<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-B/A
Amendment No. 1 to Form 8-B
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 No.)
incorporation or organization)
4565 COLORADO BOULEVARD, LOS ANGELES, CALIFORNIA 90039
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Securities to be registered pursuant
to Section 12(b) of the Act:
NONE
- -------------------------------------------------------------------------------
Securities to be registered pursuant
to Section 12(g) of the Act:
Common Stock
$0.01 PAR VALUE
- -------------------------------------------------------------------------------
(Title of Class)
Page 1 of 12
Exhibit Index appears on pages 9-12
<PAGE>
Item 1. General Information.
- ------- -------------------
(a) Bank Plus Corporation ("Bank Plus") was organized as a corporation
under the General Corporation Law of the State of Delaware on March 14, 1996.
(b) Bank Plus' fiscal year ends on December 31.
Item 2. Transaction of Succession.
- ------- -------------------------
(a) Bank Plus will be the successor issuer to Fidelity Federal Bank, A
Federal Savings Bank ("Fidelity") upon the effectiveness of the reorganization
described in the Agreement and Plan of Reorganization attached hereto as Exhibit
1.1 (the "Reorganization"). The Class A Common Stock of Fidelity, par value
$0.01 per share ("Fidelity Common Stock"), is currently registered under Section
12(g) of the Securities Exchange Act of 1934.
(b) As a result of the Reorganization, all of the outstanding Fidelity
Common Stock will be converted on a one-for-one basis into all of the
outstanding common stock, par value $0.01 per share, of Bank Plus ("Bank Plus
Common Stock"), and Bank Plus will become the holding company for Fidelity. The
Reorganization will be accomplished through the following steps: (1) Fidelity
will contribute $2 million and all of the outstanding capital stock of Gateway
Investment Services, Inc., its wholly owned broker-dealer subsidiary, to Bank
Plus, (2) an interim federal savings bank will be organized as a wholly owned
subsidiary of Bank Plus, (3) the interim federal savings bank will be merged
with and into Fidelity, with Fidelity as the surviving bank and (4) upon such
merger, holders of Fidelity Common Stock will receive Bank Plus Common Stock in
exchange for their shares of Fidelity Common Stock on a one-for-one basis. Upon
consummation of the Reorganization, the holders of Fidelity Common Stock
immediately prior to consummation of the Reorganization will be the sole
stockholders of Bank Plus, which in turn will be the holding company for the
Bank.
Item 3. Securities to be Registered.
- ------- ---------------------------
Pursuant to the Certificate of Incorporation of Bank Plus, the
authorized capital stock of Bank Plus consists of 78,500,000 shares of common
stock and 10,000,000 shares of preferred stock. Currently, no shares of Bank
Plus stock are issued or outstanding.
-2-
<PAGE>
Item 4. Description of Registrant's Securities to Be Registered.
- ------- -------------------------------------------------------
The following summary description of the capital stock of Bank Plus does
not purport to be complete and is qualified in its entirety by reference to the
Proxy Statement and Offering Memorandum attached hereto as Exhibit 2, including
the Certificate of Incorporation and By-laws of Bank Plus included therein.
Common Stock. Each share of Bank Plus Common Stock has the same
relative rights, and is identical in all respects with, each other share of Bank
Plus Common Stock. Until such time as voting preferred stock is issued, if
ever, the holders of Bank Plus Common Stock will possess all rights, including
exclusive voting rights, pertaining to the capital stock of Bank Plus. Holders
of Bank Plus Common Stock will be entitled to one vote per share on all matters
requiring stockholder action, including, but not limited to, the election of,
and any other matters relating to, directors. Holders of Bank Plus Common Stock
will not be entitled to cumulate their votes for the election of directors or
for any other purpose.
The holders of Bank Plus Common Stock will be entitled to receive
dividends, out of funds legally available therefor, subject to any restrictions
imposed by federal regulators and the payment of any preferential amounts to
which any class of preferred stock may be entitled. Upon liquidation,
dissolution or winding up of Bank Plus, holders of Bank Plus Common Stock will
be entitled to share ratably in all assets remaining after the payment of all
liabilities of Bank Plus and of preferential amounts to which any preferred
stock may be entitled.
The holders of Bank Plus Common Stock will have no preemptive or other
subscription rights. Bank Plus Common Stock will not be subject to call or
redemption, and, upon receipt by Bank Plus of the full purchase price therefor,
each share of Bank Plus Common Stock will be fully paid and non-assessable.
Preferred Stock. Bank Plus is currently authorized by its Certificate
of Incorporation to issue up to 10,000,000 shares of preferred stock. The Board
of Directors has broad authority to designate and establish the terms of one or
more series of preferred stock. Among other matters, the Board is authorized to
establish voting powers, designations, preferences and special rights of each
such series and any qualifications, limitations and restrictions thereon. Bank
Plus preferred stock may rank prior to Bank Plus Common Stock as to dividend
rights, liquidation preferences, or both, may have full or limited voting
rights, and may be convertible into Bank Plus Common Stock. The holders of any
class or series of Bank Plus preferred stock also may have the right to vote
separately as a class or series under the terms of the class or series as
hereafter fixed by the Board or otherwise required by Delaware law.
-3-
<PAGE>
Item 5. Financial Statements and Exhibits.
- ------- ---------------------------------
(a) Financial Statements.
None.
(b) Exhibits.
1. Copies of the Plan or Agreement of Succession.
1.1 Form of Agreement and Plan of Reorganization among Fidelity
Federal Bank, A Federal Savings Bank, Bank Plus Corporation
and Fidelity Interim Bank (incorporated by reference to
Exhibit 2.1 hereto).
2. Copies of Any Proxy Statement or Prospectus.
2.1 Proxy Statement and Offering Memorandum.
3. Copies of All Other Exhibits Called for by Form 10.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Bank Plus Corporation
(incorporated by reference to Exhibit 2.1 hereto).
3.2 By-laws of Bank Plus Corporation (incorporated by reference to
Exhibit 2.1 hereto).
4.1 Bank Plus Common Stock Certificate.
4.2 Form of Indenture relating to senior notes of Fidelity.
10.1 Settlement Agreement between Fidelity, Citadel Holding
Corporation ("Citadel") and certain lenders, dated as of June 3,
1994 (the "Letter Agreement").
10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, 1994.
10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994.
10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------------------------------------------------------------
<S> <C>
10.5 Mutual Release, dated as of August 4, 1994, between Fidelity,
Citadel and certain lenders.
10.6 Mutual Release between Fidelity, Citadel and The Chase Manhattan
Bank, NA, dated June 17, 1994.
10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13,
1994, between Fidelity and Colony Capital, Inc.
10.8 Real Estate Purchase Agreement, dated as of August 3, 1994,
between Fidelity and Citadel Realty, Inc. ("CRI").
10.9 Loan and REO Purchase Agreement (Secondary), dated as of July
12, 1994, between Fidelity and EMC Mortgage Corporation.
10.10 Loan and REO Purchase Agreement (Secondary), dated as of July
21, 1994, between Fidelity and International Nederlanden (US)
Capital Corporation, Farallon Capital Partners, L.P., Tinicum
Partners, L.P. and Essex Management Corporation.
10.11 Purchase of Assets and Liability Assumption Agreement by and
between Home Savings of America, FSB and Fidelity, dated as of
July 19, 1994.
10.12 Promissory Note and Deed of Trust, dated July 28, 1994, by CRI
in favor of Fidelity and related loan documents (3943 Veselich
Avenue).
10.13 Promissory Note and Deed of Trust, dated July 28, 1994, by CRI
in favor of Fidelity and related loan documents (23200 Western
Avenue).
10.14 Promissory Note, dated August 3, 1994, by CRI in favor of
Fidelity and related loan documents (1661 Camelback Road).
10.15 Guaranty Agreement, dated August 3, 1994, by Citadel in favor of
Fidelity.
10.16 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and
between Citadel and Fidelity.
10.17 Option Agreement, dated as of August 4, 1994, by and between
Fidelity and Citadel.
10.18 Executive Employment Agreement, dated as of June 2, 1995,
between Richard M. Greenwood and Fidelity.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------------------------------------------------------------
<S> <C>
10.19 Amended Service Agreement between Fidelity and Citadel dated as
of August 1, 1994.
10.20 Side letter, dated August 3, 1994, between Fidelity and CRI.
10.21 Placement Agency Agreement, dated July 12, 1994, between
Fidelity, Citadel and J.P. Morgan Securities Inc.
10.22 Stock Purchase Agreement, dated as of August 3, 1994, between
Fidelity and Citadel.
10.23 Litigation and Judgment Assignment and Assumption Agreement,
dated as of August 3, 1994, between Fidelity and Citadel.
10.24 1996 Stock Option Plan (to be assumed by Bank Plus upon the
effectiveness of the Reorganization).
10.25 Retirement Plan for Non-Employee Directors.
10.26 Form of Severance Agreement between the Bank and each of Messrs.
Johnson and Sanders.
10.27 Form of Severance Agreement between the Bank and each of Messrs.
Osborne and Greenwood.
10.28 Form of Severance Agreement between the Bank and each of Messrs.
Condon, Evans, Mason, Stutz and Taylor.
10.29 Form of Severance Agreement between the Bank and each of Messrs.
Michel and Renstrom.
10.30 Form of Incentive Stock Option Agreement between the Bank and
certain officers (to be assumed by Bank Plus upon the
effectiveness of the Reorganization).
10.31 Form of amendment to Incentive Stock Option Agreement between
the Bank and certain officers (to be assumed by Bank Plus upon
the effectiveness of the Reorganization).
10.32 Form of Non-Employee Director Stock Option Agreement between the
Bank and certain directors (to be assumed by Bank Plus upon the
effectiveness of the Reorganization).
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------------------------------------------------------------
<S> <C>
10.33 Form of Amendment to Non-Employee Director Stock Option
Agreement between the Bank and certain directors (to be assumed
by Bank Plus upon the effectiveness of the Reorganization).
10.34 Loan and REO Purchase Agreement, dated as of December 15, 1994
between Fidelity and Berkeley Federal Bank & Trust FSB.
10.35 Standard Office Lease-Net, dated July 15, 1994, between the Bank
and 14455 Ventura Blvd., Inc.
10.36 Standard Office Lease - Modified Gross, dated July 15, 1994,
between the Bank and Citadel Realty, Inc.
