ 8,019 $ 7,226 $ 7,775
Multifamily:
2 to 4 units......................... 2,609 948 5,959 6,671 6,590
5 to 36 units........................ 3,568 4,753 18,071 14,312 23,112
37 units and over.................... 562 2,090 2,671 3,190 7,088
------------- ------------- ------------- ------------- -------------
Total multifamily................. 6,739 7,791 26,701 24,173 36,790
Commercial & industrial................... 1,127 1,062 1,405 20,511 27,049
Other loans............................... 157 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total.................................. $ 14,372 $ 13,074 $ 36,125 $ 51,910 $ 71,614
============= ============= ============= ============= =============
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
$1.9 million, $3.9 million and $6.0 million for 1998, 1997 and 1996,
respectively.
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 net accruing loans delinquent 90 days or
greater at the dates indicated:
DECEMBER 31,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
90 to 119 days............................... $ 17,969 705
120 to 149 days.............................. 17,363 376
150 days and over............................ 4,460 428
----------- -----------
Total..................................... $ 39,792 $ 1,509
=========== ===========
46
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,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Property type:
Single family.................................... $ 561 $ 575 $ 1,178 $ 1,162 $ 459
Multifamily:
2 to 4 units.................................. 2,167 3,287 4,260 2,597 2,511
5 to 36 units................................. 15,694 14,972 11,647 15,189 35,347
37 units and over............................. 8,156 6,485 5,805 9,109 10,292
------------ ------------ ------------ ------------ ------------
Total multifamily........................... 26,017 24,744 21,712 26,895 48,150
Commercial and industrial........................ 21,440(1) 18,674(1) 22,306(1) 3,688 1,645
Land............................................. -- -- -- 946 1,890
------------ ------------ ------------ ------------ ------------
Total TDRs.................................. $ 48,018 $ 43,993 $ 45,196 $ 32,691 $ 52,144
- ----------------- ============ ============ ============ ============ ============
(1) Includes a hotel property loan with a balance of $18.0 million,
$18.1 million and $18.4 million at December 31, 1998, 1997 and 1996,
respectively.
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.
As of June 30, 1998, the Plan was terminated 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
47
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,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Performing classified loans:
Single family......................... $ 3,492 $ 3,551 $ 4,555 $ 4,368 $ 544
Multifamily:
2 to 4 units........................ 2,672 4,241 6,030 8,297 951
5 to 36 units....................... 39,570 63,777 60,785 85,581 28,872
Over 37 units....................... 17,027 22,704 10,375 39,301 19,925
------------- ------------- ------------- ------------- -------------
Total multifamily................ 59,269 90,722 77,190 133,179 49,748
Commercial and industrial............. 5,802 10,412 29,503 10,099 5,515
Credit card loans..................... 39,792 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total performing classified loans... 108,355 104,685 111,248 147,646 55,807
------------- ------------- ------------- ------------- -------------
NPAs:
NPLs 14,372 13,074 36,125 51,910 71,614
REO................................... 8,397 12,293 24,663 19,521 14,115
Other repossessed assets.............. 535 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total NPAs.......................... 23,304 25,367 60,788 71,431 85,729
------------- ------------- ------------- ------------- -------------
Other classified assets.................. 1,426 23,450 2,060 -- --
------------- ------------- ------------- ------------- -------------
Total classified assets.................. $ 133,085 $ 153,502 $ 174,096 $ 219,077 $ 141,536
============= ============= ============= ============= =============
Classified asset ratios:
NPLs to total assets.................. 0.39% 0.31% 1.08% 1.57% 1.93%
NPLs to total loans................... 0.54% 0.46% 1.34% 1.77% 2.18%
NPAs to total assets.................. 0.63% 0.61% 1.83% 2.16% 2.31%
TDRs to total assets.................. 1.29% 1.06% 1.36% 0.99% 1.40%
NPAs and TDRs to total assets......... 1.92% 1.66% 3.18% 3.16% 3.72%
Classified assets to total assets..... 3.59% 3.68% 5.23% 6.64% 3.82%
REO to NPAs........................... 36.03% 48.46% 40.57% 27.33% 16.47%
NPLs to NPAs.......................... 61.67% 51.54% 59.43% 72.67% 83.53%
Total classified assets decreased $20.4 million or 13.3% from December 31,
1997, to $133.1 million at December 31, 1998. This decrease was due to a $34.8
million decrease in classified mortgage loans and a $22.0 million decrease in
other classified assets offset by a $39.8 million increase 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. Other classified assets decreased due to the sale of
certain classified asset backed securities in 1998. The increase in classified
credit card loans was the result of the increase in accounts delinquent greater
than 90 days.
48
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,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Single family............................... $ 2,453 $ 2,611 $ 3,185 $ 2,952 $ 930
Multifamily:
2 to 4 units............................ 1,281 1,091 3,410 2,598 198
5 to 36 units........................... 1,735 5,318 13,574 8,421 4,884
37 units and over....................... 1,844 3,149 1,844 -- 1,041
------------- ------------- ------------- ------------- -------------
Total multifamily....................... 4,860 9,558 18,828 11,019 6,123
Commercial and industrial................... 1,584 624 3,950 7,850 7,062
Valuation allowances........................ (500) (500) (1,300) (2,300) --
------------- ------------- ------------- ------------- -------------
Total net REO........................... $ 8,397 $ 12,293 $ 24,663 $ 19,521 $ 14,115
============= ============= ============= ============= =============
Properties foreclosed during the period:
Number.................................. 62 88 131 109 64
Gross book value........................ $ 27,774 $ 75,385 $ 77,585 $ 92,661 $ 102,293
Average book value...................... $ 231 $ 294 $ 343 $ 343 $ 441
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,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................. $ 55,993 $ 59,589 $ 92,927 $ 69,520 $ 101,547
------------- ------------- ------------- ------------- -------------
Charge-offs................................. (25,624) (44,000) (55,471) (52,636) (72,505)
Recoveries.................................. 5,085 9,118 3,304 2,953 4,542
------------- ------------- ------------- ------------- -------------
Net charge-offs........................... (20,539) (34,882) (52,167) (49,683) (67,963)
Provision:
Estimated loan losses..................... 73,032 13,004 15,610 69,724 65,559
REO....................................... 251 1,060 3,219 3,366 8,768
Net change in cash reserves................. 461(2) 4,332 -- -- --
ALLL charged off on bulk sale assets........ -- -- -- -- (38,391)
Allowances related to acquisition (1)....... -- 12,890 -- -- --
------------- ------------- ------------- ------------- -------------
Balance at end of period....................... $ 109,198 $ 55,993 $ 59,589 $ 92,927 $ 69,520
============= ============= ============= ============= =============
Ratio of net charge-offs during the period to
average loans outstanding................... 0.8% 1.2% 1.8% 1.6% 1.9%
(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.
49
The following table presents loan and REO charge-offs and recoveries for
the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Charge-offs:
Single family.............................. $ 1,143 $ 3,343 $ 4,345 $ 2,650 $ 4,127
Multifamily loans:
2 to 4 units............................. 1,490 6,306 6,242 5,218 8,584
5 to 36 units............................ 8,384 28,664 33,083 33,948 39,050
37 units and over........................ 3,515 3,548 6,043 8,179 16,291
------------- ------------- ------------- ------------- -------------
Total multifamily..................... 13,389 38,518 45,368 47,345 63,925
Commercial and industrial.................. 529 2,139 5,758 2,641 4,453
Credit card loans.......................... 9,502 -- -- -- --
Other loans................................ 1,061 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total charge-offs............................. $ 25,624 $ 44,000 $ 55,471 $ 52,636 $ 72,505
============= ============= ============= ============= =============
Recoveries:
Single family.............................. $ 1,345 $ 2,199 $ 645 $ 57 $ 158
Multifamily loans:
2 to 4 units............................. 798 1,286 303 62 169
5 to 36 units............................ 2,286 4,611 1,144 1,781 3,227
37 units and over........................ 511 247 491 829 727
------------- ------------- ------------- ------------- -------------
Total multifamily..................... 3,595 6,144 1,938 2,672 4,123
Commercial and industrial.................. 63 775 721 224 261
Credit card loans.......................... -- -- -- -- --
Other loans................................ 82 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total recoveries.............................. $ 5,085 $ 9,118 $ 3,304 $ 2,953 $ 4,542
============= ============= ============= ============= =============
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, 1998 and 1997, cash reserves were
$1.9 million and $4.3 million, respectively, and were recorded as deposits on
the Company's statements of financial condition. Accounts purchased from cash
reserves during 1998 totaled $25.7 million and are not included in the above
table. No accounts were purchased from cash reserves in 1997.
50
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,
1998 1998 1998 1998 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Loans:
ALLL ............................... $ 98,229 $ 88,500 $ 36,088 $ 32,192 $ 32,426
SVA................................. 7,942 10,522 15,800 15,843 18,112
------------- ------------- ------------- ------------- -------------
Total ALLL and SVA................ 106,171 99,022 51,888 48,035 50,538
Cash reserves....................... 1,888 7,656 8,334 6,488 4,332
------------- ------------- ------------- ------------- -------------
Total allowances and cash reserves 108,059 106,678 60,222 54,523 54,870
------------- ------------- ------------- ------------- -------------
REO valuation allowances............... 1,139 1,032 1,041 1,068 1,123
------------- ------------- ------------- ------------- -------------
Total allowances and cash reserves..... $ 109,198 $ 107,710 $ 61,263 $ 55,591 $ 55,993
============= ============= ============= ============= =============
Selected ratios:
Total loan allowances to gross loans 3.86% 3.68% 2.06% 1.86% 1.90%
Total allowances to loans and REO... 3.94% 3.77% 2.12% 1.91% 1.95%
Total ALLL and cash reserves to:
Net loans......................... 3.62% 3.38% 1.31% 1.33% 1.29%
Net NPLs.......................... 696.61% 569.48% 185.27% 232.15% 281.15%
Net loans and REO................. 3.63% 3.38% 1.55% 1.34% 1.30%
Net NPAs.......................... 431.75% 354.97% 148.84% 143.79% 146.88%
Total assets...................... 2.71% 2.53% 1.05% 0.92% 0.89%
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.
The 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.
51
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, 1998 was determined as
follows:
o SINGLE FAMILY MORTGAGE LOANS: A delinquency migration model was
utilized which applies 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 1999 are expected to be $1.7 million.
o MULTIFAMILY MORTGAGE 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 classification migration models that track
three years of the Company's historical loss experience.
Estimated charge-offs in 1999 are expected to be $8.3 million.
o COMMERCIAL & 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 loss experiences for
similar types of loans of other enterprises. Estimated
charge-offs in 1999 are expected to be $1.3 million.
o MULTIFAMILY AND COMMERCIAL & INDUSTRIAL REAL ESTATE LOANS GRADED
SUBSTANDARD: For all loans greater than $1 million, an estimated
allowance was computed based on the estimated value of the
underlying collateral of each loan net of estimated selling and
disposition costs. For all other loans, loss factors were applied
to the outstanding loan balances based on their relative size or
loan to value ratio. The loss factors utilized were based in part
on the Company's historical experience and current expectations.
Estimated charge-offs in 1999 are expected to be $5.8 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. No recovery of charged off
accounts was assumed. Estimated charge-offs in 1999 are expected
to be $72.5 million.
o CREDIT CARD LOANS ORIGINATED UNDER OTHER PROGRAMS: Delinquency
migration models based on the related credit card portfolios
specific experience were utilized or, for the most recently
established programs, loss factors based in part on the Company's
loss experience for its other credit card portfolios were
applied. Estimated charge-offs in 1999, net of related cash
deposits and guarantees of credit enhanced credit card program
marketers, are expected to be $0.2 million.
o AUTO LOANS: A delinquency migration model, which applies
delinquency and loss factors to the outstanding portfolio
segregated by delinquency status, was utilized. Estimated
charge-offs in 1999 are expected to be $3.5 million.
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 1999 are
expected to be $0.2 million.
52
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,
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 bank regulatory examination results
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 actually observed for
these losses 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.
53
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:
TO BE CATEGORIZED
AS ADEQUATELY TO BE CATEGORIZED
ACTUAL CAPITALIZED AS WELL CAPITALIZED
---------------------- ------------------------ ------------------------
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% $ 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
AS OF DECEMBER 31, 1997:
Total capital (to risk-weighted assets)..... 244,719 11.57 169,157 8.00 211,447 10.00
Core capital (to adjusted tangible assets).. 218,296 5.26 124,485 3.00 207,476 5.00
Tangible capital (to tangible assets)....... 218,296 5.26 62,243 1.50 N/A
Core capital (to risk-weighted assets)...... 218,296 10.32 N/A 126,868 6.00
54
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, 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, 1997:
Consolidated stockholders' equity................. $ 181,345 $ 181,345 $ 181,345
Adjustments:
Fidelity's Preferred Stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (3,063) (3,063) (3,063)
------------ ------------ ------------
Fidelity's stockholders' equity................... 230,032 230,032 230,032
Accumulated other comprehensive loss.............. 4,467 4,467 4,467
Adjustments:
Intangible assets............................... (16,185) (16,185) (16,185)
Nonincludable subsidiaries...................... (18) (18) (18)
Excess ALLL..................................... -- -- 26,505
Equity investments.............................. -- -- (82)
------------ ------------ ------------
Regulatory capital.................................. $ 218,296 $ 218,296 $ 244,719
============ ============ ============
As of December 31, 1998, the Bank was "adequately capitalized" under the
PCA regulations adopted by the OTS pursuant to FDICIA. As of December 31, 1998,
the most constraining of the capital ratio measurements was core capital to
adjusted tangible assets which had an excess of $13.5 million above the minimum
level required to be considered adequately capitalized. The Bank's capital
amounts and classification are subject to review by federal regulators about
components, risk-weightings and other factors. There are no conditions or events
since December 31, 1998 that management believes have changed the institution's
category.
