================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _______________
COMMISSION FILE NUMBER 0-28292
____________________________
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
____________________________
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
--- ---
As of April 30, 1999, Registrant had outstanding 19,408,449 shares of
Common Stock, par value $.01 per share.
================================================================================
BANK PLUS CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 and December 31, 1998...................... 1
Consolidated Statements of Operations for the quarters
ended March 31, 1999 and 1998............................. 2
Consolidated Statements of Comprehensive Income for the
quarters ended March 31, 1999 and 1998.................... 3
Consolidated Statements of Cash Flows for the quarters
ended March 31, 1999 and 1998............................. 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 28
Item 4. Submission of Matters to a Vote of Security Holders.......... 30
Item 6. Exhibits and Reports on Form 8-K............................. 31
a. Exhibits............................................... 31
b. Reports on Form 8-K.................................... 32
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
ASSETS:
Cash and cash equivalents.................................................. $ 459,102 $ 380,507
Investment securities available for sale ("AFS"), at fair value............ -- 28,797
Investment securities held to maturity, at amortized cost (market value of
$1,111 and $1,099 at March 31, 1999 and December 31, 1998,
respectively)............................................................ 1,101 1,084
Mortgage-backed securities ("MBS") available for sale, at fair value....... 338,704 465,010
Loans receivable, net of allowances for estimated loan losses of $77,898
and $106,171 at March 31, 1999 and December 31, 1998, respectively....... 2,584,283 2,665,576
Investment in Federal Home Loan Bank ("FHLB") stock........................ 66,252 65,358
Premises and equipment..................................................... 38,017 39,042
Other assets............................................................... 61,194 66,685
-------------- --------------
Total Assets............................................................. $ 3,548,653 $ 3,712,059
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits................................................................. $ 2,759,998 $ 2,922,531
FHLB advances............................................................ 585,000 585,000
Senior notes............................................................. 51,478 51,478
Other liabilities........................................................ 21,830 25,390
-------------- --------------
Total Liabilities..................................................... 3,418,306 3,584,399
-------------- --------------
Minority interest.......................................................... 272 272
Stockholders' equity:
Common stock:
Common stock, par value $.01 per share; 78,500,000 shares
authorized; 19,458,013 and 19,434,043 shares outstanding
at March 31, 1999 and December 31, 1998, respectively............... 195 194
Paid-in capital.......................................................... 275,264 275,131
Accumulated other comprehensive loss..................................... (2,239) (2,795)
Accumulated deficit...................................................... (143,145) (145,142)
-------------- --------------
Total Stockholders' Equity............................................ 130,075 127,388
-------------- --------------
Total Liabilities and Stockholders' Equity.................................... $ 3,548,653 $ 3,712,059
============== ==============
See notes to consolidated financial statements.
1
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
INTEREST INCOME:
Loans...................................................................... $ 57,960 $ 54,005
MBS........................................................................ 5,772 13,677
Investment securities and other............................................ 4,671 6,993
-------------- --------------
Total interest income.................................................... 68,403 74,675
-------------- --------------
INTEREST EXPENSE:
Deposits................................................................... 31,123 35,471
FHLB advances.............................................................. 8,245 16,626
Other borrowings........................................................... 1,576 1,569
-------------- --------------
Total interest expense................................................... 40,944 53,666
-------------- --------------
Net interest income........................................................... 27,459 21,009
Provision for estimated loan losses........................................... 13,000 2,000
-------------- --------------
Net interest income after provision for estimated loan losses................. 14,459 19,009
-------------- --------------
NONINTEREST INCOME (EXPENSE):
Loan fee income............................................................ 729 519
Credit card fees........................................................... 10,337 2,121
Fee income from the sale of uninsured investment products.................. 1,555 1,453
Fee income from deposits and other fee income.............................. 870 794
Gains on securities and trading activities................................. -- 166
Fee income from automated teller machine ("ATM") cash services............. 1,314 1,094
Other income............................................................... 2 18
Real estate operations, net................................................ (430) (834)
-------------- --------------
Total noninterest income................................................. 14,377 5,331
-------------- --------------
OPERATING EXPENSE:
Personnel and benefits..................................................... 10,907 9,256
Occupancy.................................................................. 3,661 3,387
Federal Deposit Insurance Corporation ("FDIC") insurance................... 2,255 642
Professional services...................................................... 3,537 3,605
Credit card data processing................................................ 3,955 1,160
Office-related expenses.................................................... 1,352 1,270
Other...................................................................... 1,165 842
-------------- --------------
Total operating expense.................................................. 26,832 20,162
-------------- --------------
Earnings before income taxes and minority interest in subsidiary.............. 2,004 4,178
Income tax expense............................................................ -- 630
-------------- --------------
Earnings before minority interest in subsidiary............................... 2,004 3,548
Minority interest in subsidiary............................................... 7 7
-------------- --------------
Earnings available for common stockholders.................................... $ 1,997 $ 3,541
============== ==============
EARNINGS PER SHARE ("EPS"):
Basic...................................................................... $ 0.10 $ 0.18
============== ==============
Diluted.................................................................... $ 0.10 $ 0.18
============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic...................................................................... 19,455,887 19,369,326
============== ==============
Diluted.................................................................... 19,698,549 19,817,279
============== ==============
See notes to consolidated financial statements
2
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
Earnings available for common stockholders.................................... $ 1,997 $ 3,541
-------------- --------------
Other comprehensive earnings (loss):
Investment securities and MBS AFS:
Unrealized holding gains arising during the period, net.................. 556 2,007
Reclassification adjustment for gains included in earnings, net.......... -- (226)
-------------- --------------
Total.................................................................. 556 1,781
-------------- --------------
Derivative financial instruments:
Unrealized holding losses arising during the period, net................. -- (1,406)
Reclassification adjustment for losses included in earnings, net......... -- 91
-------------- --------------
Total.................................................................. -- (1,315)
-------------- --------------
Other comprehensive earnings............................................... 556 466
-------------- --------------
Comprehensive earnings........................................................ $ 2,553 $ 4,007
============== ==============
See notes to consolidated financial statements
3
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................... $ 1,997 $ 3,541
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provisions for estimated loan and real estate losses.................. 13,014 2,063
Gains on sale of loans and securities................................. (2) (296)
FHLB stock dividends.................................................. (807) (875)
Depreciation and amortization......................................... 2,042 1,585
Amortization of discounts and net deferred loan and credit
card fees and accretion of premiums................................. (6,384) 1,910
Deferred income tax (benefit) expense................................. (56) 520
Purchases of MBS held for trading.......................................... -- (19,842)
Principal repayments of MBS held for trading............................... -- 1,927
Proceeds from sales of MBS held for trading................................ -- 28,617
Interest receivable decrease............................................... 1,630 734
Other assets decrease...................................................... 3,384 3,108
Interest payable decrease.................................................. (1,659) (4,097)
Other liabilities decrease................................................. (1,533) (125)
-------------- --------------
Net cash provided by operating activities................................ 11,626 18,770
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities AFS.................................... 28,831 10,000
Proceeds from sales of investment securities AFS .......................... -- 57,805
Principal repayments of MBS AFS............................................ 125,325 51,911
Proceeds from sales of MBS AFS............................................. -- 20,888
Purchases of derivative securities......................................... -- (3,704)
Loans receivable, net decrease (increase).................................. 70,916 (32,878)
Proceeds from sales of real estate......................................... 4,967 10,177
Purchases of premises and equipment........................................ (537) (2,043)
-------------- --------------
Net cash provided by investing activities................................ 229,502 112,156
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net (decrease) increase.............. (271) 67,165
Certificate accounts, net (decrease) increase.............................. (162,262) 36,988
Proceeds from FHLB advances................................................ -- 180,000
Repayments of FHLB advances................................................ -- (230,000)
Proceeds from exercise of stock options.................................... -- 180
-------------- --------------
Net cash (used in) provided by financing activities...................... (162,533) 54,333
-------------- --------------
Net increase in cash and cash equivalents..................................... 78,595 185,259
Cash and cash equivalents at beginning of period.............................. 380,507 165,945
-------------- --------------
Cash and cash equivalents at end of period.................................... $ 459,102 $ 351,204
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other borrowings.................. $ (42,236) $ (57,395)
Income tax payments....................................................... (155) (10)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure.................................. 5,015 8,428
Issuance of stock ........................................................ 134 --
See notes to consolidated financial statements.