10.37 Loan Servicing Purchase and Sale Agreement dated March 31, 1995
between the Bank and Western Financial Savings Bank, FSB.
10.38 Supervisory Agreement dated June 28, 1995, between Fidelity and
the OTS.
10.39 Form of Indemnity Agreement between the Bank and its directors
and senior officers.
10.40 Letter from the OTS to the Bank dated December 8, 1995,
terminating the Supervisory Agreement as of the date of the
letter.
21.1 List of subsidiaries.
27.1 Financial Data Schedule.
99.1 Consolidated financial statements of the Bank.
</TABLE>
-7-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Fidelity Federal Bank,
A Federal Savings Bank
Date: May 6, 1996 By: /s/ Godfrey B. Evans
----------------------------------
Godfrey B. Evans
Executive Vice President,
General Counsel and
Corporate Secretary
-8-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------
<S> <C>
1.1 * Form of Agreement and Plan of Reorganization
among Fidelity Federal Bank, A Federal
Savings Bank, Bank Plus Corporation and
Fidelity Interim Bank (incorporated by
reference to Exhibit 2.1 hereto).
2.1 * Proxy Statement and Offering Memorandum.
3.1 * Certificate of Incorporation of Bank
Plus Corporation (incorporated by
reference to Exhibit 2.1 hereto).
3.2 * By-laws of Bank Plus Corporation
(incorporated by reference to Exhibit
2.1 hereto).
4.1 * Bank Plus Common Stock Certificate.
4.2 * Form of Indenture relating to Fidelity
senior notes.
10.1 * Settlement Agreement between Fidelity,
Citadel Holding Corporation ("Citadel") and
certain lenders, dated as of June 3,
1994 (the "Letter Agreement").
10.2 * Amendment No. 1 to Letter Agreement,
dated as of June 20, 1994.
10.3 * Amendment No. 2 to Letter Agreement,
dated as of July 28, 1994.
10.4 * Amendment No. 3 to Letter Agreement,
dated as of August 3, 1994.
10.5 * Mutual Release, dated as of August 4, 1994,
between Fidelity, Citadel and certain
lenders.
10.6 * Mutual Release between Fidelity,
Citadel and The Chase Manhattan Bank, NA,
dated June 17, 1994.
10.7 * Loan and REO Purchase Agreement (Primary),
dated as of July 13, 1994, between
Fidelity and Colony Capital, Inc.
10.8 * Real Estate Purchase Agreement, dated as
of August 3, 1994, between Fidelity and
Citadel Realty, Inc.
("CRI").
</TABLE>
* Previously filed.
-9-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------
<S> <C>
10.9 * Loan and REO Purchase Agreement (Secondary),
dated as of July 12, 1994, between Fidelity and
EMC Mortgage Corporation.
10.10 * Loan and REO Purchase Agreement (Secondary),
dated as of July 21, 1994, between Fidelity and
International Nederlanden (US) Capital
Corporation, Farallon Capital Partners, L.P.,
Tinicum Partners, L.P. and Essex Management
Corporation.
10.11 * Purchase of Assets and Liability Assumption
Agreement by and between Home Savings of
America, FSB and Fidelity, dated as of
July 19, 1994.
10.12 * Promissory Note and Deed of Trust, dated
July 28, 1994, by CRI in favor of Fidelity
and related loan documents (3943
Veselich Avenue).
10.13 * Promissory Note and Deed of Trust, dated
July 28, 1994, by CRI in favor of Fidelity
and related loan documents (23200
Western Avenue).
10.14 * Promissory Note, dated August 3, 1994,
by CRI in favor of Fidelity and related
loan documents (1661 Camelback Road).
10.15 * Guaranty Agreement, dated August 3, 1994,
by Citadel in favor of Fidelity.
10.16 * Tax Disaffiliation Agreement, dated as
of August 4, 1994, by and between Citadel
and Fidelity.
10.17 * Option Agreement, dated as of August 4,
1994, by and between Fidelity and Citadel.
10.18 * Executive Employment Agreement, dated as
of June 2, 1995, between Richard M.
Greenwood and Fidelity.
10.19 * Amended Service Agreement between Fidelity and
Citadel dated as of August 1, 1994.
10.20 * Side letter, dated August 3, 1994,
between Fidelity and CRI.
</TABLE>
-10-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------
<S> <C>
10.21 * Placement Agency Agreement, dated July
12, 1994, between Fidelity, Citadel and
J.P. Morgan Securities Inc.
10.22 * Stock Purchase Agreement, dated as of
August 3, 1994, between Fidelity and Citadel.
10.23 * Litigation and Judgment Assignment and
Assumption Agreement, dated as of
August 3, 1994, between Fidelity and
Citadel.
10.24 * 1996 Stock Option Plan (to be assumed
by Bank Plus upon the effectiveness of the
Reorganization).
10.25 * Retirement Plan for Non-Employee Directors.
10.26 * Form of Severance Agreement between the
Bank and each of Messrs. Johnson and
Sanders.
10.27 * Form of Severance agreement between the
Bank and each of Messrs. Osborne and
Greenwood.
10.28 * Form of Severance Agreement between the
Bank and each of Messrs. Condon,
Evans, Mason, Stutz and Taylor.
10.29 * Form of Severance Agreement between the
Bank and each of Messrs. Michel and
Renstrom.
10.30 * Form of Incentive Stock Option Agreement
between the Bank and certain officers
(to be assumed by Bank Plus upon the
effectiveness of the Reorganization).
10.31 * Form of Amendment to Incentive Stock
Option Agreement between the Bank and
certain officers (to be assumed by Bank
Plus upon the effectiveness of the
Reorganization).
10.32 * Form of Non-Employee Director Stock Option
Agreement between the Bank and certain
directors (to be assumed by Bank Plus
upon the effectiveness of the
Reorganization).
</TABLE>
-11-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ---------------------------------------------
<S> <C>
10.33 * Form of Amendment to Non-Employee Director
Stock Option Agreement between the Bank and
certain directors (to be assumed by Bank Plus
upon the effectiveness of the Reorganization).
10.34 * Loan and REO Purchase Agreement, dated as
of December 15, 1994 between Fidelity and
Berkeley Federal Bank & Trust FSB.
10.35 * Standard Office Lease-Net, dated July
15, 1994, between the Bank and 14455
Ventura Blvd., Inc.
10.36 * Standard Office Lease - Modified Gross,
dated July 15, 1994, between the Bank and
Citadel Realty, Inc.
10.37 * Loan Servicing Purchase and Sale Agreement dated
March 31, 1995 between the Bank and Western
Financial Savings Bank, FSB.
10.38 * Supervisory Agreement dated June 28, 1995,
between Fidelity and the OTS.
10.39 * Form of Indemnity Agreement between the
Bank and its directors and senior officers.
10.40 * Letter from the OTS to the Bank dated
December 8, 1995, terminating the Supervisory
Agreement as of the date of the letter.
21.1 * List of subsidiaries.
27.1 Financial Data Schedule.
99.1 Consolidated financial statements of the Bank.
</TABLE>
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
30, 1996 FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT ON FORM 10-Q FOR
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 40,402
<INT-BEARING-DEPOSITS> 5,295
<FED-FUNDS-SOLD> 12,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 190,512
<INVESTMENTS-CARRYING> 50,066
<INVESTMENTS-MARKET> 0
<LOANS> 2,959,741
<ALLOWANCE> 81,430
<TOTAL-ASSETS> 3,279,564
<DEPOSITS> 2,579,062
<SHORT-TERM> 322,600
<LIABILITIES-OTHER> 30,363
<LONG-TERM> 120,000
51,750
0
<COMMON> 182
<OTHER-SE> 175,607
<TOTAL-LIABILITIES-AND-EQUITY> 3,279,564
<INTEREST-LOAN> 56,180
<INTEREST-INVEST> 3,220
<INTEREST-OTHER> 652
<INTEREST-TOTAL> 60,052
<INTEREST-DEPOSIT> 31,033
<INTEREST-EXPENSE> 7,181
<INTEREST-INCOME-NET> 21,838
<LOAN-LOSSES> 3,905
<SECURITIES-GAINS> (83)
<EXPENSE-OTHER> 19,082
<INCOME-PRETAX> 1,571
<INCOME-PRE-EXTRAORDINARY> 1,571
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,571
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.68
<LOANS-NON> 40,111
<LOANS-PAST> 0
<LOANS-TROUBLED> 53,745
<LOANS-PROBLEM> 222,279
<ALLOWANCE-OPEN> 89,435
<CHARGE-OFFS> 12,451
<RECOVERIES> 541
<ALLOWANCE-CLOSE> 81,430
<ALLOWANCE-DOMESTIC> 81,430
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 38,202
</TABLE>
<PAGE>
EXHIBIT 99.1
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 57,697 $ 94,794
Investment securities available for
sale, at fair value................... 161,175 94,305
Mortgage-backed securities available
for sale, at fair value............... 29,337 31,733
Loans receivable, net of allowances of
$81,430 and $89,435 at March 31, 1996
and December 31, 1995, respectively... 2,878,311 2,935,116
Interest receivable.................... 21,083 20,162
Investment in FHLB stock............... 50,066 49,425
Real estate owned, net................. 23,533 19,521
Premises and equipment, net............ 34,117 34,333
Other assets........................... 24,245 20,055
---------- ----------
$3,279,564 $3,299,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits.............................. $2,579,062 $2,600,869
FHLB advances......................... 232,700 292,700
Commercial paper...................... 100,000 50,000
Mortgage-backed notes................. 100,000 100,000
Other borrowings...................... 9,900 --
Other liabilities..................... 30,363 26,832
---------- ----------
3,052,025 3,070,401
---------- ----------
Stockholders' equity:
Serial preferred stock, no par value,
10,000,000 shares authorized;
2,070,000 shares outstanding;
liquidation preference $25 per share. 51,750 51,750
Common Stock:
Class A Common stock, par value $.01
per share; 78,500,000 shares
authorized; 18,242,465 shares
outstanding......................... 182 182
Paid-in capital....................... 262,151 262,151
Unrealized (losses) gains on
securities........................... (695) 788
Accumulated deficit................... (85,849) (85,828)
---------- ----------
227,539 229,043
---------- ----------
$3,279,564 $3,299,444
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Loans.................................. $ 56,180 $ 55,455
Mortgage-backed securities............. 504 975
Investment securities and other........ 3,368 4,140
----------- ----------
Total interest income................. 60,052 60,570
----------- ----------
INTEREST EXPENSE:
Deposits............................... 31,033 28,433
FHLB advances.......................... 3,667 5,111
Other borrowings....................... 3,514 9,097
----------- ----------
Total interest expense................ 38,214 42,641
----------- ----------
NET INTEREST INCOME 21,838 17,929
Provision for estimated loan losses.... 3,905 4,020
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES.................. 17,933 13,909
----------- ----------
NONINTEREST INCOME (EXPENSE):
Loan fee income........................ 814 1,373
Losses on loan sales, net.............. -- (292)
Fee income from sale of uninsured
investment products................... 1,199 1,209
Fee income on deposits and other income 790 898
(Losses) gains on securities
activities, net....................... (83) 939
Gains on sale of servicing............. -- 4,319
----------- ----------
2,720 8,446
----------- ----------
Provision for estimated real estate
losses................................ (668) (391)
Direct costs of real estate
operations, net....................... (1,787) (1,769)
----------- ----------
(2,455) (2,160)
----------- ----------
Total noninterest income.............. 265 6,286
----------- ----------
OPERATING EXPENSE:
Personnel and benefits................. 6,973 9,397
Occupancy.............................. 2,717 2,986
FDIC insurance......................... 2,031 2,060
Professional services.................. 2,503 2,295
Office-related expenses................ 1,086 1,253
Other.................................. 1,317 1,155
----------- ----------
Total operating expense............... 16,627 19,146