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.
55
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, 1998, the Company had deposits of $2.9 billion. The
following table presents the distribution of deposit accounts at the dates
indicated:
DECEMBER 31,
----------------------------
1998 1997
------------ -------------
(DOLLARS IN THOUSANDS)
Passbook accounts........................... $ 56,836 $ 67,502
Checking accounts........................... 380,292 336,036
Money market savings accounts............... 56,451 55,885
------------ -------------
Total transaction accounts............. 493,579 459,423
------------ -------------
CDs......................................... 2,428,952 2,432,378
------------ -------------
Total deposits......................... $ 2,922,531 $ 2,891,801
============ =============
There were no brokered deposits outstanding at December 31, 1998 and 1997.
The following table summarizes CDs by remaining maturity and weighted
average rate at December 31, 1998.
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.................... $ 521,560 $ 397,020 $ 576,217 $ 300,203 $ 1,795,000
Greater than $100,000................. 186,848 117,219 181,374 148,511 633,952
------------- -------------- ------------- ------------- -------------
Total CDs................................. $ 708,408 $ 514,239 $ 757,591 $ 448,714 $ 2,428,952
============= ============== ============= ============= =============
Weighted average yield:
Less than $100,000.................... 5.23% 5.11% 4.91% 4.96% 5.06%
Greater than $100,000................. 5.59 5.39 5.23 5.02 5.32
------------- -------------- ------------- ------------- -------------
Total weighted average yield on
CDs 5.32% 5.18% 4.99% 4.98% 5.12%
============= ============== ============= ============= =============
56
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
-----------------------
NEW OR NEW OR
MATURITIES RENEWED NET CHANGE MATURITIES RENEWED
------------- ------------- ------------ ---------- ---------
(DOLLARS IN THOUSANDS)
CDs maturing in quarter ended:
December 31, 1998................. $ 588,091 $ 436,875 $ (151,216) 5.42% 4.30%
September 30, 1998................ 604,220 591,719 (12,501) 5.43 5.06
June 30, 1998..................... 456,817 617,404 160,587 5.34 5.24
March 31, 1998.................... 637,224 701,988 64,764 5.26 5.42
December 31, 1997................. 443,897 461,385 17,488 5.31 5.39
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, 1998:
WEIGHTED
PERCENT OF TOTAL AVERAGE
MATURES IN QUARTER ENDED: AMOUNT DEPOSITS RATE
------------------------- ------------- ---------------- ---------
(DOLLARS IN THOUSANDS)
March 31, 1999................................................... $ 612,653 21.0% 5.19%
June 30, 1999.................................................... 424,396 14.5 5.21
September 30, 1999............................................... 374,016 12.8 4.97
December 31, 1999................................................ 250,603 8.6 4.86
March 31, 2000................................................... 232,679 8.0 4.83
June 30, 2000.................................................... 36,430 1.2 4.26
September 30, 2000............................................... 7,442 0.3 5.40
December 31, 2000 and after...................................... 490,733 16.7 5.42
------------- ------
Total CDs..................................................... $ 2,428,952 83.1% 5.12
============= ======
57
BORROWINGS
The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated:
DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
FHLB advances:
Fixed rate advances........................................... $ 585,000 $ 835,000 $ 237,151
Floating rate advances........................................ -- 174,960 212,700
------------- ------------- -------------
Total FHLB advances.......................................... 585,000 1,009,960 449,851
------------- ------------- -------------
Other borrowings:
Senior Notes.................................................. 51,478 51,478 --
Mortgage-backed notes......................................... -- -- 100,000
Commercial paper.............................................. -- -- 40,000
------------- ------------- -------------
Total other borrowings....................................... 51,478 51,478 140,000
------------- ------------- -------------
Total borrowings................................................. $ 636,478 $ 1,061,438 $ 589,851
============= ============ =============
Weighted average interest rate on all borrowings................. 6.20% 6.13% 6.02%
============= ========= =========
Percent of total borrowings to total liabilities and
stockholders' equity.......................................... 17.15% 25.46% 17.71%
============= ========= =========
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
December 31, 1998 include (a) a line of credit with the FHLB with $156.0 million
available, (b) $76.5 million in unpledged securities available to be placed in
reverse repurchase agreements or sold and (c) $294.3 million of unpledged loans,
some of which would be available to collateralize additional FHLB or private
borrowings, or be securitized.
CONTINGENT OR POTENTIAL USES OF FUNDS
The Bank had unfunded loans totaling less than $0.1 million and $1.7
million at December 31, 1998 and 1997, respectively. The Bank had no unfunded
loans at December 31, 1996. Additionally, unused lines of credit related to
credit card loans and other credit lines totaled $114.8 million, $46.0 million
and $19.7 million at December 31, 1998, 1997 and 1996, respectively.
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 18.40% and 22.75% at December 31, 1998
and 1997, respectively. The Bank's monthly average regulatory liquidity ratio,
under the liquidity regulations in force at the time was 6.86% for December 31,
1996.
HOLDING COMPANY LIQUIDITY
At December, 1998 and 1997, Bank Plus had cash and cash equivalents of $0.7
million and $1.0 million, respectively. Bank Plus has no material potential cash
producing operations or assets other than its investments in Fidelity, Gateway
and BPCS. Accordingly, Bank Plus is substantially dependent on dividends from
Fidelity, Gateway and BPCS in order to fund its cash needs, including its
payment obligations on the $51.5 million principal amount of the Senior Notes
issued in exchange for Fidelity's Preferred Stock.
58
Bank Plus has funded the interest payments on its Senior Notes through
preferred stock and common stock dividends from Fidelity. The preferred stock
carries a 10% rate and is not subject to OTS approval unless, among other
things, the Bank's regulatory capital falls below adequately capitalized. The
common stock dividends, which are used to fund the difference between the rate
on the Senior Notes and the rate on the preferred stock dividends, are currently
subject to OTS approval. No assurance can be given that the OTS will approve the
common stock dividends in the future, or that the OTS will approve the preferred
stock dividends in the future if the Bank's regulatory capital falls below
adequately capitalized. The February 1999 Senior Note interest payments were
funded by the preferred stock dividend from Fidelity and cash on hand at Bank
Plus. In future periods, Bank Plus may be able to increase its liquidity through
dividends from Gateway or BPCS. No assurance can be given that funds will
continue to be available at Bank Plus to pay future interest payments, or that
dividends will be able to be made by Gateway or BPCS to provide additional
liquidity.
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, 1998, the Company had less than $0.1
million in commitments to fund loans. There was an unused line of credit of
$16.9 million associated with a mortgage warehouse credit agreement. In
addition, the Company has extended lines of credit in the form of credit cards
totaling $431.3 million, of which $81.2 million was unused and available at
December 31, 1998.
As of December 31, 1998, the Company had certain mortgage loans with a
gross principal balance of $78.7 million, of which $65.7 million had been sold
in the form of mortgage pass-through certificates, over various periods of time,
to four investor financial institutions leaving a balance of $13.0 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 $65.7 million held by investors are deemed Senior Mortgage
Pass-Through Certificates and the $13.0 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 $13.0 million is subject to this
contingent liability due to its subordination. In 1993, the Bank repurchased as
an investment a portion of the mortgage pass-through certificates, and at
December 31, 1998, the balance of the repurchased certificate was $23.1 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 $42.6
million at December 31, 1998 are owned by other investor institutions. The
contingent liability for credit losses on these mortgage pass-through
certificates was $0.9 million and $2.1 million at December 31, 1998 and 1997,
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, 1998 of $89.8
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, 1998, $16.4 million, comprised of $12.2 million in
cash and $4.2 million in U.S. Treasury securities and MBS. The Company shall
absorb losses, if any, which may be incurred on the securitized multifamily
loans to the extent of $16.4 million. FNMA is responsible for any losses in
excess of the $16.4 million. The corresponding contingent liability for credit
losses was $2.3 million and $4.0 million at December 31, 1998 and 1997,
respectively, and is included in other liabilities.
59
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. Having liabilities that reprice more
quickly than assets is beneficial when interest rates fall, but may be
detrimental when interest rates rise.
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of December 31,
1998. "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, 1998
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.............. $ 233,894 $ -- $ -- $ -- $ -- $ 233,894
Investment securities (1) (2).......... 94,155 1,084 -- -- -- 95,239
MBS (1) 152,004 980 -- -- 312,026 465,010
Loans receivable:
ARMs and other adjustables (3)....... 351,914 2,203,996 98,722 10,455 401 2,665,488
Fixed rate loans..................... 5,059 -- 4,007 12,771 109,679 131,516
----------- ------------ --------- ---------- ---------- -----------
Total gross loans receivable....... 356,973 2,203,996 102,729 23,226 110,080 2,797,004
----------- ------------ --------- ---------- ---------- -----------
Total interest-earning assets............ 837,026 2,206,060 102,729 23,226 422,106 $3,591,147
----------- ------------ --------- ---------- ---------- ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts (4).... 437,128 -- -- -- -- $ 437,128
Money market accounts (4)............ 56,451 -- -- -- -- 56,451
Fixed maturity deposits:
Retail customers................... 700,295 1,271,830 447,594 616 404 2,420,739
Wholesale customers................ 8,113 -- 100 -- -- 8,213
----------- ------------ --------- ---------- ---------- -----------
Total deposits................... 1,201,987 1,271,830 447,694 616 404 2,922,531
----------- ------------ --------- ---------- ---------- -----------
Borrowings:
FHLB advances (3).................... -- -- 585,000 -- -- 585,000
Other................................ -- -- -- 51,478 -- 51,478
----------- ------------ --------- ---------- ---------- -----------
Total borrowings................... -- -- 585,000 51,478 -- 636,478
----------- ------------ --------- ---------- ---------- -----------
Total interest-bearing liabilities....... 1,201,987 1,271,830 1,032,694 52,094 404 $ 3,559,009
----------- ------------ ----------- ---------- ---------- ============
Repricing Gap............................ $ (364,961) $ 934,230 $ (929,965) $ (28,868) $ 421,702
=========== ============ =========== ========== ==========
Gap to total assets...................... (9.83)% 25.17% (25.05)% (0.78)% 11.36%
Cumulative Gap to Total Assets........... (9.83)% 15.34% (9.71)% (10.49)% 0.87%
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $65.4 million.
(3) ARMs are primarily in the shorter categories as they are subject to interest
rate adjustments.
(4) These liabilities are subject to daily adjustments and are therefore
included in the "Within 3 Months" category.
60
The Company manages interest rate risk by, among other things, maintaining
a portfolio consisting primarily of adjustable rate mortgage ("ARM") loans. ARM
loans comprised 95%, 94% and 97% of the total mortgage loan portfolio at
December 31, 1998, 1997 and 1996, respectively. The percentage of monthly
adjustable ARMs to total mortgage loans was approximately 71%, 71% and 76% at
December 31, 1998, 1997 and 1996, respectively. Interest sensitive assets
provide the Company with a degree of long-term protection from rising interest
rates. At December 31, 1998, approximately 91% of Fidelity's total mortgage loan
portfolio consisted of loans which mature or reprice within one year, compared
to approximately 93% at both December 31, 1997 and 1996. Fidelity has in recent
periods been negatively impacted by the fact that increases in the interest
rates accruing on Fidelity's ARMs lagged the increases in interest rates
accruing on its deposits due to reporting delays and contractual look-back
periods contained in the Bank's loan documents. At December 31, 1998, 87% of the
Bank's mortgage loans, which are indexed to COFI, as with all COFI portfolios in
the industry, do not reprice until some time after the industry liabilities
composing COFI reprice. The Company's liabilities reprice generally in line with
the cost of funds of institutions which comprise the FHLB Eleventh District. In
the Company's case, the lag between the repricing of its liabilities and its ARM
loans indexed to COFI is approximately four months. Thus, in a rising rate
environment there will be upward pressure on rates paid on deposit accounts and
wholesale borrowings, and the Company's net interest income will be adversely
affected until the majority of its interest-earning assets fully reprice.
Conversely, in a falling interest rate environment, net interest income will be
positively affected.
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.
In 1997, the Bank entered into an interest rate swap agreement with a
notional amount of $90.0 million to convert a fixed rate FHLB advance to a
floating rate. The swap was terminated in the fourth quarter of 1997 and as a
result recorded a deferred gain of $0.6 million that is being amortized as a
yield adjustment over the remaining life of the FHLB advance.
There were no derivative financial instruments outstanding at December 31, 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.
61
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.
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, 1998, 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, 1998 DECEMBER 31, 1997
---------------------------- -----------------------------
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 1% --% (17)% (13)%
+200 3 4 (11) (7)
+100 4 5 (6) (1)
Base Case -- -- -- --
-100 (6) (7) 5 (4)
-200 (13) (15) 10 (7)
-300 (19) (19) 15 (7)
(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.