4
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bank Plus
Corporation ("Bank Plus") and its 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.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements, prepared from the Company's books and records, contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of March 31, 1999 and
December 31, 1998, and the results of operations, statements of comprehensive
income and statements of cash flows for the three months ended March 31, 1999
and 1998. All significant intercompany transactions and balances have been
eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1999 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
The financial information provided herein, including the information under the
heading Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" ("MD&A"), is written with the presumption that the users
of the interim financial statements have read, or have access to, the most
recent Annual Report on Form 10-K which contains the latest available audited
consolidated financial statements and notes thereto, as of December 31, 1998,
together with the MD&A as of such date. Based on management's process for
evaluating financial information, assessing performance and allocating
resources, no separate operating segments were identified as of March 31, 1999
and December 31, 1998.
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.
5
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
2. EARNINGS PER SHARE
The reconciliation of the numerators and denominators used in basic and
diluted EPS follows for the periods indicated:
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Earnings available for common stockholders.............................. $ 1,997 $ 3,541
============== ==============
Weighted average common shares outstanding:
Basic............................................................... 19,455,887 19,369,326
Effect of dilutive securities-- stock options....................... 225,564 446,876
Effect of dilutive securities-- deferred stock awards............... 17,098 1,077
-------------- --------------
Diluted............................................................. 19,698,549 19,817,279
============== ==============
EPS:
Basic............................................................... $ 0.10 $ 0.18
Effect of dilutive securities-- stock options....................... -- --
Effect of dilutive securities-- deferred stock awards............... -- --
-------------- --------------
Diluted............................................................. $ 0.10 $ 0.18
============== ==============
3. 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.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q,
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;
changes in the ownership of the Company or in tax regulations which would limit
the Company's ability to utilize its net operating loss carryforwards; 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.
RECENT DEVELOPMENTS
During the first quarter of 1999 the Company continued to follow its
revised strategic plan of curtailing its credit card activities, reducing core
operating expenses, increasing its interest margin and becoming well capitalized
in 1999. The Company's credit card portfolio decreased by over $39 million and
credit card delinquencies decreased from 21.4% at December 31, 1998 to 16.8% at
March 31, 1999. The net yield on interest earning assets increased to 3.08% and
core operating expenses decreased 14.7% from the fourth quarter of 1998.
Other recent developments include:
SALE OF AUTO LOAN PORTFOLIO
In March 1999 Fidelity sold $10.5 million, or 64%, of its auto loan
portfolio. The buyer, who will service the balance of the portfolio still owned
by the Bank, has a 90 day option to purchase an additional $2.3 million of the
portfolio. No gain or loss was recognized on this transaction.
SALE OF DEPOSITS
The Bank has solicited bids from a broad group of potential purchasers to
sell $140 million of deposits and three branch offices (the "Deposit Sale").
Bids have been received and the high bidders have been notified of the Bank's
intention to proceed with these sales, subject to the negotiation and execution
of definitive agreements and regulatory approval of these potential
transactions. Successful bidders will purchase the deposits for an aggregate
purchase price which includes a deposit premium, the net book value of
furniture, fixtures and equipment and the appraised value of the two owned
branch offices. The buyer of the leased branch will assume that leasehold. The
Bank anticipates closing the Deposit Sale by June 30, 1999, although no
assurances can be given that the sale will be completed, or if completed, will
be completed by June 30, 1999.
The Company is engaged in negotiations with a third party to sell the Mall
of America ("MOA") branch deposits, fixed assets and certain intellectual
property assets. At March 31, 1999, MOA branch deposits were $11.8 million.
7
Although no assurances can be given, based on current projections,
including the completion of the Deposit Sale by June 30, 1999, the Bank
anticipates that its regulatory capital ratios will exceed the minimum level
required to be considered "well capitalized" at June 30, 1999.
STATUS OF EXPLORATION OF STRATEGIC ALTERNATIVES
At the end of 1998, the Company, with the help of its financial advisors,
initiated a process to explore a potential sale with parties interested in an
acquisition of the Company in whole or in part. Information on the Company was
distributed to interested parties and expressions of interest, including
preliminary non-binding offers, were received from several parties. Certain of
those parties have performed due diligence on the Company. The Company continues
to evaluate the preliminary offers received and to negotiate the terms of the
preliminary offers to improve their overall value. To date, no definitive offers
have been received. There can be no assurance that any definitive offers will be
received or, if received, will be determined to be adequate by the Board of
Directors of the Company.
RESULTS OF OPERATIONS
SUMMARY
The Company reported net earnings of $2.0 million for the three months
ended March 31, 1999, as compared to net earnings of $3.5 million for the three
months ended March 31, 1998. The 1999 first quarter results of operations, in
comparison to 1998 first quarter results, were significantly affected by
increased revenues and expenses related to the Company's credit card loan
portfolio, including (i) an increase in net interest income as a result of the
credit card loan portfolio's higher yield, (ii) an $8.2 million increase in
credit card fees and (iii) a $5.6 million increase in operating expenses related
to servicing the credit card portfolio. In addition, the $11.0 million increase
in provision for estimated loan losses was primarily related to the credit card
loan portfolio. Other factors impacting the 1999 first quarter results of
operations included higher FDIC insurance premiums, lower costs of deposits and
borrowings and a reduction in operating expenses of the core Bank.
8
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.
QUARTER ENDED MARCH 31,
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- --------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------- -------------- ------- -------------- -------------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage and other loans .......... $ 2,395,845 $ 44,606 7.45% $ 2,809,270 $ 52,063 7.41%
Credit card loans.................. 337,627 13,354 15.82 72,587 1,942 10.86
MBS................................ 410,853 5,772 5.62 848,219 13,677 6.45
Investment securities ............. 298,329 3,864 5.25 407,399 6,118 6.09
Investment in FHLB stock .......... 65,983 807 4.96 60,823 875 5.83
-------------- -------------- -------------- --------------
Total interest-earning assets ........ 3,508,637 68,403 7.81 4,198,298 74,675 7.12
-------------- --------------
Noninterest-earning assets ........... 111,434 170,221
-------------- --------------
Total assets ......................... $ 3,620,071 $ 4,368,519
============== ==============
Interest-bearing liabilities:
Deposits:
Checking.......................... $ 373,729 1,132 1.23 $ 340,509 987 1.18
Savings........................... 118,364 831 2.85 123,875 916 3.00
Certificates of deposits ("CDs").. 2,328,218 29,160 5.02 2,472,879 33,568 5.45
-------------- -------------- -------------- --------------
Total deposits ....................... 2,820,311 31,123 4.48 2,937,263 35,471 4.90
Borrowings ........................... 636,478 9,821 6.26 1,207,413 18,195 6.11
-------------- -------------- -------------- --------------
Total interest-bearing liabilities.... 3,456,789 40,944 4.80 4,144,676 53,666 5.25
-------------- --------------
Noninterest-bearing liabilities....... 33,882 41,281
Preferred stock issued by
consolidated subsidiary............ 272 272
Stockholders' equity.................. 129,128 182,290
-------------- --------------
Total liabilities and equity.......... $ 3,620,071 $ 4,368,519
============== ==============
Net interest income; interest rate
spread............................. $ 27,459 3.01% $ 21,009 1.87%
============== ======= ============== ========
Net yield on interest-earning assets
("net interest margin") ........... 3.08% 1.94%
======= ========
Average nonaccruing mortgage loan
balance included in average loan
balance ........................... $ 16,096 $ 21,172
============== ==============
Net delinquent interest removed
from interest income .............. $ 203 $ 719
============== ==============
Reduction in net yield on
interest-earning assets due to
delinquent interest................ 0.02% 0.07%
======= ========
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 nonperforming loans ("NPLs") and (d) the interest rate
spread between the yields earned and the rates paid.