----------- ----------
EARNINGS BEFORE INCOME TAXES............ 1,571 1,049
Income tax expense..................... 40 --
----------- ----------
NET EARNINGS............................ $ 1,531 $ 1,049
Preferred dividends.................... 1,553 --
----------- ----------
NET (LOSS) EARNINGS AVAILABLE FOR
COMMON STOCKHOLDERS.................... $ (22) $ 1,049
=========== ==========
NET (LOSS) EARNINGS PER COMMON SHARE.... $ -- $0.16
=========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................ 18,242,465 6,492,465
=========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................... $ 1,531 $ 1,049
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Provisions for estimated loan and
real estate losses.................. 4,573 4,411
Losses (gains) on sale of loans and
securities.......................... 83 (647)
Amortization of deferred items, net.. (441) (889)
FHLB stock dividend.................. (649) (733)
Depreciation and amortization........ 978 1,568
Interest receivable increase........... (921) (451)
Other assets increase.................. (5,180) (7,880)
Interest payable increase.............. 1,598 9,069
Other liabilities increase............. 1,724 104
--------- ----------
Net cash provided by operating
activities........................ 3,296 5,601
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available for sale.................... (67,575) (45,569)
Maturities of investment securities
available for sale.................... -- 5,000
Proceeds from sales of investment
securities available for sale......... -- 65,154
Purchases of investment securities
held to maturity...................... -- (25,001)
Maturities of investment securities
held to maturity...................... -- 10,000
Purchases of mortgage-backed
securities available for sale......... -- (27,858)
Principal repayments of
mortgage-backed securities available
for sale.............................. 1,907 2,335
Proceeds from sales of mortgage-backed
securities available for sale......... -- 34,659
Purchases of mortgage-backed
securities held to maturity........... -- (16,234)
Principal repayments of
mortgage-backed securities held to
maturity.............................. -- 1,606
Loans receivable decrease.............. 44,554 21,823
Net proceeds from sales of real estate. 3,944 2,490
Net dispositions of premises and
equipment............................. 236 257
Net cash (used in) provided by --------- ----------
investing activities.............. (16,934) 28,662
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings
decrease.............................. (66,854) (34,783)
Certificate accounts increase.......... 45,047 87,762
Payments of preferred stock dividend... (1,552) --
Proceeds from FHLB advances............ -- 80,000
Repayments of FHLB advances............ (60,000) (120,000)
Short-term borrowings increase 59,900 (50,900)
(decrease)............................ --------- ----------
Net cash used in financing activities. (23,459) (37,921)
--------- ----------
Net decrease in cash and cash
equivalents....................... (37,097) (3,658)
Cash and cash equivalents at the
beginning of the period.............. 94,794 74,065
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................. $ 57,697 $ 70,407
========= ==========
</TABLE>
(Continued on following page)
3
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- --------
(Unaudited)
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period
for:
Interest on deposits, advances and
other borrowings....................... $35,939 $33,493
Income tax (refund) paid................ (383) 85
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Additions to real estate acquired
through foreclosure..................... 8,874 11,399
Loans originated to finance sale of
real estate acquired through foreclosure 250 1,283
Mortgage-backed securities transferred
from available for sale to held to
maturity................................ -- 3,603
Mortgage loans exchanged for
mortgage-backed securities.............. -- 45,294
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Fidelity
Federal Bank, A Federal Savings Bank and its subsidiaries (the "Bank" or
"Fidelity"). The Bank offers a broad range of consumer financial services,
including demand and term deposits, and loans to consumers, through 33 full-
service branches, all of which are located in Southern California, principally
in Los Angeles and Orange counties. All significant intercompany transactions
and balances have been eliminated. Certain reclassifications have been made to
prior years' consolidated financial statements to conform to the 1996
presentation. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results of operations to be expected
for the entire year of 1996.
In the fourth quarter of 1995, Fidelity completed a plan of
recapitalization (the "1995 Recapitalization") of the Bank, pursuant to which
Fidelity raised approximately $134.4 million in net new equity through the sale
of 2,070,000 shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock,
Series A ("Series A Preferred Stock"), and 47,000,000 shares of Class A Common
Stock. As part of the 1995 Recapitalization, Fidelity adopted the accelerated
asset resolution plan (the "Accelerated Asset Resolution Plan"), which is
designed to aggressively dispose of, resolve, or otherwise manage a pool of
primarily multifamily mortgage loans and real estate owned ("REO"). As a result,
the Bank recorded a $45.0 million loan portfolio charge in the allowance for
estimated loan losses which represents the estimated additional losses expected
to be incurred.
On February 9, 1996, the Bank's stockholders approved a one-for-four
reverse stock split (the "Reverse Stock Split") of the issued and outstanding
shares of the Bank's Common Stock. Upon effectiveness of the Reverse Stock
Split, each stockholder became the owner of one share of Common Stock for each
four shares of Common Stock held at the time of the Reverse Stock Split and
became entitled to receive cash in lieu of any fractional shares. All per share
data and weighted average common shares outstanding have been retroactively
adjusted to reflect the Reverse Stock Split.
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, 1995,
together with the MD&A as of such date.
Supplementary Earnings/Loss per Share Data
Assuming that 18,242,465 shares of Class A Common Stock were issued and
outstanding at the beginning of 1995, the net earnings per common share would
have been $0.06 for the quarter ended March 31, 1995.
5
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1996
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The following table summarizes the Bank's investment securities and
mortgage-backed securities ("MBS") portfolios. Amortized cost amounts shown for
securities included in the held to maturity portfolio that were previously
transferred from the available for sale portfolio may include unamortized market
value adjustments recorded at the time of transfer.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED AGGREGATE
---------------------
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MARCH 31, 1996
Available for sale:
Investment Securities:
U.S. Treasury and agency securities... $ 152,265 $ 1,803 $ (75) $ 153,993
Other investments (1)................. 7,197 4 (19) 7,182
--------- --------- --------- ----------
159,462 1,807 (94) 161,175
--------- --------- --------- ----------
MBS:
FHLMC................................. 2,804 -- (39) 2,765
Participation Certificates............ 26,572 -- -- 26,572
--------- --------- --------- ----------
29,376 -- (39) 29,337
--------- --------- --------- ----------
Total available for sale................ $ 188,838 $ 1,807 $ (133) $ 190,512
========= ========= ========= ==========
DECEMBER 31, 1995
Available for sale:
Investment securities:
U.S. Treasury and agency securities... $ 84,200 $ 2,984 $ -- $ 87,184
Other investments (1)................. 7,449 52 (30) 7,471
--------- --------- --------- ----------
91,649 3,036 (30) 94,655
--------- --------- --------- ----------
MBS:
FHLMC................................. 3,068 -- (30) 3,038
FNMA.................................. 55 36 -- 91
Participation certificates............ 28,123 481 -- 28,604
--------- --------- --------- ----------
31,246 517 (30) 31,733
--------- --------- --------- ----------
Total available for sale................ $ 122,895 $ 3,553 $ (60) $ 126,388
========= ========= ========= ==========
</TABLE>
- -----------------
(1) Represents U.S. Treasury securities which have been pledged as credit
support to a securitization of loans by the Bank.
6
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1996
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (CONTINUED)
At the end of the first quarter of 1995, the Bank transferred $3.6 million
of MBS from its available for sale portfolio to its held to maturity portfolio,
at fair value.
As a consequence of concerns regarding the Bank's ability to maintain
minimum regulatory capital levels to remain adequately capitalized, the Bank
reclassified all held to maturity investment securities and MBS to its available
for sale portfolio in the second quarter of 1995. Subsequent to their
reclassification, certain available for sale securities were sold. Under the
Bank's current operating plan, all securities will be classified as available
for sale for the foreseeable future. The Bank may be precluded from classifying
securities as held to maturity for a period of time.
The following table summarizes the weighted average yield of debt
securities as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Available for sale:
Investment securities... 5.70 % 4.70 %
MBS..................... 7.04 % 6.85 %
</TABLE>
The following table presents the Bank's debt securities at March 31, 1996
by contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------------
WITHIN OVER 1 YEAR OVER 5 YEARS OVER 10
1 YEAR TO 5 YEARS TO 10 YEARS YEARS TOTAL
-------- ----------- ------------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
Investment securities... $ 25,137 $ 93,504 $ 10,025 $ 32,509 $ 161,175
MBS..................... -- -- -- 29,337 29,337
-------- ----------- ------------ -------- ---------
$ 25,137 $ 93,504 $ 10,025 $ 61,846 $ 190,512
======== =========== ============ ======== =========
</TABLE>
Net unrealized gains (losses) associated with the available for sale
securities which are included in stockholders' equity in the consolidated
statement of financial condition consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net unrealized (losses) gains,
securities............................. $ (1,230) $ 127
Net unrealized gains, hedging activities 535 661
-------------- -----------------
Net unrealized (losses) gains......... $ (695) $ 788
============== =================
</TABLE>
7
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1996
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The following gains and losses were realized from the sale of investment
securities and MBS, the costs of which were computed on a specific
identification method, during the periods indicated:
<TABLE>
<CAPTION>
SALES GAINS LOSSES
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996............... $ -- $ -- $ --
1995............... 99,813 749 (566)
</TABLE>
The Bank has engaged in certain option activities related to securities.