62
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, 1998. 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) 1997
----------------------------------------------------------------------------------------------- -----------
TOTAL FAIR FAIR
1999 2000 2001 2002 2003 THEREAFTER BALANCE VALUE (2) VALUE (2)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
INTEREST-SENSITIVE ASSETS:
Investment securities. $ 29,881 $ -- $ -- $ -- $ -- $ -- $ 29,881 $ 29,896 $ 104,045
Average coupon rate. 5.30% --% --% --% --% --% 5.30%
MBS AFS 269,739 76,935 37,930 20,170 11,724 48,512 465,010 465,010 852,604
Average coupon rate. 7.01% 7.58% 7.40% 7.27% 6.99% 6.80% 7.13%
MBS held for trading.. -- -- -- -- -- -- -- -- 41,050
Loans receivable...... 770,034 456,630 647,882 225,900 188,957 376,173 2,665,576 2,707,333 2,818,236
Average interest rate 8.76% 7.08% 10.59% 6.56% 6.80% 6.57% 8.28%
Mortgage servicing
assets.............. -- -- -- -- -- 1,630 1,630 5,368 5,346
Other assets.......... -- -- -- -- -- -- -- -- 922
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-sensitive
assets............. $1,069,654 $ 533,565 $ 685,812 $ 246,070 $ 200,681 $ 426,315 $3,162,097 $3,207,607 $3,822,203
=========== =========== =========== =========== =========== =========== =========== =========== ===========
INTEREST-SENSITIVE LIABILITIES:
Deposits:
Transaction accounts $ 404,719 $ 17,772 $ 17,772 $ 17,772 $ 17,772 $ 17,772 $ 493,579 $ 493,579 $ 459,748
Average interest
rate........... 1.68% 1.30% 1.29% 1.16% 1.17% 1.17% 1.61%
CDs................ 1,981,042 184,413 239,602 18,848 4,661 386 2,428,952 2,445,581 2,440,216
Average interest
rate........... 5.26% 4.63% 4.27% 6.04% 6.07% 5.51% 5.12%
Borrowings........... -- 45,000 -- -- 540,000 51,478 636,478 663,520 1,074,162
Average interest
rate........... --% 6.80% --% --% 5.60% 12.00% 6.20%
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-sensitive
liabilities........... $2,385,761 $ 247,185 $ 257,374 $ 36,620 $ 562,433 $ 69,636 $3,559,009 $3,602,680 $3,974,126
=========== =========== =========== =========== =========== =========== =========== =========== ===========
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. 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, b) mortgage loans, mortgage
servicing rights and all interest sensitive liabilities were based on an
option adjusted cash flow valuation, which includes forward interest rate
simulations, and c) credit card loans are equal to the outstanding balances
of the credit card loans less any applicable allowances for loan losses and
deferred fees. 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 Company is not currently able to compute
a fair value of the credit card portfolio, including any unused credit
lines. The fair values may not be indicative of the value derived upon a
sale of all or part of the portfolios.
63
YEAR 2000
The Company utilizes computer software programs, systems and devices
("Systems") throughout the organization in order to support its on-going
operations. If corrective action is not taken, many of these Systems may not be
able to correctly interpret and process dates into 2000. The Company
has inventoried and analyzed its Systems to determine which will require
modification, upgrade, or replacement.
The Company has established a Year 2000 project office to provide the
business units with the support, guidance, and project management expertise to
ensure that the Company meets its Year 2000 objectives. The Year 2000 project
office is responsible for ensuring that the Company complies with the guidelines
established by the Federal Financial Institutions Examinations Council
("FFIEC"). The FFIEC issues guidelines to provide further clarification on the
federal regulatory requirements mandating how financial institutions prepare for
the Year 2000. In addition, the Company has engaged an independent third party
to provide project oversight and Year 2000 subject matter expertise.
PROJECT'S STATE OF READINESS
The Year 2000 project is comprised of two major phases. Phase I involves
the installation of upgraded mission critical Systems that are reported to be
Year 2000 complaint. Phase II involves the testing of mission critical Systems
using future dates to certify the system as Year 2000 compliant.
Phase I of the project was completed in October 1998 with the upgrade of
the Company's deposit servicing Systems to current release levels which are
reported by the software vendor to be Year 2000 compliant. This milestone also
included the conversion of the Company's accounts payable and general ledger
applications to new Systems that the software vendor states are Year 2000
compliant. All Systems upgraded during Phase I have been successfully migrated
into the Company's production environment. Additionally, the Company's mission
critical embedded Systems and mission critical applications that run on
distributed platforms have been renovated and validated for Year 2000
compliance.
The Company initiated Phase II of this project in November 1998. Phase II
is the testing and validating of the Company's mission critical Systems using
future dates. The Company's internal testing strategy includes the thirteen
future dates recommended by the FFIEC plus additional dates that are believed to
be important for certain applications. The Company has successfully tested a
total of thirteen future dates. Nine of the future dates tested are included in
the list of thirteen dates recommended by the FFIEC.
During Phase II, the Company has installed a number of program fixes to
correct test exceptions identified during the first group of future date testing
or to follow recommendations from the software vendor. Regression or re-testing
of these Systems using future dates has begun to ensure that the identified test
exceptions have been resolved.
Future date testing of the Company's internal mission critical Systems will
be completed by the end of the first quarter of 1999 with the exception of four
non-critical Year 2000 dates, which are scheduled for completion early in the
second quarter. Future date validation of the Company's externally operated
mission critical Systems has begun and is scheduled to be completed by the end
of the second quarter of 1999.
The Company implemented a Year 2000 customer awareness plan to address Year
2000 issues raised by customers. As part of this plan, the Company included a
project status update in the December and January deposit account statements. A
risk management plan was developed to address risks posed by the Company's
material customers. Both of these plans were developed in accordance with the
FFIEC guidelines and are being reviewed and updated each quarter or as required.
ESTIMATED YEAR 2000 PROJECT COSTS
The total expense estimate for anticipated Year 2000 project activities is
$6.3 million. This forecast is based on information currently known about the
Company's Systems and servicers as well as management's interpretation of the
FFIEC guidelines released to date. A significant portion of this budget is
allocated to the staffing of technology and support personnel to implement the
required modifications and upgrades. Additional personnel are also required to
perform the system testing, produce testing documentation, and prepare
contingency plans required by the FFIEC. As of December 31, 1998, the Company
had incurred Year 2000 related expenses of approximately $3.8 million.
64
CONTINGENCY PLANS
The FFIEC requires the development of remediation and business resumption
contingency plans. Remediation contingency plans are initiated if the Company
fails to successfully complete renovation, validation, or implementation of a
mission-critical system. Business resumption plans are initiated if business
interruptions should occur during the Year 2000 event. The contingency plans are
designed to provide for the continuation of the Company's critical business
functions should such interruptions occur.
An overall Year 2000 contingency plan strategy document has been developed
and distributed to Company business units. The contingency plan was developed
based on guidelines issued by the FFIEC, the United States General Accounting
Office and other sources. Company business units are in the process of creating
detailed contingency plans. The contingency planning process has been divided
into the following five phases:
o Contingency Planning Phase I
Phase I of the contingency planning process has been completed. This
phase required business units owners to identify critical business
functions and to complete a risk assessment for the critical business
functions.
o Contingency Planning Phase II
Phase II of the contingency planning process has been completed. In
Phase II of the contingency planning process, the business units
provided additional information, such as estimating the probability of
a system failing, determining how long they could operate without
certain functionality and a brief description of the work-around that
would be implemented if a system failed.
o Contingency Planning Phase III
Phase III of the contingency planning process is almost complete. This
Phase of the contingency planning process includes the identification
of all of the documentation, resources, trigger dates, interfaces, and
vendors required to finalize the contingency plan.
o Contingency Planning Phase IV
Phase IV of the contingency planning process was initiated in January
1999. During this phase, a representative of the Project Office is
meeting with each of the business units to review and finalize the
documentation provided in Phase III. The deliverable for Phase IV is
the written contingency plan containing details of the work-around as
well as departmental needs for seven identified disaster scenarios.
o Contingency Planning Phase V
After Phase IV is completed, the Company will begin Phase V of the
contingency planning process. Phase V consists of the testing and
validation of the contingency plans and completion of an event plan
for year end.
The FDIC guidelines state that the Bank must complete the organizational
planning and business impact analysis contingency plans by March 31, 1999. The
interagency statement established June 30, 1999 as the date by which the Year
2000 contingency plans are to be substantially complete. The Company is
currently on schedule to complete these plans within the specified time frames.
Once the contingency plans have been completed and tested, the Company will
continue to review and update these plans on a regular basis to ensure they are
consistent with the Company's operations.
65
RISK FACTORS
The Company utilizes the Systems and services of a number of third parties.
The failure of a key third-party service provider could result in a material
business interruption. Therefore, the Company is monitoring the Year 2000
progress of the Company's third party vendors. A third-party vendor test plan
has been developed to test mission critical services provided by third parties,
where appropriate, for Year 2000 compliance by June 30, 1999. Additional
expenses and delays may be incurred if future date testing or further analysis
reveals test exceptions that require additional system renovations, system
replacement, or the selection of another third party vendor.
Unknown expenses and consequences could result if it becomes necessary to
execute elements of the Company's Year 2000 contingency plans. Although the
Company has given the Year 2000 project a high priority and management believes
that Year 2000 compliance will be achieved, there are no assurances that the
Company will be successful in addressing Year 2000 issues within this estimated
timeframe or budget.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for financial statements for
periods beginning after June 15, 1999. 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", effective for the first fiscal
quarter beginning after December 15, 1998. SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting MBS and other retained interest should be
classified in accordance with SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities," based on the Company's ability and intent to
sell or hold those investments. The Company does not believe the adoption of
SFAS No. 134 will have a material impact on its operations or financial
position.
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
66
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 1999 Annual Meeting of Stockholders (the "1999 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 1999 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 1999
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 1999 Proxy
Statement.
67
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.
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 Promissory Note, dated August 3, 1994, by Citadel Realty, Inc. in
favor of Fidelity and related loan documents (1661 Camelback
Road) (incorporated by reference to Exhibit 10.14 to the Form
8-B).*
10.2 Guaranty Agreement, dated August 3, 1994, by Citadel Holding
Corporation ("Citadel") in favor of Fidelity (incorporated by
reference to Exhibit 10.15 to the Form 8-B).*
10.3 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and
between Citadel and Fidelity (incorporated by reference to
Exhibit 10.16 to the Form 8-B).*
10.4 Option Agreement, dated as of August 4, 1994, by and between
Fidelity and Citadel (incorporated by reference to Exhibit 10.17
to the Form 8-B).*
10.5 Executive Employment Agreement, dated as of August 1, 1997,
between Richard M. Greenwood and Fidelity (incorporated by
reference to Exhibit 10.18 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.6 Guaranty of Employment Agreement, dated as of August 1, 1997,
between Richard M. Greenwood and Bank Plus (incorporated by
reference to Exhibit 10.19 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.7 Litigation and Judgment Assignment and Assumption Agreement,
dated as of August 3, 1994, between Fidelity and Citadel
(incorporated by reference to Exhibit 10.23 to the Form 8-B).*
10.8 Stock Option and Equity Incentive Plan (incorporated by reference
to Exhibit 10.24 to the quarterly report on Form 10-Q for the
quarterly period ended March 31, 1997).*
10.9 Retirement Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.25 to the Form 8-B).*
10.10 Form of Change in Control Agreement between the Bank and Mr.
Greenwood (incorporated by reference to Exhibit 10.28 to the
quarterly report on Form 10-Q for the quarter ended June 30,
1997).*
68
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------
10.11 Form of Severance and Change in Control Agreement between the
Bank and each of Messrs. Austin, Evans & Taylor (incorporated by
reference to Exhibit 10.29 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.12 Form of Severance and Change in Control Agreement between the
Bank and each of Messrs. Condon & Stutz (incorporated by
reference to Exhibit 10.30 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.13 Form of Incentive Stock Option Agreement between the Bank and
certain officers (incorporated by reference to Exhibit 10.30 to
the Form 8-B).*
10.14 Form of Amendment to incentive Stock Option Agreement between the
Bank and certain officers (incorporated by reference Exhibit
10.31 to the Form 8-B).*
10.15 Form of Non-Employee Director Stock Option Agreement between the
Bank and certain directors (incorporated by reference to Exhibit
10.32 to the Form 8-B).*
10.16 Form of Amendment to Non-Employee Director Stock Option Agreement
between the Bank and certain directors (incorporated by reference
to Exhibit 10.33 to the Form 8-B).*
10.17 Standard Office Lease--Net, dated July 15, 1994, between the Bank
and 14455 Ventura Blvd., Inc. (incorporated by reference to
Exhibit 10.35 to the Form 8-B).*
10.18 Standard Office Lease--Modified Gross, dated July 15, 1994,
between the Bank and Citadel Realty, Inc. (incorporated by
reference to Exhibit 10.36 to the Form 8-B).*
10.19 Loan Servicing Purchase and Sale Agreement dated March 31, 1995
between the Bank and Western Financial Savings Bank, FSB
(incorporated by reference to Exhibit 10.37 to the Form 8-B).*
10.20 Loan Servicing Purchase and Sale Agreement dated May 15, 1996
between Fidelity and Western Financial Savings Bank (incorporated
by reference to Exhibit 10.37 to the quarterly report on Form
10-Q for the quarterly period ended June 30, 1996).*
10.21 First Amendment to Standard Office Lease--Modified Gross, dated
as of May 15, 1995 between the Bank and Citadel Realty, Inc
(incorporated by reference to Exhibit 10.42 to the quarterly
report on Form 10-Q for the quarterly period ended September 30,
1996).*
10.22 Second Amendment to Standard Office Lease--Modified Gross, dated
as of October 1, 1996, between the Bank and Citadel Realty, Inc
(incorporated by reference to Exhibit 10.43 to the quarterly
report on Form 10-Q for the quarterly period ended September 30,
1996).*
10.23 Form of Indemnity Agreement between Bank Plus and its directors
and senior officers (incorporated by reference to Exhibit 10.44
to the quarterly report on Form 10-Q for the quarterly period
ended September 30, 1996).*
10.24 Promissory Note, dated July 31, 1996, from Richard M. Greenwood
to Bank Plus (incorporated by reference to Exhibit 10.55 to the
1996 Form 10-K).*
10.25 Bank Plus Corporation Deferred Compensation Plan (incorporated by
reference to Exhibit 10.56 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.26 Form of 1997 Non-Employee Director Stock Option Agreement between
the Company and certain directors (incorporated by reference to
Exhibit 10.57 to the 1997 Form 10-K).*
10.27 Form of 1998 Non-Employee Director Stock Option Agreement between
the Company and certain directors (incorporated by reference to
Exhibit 10.58 to the quarterly report on Form 10-Q for the
quarter ended March 31, 1998).*
10.28 Form of Stock Option Agreement between the Company and Messrs.
Greenwood, Austin, Condon, Evans, Stutz and Taylor (incorporated
by reference to Exhibit 10.58 to the quarterly report on Form
10-Q for the quarter ended March 31, 1998).*
10.29 Form of Incentive Stock Option Agreement between the Company and
Messrs. McNamara and Villa (incorporated by reference to Exhibit
10.58 to the quarterly report on Form 10-Q for the quarter ended
March 31, 1998).*
69
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------
10.30 Form of Change in Control Agreement between the Company and
Messrs. McNamara and Villa (incorporated by reference to Exhibit
10.58 to the quarterly report on Form 10-Q for the quarter ended
March 31, 1998).*
10.31 Settlement Agreement and General Mutual Release dated as of
December 1998 between Fidelity and American Direct Credit LLC.