9
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.
QUARTER ENDED MARCH 31, 1999
COMPARED TO MARCH 31, 1998
FAVORABLE (UNFAVORABLE)
--------------------------------------------------
VOLUME RATE NET
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Interest income:
Mortgage and other loans................................. $ (7,735) $ 278 $ (7,457)
Credit card loans........................................ 10,090 1,322 11,412
MBS...................................................... (6,326) (1,579) (7,905)
Investment securities.................................... (1,487) (767) (2,254)
Investment in FHLB stock................................. 71 (139) (68)
-------------- -------------- --------------
Total interest income ................................. (5,387) (885) (6,272)
-------------- -------------- --------------
Interest expense:
Deposits:
Checking............................................... (101) (44) (145)
Savings................................................ 40 45 85
CDs.................................................... 1,876 2,532 4,408
-------------- -------------- --------------
Total deposits ..................................... 1,815 2,533 4,348
Borrowings .............................................. 8,822 (448) 8,374
-------------- -------------- --------------
Total interest expense ................................ 10,637 2,085 12,722
-------------- -------------- --------------
Increase in net interest income ............................ $ 5,250 $ 1,200 $ 6,450
============== ============== ==============
The $6.5 million increase in net interest income between the first quarter
1999 and the first quarter 1998 reflects the increase in the net interest margin
to 3.08% from 1.94%, offset by a decrease in the average balance of
interest-earning assets. The increase in the net interest margin is due to an
increase in the average balance of higher yielding credit card loans, a decrease
in the average rate on CDs and a decrease in the average balance of higher
costing FHLB advances. The decrease in average interest-earning assets is in
line with the Company's plans to reduce the size of the balance sheet to return
the Bank's regulatory capital ratios to a "well capitalized" status.
PROVISION FOR ESTIMATED LOAN LOSSES
The provision for estimated loan losses represents the change in the
Company's allowance for loan and lease losses ("ALLL") and the current period's
utilization of ALLL for charge-offs and allocations to specific reserves. During
the first quarter of 1999, the provision for estimated loan losses was primarily
related to the Company's credit card portfolio and was $13.0 million as compared
to $2.0 million in the first quarter of 1998 and $15.0 million during the fourth
quarter of 1998. During the first quarter of 1999, over $39 million of credit
card charge-offs were recorded while the utilization of ALLL for the mortgage
loan portfolio was less than $1 million. The ALLL decreased from $98.2 million
at December 31, 1998 to $70.6 million at March 31, 1999 primarily due to lower
projected charge-offs in the credit card portfolio related to lower
delinquencies and a decrease in outstanding balances.
10
NONINTEREST INCOME (EXPENSE)
The following table presents noninterest income (expense) for the periods
indicated:
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Loan fee income........................................................ $ 729 $ 519
Credit card fees....................................................... 10,337 2,121
Fee income from the sale of uninsured investment products.............. 1,555 1,453
Fee income from deposits and other fee income.......................... 870 794
Gains on securities and trading activities, net........................ -- 166
Fee income on ATM cash services........................................ 1,314 1,094
Other income........................................................... 2 18
Real estate operations, net............................................ (430) (834)
-------------- --------------
Total noninterest income............................................. $ 14,377 $ 5,331
============== ==============
Noninterest income increased by $9.0 million for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998 primarily
due to an $8.2 million increase in credit card fees. The increase in credit card
fees is due to the growth of the credit card portfolio from $112.7 million at
March 31, 1998 to $310.6 million at March 31, 1999. Included in the credit card
fees 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. $4.6 million of credit card fees in
the first quarter of 1999 represent the amortization of deferred origination
fees and costs from one of the Company's credit card programs for which the
Company ceased originations in the third quarter of 1998. The remaining $5.7
million of unamortized deferred origination fees and costs are expected to be
recognized or charged off during the second and third quarters of 1999, and no
additional credit card origination fees or costs are expected to be created.
The contract with Americash LLC to provide ATM cash services was terminated
in March 1999. The Company currently has no other contracts to provide these
services to other companies.
OPERATING EXPENSES
The following table presents operating expenses for the periods indicated:
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Personnel and benefits................................................. $ 10,907 $ 9,256
Occupancy.............................................................. 3,661 3,387
FDIC insurance......................................................... 2,255 642
Professional services.................................................. 3,537 3,605
Credit card servicing.................................................. 3,955 1,160
Office-related expenses................................................ 1,352 1,270
Other.................................................................. 1,165 842
-------------- --------------
Total operating expense.............................................. $ 26,832 $ 20,162
============== ==============
11
Operating expenses increased by $6.7 million to $26.8 million for the three
months ended March 31, 1999 compared to $20.2 million for the three months ended
March 31, 1998. The increase in expenses was due primarily to costs associated
with servicing the Bank's credit card programs and increased FDIC insurance
costs offset by reductions in core Bank operating expenses.
Servicing of the Bank's credit card programs, which is performed by third
party servicers and BPCS, increased $5.6 million during the three months ended
March 31, 1999 as compared to the corresponding period in 1998. This increase
was due to the significant increases in the outstanding balances and
delinquencies in the Bank's credit card portfolio in 1998.
FDIC insurance costs increased as a result of the change in the Bank's
regulatory status. Increased insurance costs are anticipated for the remainder
of 1999.
For the quarter ended March 31, 1999, the operating expenses of the core
Bank excluding credit card servicing, FDIC insurance costs and Year 2000 ("Y2K")
compliance project expenses decreased by $2.8 million and $1.3 million compared
to the quarters ended December 31, 1998 and March 31, 1998, respectively, as a
result of reductions in staffing and controls put in place to reduce
discretionary expenses.
INCOME TAXES
The Company's expected combined federal and state statutory tax rate is
approximately 42.0% of earnings before income taxes. As of March 31, 1999 and
December 31, 1998, the Company's significant deferred tax assets, which
primarily consisted of net operating loss carryforwards and bad debt timing
differences, were reduced by a valuation allowance as required under SFAS No.
109, "Accounting for Income Taxes." As the Company does not anticipate a
significant change in the determination of the valuation allowance during 1999,
the Company does not expect to record any tax expense or benefit in 1999.
FINANCIAL CONDITION
ASSET QUALITY
Because over 90% of the Company's mortgage loan portfolio is secured by
properties located in southern California the performance of the Company's loans
are particularly susceptible to the potential for declines in the southern
California economy, such as increasing vacancy rates, declining rents,
increasing interest rates, declining debt coverage ratios, and declining market
values for multifamily and commercial properties. In addition, the possibility
that borrowers 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. 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 portfolio's are not sub-prime.