Realized losses from such activities totaled $0.1 million for the quarter ending
March 31, 1996 compared to realized gains of $0.8 million for the comparable
period in 1995. There were no open positions in this program at March 31, 1996.
8
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition................. 2
Consolidated Statements of Operations.......................... 3
Consolidated Statements of Stockholders' Equity................ 4
Consolidated Statements of Cash Flows.......................... 5
Notes to Consolidated Financial Statements..................... 7
</TABLE>
1
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents......................................... $ 94,444 $ 74,065
Investment securities available for sale, at fair value........... 94,655 24,158
Investment securities held to maturity, at amortized cost
(market value of $128,437 at December 31, 1994)................. -- 125,233
Mortgage-backed securities available for sale, at fair value...... 31,733 46,028
Loans held for sale, at lower of cost or market................... -- 48,315
Loans receivable, net of allowances of $89,435 and $67,202
at December 31, 1995 and 1994, respectively..................... 2,935,116 3,239,988
Interest receivable............................................... 20,162 20,256
Investment in FHLB stock.......................................... 49,425 47,017
Real estate owned, net............................................ 19,521 14,115
Premises and equipment, net....................................... 34,333 50,039
Other assets...................................................... 20,055 20,624
---------- ----------
$3,299,444 $3,709,838
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits........................................................ $2,600,869 $2,697,272
FHLB advances................................................... 292,700 332,700
Commercial paper................................................ 50,000 400,000
Mortgage-backed notes........................................... 100,000 100,000
Other liabilities............................................... 26,832 23,319
---------- ----------
3,070,401 3,553,291
---------- ----------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, no par value; 10,000,000 shares
authorized; 2,070,000 shares outstanding; liquidation
preference $25 per share...................................... 51,750 --
Common stock:
Class A Common stock, par value $.01 per share; 78,500,000
shares authorized; 18,242,465 and 4,965,119 shares
outstanding at December 31, 1995 and December 31, 1994,
respectively.................................................. 182 50
Class B Common stock, par value $.01 per share; no shares
authorized or outstanding at December 31, 1995,
14,000,000 shares authorized, and 1,050,561 shares
outstanding at December 31, 1994.............................. -- 11
Class C Common stock, par value $.01 per share; 3,000,000
shares authorized, no shares outstanding at December
31, 1995 and 476,786 shares outstanding at December 31, 1994.. -- 5
Paid-in capital................................................... 262,151 179,625
Unrealized gains (losses) on securities........................... 788 (3,482)
Minimum pension liability adjustment.............................. -- (2,813)
Accumulated deficit............................................... (85,828) (16,849)
---------- ----------
229,043 156,547
---------- ----------
$3,299,444 $3,709,838
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans................................................... $ 227,710 $ 226,949 $ 269,712
Mortgage-backed securities.............................. 3,535 2,868 11,051
Investment securities and other......................... 15,232 11,648 8,568
--------- --------- ---------
Total interest income................................ 246,477 241,465 289,331
--------- --------- ---------
INTEREST EXPENSE:
Deposits................................................ 128,242 108,310 131,721
FHLB advances........................................... 17,411 17,663 17,077
Other borrowings........................................ 29,183 25,526 32,323
Subordinated notes...................................... -- 4,329 7,373
--------- --------- ---------
Total interest expense............................... 174,836 155,828 188,494
--------- --------- ---------
NET INTEREST INCOME.......................................... 71,641 85,637 100,837
Provision for estimated loan losses..................... 69,724 65,559 65,100
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES................................... 1,917 20,078 35,737
--------- --------- ---------
NONINTEREST INCOME (EXPENSE):
Loan fee income......................................... 3,606 4,518 4,942
Gains (losses) on loans sales, net...................... 522 (3,963) 194
Fee income from sale of uninsured
investment products................................... 4,117 3,419 --
Fee income on deposits and other income................. 3,260 4,522 3,718
Gains on securities activities, net..................... 4,098 1,130 1,304
Gains on sales of servicing............................. 4,604 -- --
--------- --------- ---------
20,207 9,626 10,158
--------- --------- ---------
Provision for estimated real estate losses.............. (3,366) (8,768) (30,200)
Direct costs of real estate operations, net............. (5,779) (8,651) (18,643)
--------- --------- ---------
(9,145) (17,419) (48,843)
--------- --------- ---------
Total noninterest income (expense)................... 11,062 (7,793) (38,685)
--------- --------- ---------
OPERATING EXPENSE:
Personnel and benefits.................................. 34,859 44,368 44,266
Occupancy............................................... 12,337 13,707 13,086
FDIC insurance.......................................... 8,205 9,340 8,628
Professional services................................... 10,601 10,208 11,351
Office-related expenses................................. 4,611 6,647 6,449
Capitalized software charge............................. 4,297 -- --
Goodwill impairment charge.............................. -- -- 8,776
Other................................................... 7,044 7,589 6,176
--------- --------- ---------
81,954 91,859 98,732
1994 Restructuring and Recapitalization charges, net.... -- 65,394 --
--------- --------- ---------
Total operating expense.............................. 81,954 157,253 98,732
--------- --------- ---------
LOSS BEFORE INCOME TAXES..................................... (68,975) (144,968) (101,680)
Income tax expense (benefit)............................ 4 (16,524) (35,793)
--------- --------- ---------
NET LOSS..................................................... $ (68,979) $(128,444) $ (65,887)
========= ========= =========
NET LOSS PER COMMON SHARE.................................... $ (8.84) $ (39.08) $ (62.72)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................... 7,807,201 3,286,960 1,050,561
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
PREFERRED STOCK COMMON STOCK (1) COMMON STOCK (1) COMMON STOCK
--------------------- ---------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ----------- ------ -------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 (1)....... -- $ -- 1 $ -- -- $ -- -- $ --
Capital contribution from Citadel.. -- -- -- -- -- -- -- --
Net loss for 1993.................. -- -- -- -- -- -- -- --
--------- ------ ----------- ----- ------ ----- --------- ------
Balance, December 31, 1993......... -- -- 1 -- -- -- -- --
Issuance of Class A and B
common stock (1).................. -- -- 19,860,473 199 4,202,243 42 -- --
Issuance of Class C common
stock............................. -- -- -- -- -- -- 1,907,143 19
Unrealized loss on securities
available for sale................ -- -- -- -- -- -- -- --
Minimum pension liability
adjustment........................ -- -- -- -- -- -- -- --
Net loss for 1994.................. -- -- -- -- -- -- -- --
--------- -------- ------------ ----- --------- ------ ---------- ------
Balance, December 31, 1994......... -- -- 19,860,474 199 4,202,243 42 1,907,143 19
Reclass Class B Stock to
Class A Stock..................... -- -- 4,202,243 42 (4,202,243) (42) -- --
Reclass Class C Stock to
Class A Stock..................... -- -- 1,907,143 19 -- -- (1,907,143) (19)
Issuance of Preferred Stock (2).... 2,070,000 51,750 -- -- -- -- -- --
Issuance of Class A Stock (2)...... 47,000,000 470 -- -- -- --
Unrealized gain on securities
available for sale................ -- -- -- -- -- -- -- --
Minimum pension liability
adjustment........................ -- -- -- -- -- -- -- --
Effect of one-for-four
Reverse Stock Split (3)........... -- -- (54,727,395) (548) -- -- -- --
Net loss for 1995.................. -- -- -- -- -- -- -- --
--------- --------- ------------ ----- --------- ------ ----------- -----
Balance, December 31, 1995......... 2,070,000 $51,750 18,242,465 $ 182 -- $ -- -- $ --
========= ========= ============ ===== ========= ====== =========== =====
<CAPTION>
Minimum Retained Total
Unrealized Pension Earning/ Stock-
Paid In Gain (loss) on Liability (Accumulated holders'
Capital Securities Adjustment Deficit) Equity
---------- --------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 (1)........... $ 42,689 $ -- $ -- $ 177,482 $ 220,171
Capital contribution from Citadel...... 28,000 -- -- -- 28,000
Net loss for 1993...................... -- -- -- (65,887) (65,887)
-------- ------- ------- -------- ---------
Balance, December 31, 1993............. 70,689 -- -- 111,595 182,284
Issuance of Class A and B
common stock (1)...................... 99,211 -- -- -- 99,452
Issuance of Class C common
stock................................. 9,531 -- -- -- 9,550
Unrealized loss on securities
available for sale.................... -- (3,482) -- -- (3,482)
Minimum pension liability ll
adjustment............................ -- -- (2,813) -- (2,813)
Net loss for 1994...................... -- -- -- (128,444) (128,444)
-------- ------- ------- -------- ---------
Balance, December 31, 1994............. 179,431 (3,482) (2,813) (16,849) 156,547
Reclass Class B Stock to
Class A Stock......................... -- -- -- -- --
Reclass Class C Stock to
Class A Stock......................... -- -- -- -- --
Issuance of Preferred Stock (2)........ -- -- -- -- 51,750
Issuance of Class A Stock (2).......... 82,172 -- -- -- 82,642
Unrealized gain on securities
available for sale.................... -- 4,270 -- -- 4,270
Minimum pension liability
adjustment............................ -- -- 2,813 -- 2,813
Effect of one-for-four
Reverse Stock Split (3)............... 548 -- -- -- --
Net loss for 1995...................... -- -- -- (68,979) (68,979)
-------- ------- ------- -------- ---------
Balance, December 31, 1995............. $262,151 $ 788 $ -- $(85,828) $ 229,043
======== ======= ======= ======== =========
</TABLE>
(1) The one share of common stock owned by Citadel Holding Corporation
("Citadel") prior to August 4, 1994 is included in Class A common stock
for purposes of this statement until it was converted to 1,050,000
shares of Class B common stock on August 4, 1994.
(2) During 1995, Fidelity issued and sold to investors in a public offering
2,070,000 shares of preferred stock for $51.8 million and 11,750,000
shares of Class A Common Stock for $82.7 million.
(3) Common Stock share data has been retroactively adjusted for the one-
for-four reverse stock split approved by stockholders on February 9,
1996.