10.32 Severance Agreement dated September 19, 1998 among Richard M.
Greenwood, Bank Plus and Fidelity.
10.33 Release Agreement dated as of September 21, 1998 among Richard M.
Greenwood, Bank Plus and Fidelity.
10.34 Consulting Agreement dated as of September 21, 1998 among Richard
M. Greenwood, Bank Plus and Fidelity.
10.35 Release Agreement dated as of November 16, 1998 among W.C. Taylor
III, Bank Plus, Fidelity and BPCS.
10.36 Consulting Agreement dated as of November 16, 1998 among W.C.
Taylor III, Bank Plus, Fidelity and BPCS.
10.37 Release Agreement dated as of January 19, 1999 among Robert P.
Condon, Bank Plus, Fidelity and Gateway.
10.38 Consulting and Profit Sharing Agreement dated as of January 19,
1999 among Robert P. Condon, Bank Plus, Fidelity and Gateway.
10.39 Severance Agreement dated November 23, 1998 among Stephen J.
Austin, Bank Plus and Fidelity.
10.40 Employment Agreement dated as of October 28, 1998 among Mark K.
Mason, Bank Plus and Fidelity.
10.41 Employment Agreement dated as of November 19, 1998 among Godfrey
B. Evans, Bank Plus and Fidelity.
10.42 Employment Agreement dated as of November 19, 1998 among John M.
Michel, Bank Plus and Fidelity.
10.43 Form of Stock Option Agreement dated as of November 19, 1998
between Bank Plus and each of Messrs. Mason, Evans, and Michel.
10.44 Master Agreement dated as of December 17, 1998 by and among The
Variable Annuity Life Insurance Company ("VALIC"), Gateway and
Bank Plus.
10.45 Limited Liability Company Agreement of American General Gateway
Services, L.L.C. dated as of January 1, 1999 between VALIC and
Gateway.
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.
o * Indicates previously filed documents.
70
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
A current report on Form 8-K was filed with the SEC on November 30, 1998
reporting on Item 5 "Other Events" regarding the announcement of a new
management team and the restructuring of management and incentive compensation.
71
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 31, 1999
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 31, 1999
- ------------------------------------
GORDON V. SMITH
/S/ MARK K. MASON President and Chief Executive Officer; Vice March 31, 1999
- ------------------------------------ Chairman of the Board
MARK K. MASON (Principal Executive Officer)
/S/ NORMAN BARKER, JR. Director March 31, 1999
- ------------------------------------
NORMAN BARKER, JR.
/S/ WALDO H. BURNSIDE Director March 31, 1999
- -----------------------------------
Waldo H. Burnside
/S/ GEORGE GIBBS, JR. Director March 31, 1999
- -----------------------------------
GEORGE GIBBS, JR.
/S/ LILLY V. LEE Director March 31, 1999
- -----------------------------------
LILLY V. LEE
/S/ JOHN M. MICHEL Executive Vice President, Chief Financial Officer March 31, 1999
- ----------------------------------- (Principal Financial Offier)
JOHN M. MICHEL
/S/ RICHARD VILLA Senior Vice President, March 31, 1999
- ----------------------------------- Director of Finance and Treasurer
RICHARD VILLA (Principal Accounting Officer)
72
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
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bank Plus Corporation
Los Angeles, California
We have audited the consolidated statements of financial condition of Bank
Plus Corporation and subsidiaries (the "Company") as of December 31, 1998 and
1997, 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, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Bank Plus
Corporation and subsidiaries at December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 19, 1999
F-2
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
----------------------------
1998 1997
-------------- -------------
ASSETS:
Cash and cash equivalents....................................................... $ 380,507 $ 165,945
Investment securities available for sale ("AFS"), at fair value................. 28,797 100,837
Investment securities held to maturity, at amortized cost....................... 1,084 3,189
Mortgage-backed securities ("MBS") held for trading, at fair value.............. -- 41,050
Mortgage-backed securities available for sale, at fair value.................... 465,010 852,604
Loans receivable, net of allowances for estimated loan losses
of $106,171 and $50,538 at December 31, 1998 and 1997, respectively........... 2,665,576 2,823,577
Investment in Federal Home Loan Bank ("FHLB") stock............................. 65,358 60,498
Premises and equipment.......................................................... 39,042 32,707
Other assets.................................................................... 66,685 87,399
-------------- -------------
Total Assets....................................................................... $ 3,712,059 $ 4,167,806
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits...................................................................... $ 2,922,531 $ 2,891,801
FHLB advances................................................................. 585,000 1,009,960
Senior Notes.................................................................. 51,478 51,478
Other liabilities............................................................. 25,390 32,950
-------------- -------------
Total Liabilities.......................................................... 3,584,399 3,986,189
-------------- -------------
Commitments and contingencies
Minority interest............................................................... 272 272
Stockholders' equity:
Common stock:
Common stock, par value $.01 per share; 78,500,000 shares
authorized; 19,434,043 and 19,367,215 shares outstanding
at December 31, 1998 and December 31, 1997, respectively................. 194 194
Paid-in capital............................................................... 275,131 274,432
Accumulated other comprehensive loss.......................................... (2,795) (4,467)
Accumulated deficit........................................................... (145,142) (88,814)
-------------- -------------
Total Stockholders' Equity................................................. 127,388 181,345
-------------- -------------
Total Liabilities and Stockholders' Equity......................................... $ 3,712,059 $ 4,167,806
============== =============
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,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
INTEREST INCOME:
Loans........................................................ $ 225,029 $ 205,275 $ 213,013
MBS.......................................................... 43,305 29,435 5,772
Investment securities and other.............................. 32,013 20,297 19,128
-------------- -------------- --------------
Total interest income...................................... 300,347 255,007 237,913
-------------- -------------- --------------
INTEREST EXPENSE:
Deposits..................................................... 145,020 126,717 120,265
FHLB advances................................................ 57,992 40,807 16,161
Other borrowings............................................. 6,192 6,485 16,197
-------------- -------------- --------------
Total interest expense..................................... 209,204 174,009 152,623
-------------- -------------- --------------
Net interest income............................................. 91,143 80,998 85,290
Provision for estimated loan losses............................. 73,032 13,004 15,610
-------------- -------------- --------------
Net interest income after provision for estimated loan losses... 18,111 67,994 69,680
-------------- -------------- --------------
NONINTEREST INCOME (EXPENSE):
Loan fee income.............................................. 3,255 2,076 2,295
Credit card fees............................................. 21,414 45 --
Fee income from the sale of uninsured investment products.... 7,019 5,959 4,456
Fee income from deposits and other fee income................ 3,331 3,365 3,044
(Losses) gains on securities and trading activities.......... (860) (2,168) 1,336
Fee income from ATM cash services............................ 3,375 1,049 --
Other income (expense)....................................... (481) 37 22
Real estate operations, net.................................. (2,635) (6,473) (8,907)
-------------- -------------- --------------
Total noninterest income................................... 34,418 3,890 2,246
-------------- -------------- --------------
OPERATING EXPENSE:
Personnel and benefits....................................... 46,040 29,564 27,022
Occupancy.................................................... 14,591 11,647 10,353
Federal Deposit Insurance Corporation ("FDIC") insurance..... 2,637 2,563 24,936
Professional services........................................ 16,901 11,054 11,156
Credit card data processing.................................. 10,848 -- --
Office-related expenses...................................... 6,759 3,819 3,552
Other........................................................ 7,183 4,449 5,432
-------------- -------------- --------------
Total operating expense.................................... 104,959 63,096 82,451
-------------- -------------- --------------
(Loss) earnings before income taxes and minority
interest in subsidiary....................................... (52,430) 8,788 (10,525)
Income tax expense (benefit).................................... 3,870 (8,100) (1,093)
-------------- -------------- --------------
(Loss) earnings before minority interest in subsidiary.......... (56,300) 16,888 (9,432)
Minority interest in subsidiary................................. 28 4,235 4,657
-------------- -------------- --------------
Net (loss) earnings............................................. (56,328) 12,653 (14,089)
Preferred stock dividends....................................... -- -- 1,553
-------------- -------------- --------------
(Loss) earnings available for common stockholders............... $ (56,328) $ 12,653 $ (15,642)
============== ============== ==============
(LOSS) EARNINGS PER SHARE:
Basic........................................................ $ (2.90) $ 0.67 $ (0.86)
============== ============== ==============
Diluted...................................................... $ (2.90) $ 0.66 $ (0.86)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic........................................................ 19,395,337 18,794,887 18,242,887
============== ============== ==============
Diluted...................................................... 19,395,337 19,143,233 18,242,887
============== ============== ==============
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,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(Loss) earnings available for common stockholders............. $ (56,328) $ 12,653 $ (15,642)
-------------- -------------- --------------
Other comprehensive earnings (loss):
Investment and MBS securites AFS:
Unrealized holdong gains (losses) arising during
the period, net........................................ (2,565) (1,807) 1,712
Reclassificaiton adjustment for (gains)losses
included in earnings/loss, net......................... (1,461) 2,355 (1,156)
-------------- -------------- --------------
Total............................................... (4,026) 548 556
-------------- -------------- --------------
Derivative financial instruments:
Unrealized holding gains (losses) arising during
the period, net........................................ 1,376 (6,068) (301)
Reclassification adjustment for (gains) losses
included in earnings/loss, net......................... 4,322 10 --
-------------- -------------- --------------
Total............................................... 5,698 (6,058) (301)
-------------- -------------- --------------
Other comprehensive earnings (loss)....................... 1,672 (5,510) 255
-------------- -------------- --------------
Comprehensive (loss) earnings................................. $ (54,656) $ 7,143 $ (15,387)
============== ============== ==============
See notes to consolidated financial statements.
F-5
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
CLASS A
COMMON STOCK COMMON STOCK PREFERRED STOCK
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- --------- ------------- --------- ------------- ---------
Balance, January 1, 1996........................... -- -- 18,242,465 $ 182 2,070,000 $ 51,750
Accumulated other comprehensive earnings........... -- -- -- -- -- --
Cash dividends on preferred stock issued by
consolidated subsidiary............................ -- -- -- -- -- --
Exercise of stock options.......................... -- -- 2,800 -- -- --
Holding company reorganization and capitalization.. 18,245,265 $ 182 (18,245,265) (182) (2,070,000) (51,750)
Net loss for 1996.................................. -- -- -- -- -- --
------------- --------- ------------- --------- ------------- ---------
Balance, December 31, 1996......................... 18,245,265 182 -- -- -- --
Accumulated other comprehensive loss............... -- -- -- -- -- --
Minority interest in subsidiary.................... -- -- -- -- -- --
Acquisition of Hancock Savings Bank................ 1,058,575 11 -- -- -- --
Exercise of stock options.......................... 63,375 1 -- -- -- --
Net earnings for 1997.............................. -- -- -- -- -- --
------------- --------- ------------- --------- ------------- ---------
Balance, December 31, 1997......................... 19,367,215 194 -- -- -- --
Accumulated other comprehensive earnings........... -- -- -- -- -- --
Exercise of stock options and other stock 66,828 -- -- -- -- --
activity...........................................
Net loss for 1998.................................. -- -- -- -- -- --
------------- --------- ------------- --------- ------------- ---------
Balance, December 31, 1998......................... 19,434,043 $ 194 -- $ -- -- $ --
============= ========= ============ ========= ============= =========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL GAIN/(LOSS) DEFICIT EQUITY
----------- ------------ ----------- -------------
Balance, January 1, 1996........................... $ 262,151 $ 788 $ (85,828) $ 229,043
Accumulated other comprehensive earnings........... -- 255 -- 255
Cash dividends on preferred stock issued by
consolidated -- -- (1,553) (1,553)
subsidiary......................................
Exercise of stock options.......................... 23 -- -- 23
Holding company reorganization and capitalization (272) -- -- (52,022)
Net loss for 1996.................................. -- -- (14,089) (14,089)
----------- ------------ ----------- -------------
Balance, December 31, 1996......................... 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................ 12,001 -- -- 12,012
Exercise of stock options.......................... 529 -- -- 530
Net earnings for 1997.............................. -- -- 12,653 12,653
----------- ------------ ----------- -------------
Balance, December 31, 1997......................... 274,432 (4,467) (88,814) 181,345
Accumulated other comprehensive earnings........... -- 1,672 -- 1,672
Exercise of stock options and other stock 699 -- -- 699
activity...........................................