12
DELINQUENT LOANS
The following tables present net delinquent loans at the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Mortgage loan delinquencies by number of days:
30 to 59 days......................... $ 5,026 $ 6,556 $ 8,706 $ 6,401 $ 11,664
60 to 89 days......................... 4,001 4,936 4,776 4,647 3,079
90 days and over...................... 12,962 13,841 15,551 18,338 16,420
-------------- -------------- -------------- -------------- --------------
Total............................... $ 21,989 $ 25,333 $ 29,033 $ 29,386 $ 31,163
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days....................... 0.21% 0.27% 0.35% 0.24% 0.42%
60 to 89 days....................... 0.17 0.21 0.19 0.17 0.11
90 days and over.................... 0.55 0.57 0.61 0.69 0.60
-------------- -------------- -------------- -------------- --------------
Total............................ 0.93% 1.05% 1.15% 1.10% 1.13%
============== ============== ============== ============== ==============
Credit card loan delinquencies by number of days:
30 to 59 days......................... $ 12,801 $ 19,609 $ 26,892 $ 9,187 $ 4,097
60 to 89 days......................... 10,485 15,391 10,606 5,419 2,814
90 to 119 days........................ 11,101 17,969 5,983 3,691 2,190
120 to 149 days....................... 11,148 17,363 5,031 2,278 1,553
150 days and over..................... 6,670 4,460 1,420 1,206 1,003
-------------- -------------- -------------- -------------- --------------
Total............................... $ 52,205 $ 74,792 $ 49,932 $ 21,781 $ 11,657
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days....................... 4.12% 5.60% 8.64% 4.73% 3.63%
60 to 89 days....................... 3.38 4.40 3.41 2.79 2.50
90 to 119 days...................... 3.57 5.13 1.92 1.90 1.94
120 to 149 days..................... 3.59 4.96 1.62 1.17 1.38
150 days and over................... 2.15 1.27 0.46 0.62 0.89
-------------- -------------- -------------- -------------- --------------
Total............................ 16.81% 21.36% 16.05% 11.21% 10.34%
============== ============== ============== ============== ==============
Other loan delinquencies by number of days:
30 to 59 days......................... $ 1,002 $ 2,079 $ 965 $ 284 $ 375
60 to 89 days......................... 192 533 227 155 --
90 days and over...................... 175 414 294 349 137
-------------- -------------- -------------- -------------- --------------
Total............................... $ 1,369 $ 3,026 $ 1,486 $ 788 $ 512
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days....................... 8.79% 8.48% 3.69% 1.45% 2.41%
60 to 89 days....................... 1.69 2.18 0.87 0.79 --
90 days and over.................... 1.54 1.69 1.12 1.78 0.88
-------------- -------------- -------------- -------------- --------------
Total............................ 12.02% 12.35% 5.68% 4.02% 3.29%
============== ============== ============== ============== ==============
Of the $22.0 million in mortgage loan delinquencies at March 31, 1999, $5.7
million are loans on single family or 2 to 4 unit residences which have Veterans
Administration ("VA") or Federal Housing Administration ("FHA") guarantees. As a
result of the VA or FHA guarantees no losses are expected from these loans.
Credit card delinquencies decreased $22.6 million as of March 31, 1999 as
compared to December 31, 1998 primarily due to significant charge-offs during
the first quarter of 1999 and increased collection efforts.
13
The following table presents the credit card loan portfolio by program at
the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
MMG Direct, Inc. outstanding balances:
Current.............................. $ 105,133 $ 116,431 $ 132,855 $ 78,446 $ 33,143
Delinquencies:
30 to 59 days...................... 6,064 11,810 19,486 4,419 934
60 to 89 days...................... 5,765 10,089 6,257 1,589 4
90 to 119 days..................... 6,390 13,472 2,944 986 --
120 to 149 days.................... 7,689 14,660 2,304 338 --
150 days and over.................. 6,670 4,460 1,175 4 --
-------------- -------------- -------------- -------------- --------------
Total delinquencies............. 32,578 54,491 32,166 7,336 938
-------------- -------------- -------------- -------------- --------------
Total................................ $ 137,711 $ 170,922 $ 165,021 $ 85,782 $ 34,081
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days...................... 4.40% 6.91% 11.81% 5.15% 2.74%
60 to 89 days...................... 4.19 5.90 3.79 1.85 0.01
90 to 119 days..................... 4.64 7.88 1.78 1.15 --
120 to 149 days.................... 5.58 8.58 1.40 0.40 --
150 days and over.................. 4.84 2.61 0.71 -- --
-------------- -------------- -------------- -------------- --------------
Total........................... 23.65% 31.88% 19.49% 8.55% 2.75%
============== ============== ============== ============== ==============
American Direct Credit, LLC outstanding balances:
Current.............................. $ 122,989 $ 129,450 $ 107,099 $ 82,506 $ 64,992
Delinquencies:
30 to 59 days...................... 5,529 6,603 6,755 4,610 3,153
60 to 89 days...................... 4,012 4,633 3,973 3,687 2,810
90 to 119 days..................... 4,245 3,959 2,864 2,695 2,190
120 to 149 days.................... 3,431 2,699 2,727 1,940 1,553
150 days and over.................. -- -- 245 1,202 1,003
-------------- -------------- -------------- -------------- --------------
Total delinquencies............. 17,217 17,894 16,564 14,134 10,709
-------------- -------------- -------------- -------------- --------------
Total................................ $ 140,206 $ 147,344 $ 123,663 $ 96,640 $ 75,701
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days...................... 3.94% 4.48% 5.46% 4.77% 4.17%
60 to 89 days...................... 2.86 3.14 3.21 3.82 3.71
90 to 119 days..................... 3.03 2.69 2.32 2.79 2.89
120 to 149 days.................... 2.45 1.83 2.21 2.00 2.05
150 days and over.................. -- -- 0.20 1.24 1.33
-------------- -------------- -------------- -------------- --------------
Total........................... 12.28% 12.14% 13.40% 14.62% 14.15%
============== ============== ============== ============== ==============
(CONTINUED)
14
(CONTINUED)
QUARTERS ENDED
--------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Other credit card loans outstanding balances:
Current.............................. $ 30,273 $ 29,405 $ 21,365 $ 11,590 $ 2,923
Delinquencies:
30 to 59 days...................... 1,208 1,196 651 158 10
60 to 89 days...................... 708 669 376 143 --
90 to 119 days..................... 466 538 175 10 --
120 to 149 days.................... 28 4 -- -- --
150 days and over.................. -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Total delinquencies............. 2,410 2,407 1,202 311 10
-------------- -------------- -------------- -------------- --------------
Total................................ $ 32,683 $ 31,812 $ 22,567 $ 11,901 $ 2,933
============== ============== ============== ============== ==============
As a percentage of outstanding balances:
30 to 59 days...................... 3.70% 3.76% 2.88% 1.33% 0.34%
60 to 89 days...................... 2.17 2.10 1.67 1.21 --
90 to 119 days..................... 1.43 1.69 0.77 0.08 --
120 to 149 days.................... 0.08 0.01 -- -- --
150 days and over.................. -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Total........................... 7.38% 7.56% 5.32% 2.62% 0.34%
============== ============== ============== ============== ==============
The available credit on credit cards outstanding at March 31, 1999 was
$25.1 million, $32.3 million and $14.7 million for MMG Direct, Inc. ("MMG"),
American Direct Credit, LLC ("ADC") and other card programs, respectively.