See notes to consolidated financial statements.
4
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------ ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (68,979) $(128,444) $ (65,887)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provisions for estimated loan and real estate losses........ 73,090 74,327 95,300
Provisions for capitalized software charge.................. 4,297 -- --
Provisions for bulk sale losses............................. -- 56,296 --
Gain on sale of branches.................................... -- (5,048) --
Capitalized loan origination costs.......................... (58) (411) (2,187)
Gains (losses) on sale of loans and securities.............. (4,620) 2,833 (1,498)
FHLB stock dividends........................................ (2,438) (2,376) (1,640)
Depreciation and amortization............................... 5,587 6,561 23,085
Amortization of deferred loan items, net.................... (2,790) (2,616) (1,163)
Investment securities held for sale, lower of cost or market
adjustment................................................ -- -- 2,074
Deferred income tax (benefit) expense....................... -- (14,789) 15,526
Purchases of investment securities held for trading........... -- -- (248,272)
Proceeds from sales of securities held for trading............ -- -- 248,248
Purchases of mortgage-backed securities ("MBS") held for
trading..................................................... -- -- (51,248)
Proceeds from sales of MBS held for trading................... -- -- 51,277
Originations of loans held for sale........................... -- (105,867) (162,868)
Purchases of loans held for sale.............................. -- (91,534) --
Proceeds from sales of loans held for sale.................... 1,290 280,486 138,399
Interest receivable decrease.................................. 94 2,793 4,083
Other assets (increase) decrease.............................. (1,092) 44,187 (50,564)
Interest payable increase (decrease).......................... 8,017 (6,970) (5,102)
Other liabilities and deferred income (decrease) increase..... (400) 1,304 (15,245)
--------- --------- ---------
Net cash provided by (used in) operating activities..... 11,998 110,732 (27,682)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale......... (45,919) (43,972) (420,921)
Maturities of investment securities available for sale........ 22,286 2,686 260,816
Proceeds from sales of investment securities
available for sale.......................................... 102,061 18,988 76,674
Purchase of investment securities held to maturity............ (25,001) (34,083) (200,055)
Maturities of investment securities held to maturity.......... 10,000 -- 226,617
Proceeds from sales of investment securities
held to maturity............................................ -- -- 26,908
Purchases of MBS available for sale........................... (27,858) (61,780) (395,561)
Principal repayments of MBS available for sale................ 7,952 12,954 68,430
Proceeds from sales of MBS available for sale................. 162,365 137,102 470,818
Purchase of MBS held to maturity.............................. (16,234) -- --
Principal repayments of MBS held to maturity.................. 3,408 -- --
Proceeds from bulk sales, net................................. -- 340,963 --
Purchases of loans for investment............................. -- -- (3,951)
Loans receivable, net decrease (increase)..................... 131,608 (56,815) 153,229
Redemption of FHLB stock...................................... -- 7,310 --
Redemption of FRB stock....................................... -- 200 --
(Continued on following page)
</TABLE>
5
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES: (CONTINUED)
Proceeds from sales of real estate, net..................... $ 34,063 $ 18,300 $ 41,608
Purchase of Gateway Investment Services, net of cash
acquired.................................................. -- 523 --
Premises and equipment dispositions (additions), net........ 1,661 (3,024) (6,933)
Other, net.................................................. -- -- (45)
--------- --------- ---------
Net cash provided by investing activities............. 360,392 339,352 297,634
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net decrease.......... (66,670) (197,040) (113,311)
Certificate accounts, net (decrease) increase............... (29,733) (138,205) 22,327
Payment for deposits included in branch sale, net........... -- (331,099) --
Proceeds from FHLB advances................................. 80,000 570,000 250,000
Repayments of FHLB advances................................. (120,000) (563,700) (505,000)
Repayment of subordinated notes............................. -- (60,000) --
Short-term borrowing (decrease) increase.................... (350,000) 92,170 242,830
Proceeds from issuance of capital stock, net................ 134,392 109,002 --
Repayments of long-term borrowings.......................... -- -- (162,000)
Capital contributions....................................... -- -- 28,000
--------- --------- ---------
Net cash used in financing activities................. (352,011) (518,872) (237,154)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents....................................... 20,379 (68,788) 32,798
Cash and cash equivalents at beginning of period...... 74,065 142,853 110,055
--------- --------- ---------
Cash and cash equivalents at end of the period........ $ 94,444 $ 74,065 $ 142,853
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest on deposits, advances and other borrowings.... $ 166,239 $ 164,412 $ 180,861
Income taxes........................................... (5,837) (40,927) (754)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to real estate acquired through foreclosure..... 51,872 74,214 193,641
Loans originated to finance sale of real estate owned..... 9,037 13,151 51,607
Loans originated to finance bulk sale of real estate
owned to Citadel........................................ 5,339 13,930 --
Transfers from held to maturity portfolio to available
for sale portfolio:
Loans receivable........................................ 68,995 85,301 325,222
Investment securities................................... 141,678 -- 14,264
MBS..................................................... 16,404 -- 214,310
Transfers from available for sale portfolio to held to
maturity portfolio:
Loans receivable........................................ -- 246,885 --
Investment securities................................... -- 96,942 --
MBS..................................................... 3,603 -- --
Mortgage loans exchanged for MBS.......................... 112,840 44,453 --
In-substance foreclosures transferred to loans, net....... -- 28,362 --
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Fidelity Federal
Bank, a Federal Savings Bank and its subsidiaries (the "Bank" or "Fidelity").
The Bank offers a broad range of consumer financial services, including demand
and term deposits, and loans to consumers, through 33 full-service branches, all
of which are located in Southern California, principally in Los Angeles and
Orange counties. All significant intercompany transactions and balances have
been eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1995 presentation.
In the fourth quarter of 1995, Fidelity completed a plan of recapitalization
(the "1995 Recapitalization") of the Bank, pursuant to which Fidelity raised
approximately $134.4 million in net new equity through the sale of 2,070,000
shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock, Series A
("Series A Preferred Stock"), and 47,000,000 shares of Class A Common Stock. As
part of the 1995 Recapitalization, Fidelity adopted the accelerated asset
resolution plan (the "Accelerated Asset Resolution Plan") which is designed to
aggressively dispose of, resolve or otherwise manage a pool of primarily
multifamily mortgage loans and real estate owned ("REO"). As a result, the Bank
recorded a $45.0 million loan portfolio charge which represents the estimated
additional losses expected to be incurred and was recorded in the allowance for
estimated loan losses.
On February 9, 1996, the Bank's stockholders approved a one-for-four reverse
stock split (the "Reverse Stock Split") of the issued and outstanding shares of
the Bank's Class A Common Stock. Upon effectiveness of the Reverse Stock Split,
each stockholder became the owner of one share of Common Stock for each four
shares of Common Stock held at the time of the Reverse Stock Split and became
entitled to receive cash in lieu of any fractional shares. All per share data
and weighted average common shares outstanding have been retroactively adjusted
to reflect the Reverse Stock Split.
On August 4, 1994, Fidelity and its former sole stockholder, Citadel Holding
Corporation ("Citadel"), completed major aspects of a plan of restructuring and
recapitalization (the "1994 Restructuring and Recapitalization"), pursuant to
which Fidelity raised approximately $109 million in net new equity, and
Citadel's ownership interest in Fidelity was reduced to 16.2% of the then
outstanding common stock. Citadel's ownership interest was reclassified into
4,202,243 shares of Class B Common Stock. All share and per share amounts have
been restated to retroactively reflect the reclassification of Citadel's
ownership interest in Fidelity.
In April 1995, Citadel transferred an aggregate of 4,195,000 shares of its
Class B Common Stock to various third parties, retaining 7,243 shares. As a
result of these transfers, all of the outstanding Class B Common Stock was
reclassified into Class A Common Stock in accordance with the stockholders'
agreement entered into as a part of the 1994 Restructuring and Recapitalization.
Unless the context otherwise requires, financial presentations reflect the
current outstanding common stock ownership of Fidelity.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods. There were no federal
7
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
funds outstanding at December 31, 1995 and December 31, 1994. Fidelity is
required by the Federal Reserve System to maintain noninterest-earning cash
reserves based upon the outstanding balances in certain of its transaction
accounts. At December 31, 1995, the required reserves, including vault cash,
totaled $15.4 million.
Investment Securities and Mortgage-backed Securities
The Bank's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. The Bank adopted Statement of
Financial Accounting Standard No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities" at January 1, 1994. In accordance
with SFAS No. 115, the Bank classifies its investment in securities as held to
maturity securities, trading securities and available for sale securities as
applicable. The Bank did not hold any trading securities at December 31, 1995
or 1994.
Prior to January 1, 1994, any securities held for investment were those
securities which the Bank had the intent and ability to hold until maturity, and
were carried on the amortized cost basis. Securities to be held for indefinite
periods of time, including securities that management intended to use as part of
its asset/liability strategy, or that may have been sold in response to changes
in interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar factors, were classified as held for sale (shown as
"available for sale" on the statement of financial condition for comparability
purposes) and were carried at the lower of cost or market value. Any investment
securities held for trading were carried at market value.
Loans
On January 1, 1994, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." This statement
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings ("TDRs"). SFAS No. 114 states that a loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest amounts due according to the contracted terms of the loan
agreement. A creditor is required to measure impairment by discounting expected
future cash flows at the loan's effective interest rate, or by reference to an
observable market price, or by determining the fair value of the collateral for
a collateral dependent asset. Regardless of the measurement method, a creditor
shall measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. The statement also clarifies
the existing accounting for in-substance foreclosures ("ISFs") by stating that a
collateral dependent real estate loan would be reported as REO only if the
lender had taken possession of the collateral. On December 29, 1994, the Office
of Thrift Supervision (the "OTS") published RB 32 "Valuation and Classification
of Troubled, Collateral - Dependent Loans" which revised OTS policy to require
valuation of troubled, collateral-dependent loans based only on the fair value
of the collateral where, based on current information and events, it is probable
that the lender will be unable to collect all amounts due (both principal and
interest), with selling cost adjustments for loans which are probable
foreclosures. RB 32 was effective March 31, 1995.