Net loss for 1998.................................. -- -- (56,328) (56,328)
----------- ------------ ----------- -------------
Balance, December 31, 1998......................... $ 275,131 $ (2,795) $ (145,142) $ 127,388
=========== ============ =========== =============
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,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings................................................. $ (56,328) $ 12,653 $ (14,089)
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Provisions for estimated loan and real estate losses........... 73,283 14,064 18,829
Losses (gains) on sale of loans and securities................. 10 2,131 (1,358)
FHLB stock dividends........................................... (3,699) (3,473) (3,072)
Depreciation and amortization.................................. 7,373 4,764 3,834
Amortization of discounts and net deferred loan fees and
accretion of premiums........................................ 7,448 263 (2,152)
Deferred income tax expense (benefit).......................... 3,117 (8,353) --
Issuance of stock and options.................................. 460 -- --
Purchases of MBS held for trading................................... (48,978) (60,717) (38,972)
Principal repayments of MBS held for trading........................ 2,829 2,405 62
Proceeds from sales of MBS held for trading......................... 86,481 31,915 24,971
Purchases of FHLB stock............................................. (1,250) (3,506) --
Interest receivable decrease (increase)............................. 5,364 (2,795) (39)
Other assets decrease (increase).................................... 6,335 31,317 (34,383)
Interest payable (decrease) increase................................ (4,383) 989 1,280
Other liabilities increase (decrease)............................... 1,852 (5,681) 2,554
-------------- -------------- --------------
Net cash provided by (used in) operating activities............... 79,914 15,976 (42,535)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hancock Savings Bank, FSB ("Hancock") acquisition................... -- 52,908 --
Coast Federal Bank, FSB ("Coast") deposit acquisition............... -- 47,489 --
Purchases of investment securities AFS.............................. (28,600) -- (201,313)
Maturities of investment securities AFS............................. 10,000 15,000 42,950
Proceeds from sales of investment securities AFS ................... 90,805 42,850 89,479
Maturities of investment securities held to maturity................ 2,280 2,286 2,286
Purchases of MBS AFS................................................ (159,835) (945,191) (206,089)
Principal repayments of MBS AFS..................................... 374,316 62,798 4,655
Proceeds from sales of MBS AFS...................................... 167,343 234,747 40,490
Purchase of MBS held to maturity.................................... -- -- (15,869)
Principal repayments of MBS held to maturity........................ -- 3,037 1,397
Purchase of derivative securities................................... (5,322) (3,541) --
Loans receivable, net decrease (increase)........................... 60,488 (52,292) 184,768
Proceeds from sales of real estate.................................. 28,956 59,542 35,544
Purchases of premises and equipment................................. (11,792) (3,768) (844)
-------------- -------------- --------------
Net cash provided by (used in) investing activities............... 528,639 (484,135) (22,546)
-------------- -------------- --------------
(CONTINUED ON FOLLOWING PAGE)
F-7
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net increase (decrease)......$ 34,156 $ (3,179) $ (125,589)
Certificate accounts, net (decrease) increase...................... (3,426) 146,518 20,653
Payment of Preferred Stock dividend................................ -- -- (1,553)
Proceeds from FHLB advances........................................ 705,000 1,320,941 349,008
Repayments of FHLB advances........................................ (1,129,960) (760,832) (191,857)
Short-term borrowing decrease...................................... -- (40,000) (10,000)
Repayments of long-term borrowings................................. -- (100,000) --
Bank Plus capitalization costs..................................... -- -- (272)
Proceeds from exercise of stock options............................ 239 530 23
-------------- -------------- --------------
Net cash (used in) provided by financing activities.............. (393,991) 563,978 40,413
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.................. 214,562 95,819 (24,668)
Cash and cash equivalents at beginning of period...................... 165,945 70,126 94,794
-------------- -------------- --------------
Cash and cash equivalents at end of the period........................$ 380,507 $ 165,945 $ 70,126
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other borrowings...........$ 212,222 $ 171,811 $ 149,067
Income tax payments (refunds)...................................... 755 (493) (257)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure......................... 25,500 53,214 48,663
Loans originated to finance sale of real estate owned............ 189 8,378 4,758
Transfers of MBS from held to maturity portfolio to AFS portfolio -- 26,998 --
Transfers from AFS portfolio to held to maturity portfolio:
Investment securities......................................... -- -- 7,378
MBS........................................................... -- -- 15,552
Exchange of Preferred Stock for Senior Notes..................... -- 51,478 --
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, 1998
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"), Gateway Investment Services, Inc. ("Gateway") and Bank Plus
Credit Services Corporation ("BPCS") (collectively, the "Company"). The Company
offers a broad range of consumer financial services, including demand and term
deposits and loans to consumers. In addition, through Gateway, a National
Association of Securities Dealers, Inc. ("NASD") registered broker/dealer, the
Bank provides customers with uninsured investment products, including mutual
funds and annuities. Fidelity operates through 38 full-service branches, 37 of
which are located in southern California, principally in Los Angeles and Orange
counties, and one of which is located in Bloomington, Minnesota. All significant
intercompany transactions and balances have been eliminated. Based on
management's process for evaluating financial information, assessing performance
and allocating resources, no separate operating segments were identified as of
December 31, 1998. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1998 presentation.
On July 18, 1997, the Company completed an exchange offer (the "Exchange
Offer") of the Company's Senior Notes for the outstanding shares of
Noncumulative Exchangeable Perpetual 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.
In May 1996, the Bank completed a reorganization pursuant to which all of
the outstanding Class A Common Stock of Fidelity was converted on a one-for-one
basis into outstanding common stock of Bank Plus and Bank Plus became the
holding company for Fidelity (the "Reorganization"). Bank Plus currently has no
significant business or operations other than serving as the holding company for
Fidelity, BPCS and Gateway, which prior to the Reorganization was a subsidiary
of the Bank. All references to "Fidelity" prior to the Reorganization include
Gateway.
On February 9, 1996, the Bank's stockholders approved a one-for-four
reverse stock split (the "Reverse Stock Split") of the issued and outstanding
shares of the Bank's Common Stock. All per share data and weighted average
common shares outstanding have been retroactively adjusted to reflect the
Reverse Stock Split.
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 $220.0 million in federal funds outstanding at December 31,
1998 and none at December 31, 1997. There were no whole loan investment
repurchase agreements at December 31, 1998 and $28.0 million outstanding at
December 31, 1997. At December 31, 1998, noninterest-earning cash reserves,
maintained by Fidelity to meet requirements of the Federal Reserve System,
totaled $8.9 million.
F-9
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company's securities principally consist of U.S. treasury and agency
securities and 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, net of any tax effect. 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
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 a loan 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 application fees and annual fees related to the issuance and
renewal of its 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.
Credit card loans are charged-off to the allowance for loan and lease
losses ("ALLL") upon reaching 180 days delinquency or earlier in certain
circumstances. Amounts charged-off include uncollected principal balance,
finance charges, late fees and other fees. The amount of the charge-off is
reduced by the amount of any, unamortized application and annual fees. The
amount of unamortized origination costs associated with charged-off accounts is
charged against credit card fee income.
ALLOWANCES FOR ESTIMATED LOAN LOSSES
The allowances for estimated losses on loans 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
F-10
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on loans where a loss has been identified and an 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 when, in the
Company's judgment, the loan is considered uncollectable.
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.
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. Upon the sale of servicing retained
loans, the Company capitalizes the costs associated with the right to service
mortgage loans based on their relative fair values. The Company determines the
fair value of the servicing rights based on the present value of estimated net
future cash flows related to servicing income. 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 for
each pool in the period of impairment. At December 31, 1998, mortgage servicing
rights were $1.6 million and no valuation allowance existed.
REAL ESTATE OWNED
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.
F-11
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, goodwill totaled $6.0 million
and had a remaining life of 14 years and the cost of core deposits purchased
totaled $8.0 million and had a remaining life of 6 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
affect 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 has employed various derivative financial instruments to hedge
valuation fluctuations in its trading and AFS securities portfolios. Financial
instruments entered into for trading purposes are carried at fair value, with
realized and unrealized changes in fair values recognized in 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, 1998, the Company had no derivative financial instruments
outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for financial statements for
periods beginning after June 15, 1999. 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.
F-12
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", effective for the first fiscal
quarter beginning after December 15, 1998. SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting MBS and other retained interest should be
classified in accordance with SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities," based on the Company's ability and intent to
sell or hold those investments. The Company does not believe the adoption of
SFAS No. 134 will have a material impact on its operations or financial
position.
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.
F-13
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998:
Investment securities:
Commercial paper................................. $ 28,797 $ -- $ -- $ -- $ 28,797
---------- ---------- ---------- ---------- ----------
MBS:
Federal Home Loan Mortgage Corporation ("FHLMC"). 3,843 -- (52) (52) 3,791
Federal National Mortgage Association ("FNMA")... 170,506 232 (752) (520) 169,986
Government National Mortgage Association ("GNMA") 86,422 218 (84) 134 86,556
Participation certificates....................... 23,055 -- -- -- 23,055
Collateralized mortgage obligations ("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
========== ========== ========== ========== ==========
DECEMBER 31, 1997:
Investment securities:
U.S. Treasury and agency securities.............. $ 100,032 $ 880 $ (75) $ 805 $ 100,837
---------- ---------- ---------- ---------- ----------
MBS:
FHLMC............................................ 10,384 11 (120) (109) 10,275
FNMA............................................. 228,893 2,095 (479) 1,616 230,509
GNMA............................................. 221,716 1,092 -- 1,092 222,808
Participation certificates....................... 24,860 -- -- -- 24,860
CMO.............................................. 344,513 194 (1,495) (1,301) 343,212
London Interbank Offered Rate Asset Trust........ 20,940 -- -- -- 20,940
---------- ---------- ---------- ---------- ----------
Total MBS...................................... 851,306 3,392 (2,094) 1,298 852,604
---------- ---------- ---------- ---------- ----------
Total securities AFS................................ $ 951,338 $ 4,272 $ (2,169) 2,103 $ 953,441
========== ========== ========== ==========
Net realized and unrealized losses (1).............. (6,770)
Deferred tax benefits............................... 200
----------
Net amount included in stockholders' equity......... $ (4,467)
==========
- ----------
(1) Includes net realized and unrealized losses from hedging activities and
unamortized market value adjustments recorded upon the transfer of
securities from AFS to held to maturity.
F-14
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of the dates indicated:
UNREALIZED
AMORTIZED ---------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998:
Investment securities........... $ 1,084 $ 15 $ -- $ 15 $ 1,099
========== ========== ========== ========== ==========
DECEMBER 31, 1997:
Investment securities........... $ 3,189 $ 19 $ -- $ 19 $ 3,208
========== ========== ========== ========== ==========
The following table summarizes the weighted average yield of debt
securities as of the dates indicated:
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
Investment securities:
AFS.......................................................... 5.55% 5.53%
Held to maturity............................................. 6.19 6.00
MBS:
AFS.......................................................... 6.79 7.05
Trading...................................................... -- 6.66
The following table presents the AFS and held to maturity portfolios at
December 31, 1998 by contractual maturity. Actual maturities on MBS may differ
from contractual maturities due to prepayments.
UNREALIZED
AMORTIZED --------------------- AGGREGATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
AFS:
Investment securities-- within 1 year......... $ 28,797 $ -- $ -- $ 28,797
---------- ---------- ---------- ----------
MBS:
Within 1 year............................... 153,864 -- (881) 152,983
Greater than 10 years....................... 313,941 569 (2,483) 312,027
---------- ---------- ---------- ----------
Total MBS................................. 467,805 569 (3,364) 465,010
---------- ---------- ---------- ----------
Total AFS........................................ $ 496,602 $ 569 $ (3,364) $ 493,807
========== ========== ========== ==========
Held to Maturity:
U. S. Treasury securities-- within 1 year..... $ 1,084 $ 15 $ -- $ 1,099
========== ========== ========== ==========
F-15
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following gains and losses were realized on debt securities, the costs
of which were computed on a specific identification method, during the periods
indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Sales:
AFS....................................................$ 258,148 $ 277,597 $ 129,969
Trading................................................ 86,481 31,915 24,971
------------ ------------ ------------
Total................................................$ 344,629 $ 309,512 $ 154,940
============ ============ ============
Gains (losses) on securities and trading activities, net:
AFS portfolio:
Gains................................................$ 49 $ 2,483 $ 1,215
Losses............................................... (368) -- (59)
------------ ------------ ------------
Total.............................................. (319) 2,483 1,156
------------ ------------ ------------
Trading portfolio:
Realized (losses) gains, net......................... (541) 187 187
Unrealized losses, net............................... -- -- (7)
------------ ------------ ------------
Total.............................................. (541) 187 180
------------ ------------ ------------
Losses on securities transferred to AFS portfolio...... -- (4,838) --
------------ ------------ ------------
Total.....................................................
$ (860) $ (2,168) $ 1,336
============ ============ ============
At December 31, 1998 and 1997, interest receivable in the accompanying
statements of financial condition include accrued interest receivable on debt
securities of $3.1 million and $6.7 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
The Company has 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. 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. At
December 31, 1998, the remaining unamortized loss was $3.3 million. 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 of December 31, 1998, the Company had no
derivative financial instruments outstanding.