15
NONPERFORMING AND CLASSIFIED ASSETS
All assets and ratios are reported net of specific reserves unless
otherwise stated. The following table presents asset quality details at the
dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Nonperforming Assets ("NPAs") by Type:
NPLs................................... $ 13,137 $ 14,372 $ 16,884 $ 20,450 $ 16,420
Real Estate Owned ("REO").............. 8,431 8,397 10,161 9,566 10,481
Other repossessed assets............... 320 535 183 288 88
-------------- -------------- -------------- -------------- --------------
Total NPAs........................... $ 21,888 $ 23,304 $ 27,228 $ 30,304 $ 26,989
============== ============== ============== ============== ==============
Number of REO properties.................. 57 62 72 64 78
============== ============== ============== ============== ==============
NPAs by Composition:
Single family residences............... $ 9,761 $ 8,923 $ 8,594 $ 8,408 $ 7,708
Multifamily 2 to 4 units............... 2,423 3,890 4,192 4,295 3,357
Multifamily 5 units and over........... 7,061 7,709 11,917 14,800 13,305
Commercial and other................... 2,705 2,590 2,730 2,914 3,031
Consumer............................... 438 692 295 387 88
REO valuation allowances............... (500) (500) (500) (500) (500)
-------------- -------------- -------------- -------------- --------------
Total NPAs........................... 21,888 23,304 27,228 30,304 26,989
Total troubled debt
restructurings ("TDRs")............. 48,020 48,018 47,222 44,990 42,195
-------------- -------------- -------------- -------------- --------------
Total TDRs and NPAs.................. $ 69,908 $ 71,322 $ 74,450 $ 75,294 $ 69,184
============== ============== ============== ============== ==============
Classified Assets:
NPAs................................... $ 21,888 $ 23,304 $ 27,228 $ 30,304 $ 26,989
Performing classified loans ........... 88,623 108,355 87,401 92,390 90,630
Other classified assets................ 1,242 1,426 3,999 3,782 2,066
-------------- -------------- -------------- -------------- --------------
Total classified assets.............. $ 111,753 $ 133,085 $ 118,628 $ 126,476 $ 119,685
============== ============== ============== ============== ==============
Classified Asset Ratios:
NPLs to total assets................... 0.37% 0.39% 0.44% 0.48% 0.39%
NPLs to total loans.................... 0.51% 0.54% 0.61% 0.73% 0.58%
NPAs to total assets................... 0.62% 0.63% 0.71% 0.71% 0.64%
TDRs to total assets................... 1.35% 1.29% 1.23% 1.05% 1.00%
NPAs and TDRs to total assets.......... 1.97% 1.92% 1.95% 1.76% 1.64%
Classified assets to total assets...... 3.15% 3.59% 3.10% 2.95% 2.84%
REO to NPAs............................ 38.52% 36.03% 37.32% 31.57% 38.83%
NPLs to NPAs........................... 60.02% 61.67% 62.01% 67.48% 60.84%
Total classified assets decreased $21.3 million or 16.0% from December 31,
1998, to $111.8 million at March 31, 1999. This decrease was primarily due to a
$10.1 million decrease in classified mortgage loans and a $10.9 million decrease
in classified credit card loans. The decrease in performing classified loans
reflects the improvement in mortgage and credit card delinquencies and, in the
case of mortgage loans, the performance of the underlying income properties.
16
ALLOWANCE FOR ESTIMATED LOAN AND REO LOSSES
The following schedule summarizes the activity in the Bank's allowances for
estimated loan and REO losses:
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................................... $ 109,198 $ 55,993
-------------- --------------
Charge-offs................................................... (43,228) (6,610)
Recoveries.................................................... 687 1,989
-------------- --------------
Net charge-offs............................................. (42,541) (4,621)
Provision:
Estimated loan losses....................................... 13,000 2,000
REO......................................................... 14 63
Net change in cash reserves(1)................................ 1,140 2,156
-------------- --------------
Balance at end of period......................................... $ 80,811 $ 55,591
============== ==============
Ratio of net charge-offs during the period to average
loans outstanding............................................. 1.56% 0.16%
____________________
(1) Net change in cash reserves includes fundings, repurchases and transfers
from credit card marketers.
The following table presents loan and REO charge-offs and recoveries for
the periods indicated:
QUARTER ENDED MARCH 31,
--------------------------------
1999 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Charge-offs:
Single family................................................. $ 192 $ 430
Multifamily loans:
2 to 4 units................................................ 267 517
5 to 36 units............................................... 518 4,199
37 units and over........................................... -- 1,117
Commercial and industrial..................................... 1,154 335
Credit card loans............................................. 39,384 --
Other loans................................................... 1,713 12
-------------- --------------
Total charge-offs................................................ $ 43,228 $ 6,610
============== ==============
Recoveries:
Single family................................................. $ 75 $ 411
Multifamily loans:
2 to 4 units................................................ 147 219
5 to 36 units............................................... 120 1,093
37 units and over........................................... -- 266
Credit card loans............................................. 345 --
-------------- --------------
Total recoveries................................................. $ 687 $ 1,989
============== ==============
17
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 March 31, 1999 and 1998, cash reserves were $1.9
million and $6.5 million, respectively, and were recorded as deposits on the
Company's statements of financial condition. Accounts purchased from cash
reserves during the first quarters of 1999 and 1998 totaled $0.9 million and
$2.4 million, respectively and are not included in the above table.
The following table sets forth the allowance for estimated loan and REO
losses at the dates indicated:
QUARTERS ENDED
--------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Loans:
ALLL .................................. $ 70,606 $ 98,229 $ 88,500 $ 36,088 $ 32,192
Specific Valuation Allowance ("SVA")... 7,292 7,942 10,522 15,800 15,843
-------------- -------------- -------------- -------------- --------------
Total ALLL and SVA................... 77,898 106,171 99,022 51,888 48,035
Cash reserves.......................... 1,915 1,888 7,656 8,334 6,488
-------------- -------------- -------------- -------------- --------------
Total loan allowances and cash
reserves.......................... 79,813 108,059 106,678 60,222 54,523
-------------- -------------- -------------- -------------- --------------
REO valuation allowances.................. 998 1,139 1,032 1,041 1,068
-------------- -------------- -------------- -------------- --------------
Total allowances and cash reserves........ $ 80,811 $ 109,198 $ 107,710 $ 61,263 $ 55,591
============== ============== ============== ============== ==============
Selected ratios:
Total allowances to net loans and REO.. 3.03% 3.94% 3.77% 2.12% 1.91%
Total ALLL and cash reserves to:
Net loans............................ 2.73% 3.62% 3.38% 1.31% 1.33%
Net NPLs............................. 552.04% 696.61% 573.28% 185.85% 235.57%
Net loans and REO.................... 2.74% 3.63% 3.38% 1.55% 1.34%
Net NPAs............................. 333.61% 431.75% 356.44% 149.16% 145.17%
Total assets......................... 2.06% 2.71% 2.53% 1.05% 0.92%
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.
The allowance for credit 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
credit losses is an ongoing process. Consequently, there can be no assurance
that material additions to the Bank's allowance for credit losses will not be
required in the future, thereby adversely affecting earnings and the Bank's
ability to maintain or build capital.
18
REGULATORY CAPITAL COMPLIANCE
The Office of Thrift Supervision ("OTS") capital regulations, as required
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
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 MARCH 31, 1999:
Total capital (to risk-weighted
assets)............................... $ 189,392 9.21% $ 164,568 8.00% $ 205,710 10.00%
Core capital (to adjusted tangible
assets)............................... 163,124 4.61 106,090 3.00 176,817 5.00
Tangible capital (to tangible
assets)............................... 163,124 4.61 53,045 1.50 N/A
Core capital (to risk-weighted
assets)............................... 163,124 7.93 N/A 123,426 6.00
AS OF MARCH 31, 1998:
Total capital (to risk-weighted
assets)............................... 249,202 11.22 177,606 8.00 222,008 10.00
Core capital (to adjusted tangible
assets)............................... 221,434 5.27 126,106 3.00 210,176 5.00
Tangible capital (to tangible
assets)............................... 221,434 5.27 63,053 1.50 N/A
Core capital (to risk-weighted
assets)............................... 221,434 9.97 N/A 133,205 6.00
19
The following table reconciles the Company's stockholders' equity 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 MARCH 31, 1999:
Consolidated stockholders' equity................... $ 130,075 $ 130,075 $ 130,075
Adjustments:
Fidelity's Preferred Stock........................ 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............... (7,146) (7,146) (7,146)
-------------- -------------- --------------
Fidelity's stockholders' equity..................... 174,679 174,679 174,679
Accumulated other comprehensive loss................ 2,239 2,239 2,239
Adjustments:
Intangible assets................................. (13,789) (13,789) (13,789)
Excess ALLL....................................... -- -- 26,268
Nonincludable subsidiaries........................ (5) (5) (5)
-------------- -------------- --------------
Regulatory capital.................................... $ 163,124 $ 163,124 $ 189,392
============== ============== ==============
AS OF MARCH 31, 1998:
Consolidated stockholders' equity................... $ 185,532 $ 185,532 $ 185,532
Adjustments:
Fidelity's Preferred Stock........................ 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............... (4,127) (4,127) (4,127)
-------------- -------------- --------------
Fidelity's stockholders' equity..................... 233,155 233,155 233,155
Accumulated other comprehensive loss................ 4,001 4,001 4,001
Adjustments:
Intangible assets................................. (15,706) (15,706) (15,706)
Excess ALLL....................................... -- -- 27,806
Nonincludable subsidiaries........................ (16) (16) (54)
-------------- -------------- --------------
Regulatory capital.................................... $ 221,434 $ 221,434 $ 249,202
============== ============== ==============
As of March 31, 1999, 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. As of March 31,
1999, the most constraining of the capital ratio measurements under the PCA
requirements was core capital to adjusted tangible assets which had an excess of
$21.7 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 March 31, 1999 that management believes have
changed the institution's category.