8
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Interest on loans, including impaired loans, is credited to income as earned
and is accrued only if deemed collectible, using the interest method. Unpaid
interest income is reversed when a loan becomes over 90 days contractually
delinquent and on other loans, if management determines it is warranted, prior
to being 90 days delinquent. While a loan is on nonaccrual status, interest is
recognized only as cash is received. Discounts and premiums on purchased loans
are classified with loans receivable on the statement of financial condition and
are credited or charged to operations over the estimated life of the related
loans using the interest method. The Bank charges fees for originating loans.
Loan origination fees, net of certain direct costs of originating the loan, are
recognized as an adjustment of the loan yield over the estimated life of the
loan by the interest method. When a loan is sold, unamortized net loan
origination fees and direct costs are recognized in earnings with the related
gain or loss on sale. Other loan fees and charges representing service costs for
the prepayment of loans, for delinquent payments or for miscellaneous loan
services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
The Bank may designate certain of its loans receivable as being held for sale.
In determining the level of loans held for sale, the Bank considers whether
loans (a) would be sold as part of its asset/liability strategy, or (b) may be
sold in response to changes in interest rates, changes in prepayment risk, the
need to increase regulatory capital or other similar factors. Loans held for
sale are carried at the lower of aggregate cost or market value. The market
value calculation includes consideration of commitments and related fees.
Adjustments to the lower of cost or market are charged to current operations and
are included in net gains/losses on loan sales in the statement of operations.
In the normal course of business, Fidelity has sold loans, without
relinquishing the right to service such loans, which has generated a stream of
loan servicing revenue and cash for lending or liquidity. Sales of loans are
dependent upon various factors, including interest rate movements, investor
demand for loan products, deposit flows, the availability and attractiveness of
other sources of funds, loan demand by borrowers and liquidity and capital
requirements. Due to the volatility and unpredictability of these factors, the
volume of Fidelity's sales of loans has fluctuated. The Bank sells loans
primarily from its held for sale portfolio. However, the Bank may sell certain
individual nonperforming or problem loans in an effort to maintain a lower level
of NPAs. The Bank believes that it has the intent and ability to hold all of
its loans, other than those designated as held for sale, until maturity. From
time to time, Fidelity may consider selling all or a portion of its rights to
service loans. Additionally, the Bank may from time to time consider purchasing
others' rights to service loans.
As of January 1, 1995, the Bank adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends certain provisions of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to require recognition of
the rights to service mortgage loans for others as separate assets, however
those rights are acquired, eliminating the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. SFAS No. 122 also
requires that capitalized mortgage servicing assets be assessed for impairment
based on the fair value of those rights. As a consequence of the adoption of
SFAS No. 122, gains on sales of loans for the year ended December 31 , 1995
increased by $0.7 million and the Bank's loss per share decreased by $0.08.
9
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Real Estate Owned
Real estate held for sale acquired in settlement of loans generally results
when property collateralizing a loan is foreclosed upon or otherwise acquired by
the Bank in satisfaction of the loan. Real estate acquired through foreclosure
is recorded at the lower of fair value or the recorded investment in the loan
satisfied at the date of foreclosure. Fair value is based on the net amount that
the Bank could reasonably expect to receive for the asset in a current sale
between a willing buyer and a willing seller, that is, other than in a forced or
liquidation sale. Inherent in the computation of estimated fair value are
assumptions about the length of time the Bank may have to hold the property
before disposition. The holding costs through the expected date of sale and
estimated disposition costs are included in the valuations. Adjustments to the
carrying value of the assets are made through valuation allowances and charge-
offs, recognized through a charge to operations.
Allowances for Estimated Losses on Loans and Real Estate Owned
The allowances for estimated losses on loans and REO represents the Bank's
estimate of identified and unidentified losses in the Bank's portfolios. These
estimates, while based upon historical loss experience and other relevant data,
are ultimately subjective and inherently uncertain. The Bank has established
valuation allowances for estimated losses on specific loans and REO ("specific
valuation allowances") and for the inherent risk in the loan and REO portfolios
which has yet to be specifically identified ("general valuation allowances" or
"GVA"). Additions to the GVA, in the form of provisions, are reflected in
current operations. Specific valuation allowances are allocated from the GVA
when, in the Bank's judgment, a loan is impaired or REO has declined in value
and the loss is probable and estimable. When these estimated losses are
determined to be permanent, such as when a loan is foreclosed and the related
property is transferred to REO, specific valuation allowances are charged off.
The Bank's internal asset review process reviews the quality and
recoverability of each of those assets which exhibit credit risk to the Bank
based on delinquency and other criteria in order to establish adequate specific
valuation allowances and general valuation allowances. The Bank utilizes the
delinquency migration method, along with a variety of other methodologies in
determining the adequacy of its GVA. The delinquency migration method attempts
to capture potential future losses as of a particular date associated with a
given portfolio of loans, based on the Bank's own historical delinquency
migration and loss experience over a given period of time. The Bank calculates
an estimated range of possible loss by applying these methodologies and then
applies judgment and knowledge of particular credits, economic trends, industry
experience and other relevant factors to estimate the appropriate level for the
GVA.
Depreciation and Amortization
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the lives of the respective leases or the useful
lives of the improvements, whichever is shorter.
10
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Supplementary Loss/Earnings per Share Data
Assuming, after giving effect to the one-for-four Reverse Stock Split, that
(a) 11,750,000 shares of Class A common stock were issued at the beginning of
1995 and 17,191,904 shares of Class A common stock were issued at the beginning
of each respective period and (b) Citadel's previously existing share of common
stock was reclassified into 1,050,561 shares of Class A common stock at the
beginning of each respective period, the net loss per share would have been
$3.78, $7.04 and $3.61 for 1995, 1994 and 1993, respectively.
Income Taxes
Through August 4, 1994, the 1994 Restructuring and Recapitalization date, the
Bank filed a consolidated federal income tax return and a combined California
franchise tax return with its former parent company, Citadel. Fidelity and its
subsidiaries filed a consolidated federal income tax return and a combined
California franchise tax return with the Bank as the common parent corporation
for the period of August 5, 1994 through December 31, 1994, and will file
accordingly for subsequent calendar years.
Income taxes are provided for under SFAS No. 109, "Accounting for Income
Taxes." This accounting standard requires, subject to limitations, that
deferred tax assets or liabilities shown on the balance sheet be adjusted to
reflect the tax effects of differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements.
Financial Instruments
The Bank utilizes various financial instruments in the normal course of its
business. By their nature all such instruments involve risk, and the maximum
potential loss may exceed the value at which such instruments are carried. As is
customary for these types of instruments, the Bank is required to pledge
collateral or other security to other parties to these instruments. The Bank
controls its credit exposure to counterparties through credit approvals, credit
limits and other monitoring procedures.
The Bank has employed interest rate swaps, caps and floors in the management
of interest rate risk. Additionally, the Bank may engage in certain option
activities as an integral part of the Bank's investment and asset/liability
strategies which involve the purchase and sale of options on U.S. Government
securities. Interest rate swaps generally involve the exchange of fixed or
floating interest payments without the exchange of the underlying principal
amounts. Interest rate caps and floors generally involve the payment of a one
time premium to a counterparty who, if interest rates rise or fall, above or
below a predetermined level, will make payments to the Bank at an agreed upon
rate for the term of the agreement until such time as interest rates fall below
or rise above the cap or floor level.
Option positions are carried at fair value. Realized and unrealized changes in
fair values are recognized in earnings in the period in which the changes occur.
For interest rate swaps, amounts receivable or payable under the swaps are
recognized as interest income or expense, depending upon the assets or
liabilities to which they are matched. Gains or losses on early terminations of
swaps are included in the carrying amount of the related asset or liability and
amortized as yield adjustments over the remaining terms of the asset or
11
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
liability. The premiums paid for interest rate floors are capitalized and
amortized over the life of the contracts using the straight line method.
The Bank adopted SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," on December 31, 1994. SFAS
No. 119 requires various disclosures regarding derivative activities which are
set forth in Note 3 to the consolidated financial statements.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. Financial instruments are defined as
cash, evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
Much of the information used to determine fair value is highly subjective.
When applicable, readily available market information has been utilized.
However, for a significant portion of the Bank's financial instruments, active
markets do not exist. Therefore, considerable judgment was required in
estimating fair value for certain items. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair values are estimated as of December 31, 1995 and 1994,
the amounts that will actually be realized or paid at settlement or maturity of
the instruments could be significantly different. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
The Bank maintains a stock option plan for the benefit of its executives. In
1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which encourages companies to account for stock-based compensation awards at
their fair values at the date the awards are granted. This statement does not
require the application of the fair value method and allows the continuance of
the current accounting method, which requires accounting for stock-based
compensation awards at their intrinsic value, if any, as of the grant date.
12
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The accounting and disclosure requirements of this statement are effective for
financial statements at various dates beginning after December 15, 1995. The
Bank has elected not to adopt the fair value accounting provisions of this
statement.
The following table summarizes the Bank's investment securities and MBS
portfolios. Amortized cost amounts shown for securities included in the held to
maturity portfolio that were previously transferred from the available for sale
portfolio may include unamortized market value adjustments recorded at the time
of transfer.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED AGGREGATE
---------------------
COST GAINS LOSSES FAIR VALUE
--------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Available for Sale:
Investment securities:
U.S. Treasury and agency securities $ 84,200 $ 2,984 $ -- $ 87,184
Other investments (1).............. 7,449 52 (30) 7,471
-------- ------- ---------- ----------
91,649 3,036 (30) 94,655
-------- ------- ---------- ----------
MBS:
FHLMC.............................. 3,068 -- (30) 3,038
FNMA............................... 55 36 -- 91
Participation certificates......... 28,123 481 -- 28,604
-------- ------- ---------- ----------
31,246 517 (30) 31,733
-------- ------- ---------- ----------
Total available for sale......... $122,895 $ 3,553 $ (60) $ 126,388
======== ======= ========== ==========
DECEMBER 31, 1994
Available for Sale:
Investment securities:
U.S. Treasury and agency securities $ 24,177 $ -- $ (19) $ 24,158
MBS:
FHLMC.............................. 10,490 -- (220) 10,270
FNMA............................... 4,130 -- (79) 4,051
Participation certificates......... 32,635 -- (928) 31,707
-------- ------- ---------- ----------
47,255 -- (1,227) 46,028
-------- ------- ---------- ----------
Total available for sale......... $ 71,432 $ -- $ (1,246) $ 70,186
======== ======= ========== ==========
Held to maturity:
Investment securities:
U.S. Treasury and agency securities $116,313 $ 3,839 $ (152) $ 120,000
Other investments (1).............. 8,920 -- (483) 8,437
-------- ------- ---------- ----------
Total held to maturity........... $125,233 $ 3,839 $ (635) $ 128,437
======== ======= ========== ==========
</TABLE>
- ---------
(1) Represents U.S. Treasury securities which have been pledged as credit
support to a securitization of loans by the Bank.