F-16
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following derivative financial instruments were outstanding at December
31, 1997:
MATURITY/ AVERAGE
NOTIONAL EXERCISE FAIR UNREALIZED
INSTRUMENT AMOUNT DATE VALUE FAIR VALUE GAIN (LOSS)
----------------------------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Trading:
Interest rate cap............... $ 71,000 2007 $ 1,050 $ 818 $ (956)
Put option on treasury futures.. 6,500 1998 66 104 21
Commitments to purchase MBS..... 30,000 1998 58 58 58
Commitments to sell MBS......... 15,000 1998 1 1 1
Interest rate swap.............. 5,000 2002 16 (46) (46)
AFS:
Treasury futures ............... 205,900 1998 (2,615) (2,496) (2,496)
NOTE 5--LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single family.................................................... $ 486,864 $ 638,539
Multifamily:
2 to 4 units.................................................. 281,960 322,309
5 to 36 units................................................. 1,220,585 1,343,597
37 units and over............................................. 247,638 308,473
------------- -------------
Total multifamily........................................... 1,750,183 1,974,379
Commercial and industrial........................................ 179,956 204,656
Land 39 1,656
------------- -------------
Total real estate loans..................................... 2,417,042 2,819,230
Credit card loans................................................... 350,078 50,828
Other............................................................... 29,884 12,084
------------- -------------
Total loans, gross.................................................. 2,797,004 2,882,142
------------- -------------
Less:
Undisbursed loan funds........................................... 42 1,710
Unearned (premiums) discounts.................................... (4,227) (2,722)
Deferred loan fees............................................... 29,442 9,039
Allowances for estimated losses.................................. 106,171 50,538
------------- -------------
Total ........................................................ 131,428 58,565
------------- -------------
Total loans, net.................................................... $ 2,665,576 $ 2,823,577
============= =============
Fidelity's portfolio of mortgage loans serviced for others amounted to
$278.3 million at December 31, 1998 and $308.8 million at December 31, 1997. The
Bank sold the servicing rights to substantially all of the single family and 2-4
unit 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 have been 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 is being accreted over the
estimated life of the loans. The related accretion totaled $1.2 million, $2.2
million and $1.5 million during 1998, 1997 and 1996, respectively. At December
31, 1998, the remaining single family and 2 - 4 unit loans serviced by others
totaled $555.3 million and the deferred servicing gain was $3.0 million.
F-17
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and, accordingly, earn a higher rate of interest
to compensate in part for the risk. Approximately 99% of these loans are secured
by property within the state of California.
Fidelity's credit card loans, which were primarily marketed to customers
with lower credit quality, are generally unsecured open-end borrowings that have
experienced significantly higher levels of delinquency and defaults than the
Bank's mortgage loan portfolio. At December 31, 1998, $26.1 million of the
credit card loans were secured by real estate. 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, 1998. 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, 1998
and 1997, outstanding TDRs totaled $48.0 million and $44.0 million,
respectively.
For the years ended December 31, 1998, 1997 and 1996, interest income of
$4.0 million, $3.4 million and $3.6 million, respectively, was recorded on TDRs.
Total loans on nonaccrual status was $14.4 million and $13.1 million at
December 31, 1998 and 1997, respectively. The reduction in income related to
nonaccrual loans was $1.9 million, $3.9 million and $6.0 million for 1998, 1997
and 1996, respectively.
Of the total deferred loan fees at December 31, 1998, $7.6 million were
related to mortgage loans and $21.8 million were related to credit card loans.
Deferred loan fees on credit card loans represent origination fees and annual
fees charged to the cardholder net of direct origination costs.
F-18
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--REAL ESTATE OWNED
REO, which is included in other assets, consists of the following at the
dates indicated:
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
Real estate acquired through foreclosure........................... $ 9,536 $ 13,416
Allowance for estimated losses..................................... (1,139) (1,123)
------------ ------------
Net........................................................... $ 8,397 $ 12,293
============ ============
The following summarizes the results of REO operations for the periods
indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Losses from:
Real estate operations...................................... $ (2,384) $ (5,413) $ (5,688)
Provision for estimated real estate losses.................. (251) (1,060) (3,219)
------------ ------------ ------------
Net loss from real estate operations....................... $ (2,635) $ (6,473) $ (8,907)
============ ============ ============
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, 1996............................... $ 89,435 $ 3,492 $ 92,927
Charge-offs........................................... (50,841) (4,630) (55,471)
Recoveries and other.................................. 3,304 -- 3,304
------------ ------------ ------------
Net charge-offs..................................... (47,537) (4,630) (52,167)
Provision for losses.................................. 15,610 3,219 18,829
------------ ------------ ------------
Balance at December 31, 1996............................. 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
============ ============ ============
F-19
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998 and December 31, 1997, the gross recorded investment
in mortgage loans that are considered to be impaired was $42.0 million, and
$40.8 million, respectively. Included in these amounts are impaired mortgage
loans of $22.5 million and $30.1 million at December 31, 1998 and 1997,
respectively, for which SVAs have been established totaling $6.2 million and
$10.5 million, respectively. The average balance of impaired mortgage loans was
$41.4 million and $97.2 million at December 31, 1998 and 1997, respectively. The
amount of interest income recognized on impaired mortgage loans was $2.9
million, $2.1 million and $9.4 million in 1998, 1997 and 1996, respectively.
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. As of June 30, 1998, the Plan was terminated 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.
The credit enhanced credit card programs require the marketing agent to, as
part of their contractual obligation to reimburse Fidelity for credit losses,
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. At December 31, 1998 and 1997, cash reserves were $1.9 million
and $4.3 million, respectively. During the year, 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, $2.9 million of cash reserves were transferred into
Fidelity's ALLL during 1998.
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, based upon various assumptions as to economic and other
conditions. As such, the allowance for loan losses does not represent the amount
of such losses that could be incurred under adverse conditions that management
does not consider to be the most likely to arise. In addition, management's
classification of assets and evaluation of the adequacy of the allowance for
loan losses is an ongoing process. Consequently, there can be no assurance that
material additions to the Bank's allowance for loan losses will not be required
in the future, thereby adversely affecting earnings and the Bank's ability to
maintain or build capital. While management believes that the current allowance
is adequate to absorb the known and inherent risks in the loan portfolio, no
assurances can be given that the allowance is adequate or that economic
conditions which may adversely affect the Bank's market area or other
circumstances will not result in future loan losses, which may not be covered
completely by the current allowance or may require an increased provision which
could have a significant adverse effect on the Bank's financial condition,
results of operations and levels of regulatory capital.
F-20
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--DEPOSITS
Deposits consist of the following balances at the dates indicated:
DECEMBER 31,
------------------------------------------------
1998 1997
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
TYPE OF ACCOUNT:
Passbook.................................................. $ 56,836 2.00% $ 67,502 2.00%
Checking and money market checking........................ 380,292 1.24 336,036 1.17
Money market savings...................................... 56,451 3.68 55,885 4.17
----------- -----------
Total transaction accounts.............................. 493,579 1.61 459,423 1.66
----------- -----------
Certificates of deposit ("CDs"):
Less than $100,000...................................... 1,795,000 5.06 1,711,172 5.33
Greater than $100,000................................... 633,952 5.32 721,206 5.61
----------- -----------
Total CDs............................................. 2,428,952 5.12 2,432,378 5.41
----------- -----------
Total deposits............................................ $2,922,531 4.53 $2,891,801 4.82
=========== ===========
Fidelity had noninterest-bearing checking accounts of $111.5 million and
$99.6 million at December 31, 1998 and 1997, respectively. At December 31, 1998,
CDs were scheduled to mature as follows:
AMOUNT
-------------
(DOLLARS IN
YEAR OF MATURITY THOUSANDS)
- ----------------
1999...................................................................... $ 1,661,668
2000...................................................................... 281,416
2001...................................................................... 16,057
2002...................................................................... 16,939
After 2002................................................................ 452,872
-------------
Total.................................................................. $ 2,428,952
=============
The Company, from time to time, has also utilized brokered deposits as a
short-term means of funding. These deposits are obtained or placed by or through
a deposit broker and are subject to certain regulatory limitations. The Company
had no brokered deposits outstanding at December 31, 1998 and 1997.
F-21
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance at year-end.......................................... $ 585,000 $ 1,009,960 $ 449,851
Average amount outstanding during the year................... 1,005,388 698,261 296,596
Maximum amount outstanding at any month-end.................. 1,189,960 1,209,960 449,851
Weighted average interest rate during the year............... 5.77% 5.84% 5.43%
Weighted average interest rate at year-end................... 5.69% 5.82% 5.53%
Secured by:
FHLB Stock............................................... $ 65,358 $ 60,498 $ 52,330
Mortgage loans........................................... 413,192 1,315,389 989,138
Investment securities and MBS............................ 367,729 581,445 117,786
------------- ------------- -------------
Total................................................... $ 846,279 $ 1,957,332 $ 1,159,254
============= ============= =============
The maturities and weighted average interest rates on FHLB advances are
summarized as follows at December 31, 1998:
WEIGHTED
AVERAGE
AMOUNT RATE
----------- ----------
(DOLLARS IN THOUSANDS)
YEAR OF MATURITY
- ----------------
2000........................................................... $ 45,000 6.80
2003........................................................... 540,000 5.60
-----------
Total....................................................... $ 585,000 5.69
===========
NOTE 10--OTHER BORROWINGS
At December 31, 1998 and 1997, 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. Historically, Bank Plus funds the interest
payments on the Senior Notes through preferred stock and common stock dividends
from Fidelity. Bank Plus holds $51.5 million of Preferred Stock of Fidelity,
which pays quarterly 10% dividends and is 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. The common stock dividends, which are used to fund the difference
between the rate on the Senior Notes and the rate on the preferred stock
dividends, are currently subject to OTS approval. No assurance can be given that
the OTS will approve the common stock dividends in the future, 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. The February 1999 Senior Note interest payments were funded by the
preferred stock dividend from Fidelity and cash on hand at Bank Plus. In future
periods, Bank Plus may be able to increase its liquidity through dividends from
Gateway or BPCS. No assurance can be given that funds will continue to be
available at Bank Plus to pay future interest payments, or that dividends will
be able to be made by Gateway or BPCS to provide additional liquidity. 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-22
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No short-term borrowings were outstanding during 1998. The following table
summarizes short-term borrowings for the periods indicated:
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Commercial paper:
Balance at year-end.................................................. $ -- $ 40,000
Average amount outstanding during the year........................... 11,417 93,457
Maximum amount outstanding at any month-end.......................... 40,000 140,000
Weighted average interest rate during the year....................... 6.26% 5.72%
Weighted average interest rate at year end........................... --% 5.36%
Securities sold under agreement to repurchase:
Balance at year-end.................................................. $ -- $ --
Average amount outstanding during the year........................... 2,260 25,382
Maximum amount outstanding at any month-end.......................... 25,500 73,007
Weighted average interest rate during the year....................... 5.35% 5.17%
Federal funds purchased:
Balance at year-end.................................................. $ -- $ --
Average amount outstanding during the year........................... 135 --
Maximum amount outstanding at any month-end.......................... -- --
Weighted average interest rate during the year....................... 5.93% --%
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 are sufficient to satisfy legal
funding requirements.
The components of net pension costs are as follows for the periods
indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest cost....................................................... $ 163 $ 158 $ 202
Actual return on plan assets........................................ (246) (207) (426)
Net amortization and deferral....................................... (69) (51) 149
Effect of partial settlements....................................... 120 55 189
----------- ----------- -----------
Net pension costs................................................ $ (32) $ (45) $ 114
========== =========== ===========
F-23
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of this plan was as follows as of the dates indicated:
DECEMBER 31,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Accumulated benefit obligation (all participants are vested)............. $ (2,397) $ (2,461)
Fair value of plan assets................................................ 3,126 2,839
----------- -----------
Net plan assets over projected benefit obligation.................... 729 378
Minimum liability adjustment............................................. 155 474
----------- -----------
Prepaid pension cost................................................. $ 884 $ 852
=========== ===========
Actuarial assumptions:
Discount rate........................................................ 6.50% 7.00%
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 $0.4 million, $0.1 million and $0.1 million
in the years ended December 31, 1998, 1997 and 1996, respectively.
DIRECTORS' RETIREMENT PLAN
The Directors' Retirement Plan provides for non-employee directors who have
at least three years of Board service, including service on the Board of
Directors prior to the 1994 restructuring and recapitalization.
An eligible director shall, after termination from Board service for any
reason other than cause, be entitled to receive a quarterly payment equal to one
quarter of his/her average annual compensation (including compensation for
service on the Board of 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 $0.9 million at both December 31, 1998 and 1997, and net pension costs were
$0.3 million for both 1998 and 1997.