20
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.
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. At March 31,
1999, the Company had deposits of $2.8 billion. The following table presents the
distribution of deposit accounts at the dates indicated:
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Checking accounts........................................ $ 374,010 $ 380,292 $ 351,452
Passbook accounts........................................ 59,078 56,836 66,517
Money market savings accounts............................ 60,220 56,451 56,177
-------------- -------------- --------------
Total transaction accounts............................ 493,308 493,579 474,146
-------------- -------------- --------------
CDs:
Less than $100,000.................................... 1,616,309 1,795,000 1,738,462
Greater than $100,000................................. 650,381 633,952 783,346
-------------- -------------- --------------
Total CDs........................................... 2,266,690 2,428,952 2,521,808
-------------- -------------- --------------
Total deposits........................................... $ 2,759,998 $ 2,922,531 $ 2,995,954
============== ============== ==============
Weighted average interest rate on deposits............... 4.31% 4.53% 4.82%
============== ============== ==============
There were no brokered deposits outstanding at the dates indicated above.
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:
March 31, 1998....................... $ 637,224 $ 701,988 $ 64,764 5.26% 5.42%
June 30, 1998........................ 456,817 617,404 160,587 5.34 5.24
September 30, 1998................... 604,220 591,719 (12,501) 5.43 5.06
December 31, 1998.................... 588,091 436,875 (151,216) 5.42 4.30
March 31, 1999....................... 691,982 532,999 (158,983) 5.32 4.18
21
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 and weighted average
rate at March 31, 1999:
WEIGHTED
AVERAGE
AMOUNT RATE
-------------- --------------
(DOLLARS IN THOUSANDS)
Matures in quarter ended:
June 30, 1999............................................................... $ 541,940 5.12%
September 30, 1999.......................................................... 504,942 5.06
December 31, 1999........................................................... 330,749 4.77
March 31, 2000.............................................................. 587,221 4.66
June 30, 2000............................................................... 141,191 4.63
September 30, 2000.......................................................... 95,791 4.34
December 31, 2000........................................................... 10,624 4.91
March 31, 2001 and after.................................................... 54,232 5.62
--------------
Total CDs................................................................ $ 2,266,690 4.89
==============
BORROWINGS
The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated:
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
FHLB advances:
Fixed rate advances...................................... $ 585,000 $ 585,000 $ 785,000
Floating rate advances................................... -- -- 174,960
-------------- -------------- --------------
Total FHLB advances..................................... 585,000 585,000 959,960
-------------- -------------- --------------
Other borrowings:
Senior Notes............................................. 51,478 51,478 51,478
-------------- -------------- --------------
Total other borrowings.................................. 51,478 51,478 51,478
-------------- -------------- --------------
Total borrowings............................................ $ 636,478 $ 636,478 $ 1,011,438
============== ============== ==============
Weighted average interest rate on all borrowings............ 6.20% 6.20% 6.11%
============== ============== ==============
Percent of total borrowings to total liabilities and
stockholders' equity..................................... 17.94% 17.15% 23.97%
============== ============== ==============
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
March 31, 1999 include (a) a line of credit with the FHLB with $123.2 million
available, (b) $69.5 million in unpledged securities available to be placed in
reverse repurchase agreements or sold and (c) $493.0 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 $6.4 million and $1.1 million at March
31, 1999 and 1998, respectively. Additionally, unused lines of credit related to
credit card loans and other credit lines totaled $132.0 million and $115.8
million at March 31, 1999 and 1998, respectively.
22
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 17.36% and 24.44% for the quarters ended
March 31, 1999 and 1998, respectively.
HOLDING COMPANY LIQUIDITY
At March 31, 1999 and 1998, Bank Plus had cash and cash equivalents of $0.9
million and $0.6 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 Senior Notes.
The February 1999 Senior Note interest payment was funded by the preferred
stock dividend from Fidelity and cash on hand at Bank Plus. The liquidity for
the interest payments for the remainder of 1999 is expected to be provided by
current liquidity at Bank Plus, currently projected dividends from Gateway and
BPCS and preferred stock dividends from Fidelity.
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. The Bank has an agreement
with the OTS which permits the payment of dividends on the Bank's preferred
stock so long as the Bank remains adequately capitalized. The agreement with the
OTS does not constrain the OTS from restricting future dividend payments based
on safety and soundness considerations or future examination findings, and no
assurance can therefore be given that the OTS will permit future dividend
payments by Fidelity to Bank Plus. The Bank has received no indication from the
OTS that it will object to the continued payment of preferred stock dividends.
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.
23
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of March 31, 1999.
"Gap," as reflected in the table, represents the estimated difference between
the amount of interest-earning assets and interest-bearing liabilities repricing
during future periods based on certain assumptions, including those stated in
the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
AS OF MARCH 31, 1999
MATURITY OR REPRICING
---------------------------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Cash and cash equivalents.......... $ 406,938 $ -- $ -- $ -- $ -- $ 406,938
Investment securities (1) (2)...... 66,252 1,101 -- -- -- 67,353
MBS (1)............................ 62,532 901 -- -- 275,271 338,704
Loans receivable:
Adjustable rate mortgages ("ARMs")
and other adjustables (3)...... 2,109,709 228,461 48,864 10,093 396 2,397,523
Fixed rate loans................. 151,367 127 4,595 14,805 105,208 276,102
------------- ------------- ------------- ------------- ------------- -------------
Total gross loans receivable... 2,261,076 228,588 53,459 24,898 105,604 2,673,625
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets........ 2,796,798 230,590 53,459 24,898 380,875 $ 3,486,620
------------- ------------- ------------- ------------- ------------- =============
Interest-bearing liabilities:
Deposits:
Checking and savings accounts(4). 433,084 -- -- -- -- $ 433,084
Money market accounts (4)........ 60,222 -- -- -- -- 60,222
Fixed maturity deposits:
Retail customers............... 551,615 1,427,060 287,048 593 262 2,266,578
Wholesale customers............ -- 13 101 -- -- 114
------------- ------------- ------------- ------------- ------------- -------------
Total deposits............... 1,044,921 1,427,073 287,149 593 262 2,759,998
------------- ------------- ------------- ------------- ------------- -------------
Borrowings:
FHLB advances ................... -- 20,000 565,000 -- -- 585,000
Other............................ -- -- -- 51,478 -- 51,478
------------- ------------- ------------- ------------- ------------- -------------
Total borrowings............... -- 20,000 565,000 51,478 -- 636,478
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities... 1,044,921 1,447,073 852,149 52,071 262 $ 3,396,476
------------- ------------- ------------- ------------- ------------- =============
Repricing Gap........................ $ 1,751,877 $ (1,216,483) $ (798,690) $ (27,173) $ 380,613
============= ============= ============= ============= =============
Gap to total assets.................. 49.37% (34.28)% (22.51)% (0.77)% 10.73%
Cumulative Gap to Total Assets....... 49.37% 15.09% (7.42)% (8.19)% 2.54%
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $66.3 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.