13
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
During the fourth quarter of 1994, the Bank reevaluated its investment
strategy and transferred $96.9 million of investment securities from its
available for sale portfolio to its held to maturity portfolio, at fair value.
Additionally, at the end of the first quarter of 1995, the Bank transferred $3.6
million of MBS from its available for sale portfolio to its held to maturity
portfolio, at fair value.
As a consequence of concerns regarding the Bank's ability to maintain minimum
regulatory capital levels to remain adequately capitalized, the Bank
reclassified all held to maturity investment securities and MBS to its available
for sale portfolio in the second quarter of 1995. Subsequent to their
reclassification, certain available for sale securities were sold. Under the
Bank's current operating plan, all securities will be classified as available
for sale for the foreseeable future. The Bank may be precluded from classifying
securities as held to maturity for a period of time.
The following table summarizes the weighted average yield of debt securities
as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
<S> <C> <C>
Investment securities:
Available for sale.... 4.70% 6.91%
Held to maturity...... -- 5.20
MBS available for sale... 6.85 5.62
</TABLE>
The following table presents the Bank's securities at December 31, 1995 by
contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------
OVER 1 OVER 5
YEAR YEARS
WITHIN TO TO OVER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for Sale:
Investment Securities... $25,386 $69,269 $ -- $ -- $ 94,655
MBS..................... -- 91 -- 31,642 31,733
------- ------- -------- -------- --------
$25,386 $69,360 $ -- $ 31,642 $126,388
======= ======= ======== ======== ========
</TABLE>
14
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUE)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 2--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
Net unrealized gains (losses) associated with the available for sale
securities which are included in stockholders' equity in the consolidated
statement of financial condition consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net unrealized gains (losses),
debt securities..................... $ 127 $ (6,263)
Net unrealized gains, hedging
activities........................... 661 1,162
Deferred income tax benefit........... -- 1,619
----- --------
Net unrealized gains (losses)...... $ 788 $ (3,482)
===== =======
</TABLE>
The following gains and losses were realized from the sale of investment
securities and MBS, the costs of which were computed on a specific
identification method, during the periods indicated:
<TABLE>
<CAPTION>
GROSS
-------------------------------
SALES GAINS LOSSES
--------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995................. $264,426 $3,903 $ (566)
1994................. 156,090 260 (1,799)
1993................. 873,925 8,867 (5,489)
</TABLE>
Gains on securities activities include $0.8 million and $2.1 million of gains
from trading options and futures during 1995 and 1994, respectively.
Additionally, in 1994 the Bank recorded a $0.6 million gain related to the lower
of cost or market valuation adjustment on certain securities previously recorded
in 1993.
At December 31, 1995 and 1994, interest receivable in the accompanying
statements of financial condition include accrued interest receivable on debt
securities of $1.0 million and $1.5 million, respectively.
15
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Years Ended December 31, 1995
NOTE 3--FINANCIAL INSTRUMENTS
During 1995 and 1994, the Bank recognized net gains from options activities of
$0.8 million and $2.1 million, respectively. No comparable amounts were
recognized during 1993. The following table summarizes the Bank's option
positions.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Options:
Notional amount at year-end....... $ -- $ 223,500
Fair value at year-end............ -- 149
Average fair value for the year... 181 355
</TABLE>
At December 31, 1994, the notional amount of interest rate swap and floor
contracts outstanding totaled $1.1 billion and $100 million, respectively. At
December 31, 1994, the average receive rate on interest rate swaps was 5.97% and
the average pay rate was 6.22%. During December 1995, the Bank terminated all
the interest rate contracts outstanding and as a result, a deferred loss of $3.2
million, which will be amortized over the original term of the underlying
contracts, was recorded. No interest rate contracts were outstanding as of
December 31, 1995.
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE
Total loans include loans receivable and loans held for sale and are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Single family....................... $ 594,019 $ 755,253
Multifamily:
2 to 4 units....................... 345,884 393,943
5 to 36 units...................... 1,521,056 1,612,926
37 units and over.................. 329,916 345,287
---------- ----------
Total multifamily................ 2,196,856 2,352,156
---------- ----------
Commercial and industrial........... 234,389 248,255
Land................................ 3,027 2,050
---------- ----------
Total real estate loans.......... 3,028,291 3,357,714
Other................................. 6,040 7,251
---------- ----------
3,034,331 3,364,965
---------- ----------
Less:
Undisbursed loan funds............. -- 259
Unearned discounts................. 2,463 1,980
Deferred loan fees................. 7,317 7,221
Allowance for estimated losses..... 89,435 67,202
---------- ----------
99,215 76,662
---------- ----------
$2,935,116 $3,288,303
========== ==========
</TABLE>
16
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Years Ended December 31, 1995
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE--(CONTINUED)
During the fourth quarter of 1994, the Bank sold $45.0 million of outstanding
balances of home equity lines of credit and recorded a gain of $1.2 million. In
December 1995, the Bank sold the remaining outstanding balances of the home
equity lines of credit of $6.4 million and recorded a loss of $0.1 million.
Included in the table above is $2.2 million of amounts drawn under home equity
lines of credit at December 31, 1994.
Also included in the preceding table are loans held for sale, consisting of
the following at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Residential loans:
Single family................ $ -- $47,339
Multifamily 2 to 4 units..... -- 976
----------- -----------
Total loans held for sale... $ -- $48,315
=========== ===========
</TABLE>
Fidelity's portfolio of mortgage loans serviced for others amounted to $600.3
million at December 31, 1995 and $1.1 billion at December 31, 1994.
Fidelity's loan portfolio includes multifamily, commercial and industrial
loans of $2.4 billion at December 31, 1995 and $2.6 billion at December 31, 1994
which depend primarily on operating income to provide debt service coverage.
These loans generally have a greater risk of default than single family
residential loans and, accordingly, earn a higher rate of interest to compensate
in part for the risk. Approximately 99% of these loans are secured by property
within the state of California.
The Bank has modified a number of its loans. In some cases, the modifications
have taken the form of "early recasts" in which the amortizing payments are
revised (or recalculated) earlier than scheduled to reflect current lower
interest rates. In other cases, the Bank has agreed to accept interest only
payments for a limited time at current interest rates. In still other cases, the
Bank has modified the terms of a number of its loans that it would not otherwise
consider to protect its investment by granting concessions to borrowers because
of borrowers' financial difficulties. These modifications take several forms,
but are generally for terms that are less favorable to the Bank than the current
market. Modifications which are classified as troubled debt restructurings
("TDRs") are granted when the collateral is inadequate or the borrower does not
have the ability or willingness to continue making scheduled payments and
management determines that the modification is the best alternative for the
collection of its investment. At December 31, 1995 and 1994, outstanding TDRs
totaled $32.7 million and $52.1 million, respectively.
In order to assist borrowers affected by the January 17, 1994 Northridge
earthquake, the Bank developed several earthquake loan accommodation programs.
The OTS encouraged the development of such programs, which were designed to
provide relief to affected borrowers by deferring payments, capitalizing
interest payments or making additional advances to borrowers to repair severely
damaged properties, while remaining consistent with the Bank's safe and sound
business practices.
17
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Years Ended December 31, 1995
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE--(CONTINUED)
For the years ended December 31, 1995 and 1994, interest income of $3.2
million and $2.1 million, respectively, was recorded on TDRs. During 1995 and
1994 the reduction in interest income had the loans performed according to their
original terms was immaterial. During 1993, $8.3 million of interest income was
recorded on TDRs, $0.1 million less than would have been recorded had the loans
performed according to their original terms.
The total of loans on nonaccrual status was $51.9 million, $71.6 million and
$93.5 million at December 31, 1995, 1994 and 1993, respectively. The reduction
in income related to these loans upon which interest was not paid was $5.8
million, $10.9 million and $8.7 million for the corresponding years.
See Note 14 for a discussion of bulk sales (the "Bulk Sales") of loans and REO
as a part of the Bank's 1994 Restructuring and Recapitalization.
The Bank adopted an Accelerated Asset Resolution Plan designed to
aggressively dispose of, resolve or otherwise manage a pool of primarily
multifamily loans which generally have lower debt coverage ratios than the
remainder of the Bank's multifamily loan portfolio and thereby are considered by
the Bank to have higher risk of future nonperformance or impairment relative to
the remainder of the Bank's multifamily loan portfolio. This plan reflects both
an acceleration in estimated timing of resolution of assets within the pool, as
well as a potential change in recovery method from that which would be
anticipated through the normal course of business. The Bank has designated 411
assets with an aggregate book value of approximately $213 million as the
Accelerated Asset Resolution Pool. These assets consist primarily of accruing
and nonaccruing multifamily real estate loans and REO. As of December 31, 1995,
the Bank had resolved assets with an aggregate value of $37.8 million, and
utilized $3.5 million in Accelerated Asset Resolution Pool reserves.
NOTE 5--REAL ESTATE OWNED
Real estate owned consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate acquired through
foreclosure.......................... $ 23,013 $ 16,433
Allowance for estimated losses........ (3,492) (2,318)
----------- ----------
$ 19,521 $ 14,115
=========== ==========
</TABLE>
18
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Years Ended December 31, 1995
NOTE 5--REAL ESTATE OWNED--(CONTINUED)
The following summarizes the results of real estate owned operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
(Loss) income from:
Real estate acquired for investment or development.............. $ -- $ 95 $ 110
Real estate acquired through foreclosure........................ (5,779) (8,746) (18,753)
Provision for estimated real estate losses...................... (3,366) (8,768) (30,200)
---------- ----------- -----------
Net loss from real estate operations......................... $ (9,145) $ (17,419) $ (48,843)
=========== =========== ===========
</TABLE>
See Note 14 for a discussion of Bulk Sales of loans and REO as a part of the
Bank's 1994 Restructuring and Recapitalization.