F-24
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,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Current income tax expense (benefit):
Federal................................................... $ 716 $ 199 $ (1,100)
State..................................................... 37 54 7
----------- ----------- -----------
Total.................................................... 753 253 (1,093)
----------- ----------- -----------
Deferred income tax expense (benefit):
Federal................................................... 3,547 (7,425) --
State..................................................... (430) (928) --
----------- ----------- -----------
Total.................................................... 3,117 (8,353) --
----------- ----------- -----------
Total income tax expense (benefit)............................ $ 3,870 $ (8,100) $ (1,093)
=========== =========== ===========
Income tax asset/(liability) was comprised of the following at the dates
indicated:
DECEMBER 31,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Current income tax asset:
Federal................................................................$ 432 $ 626
State.................................................................. 382 186
----------- -----------
Total.............................................................. 814 812
----------- -----------
Deferred income tax asset (liability):
Federal................................................................ 51,499 33,621
Valuation allowance--Federal........................................... (47,779) (26,204)
State.................................................................. 12,277 6,068
Valuation allowance--State............................................. (11,053) (5,224)
----------- -----------
Total.............................................................. 4,944 8,261
----------- -----------
Total income tax asset/(liability).........................................$ 5,758 $ 9,073
=========== ===========
F-25
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,
--------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
FEDERAL:
Deferred tax assets:
Bad debt and loan loss deduction................................... $ 28,587 $ 12,218
Net operating loss carryover....................................... 25,081 38,186
Alternative minimum tax credit carryover........................... 3,624 3,059
Contingent liabilities............................................. 1,427 1,970
Debt modification gain............................................. 1,027 1,189
Sale of servicing income........................................... 1,046 1,184
Depreciation....................................................... 1,139 577
Deferred fees on credit cards...................................... 7,614 --
Receivable from credit card marketer............................... 2,865 --
Unrealized loss on securities AFS.................................. 978 1,633
Other.............................................................. 3,480 2,537
------------ ------------
Gross deferred tax assets............................................ 76,868 62,553
------------ ------------
Deferred tax liabilities:
Loan fees and interest............................................. (5,370) (6,714)
FHLB stock dividends............................................... (16,402) (15,556)
Accrual to cash adjustment on pre-1986 loans....................... (428) (2,508)
Mark to market adjustment.......................................... (978) (1,633)
Other.............................................................. (2,191) (2,521)
------------ ------------
Gross deferred tax liabilities....................................... (25,369) (28,932)
------------ ------------
Net deferred tax assets before valuation allowance 51,499 33,621
Valuation allowance.................................................. (47,779) (26,204)
------------ ------------
Net deferred tax asset............................................... $ 3,720 $ 7,417
============ ============
STATE:
Deferred tax assets:
Bad debt and loan loss deduction................................... $ 11,021 $ 7,867
Net operating loss carryover....................................... 3,269 4,765
Depreciation....................................................... 583 448
Sale of servicing income........................................... 322 486
Deferred fees on credit cards...................................... 2,342 --
Receivable from credit card marketer............................... 881 --
Alternative minimum tax credit carryover........................... 404 312
Contingent liabilities............................................. 439 610
Unrealized loss on securities AFS.................................. 303 506
Other.............................................................. 1,230 761
------------ ------------
Gross deferred tax assets............................................ 20,794 15,755
------------ ------------
Deferred tax liabilities:
Loan fees and interest............................................. (1,620) (2,061)
FHLB stock dividends............................................... (5,044) (4,818)
Mark to market adjustment.......................................... (367) (619)
Accrual to cash adjustment on pre-1986 loans....................... (132) (777)
Core deposit intangibles........................................... (857) (904)
Other.............................................................. (497) (508)
------------ ------------
Gross deferred tax liabilities....................................... (8,517) (9,687)
------------ ------------
Net deferred tax assets before valuation allowance 12,277 6,068
Valuation allowance.................................................. (11,053) (5,224)
------------ ------------
Net deferred tax asset............................................... $ 1,224 $ 844
============ ============
Combined total........................................................... $ 4,944 $ 8,261
============ ============
F-26
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 or liability was recorded in stockholder's equity
as of December 31, 1998. As of December 31, 1997, $0.2 million of deferred tax
assets were reflected in stockholders' equity.
A reconciliation from the consolidated statutory federal income tax expense
(benefit) to the consolidated effective income tax expense (benefit) follows for
the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Expected federal income tax (benefit) expense................$ (18,351) $ 3,075 $ (3,684)
Increases (reductions) in taxes resulting from:
Franchise tax (benefit) expense, net of federal income
tax and valuation allowance............................. (256) (568) 4
Addition (reduction) to valuation allowance.............. 22,230 (9,973) 91
Specified liability loss carryback under Internal
Revenue Code Section 172(f)............................. -- -- (1,100)
Bad debt recapture....................................... -- -- 3,227
Goodwill amortization.................................... 156 77 --
Other.................................................... 91 (711) 369
------------ ------------ ------------
Income tax expense (benefit).................................$ 3,870 $ (8,100) $ (1,093)
============ ============ ============
Various federal Form 1120Xs "Amended U.S. Corporation Income Tax Return"
were filed in 1996 for years 1986 through 1989, 1991, 1992 and 1994 to reflect
the 10-year loss carryback under Internal Revenue Code ("IRC") Section 172(f)
for qualifying deductions through August 4, 1994. These amended tax returns were
filed with the Bank's former parent company, Citadel. Fidelity recorded $1.1
million of tax benefit in 1996 with respect to these amended tax returns.
The Internal Revenue Service (the "Service") has completed its examination
of the federal income tax returns for 1992, 1993 and tax year ended August 4,
1994 and review of the aforementioned carryback claim. A compromise of all
unagreed issues for these years has been reached and is currently under review
by the Service's Joint Committee on Taxation. The Service is currently beginning
a new examination of the federal income tax returns for the short year ended
December 31, 1994 and the calendar years 1995, 1996 and 1997. The California
Franchise Tax Board (the "FTB") has completed its examination of the California
franchise tax returns for years 1988 through 1991. This examination is currently
in the settlement process awaiting final approval by the FTB. The company does
not expect the results of these audits will have a material adverse effect on
the consolidated financial statements of the Company.
F-27
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IRC Sections 382 and 383 and the Treasury Regulations thereunder generally
provide that following an ownership change of a corporation with a net operating
loss ("NOL"), a net unrealized built-in loss or tax credit carryovers, the
amount of annual post-ownership change taxable income that can be offset by
pre-ownership change NOLs, or recognized built-in losses and the amount of
post-ownership change tax liability that can be offset by pre-ownership change
tax credits cannot exceed a limitation prescribed by IRC Section 382. This
annual limitation generally equals the product of the fair market value of the
equity of the corporation immediately before the ownership change (subject to
various adjustments) and the federal long-term tax-exempt rate prescribed
monthly by the Service.
As a result of the 1994 restructuring and recapitalization, the Bank
underwent an ownership change, ceased to be a member of the Citadel consolidated
group, and became subject to the annual limitations under IRC Section 382. As a
result of the 1995 recapitalization, the Bank again underwent an ownership
change and became subject to the annual limitations under Section IRC 382. The
limitations imposed by the 1995 change of ownership are inclusive of the
limitations imposed by the 1994 change of ownership. The measurement of whether
a change in ownership has occurred is based on changes in the holdings of
significant shareholders and on the period of time in which any changes occur.
The Company has experienced substantial changes of its significant shareholders
in ownership and further changes may create a change in ownership as defined by
IRC Section 382. If this would occur, the Company would become subject to a new
annual limitation under IRC Section 382.
Hancock was merged with and into Fidelity as of June 30, 1997 in a tax-free
reorganization within the meaning of IRC Section 368(a)(1)(A), by reason of the
application of IRC Section 368(a)(2)(D). The total net deferred tax assets of
Hancock and the related valuation allowance are included in the balances of net
deferred taxes starting as of December 31, 1997. In accordance with the
provisions of SFAS No. 109, any subsequent reductions in the valuation allowance
associated with the deferred tax assets of Hancock will be reflected as an
adjustment to any remaining unamortized goodwill with respect to this
acquisition.
As of December 31, 1998, the Bank had an estimated NOL carryover for
federal income tax purposes of $71.7 million expiring in years 2008 through
2011. Of this amount, $59.8 million is subject to annual utilization limitations
as a result of the 1994 and 1995 changes of ownership and Hancock's change of
ownership occurring as part of its 1997 acquisition by the Bank. For California
franchise tax purposes, the Bank had an estimated NOL carryover of $30.2
million. Of the estimated California NOL carryover, $26.6 million relates to the
Bank's operations and expire in years 1999 through 2002, and $3.6 million
relates to Hancock's NOL's expiring in years 2000 through 2009. Of the total
$30.2 million California NOL, $16.3 million is subject to annual utilization
limitations as a result of the Bank's 1995 change of ownership and Hancock's
1997 change of ownership.
Effective for taxable years beginning after 1995, legislation enacted in
1996 has repealed for federal purposes the reserve method of accounting for bad
debts for thrift institutions. While thrifts qualifying as "small banks" may
continue to use the experience method, Fidelity is deemed a "large bank" and is
required to use the specific charge off method. In addition, this enacted
legislation contains certain income recapture provisions, which are discussed
below.
Thrift institutions deemed "large banks" are required to include into
income ratably over 6 years, beginning with the first taxable year beginning
after 1995, the institution's "applicable excess reserves." The applicable
excess reserves are the excess of (1) the balance of the institution's reserves
for losses on loans other than supplemental reserves at the close of its last
taxable year beginning before January 1, 1996, over (2) the adjusted balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. Fidelity's applicable excess reserves at December 31, 1995 were $14.6
million. This amount is being recognized into taxable income over six years at
F-28
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the rate of $2.4 million per year starting with the taxable year ended December
31, 1996. In addition, $1.5 million in Hancock excess reserves were recorded as
part of its acquisition as of June 30, 1997. This excess reserve amount is to be
recognized into income over a four year period. The remaining applicable excess
reserves at December 31, 1998 were $8.3 million.
The remaining adjusted pre-1988 total reserve balance of $26.3 million at
December 31, 1998 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. Based on current estimates, Fidelity had current earnings and
profits at December 31, 1998 sufficient to cover 1998 distributions to
shareholders. As a result, Fidelity did not trigger any reserve recapture into
taxable income for 1998.
Under the provisions of SFAS No. 109, a deferred tax liability has not been
provided for the remaining adjusted pre-1988 total loan loss reserve balance of
$26.3 million at December 31, 1998. The use of these reserves in a manner that
results in a recapture into taxable income as previously discussed will require
federal taxes to be provided at the then current income tax rate. The use of
these reserves in such a manner is not anticipated.
NOTE 13--COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, significant litigation outstanding against the
Company included:
MMG Direct (MMG), a credit card marketer brought litigation claiming
damages after the Company filed its claim in arbitration against MMG and after
the Company terminated its credit card program with MMG. The Bank believes that
the claims asserted by MMG are without merit and the Bank intends to vigorously
defend itself and to pursue its own claims against MMG.
A purported class action, recently amended, has been filed on behalf of
certain shareholders claiming, among other things, negligent misrepresentation,
common law fraud, statutory fraud and violations of the California Corporations
Code. The complaint has not yet been served on the Company or any of the
individual defendants. The Company believes that the claims are meritless and
intends to vigorously defend itself.
Litigation filed in federal district court raises claims with respect to
the manner in which the Bank originated and serviced certain adjustable rate
mortgage loans. The district court has certified a class in the action. The
parties are currently in settlement negotiations and certain reserves have been
established relating to this litigation.
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.
The Company has a number of other lawsuits and claims pending arising in
the normal course of business. Although there can be no assurance, the Company's
management believes that none of these lawsuits or claims will have a material
adverse effect on the financial condition or business of the Company.
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, 1998, the Company had less than $0.1
million in commitments to fund loans. There was an unused line of credit of
$16.9 million associated with a mortgage warehouse credit agreement. In
addition, the Company has extended lines of credit in the form of credit cards
totaling $431.3 million, of which $81.2 million was unused and available at
December 31, 1998.
F-29
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, the Company had certain mortgage loans with a
gross principal balance of $78.7 million, of which $65.7 million had been sold
in the form of mortgage pass-through certificates, over various periods of time,
to four investor financial institutions leaving a balance of $13.0 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 $65.7 million held by investors are deemed Senior Mortgage
Pass-Through Certificates and the $13.0 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 $13.0 million is subject to this
contingent liability due to its subordination. In 1993, the Bank repurchased as
an investment a portion of the mortgage pass-through certificates, and at
December 31, 1998, the balance of the repurchased certificate was $23.1 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 $42.6
million at December 31, 1998 are owned by other investor institutions. The
contingent liability for credit losses on these mortgage pass-through
certificates was $0.9 million and $2.1 million at December 31, 1998 and 1997,
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, 1998 of $89.8
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, 1998, $16.4 million, comprised of $12.2 million in
cash and $4.2 million in U.S. Treasury securities and MBS. The Company shall
absorb losses, if any, which may be incurred on the securitized multifamily
loans to the extent of $16.4 million. FNMA is responsible for any losses in
excess of $16.4 million. The corresponding contingent liability for credit
losses was $2.3 million and $4.0 million at December 31, 1998 and 1997,
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, 1998, 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 )
- ------------------
1999...................................................................... $ 4,687
2000...................................................................... 4,008
2001...................................................................... 3,847
2002...................................................................... 2,745
2003...................................................................... 1,895
Thereafter................................................................ 6,935
-------------
Total................................................................... $ 24,117
=============
Operating expense includes rent expense of $4.1 million in 1998, $2.9
million in 1997 and $3.3 million in 1996.
F-30
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--REGULATORY MATTERS
The OTS capital regulations, as required by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") include three separate
minimum capital requirements for the savings institution industry--a "tangible
capital requirement," a "leverage limit" and a "risk-based capital requirement."