The Company manages interest rate risk by, among other things, maintaining
a portfolio consisting primarily of ARM loans. Interest sensitive assets provide
the Company with a degree of long-term protection from rising interest rates.
ARM loans comprised 94.7% of the total mortgage loan portfolio at March 31, 1999
and 87.5% of the mortgage portfolio is indexed to the FHLB Eleventh District
Cost of Funds Index ("COFI"). 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.
24
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.
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. There has been no significant change in interest rate risk
since December 31, 1998.
YEAR 2000
The Company utilizes computer software programs, systems and devices with
embedded microchips ("Systems") throughout the organization in order to support
its 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 Y2K project office to provide the business
units with the support, guidance, and project management expertise to ensure
that the Company meets its Y2K objectives. The Y2K 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 Y2K. In
addition, the Company has engaged an independent third party to provide project
oversight and Y2K subject matter expertise.
PROJECT'S STATE OF READINESS
The Y2K project is comprised of two major phases. Phase I was the
installation of upgraded mission critical Systems that are reported to be Y2K
compliant. Phase II was the testing of mission critical Systems using future
dates to certify the system as Y2K compliant. After the completion of Phase II,
the Company entered the quality assurance period which includes the testing of
non critical future dates, certification of non mission critical Systems, and
the monitoring and maintenance of all Systems to ensure they remain 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 Y2K 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 Y2K 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 Y2K compliance.
Phase II of the project was completed in March 1999. This was a significant
event in the project because it certified our internal mission critical Systems
as Y2K compliant. Phase II consisted of testing and validating the Company's
mission critical Systems using future dates. The Company's internal testing
strategy included 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.
25
The quality assurance period was initiated in April 1999 and will continue
until January 2000. During this phase, the four non-critical Y2K dates will be
tested. The Company has successfully tested two of these dates and expects to
complete the testing of all four dates by the end of the second quarter. Future
date validation of the Company's externally operated mission critical Systems is
continuing and is scheduled to be completed by the end of the second quarter of
1999. This phase also includes the certification of the Company's non mission
critical Systems by the end of the third quarter. Additionally, policies and
procedures have been implemented to ensure that the Systems that have been
certified as Y2K compliant remain compliant. Throughout the remainder of 1999,
the Company intends to maintain and periodically test its systems to ensure that
they remain Y2K compliant.
CUSTOMER AWARENESS AND RISK MANAGEMENT PLANS
The Company implemented a Y2K customer awareness plan to address Y2K issues
raised by customers. As part of this plan, the Company included an insert in the
March statements advising customers of a Y2K related fraud scam. The Company
will distribute the next project status update in the June and July 1999 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.
CASH MANAGEMENT PLAN
The Company is developing an initial cash management plan to address
customers year-end cash requirements. This plan is scheduled to be completed by
the end of the second quarter. As part of this plan, the Company is tracking and
monitoring the amount of cash that is withdrawn. Senior level management is
closely monitoring the plan and it will be updated at least quarterly or as
required.
ESTIMATED Y2K PROJECT COSTS
The total expense estimate for anticipated Y2K 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 March 31, 1999, the Company had
incurred Y2K related expenses of $4.8 million.
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 Y2K event. The contingency plans are
designed to provide for the continuation of the Company's critical business
functions should such interruptions occur.
The interagency statement established June 30, 1999 as the date by which
the Y2K 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.
A Y2K contingency plan strategy document has been developed and distributed
to the Company's business units. The contingency plan was developed based on
guidelines issued by the FFIEC, the United States General Accounting Office and
other sources.
The Company has completed the written contingency plans. The Company has
initiated the process of having the written contingency plans independently
reviewed and tested. After the contingency plans have been approved by senior
level management they will be submitted to the Board of Directors for final
approval.
26
Significant progress has been made in the development of the year end event
planner. The event planner is being used to manage the tasks that must be
completed to ensure that the Company is adequately prepared at year-end. Many of
the tasks identified in the event planner are required for the Company to
implement the workarounds outlined in the contingency plans.
The following is a brief description of the Company's contingency planning
process:
o Phase I of the contingency planning process has been completed. This
phase required business unit owners to identify critical business
functions and to complete a risk assessment for the critical business
functions.
o 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 Phase III of the contingency planning process has been completed. 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 Phase IV of the contingency planning process has been completed.
During this phase, a representative of the Project Office met with
each of the business units to review and finalize the documentation
provided in Phase III. The deliverable for Phase IV was the written
contingency plan containing details of the work-around as well as
departmental needs for seven identified disaster scenarios.
o Phase V was initiated in April 1999. Phase V involves the testing and
validation of the contingency plans and the completion of an event
plan for year-end.
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 Y2K 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 Y2K 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 Y2K contingency plans. Although the Company
has given the Y2K project a high priority and management believes that Y2K
compliance will be achieved, there are no assurances that the Company will be
successful in addressing Y2K issues within this estimated timeframe or budget.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ADC CREDIT CARD LITIGATION
The Bank's previously reported litigation with American Direct Credit, LLC
("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. The parties executed all
documents necessary to effect the settlement between the Bank and ADC and the
court entered a dismissal with prejudice of ADC's case on March 9, 1999. All
continuing relationships with ADC have been terminated, other than ADC's
continuing obligation to indemnify the Company against third-party claims.
ADC's indemnification undertakings include ADC's obligation to provide a
defense to the Bank and Bank Plus in numerous consumer lawsuits pending in the
State of Alabama, including purported class actions, and to indemnify the Bank
and Bank Plus from any adverse judgment resulting from these lawsuits. 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 such purchases through credit cards issued by the Bank.
The Bank believes that it has substantial legal defenses to these claims in as
much 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 its contractual obligation to provide a defense to the Bank in this
litigation, uncertainty exists as to ADC's financial ability to indemnify or
continue to provide a defense in the future.
The distributors of the appliances and other consumer items financed with
the ADC credit cards agreed, in their respective contracts, to indemnify the
Bank and ADC against claims arising out of the distributor's breaches of
agreement or law. The Bank is investigating whether rights or claims should be
asserted against the distributors in the Alabama litigation under these
agreements to indemnify. If such rights or claims are asserted, uncertainty
exists as to whether the distributors will perform or have the financial ability
to perform their indemnity obligations.
MMG CREDIT CARD LITIGATION
In November 1997, the Bank entered into a credit card marketing
relationship with MMG Direct, Inc. ("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. The Bank
further asserted that MMG had breached its contract by, among other things,
refusing to reimburse the Bank for MMG's portion of program losses and to repay
marketing fees previously paid by the Bank to MMG for which the Bank was
entitled to reimbursement, engaging in regulatory violations, and engaging in
conduct which violated 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. 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 purported to state a
number of claims, including fraud in the inducement, breach of contract, common
law fraud, negligent misrepresentation, accounting and constructive trust, and
sought 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 which was granted.
28
MMG also 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 abate
MMG's third-party complaint pending arbitration. The Court granted the Bank's
motion to abate.
In light of MMG's attempts to avoid arbitration and to litigate in the
Texas courts instead, 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 filed a motion to dismiss this case.
The Bank recently amended its original arbitration petition to update and
more comprehensively state its claims against MMG. The Bank's contract claims
against MMG currently exceed $24 million and are expected to increase with the
passage of time. MMG filed a counterclaim in the arbitration asserting
essentially the same claims that it asserted in the various lawsuits in Texas.
The arbitration proceedings are expected to commence in the second quarter of
1999. The Bank intends to pursue its claims against MMG and defend MMG's claims
against the Bank vigorously. There is no assurance that the Bank will be
successful, nor is there any assurance that a judgment against MMG, should one
be obtained, will be collectible.
OTHER CREDIT CARD LITIGATION
On March 12, 1999, Choice One Finance Corp. filed an action, Case No.