The Bank's actual and required capital are as follows at the dates
indicated:
TO BE ADEQUATELY
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1998:
Total capital (to risk-weighted
assets)..........................$ 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
assets).......................... 161,506 4.36 55,514 1.50 N/A
Tier I capital (to risk-weighted
assets).......................... 161,506 7.66 N/A 84,328 4.00
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1997:
Total capital (to risk-weighted
assets).......................... 244,719 11.57 168,157 8.00 211,447 10.00
Core capital (to adjusted tangible
assets).......................... 218,296 5.26 124,485 3.00 207,476 5.00
Tangible capital (to tangible
assets).......................... 218,296 5.26 62,243 1.50 N/A
Tier I capital (to risk-weighted
assets).......................... 218,296 10.32 N/A 126,868 6.00
F-31
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, 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, 1997:
Consolidated stockholders' equity................. $ 181,345 $ 181,345 $ 181,345
Adjustments:
Fidelity's Preferred Stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (3,063) (3,063) (3,063)
------------ ------------ ------------
Fidelity's stockholders' equity................... 230,032 230,032 230,032
Accumulated other comprehensive loss.............. 4,467 4,467 4,467
Adjustments:
Intangible assets............................... (16,185) (16,185) (16,185)
Nonincludable subsidiaries...................... (18) (18) (18)
Excess ALLL..................................... -- -- 26,505
Equity investments.............................. -- -- (82)
------------ ------------ ------------
Regulatory capital.................................. $ 218,296 $ 218,296 $ 244,719
============ ============ ============
As of December 31, 1998, the Bank was "adequately capitalized" 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, 1998, the most constraining of the capital ratio measurements was
core capital to adjusted tangible assets which had an excess of $13.5 million
above the minimum level required to be considered adequately capitalized. The
Bank's capital amounts and classification are subject to review by federal
regulators about components, risk-weightings and other factors. There are no
conditions or events since December 31, 1998 that management believes have
changed the institution's category.
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-32
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.
MANDATORY SANCTIONS IF THE BANK WERE CATEGORIZED AS UNDERCAPITALIZED
CAPITAL RESTORATION PLAN. An institution that is undercapitalized must
submit a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels of
activities the institution will conduct, and such other information as the OTS
may require. The OTS must act on the capital restoration plan expeditiously and
generally not later than 60 days after the plan is submitted.
The OTS may approve a capital restoration plan only if the OTS determines
that the plan is likely to succeed in restoring the institution's capital and
will not appreciably increase the risks to which the institution is exposed. In
addition, the OTS may approve a capital restoration plan only if the
institution's performance under the plan is guaranteed by every company that
controls the institution, up to the lesser of (a) 5% of the institution's total
assets at the time the institution became undercapitalized or (b) the amount
necessary to bring the institution into compliance with all capital standards as
of the time the institution fails to comply with its capital restoration plan.
Such guarantee must remain in effect until the institution has been adequately
capitalized for four consecutive quarters and the controlling company or
companies must provide the OTS with appropriate assurances of their ability to
perform the guarantee. If the controlling company guarantee is not acceptable,
the OTS may treat the undercapitalized institution as significantly
undercapitalized. There are additional restrictions which are applicable to
significantly undercapitalized institutions which are described below.
LIMITS ON EXPANSION. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
CAPITAL DISTRIBUTIONS. With one exception, an undercapitalized savings
institution generally may not pay any dividends or make other capital
distributions. Under the exception, the OTS may permit, after consultation with
the FDIC, repurchases or redemptions of the institution's shares that are made
in connection with the issuance of additional shares to improve the
institution's financial condition. Undercapitalized institutions also may not
pay management fees to any company or individual that controls the institution.
Similarly, an adequately capitalized institution may not make a capital
distribution or pay a management fee to a controlling person if such payment
would cause the institution to become undercapitalized.
BROKERED DEPOSITS AND BENEFIT PLAN DEPOSITS. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
F-33
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--EARNINGS PER SHARE
The reconciliation of the numerators and denominators used in basic and
diluted (loss) earnings per share follows for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Loss) earnings available for common stockholders............$ (56,328) $ 12,653 $ (15,642)
============ ============ ============
Weighted average common shares outstanding:
Basic.................................................... 19,395,337 18,794,887 18,242,887
Effect of dilutive securities-- stock options............ -- 348,152 --
Effect of dilutive securities-- deferred stock awards.... -- 194 --
------------ ------------ ------------
Diluted.................................................. 19,395,337 19,143,233 18,242,887
============ ============ ============
(Loss) earnings per share:
Basic....................................................$ (2.90) $ 0.67 $ (0.86)
Effect of dilutive securities-- stock options............ -- (0.01) --
Effect of dilutive securities-- deferred stock awards.... -- -- --
------------ ------------ ------------
Diluted..................................................$ (2.90) $ 0.66 $ (0.86)
============ ============ ============
For the years ended December 31, 1998 and 1996, 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
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
F-34
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996............................................ 1,296,500 $ 8.35
Expired........................................................... (14,500) 8.35
Exercised......................................................... (2,800) 8.35
-------------
Balance, December 31, 1996.......................................... 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
=============
A summary of the outstanding stock options at December 31, 1998 follows:
WEIGHTED AVERAGE
NUMBER REMAINING
EXERCISE PRICES OF OPTIONS CONTRACTUAL LIFE
----------------------------- ---------- ----------------
$8.35 428,500 6.9
$10.25 20,000 8.3
$14.00 -- 14.50 96,250 9.3
$3.81 1,342,000 9.9
---------
Total........................ 1,886,750
=========
As of March 28, 1999, 135,125 stock options expired due to employee
terminations.
F-35
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
===========
During 1998, the Company granted 63,853 of restricted stock to senior
officers in lieu of $0.5 million in cash bonuses. These grants vest 33.3% on
January 1, 1999, 33.3% on January 1, 2000 and 33.3% on January 1, 2001. During
1998, 23,837 of these 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 less
than $0.1 million and $0.5 million in 1998 and 1997, respectively.
The fair value of options granted under the Stock Option Plan for 1998,
1997 and 1996 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for 1998 and 1997 and
1996, respectively: no dividend yield, expected stock price volatility of 74%,
60% and 77% for 1998, 1997 and 1996, 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 4.68%, 5.74% and 5.70%
for 1998, 1997 and 1996, respectively, and an option contract life of 10 years.
The Company applied 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, 1998, 1997 and 1996 would have been changed to
the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net (loss) earnings to common stockholders:
As reported........................................ $ (56,328) $ 12,653 $ (15,642)
Pro forma.......................................... (57,061) 9,182 (16,521)
Basic net (loss) earnings per common share:
As reported........................................ (2.90) 0.67 (0.86)
Pro forma.......................................... (2.94) 0.49 (0.91)
Diluted net (loss) earnings per common share:
As reported........................................ (2.90) 0.66 (0.86)
Pro forma.......................................... (2.94) 0.48 (0.91)
Weighted-average fair value per share of options granted 2.98 9.57 6.87
F-36
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities AFS............... $ 28,797 $ 28,797 $ 100,837 $ 100,837
Investment securities held to maturity.. 1,084 1,099 3,189 3,208
MBS AFS................................. 465,010 465,010 852,604 852,604
MBS held for trading.................... -- -- 41,050 41,050
Loans receivable........................ 2,665,576 2,707,333 2,823,577 2,818,236
Mortgage servicing rights............... 1,630 5,368 2,056 5,346
Other assets............................ -- -- 922 922
FINANCIAL LIABILITIES:
Deposits................................ 2,922,531 2,939,723 2,891,801 2,899,964
FHLB advances........................... 585,000 596,293 1,009,960 1,012,640
Senior Notes............................ 51,478 67,227 51,478 61,522
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitment to sell MBS.................. -- -- -- 1
Commitment to purchase MBS.............. -- -- -- 58
Interest rate swap...................... -- -- -- (46)
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.
F-37
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS RECEIVABLE
The estimated fair values of mortgage loans are based on an option adjusted
cash flow valuation ("OACFV"). The OACFV includes forward interest rate
simulations and takes into account the credit quality of performing and
nonperforming loans. Such valuations may not be indicative of the value derived
upon a sale of all or part of the portfolio.
The fair value of the Company's credit card loans included in the above
table is equal to the outstanding balances of the credit card balances less any
applicable allowances for loan losses and deferred fees. 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 Company is not
currently able to compute a fair value of the credit card portfolio, including
any unused credit lines. 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.
MORTGAGE SERVICING RIGHTS
The estimated fair values of mortgage servicing rights are based on an
OACFV analysis.
OTHER ASSETS
Fair value of trading derivative instruments are based on quoted market
prices.
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.
OFF-BALANCE SHEET INSTRUMENTS, WHICH INCLUDE INTEREST RATE SWAPS, FLOORS AND
OPTIONS
The estimated fair value for the Company's off-balance sheet instruments
are based on quoted market prices, when available, or an OACFV analysis.
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, 1998 and 1997 include "cash and cash equivalents",
"interest receivable", "investment in FHLB stock" and interest payable.
F-38
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)
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 19,393,357 19,385,946 19,369,326
Diluted................................. 19,395,337 19,500,227 19,393,357 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
1997:
Interest income........................... $ 255,007 $ 72,314 $ 65,531 $ 58,455 $ 58,707
Interest expense.......................... 174,009 52,432 45,098 38,129 38,350
----------- ----------- ----------- ----------- -----------
Net interest income..................... 80,998 19,882 20,433 20,326 20,357
Provision for estimated loan losses....... 13,004 251 4,251 4,251 4,251
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
estimated loan losses................ 67,994 19,631 16,182 16,075 16,106
Noninterest income (expense).............. 3,890 (2,206) 2,349 2,049 1,698
Operating expense......................... 63,096 17,238 16,481 15,041 14,336
----------- ----------- ----------- ----------- -----------
Earnings before income tax and minority
interest in subsidiary.................. 8,788 187 2,050 3,083 3,468
Income tax benefit........................ (8,100) (1,600) (1,700) (2,500) (2,300)
Minority interest in subsidiary........... 4,235 7 342 2,333 1,553
----------- ----------- ----------- ----------- -----------
Earnings available for common stockholders $ 12,653 $ 1,780 $ 3,408 $ 3,250 $ 4,215
========== =========== =========== ========== ===========
Earnings per share:
Basic................................... $ 0.67 $ 0.08 $ 0.18 $ 0.18 $ 0.23
Diluted................................. $ 0.66 $ 0.08 $ 0.17 $ 0.18 $ 0.23
Weighted average common shares outstanding:
Basic................................... 18,794,887 19,356,825 19,310,813 18,248,754 18,245,265
Diluted................................. 19,143,233 19,732,348 19,648,242 18,496,194 18,656,085
Market prices of common stock:
High ................................... $ 13.75 $ 13.69 $ 13.25 $ 11.50 $ 13.75
Low .................................... $ 9.63 $ 11.06 $ 10.75 $ 9.63 $ 10.38
F-39
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19--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,
----------------------------
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and cash equivalents......................................... $ 719 $ 974
Loans receivable.................................................. 445 565
Investment in Preferred Stock of subsidiary....................... 51,478 51,478
Investment in subsidiaries........................................ 129,661 184,079
Other assets...................................................... 251 1,126
------------- -------------
Total Assets $ 182,554 $ 238,222
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Senior Notes.................................................... $ 51,478 $ 51,478
Other liabilities............................................... 893 932
------------- -------------
Total Liabilities 52,371 52,410
Stockholders' equity.............................................. 130,183 185,812
------------- -------------
Total Liabilities and Stockholders' Equity...................... $ 182,554 $ 238,222
============= =============
F-40
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PLUS CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED
------------------------------- DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
INCOME:
Interest income.................................. $ 32 $ 49 $ 29
Interest expense................................. 6,199 2,782 --
------------- ------------- -------------
Net interest (expense) income....................... (6,167) (2,733) 29
------------- ------------- -------------
OPERATING EXPENSE:
Personnel and benefits........................... 3 -- --
Occupancy 150 257 --
Professional services............................ 187 219 208
Intercompany expense allocation.................. 359 271 143
Write-off of investment.......................... 558 -- --
Other............................................ 49 93 42
------------- ------------- -------------
Total operating expense........................ 1,306 840 393
------------- ------------- -------------
Loss before income taxes............................ (7,473) (3,573) (364)
Income tax expense (benefit)........................ 180 (384) (149)
------------- ------------- -------------
Loss before equity in undistributed (loss)
earnings and minority interest of subsidiaries... (7,653) (3,189) (215)
Equity in undistributed net (loss) earnings
of subsidiaries.................................. (48,647) 20,077 (9,217)
Minority interest in subsidiary..................... (28) (4,235) (4,657)
------------- ------------- -------------
Net (loss) earnings................................. $ (56,328) $ 12,653 $ (14,089)
============= ============= =============
F-41
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PLUS CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED
------------------------------- DECEMBER 31,
1998 1997 1996
------------- -------------- -------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings.................................. $ (56,328) $ 12,653 $ (14,089)
Equity in undistributed net loss
(earnings) of subsidiaries......................... 48,647 (20,077) 9,217
Minority interest in subsidiary...................... 28 4,235 4,657
Amortization of exchange offer....................... 22 22 --
Other assets decrease (increase)..................... 234 (417) (707)
Senior Notes interest payable, increase.............. -- 790 --
Other liabilities (decrease) increase................ (39) 12 100
------------- ------------- -------------
Net cash used in operating activities.............. (7,436) (2,782) (822)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in BPCS................................... (4,500) -- --
Loans receivable decrease ( increase)................ 120 144 (709)
------------- ------------- -------------
Net cash (used in) provided by investmentactivities (4,380) 144 (709)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends from subsidiaries.......................... 11,322 2,290 2,300
Proceeds from exercise of stock options.............. 239 530 23
------------- ------------- -------------
Net cash provided by financing activities.......... 11,561 2,820 2,323
------------- ------------- -------------
Net increase in cash and cash equivalents............... (255) 182 792
Cash and cash equivalents at beginning of period........ 974 792 --
------------- ------------- -------------
Cash and cash equivalents at the end of period.......... $ 719 $ 974 $ 792
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Preferred Stock for Senior Notes......... $ -- $ 51,478 $ --
F-42