BC206945, 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 and the plaintiff entered into a
contract to market credit cards, and that the Bank breached this alleged
contract and negligently interfered with contracts that the plaintiff had
entered into with third parties. In addition, the complaint contains a claim for
negligent misrepresentation. The Bank disputes the claims set forth in the
complaint, and intends to defend vigorously the asserted claims.
PURPORTED CLASS ACTION LITIGATION
On October 19, 1998 a purported class action was filed against the Company
and its current and immediately preceding chief executive officers. The case was
originally entitled HOWARD GUNTY PROFIT SHARING PLAN, BOTH INDIVIDUALLY AND ON
BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS v. RICHARD M. GREENWOOD,
MARK K. MASON, BANK PLUS CORPORATION, AND DOES 1 THROUGH 50, INCLUSIVE,
DEFENDANTS, Los Angeles Superior Court, Central Judicial District, Case No.
BC199336. 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
29
(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 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 plaintiffs have merit. If and when the
Company is served with a complaint, the Company intends to vigorously defend
itself.
ADJUSTABLE RATE MORTGAGE LITIGATION
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. 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. All but one of these cases have been dismissed or concluded in
favor of the Bank. The parties to the one remaining suit which was filed on July
1, 1992, MONICA J. HUBBARD, FORMERLY KNOWN AS MONICA J. ROEGLER, ON BEHALF OF
HERSELF AND OTHERS SIMILARLY SITUATED, PLAINTIFF V FIDELITY FEDERAL BANK, A
FEDERAL SAVINGS BANK, Case No. Civil No. 92-3939 MRP (Ex), entered into a
stipulation of settlement dated April 1, 1999, which was filed with the Court on
April 14, 1999. The settlement will not be final until mailing and publication
of notices of the settlement, opportunity for members of the class to opt out of
the settlement, final Court approval, and expiration of the appeal period. This
process is expected to be completed in the third quarter of 1999. Under the
proposed settlement, the Bank admits no fault, wrongdoing, or liability
whatsoever, but for the sake of compromise will contribute $0.6 million to a
settlement fund. Of this amount, $0.5 million had been accrued during 1998 and
the remaining $0.1 million was accrued during the first quarter of 1999.
The legal responsibility and financial exposure with respect to some of the
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
At the annual meeting of stockholders held on April 28, 1999, the
stockholders elected Victor H. Indiek and Robert W. Medearis to the Board of
Directors of Bank Plus to serve for three year terms. Of the 19,408,449 share of
Common Stock outstanding as of the record date, March 12, 1999, the following
indicates the number of votes cast for and withheld:
NUMBER OF VOTES
--------------------------------
FOR WITHHELD
-------------- --------------
Election of Directors:
Victor H. Indiek............................................... 15,438,239 3,197,028
Robert W. Medearis............................................. 15,438,239 3,197,028
30
ITEM 6. EXHIBITS 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 of Bank
Plus filed with the Securities and Exchange Commission ("SEC") on
April 22, 1996 (the "Form 8-B")).*
3.2 Amended and Restated Bylaws of Bank Plus Corporation
(incorporated by reference to Exhibit 5 to the current report on
Form 8-K filed with the SEC on March 30, 1999).*
3.3 Certificate of Designations of Series C Junior Participating
Cumulative Preferred Stock (Par Value $.01 per share) of Bank
Plus Corporation (incorporated by reference to Exhibit 3.3 to the
annual report on Form 10-K for the year ended December 31,
1998).*
4.1 Specimen of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Form 8-B).*
4.2 Indenture dated as of July 18, 1997 between Bank Plus Corporation
and The Bank of New York, as trustee relating to the 12% Senior
Notes due July 18, 2007 of Bank Plus Corporation (incorporated by
reference to Exhibit 4.4 of the Registration Statement on Form
S-8 of Bank Plus filed on September 4, 1997).*
4.3 Form of Amended and Restated Rights Agreement, dated as of March
26, 1999, between Bank Plus and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit 4
to the current report on Form 8-K filed with the SEC on March 30,
1999).*
10.01 Release Agreement dated as of January 19, 1999 among Robert P.
Condon, Bank Plus, Fidelity and Gateway (incorporated by
reference to Exhibit 10.37 to the annual report on Form 10-K for
the year ended December 31, 1998).*
10.02 Consulting and Profit Sharing Agreement dated as of January 19,
1999 among Robert P. Condon, Bank Plus, Fidelity and Gateway
(incorporated by reference to Exhibit 10.38 to the annual report
on Form 10-K for the year ended December 31, 1998).*
10.03 Employment Agreement dated as of October 28, 1998 among Mark K.
Mason, Bank Plus and Fidelity (incorporated by reference to
Exhibit 10.40 to the annual report on Form 10-K for the year
ended December 31, 1998).*
10.04 Employment Agreement dated as of November 19, 1998 among Godfrey
B. Evans, Bank Plus and Fidelity (incorporated by reference to
Exhibit 10.41 to the annual report on Form 10-K for the year
ended December 31, 1998).*
10.05 Employment Agreement dated as of November 19, 1998 among John M.
Michel, Bank Plus and Fidelity (incorporated by reference to
Exhibit 10.42 to the annual report on Form 10-K for the year
ended December 31, 1998).*
10.06 Form of Stock Option Agreement dated as of November 19, 1998
between Bank Plus and each of Messrs. Mason, Evans, and Michel
(incorporated by reference to Exhibit 10.43 to the annual report
on Form 10-K for the year ended December 31, 1998).*
10.07 Master Agreement dated as of December 17, 1998 by and among The
Variable Annuity Life Insurance Company ("VALIC"), Gateway and
Bank Plus (incorporated by reference to Exhibit 10.44 to the
annual report on Form 10-K for the year ended December 31,
1998).*
10.08 Limited Liability Company Agreement of American General Gateway
Services, L.L.C. dated as of January 1, 1999 between VALIC and
Gateway (incorporated by reference to Exhibit 10.45 to the annual
report on Form 10-K for the year ended December 31, 1998).*
31
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------
10.09 Settlement Agreement dated March 26, 1999 between Bank Plus and
Hovde Financial, Inc., Hovde Capital, Inc., Hovde Capital,
L.L.C., Financial Institution Partners, L.P., Financial
Institution Partners II, L.P., Hancock Park Acquisition, L.P.,
Hancock Park Acquisition, L.L.C., Western Acquisition Partners,
L.P., Western Acquisitions, L.L.C., Pacific Financial Investors,
Ltd., Pacific Financial Investors, L.P., Eric D. Hovde and Steven
D. Hovde (incorporated by reference to Exhibit 2 to the current
report on Form 8-K filed with the SEC on March 30, 1999).*
10.10 Settlement Agreement, dated March 26, 1999, between Bank Plus and
La Salle Financial Partners, L.P., La Salle Capital Management,
Inc., Talman Financial, Inc., Richard J. Nelson and Peter T.
Kross (incorporated by reference to Exhibit 3 to the current
report on Form 8-K filed with the SEC on March 30, 1999).*
27. Financial Data Schedule.
_______________
* Indicates previously filed documents.
REPORTS ON FORM 8-K
A current report on Form 8-K was filed with the SEC on February 3, 1999
reporting on Item 5 "Other Events" regarding the adoption of a stockholder
rights plan and amendments to Bank Plus' By-Laws.
A current report on Form 8-K was filed with the SEC on March 26, 1999
reporting on Item 5 "Other Events" regarding the amendments to Bank Plus'
By-Laws and stockholder rights plan and the execution of agreements with two
groups of stockholders relating to the withdrawal of notices filed by such
stockholders of their intent to nominate directors and propose resolutions at
the 1999 annual meeting of stockholders of Bank Plus.
32
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
Registrant
Date: May 14, 1999 /s/ Mark K. Mason
--------------------------------------
Mark K. Mason
PRESIDENT AND CHIEF EXECUTIVE OFFICER;
VICE CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 14, 1999 /s/ John M. Michel
--------------------------------------
John M. Michel
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
33