NOTE 6--ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES
The following summarizes the activity in the Bank's allowances for estimated
loan and real estate losses:
<TABLE>
<CAPTION>
REAL ESTATE
LOANS OWNED TOTAL
------------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1993............. $ 64,277 $ 16,450 $ 80,727
Provision for losses.................. 65,100 30,200 95,300
Charge-offs........................... (50,504) (28,940) (79,444)
Recoveries and other.................. 4,959 5 4,964
------------ ----------- ---------
Balance at December 31, 1993........... 83,832 17,715 101,547
Provision for losses.................. 65,559 8,768 74,327
Charge-offs........................... (55,685) (16,820) (72,505)
GVA charged off on Bulk Sale assets... (30,497) (7,894) (38,391)
Recoveries and other.................. 3,993 549 4,542
------------ ----------- ---------
Balance at December 31, 1994........... 67,202 2,318 69,520
Provision for losses.................. 69,724(1) 3,366 73,090
Charge-offs........................... (44,278) (8,358) (52,636)
Allocations from GVA to REO........... (6,166) 6,166 --
Recoveries and other.................. 2,953 -- 2,953
------------ ----------- ---------
Balance at December 31, 1995........... $ 89,435 $ 3,492 $ 92,927
============ =========== =========
</TABLE>
- --------------------
(1) Included in the provision for estimated loan losses for 1995 is the $45
million loan portfolio charge associated with the Accelerated Asset
Resolution Plan.
At December 31, 1995 and December 31, 1994, the recorded investment in loans
that are considered to be impaired under SFAS Nos. 114 and 118 was $149.3
million, and $148.0 million, respectively. Included in these amounts are $117.2
million and $46.5 million of impaired loans for which allowance for credit
losses
19
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Years Ended December 31, 1995
NOTE 6--ALLOWANCES FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES--(CONTINUED)
have been established totaling $39.1 million and $16.1 million. The average
recorded investment and the amount of interest income recognized on impaired
loans during 1995 and 1994 was $148.7 million and $169.5 million and $7.8
million and $2.2 million, respectively.
The performance of the Bank's loan portfolio has been adversely affected by
recent Southern California economic conditions. The performance of the Bank's
multifamily loan portfolio is particularly susceptible to further declines in
the Southern California economy, increasing vacancy rates, declining rents,
increasing interest rates, declining debt coverage ratios, declining market
values for multifamily residential properties, and the possibility that
investors may abandon properties or seek bankruptcy protection with respect to
properties experiencing negative cash flow, particularly where such properties
are not cross-collateralized by other performing assets. There can be no
assurances that these economic conditions will improve in the near future as
many factors key to recovery may be impacted adversely by the Federal Reserve
Bank's interest rate policy as well as other factors. Consequently, rents and
real estate values may not stabilize which may affect future delinquency and
foreclosure levels and may adversely impact the Bank's asset quality, earnings
performance and capital levels.
NOTE 7--INTANGIBLE ASSETS
In December 1994, the Bank sold $340.0 million of deposits to another
financial institution. Core deposit intangible assets related to such deposits
totaling $0.5 million were written off and are netted against the gain on the
sale. See Note 14.
Fidelity reassessed the valuation of its intangible assets annually. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its core deposit intangible assets, Fidelity wrote down the
carrying value of its core deposit intangible assets in 1995 and 1993 by $0.1
million and $5.2 million, respectively, (which writedowns were included in
interest expense). In addition, an analysis was performed of the recoverability
of the goodwill related to a 1978 acquisition. This analysis indicated that the
expected future net earnings from the branches or assets acquired did not
support the carrying value of the goodwill. As a result, in 1993, Fidelity wrote
down the remaining $8.8 million balance of goodwill related to the acquisition.
20
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 8--DEPOSITS
Deposits consist of the following balances at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994
--------------------- ----------------------
AMOUNT % AMOUNT %
---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF ACCOUNT, WEIGHTED AVERAGE INTEREST RATE:
Passbook, 2.00% at December 31, 1995 and 1994........... $ 62,934 2.4% $ 70,564 2.6%
Checking and money market checking,
1.01% at December 31, 1995 and
0.87% at December 31, 1994............................ 309,065 11.8 326,411 12.1
Money market savings,
3.05% at December 31, 1995 and
3.12% at December 31, 1994............................ 93,901 3.6 135,595 5.0
---------- ----- ---------- -----
465,900 17.8 532,570 19.7
---------- ----- --------- -----
Certificates with rates of:
Under 3.00%.......................................... 6,799 0.3 16,190 0.6
3.01 - 4.00%......................................... 64,496 2.5 523,863 19.4
4.01 - 5.00%......................................... 304,163 11.7 952,931 35.4
5.01 - 6.00%......................................... 900,019 34.6 437,463 16.2
6.01 - 7.00%......................................... 771,247 29.7 155,681 5.8
7.01 - 8.00%......................................... 76,167 2.9 56,137 2.1
Over 8.00%........................................... 12,078 0.5 22,437 0.8
---------- ----- ---------- -----
2,134,969 82.2 2,164,702 80.3
---------- ----- ---------- -----
Total deposits.................................... $2,600,869 100.0% $2,697,272 100.0%
========== ===== ========== =====
Weighted average interest rate.......................... 4.89% 4.15%
========== ==========
</TABLE>
Fidelity had noninterest-bearing checking accounts of $73.1 million and $68.1
million at December 31, 1995 and 1994, respectively. At December 31, 1995,
certificate accounts were scheduled to mature as follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT
----------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1996...................................... $1,883,739
1997...................................... 202,402
1998...................................... 25,366
1999...................................... 16,349
2000 and after............................ 7,113
----------
$2,134,969
==========
</TABLE>
21
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 8--DEPOSITS--(CONTINUED)
At December 31, 1995, loans totaling $40.5 million were pledged as collateral
for $1.2 million of public funds on deposit with the Bank and potential future
deposits.
Certificates of deposits of $100,000 or more accounted for $528 million and
represented 20% of all deposits at December 31, 1995 and $435 million or 16% of
all deposits at December 31, 1994.
The Bank has also utilized brokered deposits as a short-term means of funding.
These deposits are obtained or placed by or through a deposit broker and are
subject to certain regulatory limitations. Should the Bank become
undercapitalized, it would be prohibited from accepting, renewing or rolling
over deposits obtained through a deposit broker. The Bank accepted brokered
deposits pursuant to a waiver obtained from the FDIC, which waiver expired in
October 1994. The Bank is currently eligible to accept brokered deposits. The
Bank had no brokered deposits outstanding at December 31, 1995, compared to $0.1
million at December 31, 1994.
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at year-end........................... $ 292,700 $ 332,700
Average amount outstanding during the year.... $ 314,918 $ 392,707
Maximum amount outstanding at any month-end... $ 412,700 $ 527,700
Weighted average interest rate during the year 5.53% 4.50%
Weighted average interest rate at year-end.... 5.27% 4.93%
Secured by:
FHLB Stock................................. $ 49,425 $ 47,017
Loans receivable (1)....................... 1,174,513 1,557,548
---------- ----------
$1,223,938 $1,604,565
========== ==========
</TABLE>
- --------------
(1) Includes pledged loans available for use under the letter of credit securing
commercial paper. See Note 10.
22
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES--(CONTINUED)
The maturities and weighted average interest rates on FHLB advances are
summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------------
1995 1994
------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
-------- ------------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year of Maturity
1995............ $ -- --% $ 40,000 7.33%
1996............ 60,000 4.88 60,000 4.88
1997............ 212,700 5.06 212,700 4.14
2000............ 20,000 8.61 20,000 8.61
-------- --------
$292,700 5.27 $332,700 4.93
======== ========
</TABLE>
NOTE 10--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
YEAR OF DECEMBER 31,
--------------------
MATURITY 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings:
Commercial paper.................... 1996 $ 50,000 $400,000
Long-term borrowings:
8 1/2% Mortgage-backed medium-term
notes ("MTNs")..................... 1997 100,000 100,000
-------- --------
$150,000 $500,000
</TABLE> ======== ========
23
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 10--OTHER BORROWINGS--(CONTINUED)
The mortgage-backed notes are secured by a joint pool of mortgage loans and
U.S. Treasury notes, at cost, totaling $246.5 million and $217.1 million at
December 31, 1995 and 1994, respectively.
Borrowings other than the mortgage-backed notes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial paper:
Balance at year-end................................ $ 50,000 $400,000
Average amount outstanding during the year......... $289,028 $357,360
Maximum amount outstanding at any month-end........ $400,000 $400,000
Weighted average interest rate during the year..... 6.02% 4.34%
Weighted average interest rate at year end......... 5.70% 5.99%
Secured by Letter of Credit from FHLB.............. $500,000 $400,000
Securities sold under agreement to repurchase:
Balance at year-end................................ $ -- $ --
Average amount outstanding during the year......... $ 12,424 $ 2,405
Maximum amount outstanding at any month-end........ $ 20,345 $ 3,830
Weighted average interest rate during the year..... 5.88% 3.24%
</TABLE>
The weighted average interest rate on other borrowings was 7.57% and 6.49% at
December 31, 1995 and 1994, respectively.
NOTE 11--BENEFIT PLANS
Postretirement Benefits
The Bank provides certain health and life insurance postretirement benefits
for all eligible retired employees. Eligibility for the plan is met when the
participant reaches age 55 and the applicable service requirements are obtained;
a. Employees hired on or before December 31, 1991, must have completed five
or more years of service on the date of termination.
b. Employees hired on or after January 1, 1992, must have completed ten or
more years of service on the date of termination.
In November 1994, the Board of Directors passed a resolution adjusting the
Bank's participation in the cost of the plan by transferring 100% of the retiree
health cost to current and future retirees. This plan amendment resulted in a
curtailment under SFAS No. 106, "Employers' Accounting for Postretirement
24
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLANS--(CONTINUED)
Benefits Other than Pensions." The curtailment resulted in the elimination of
any net periodic postretirement benefit cost and the reversal of the accumulated
postretirement benefit obligation previously recorded.
Retirement Income Plan
The Bank has a retirement income plan covering substantially all employees.
The defined benefit plan provides for payment of retirement benefits commencing
normally at age 65 in a monthly annuity; however, the option of a lump sum
payment is available upon retirement or in the event of early termination. An
employee becomes vested upon five years of service. Benefits payable under the
plan are generally determined on the basis of the employee's length of service
and average earnings over the previous five years. Annual contributions to the
plan are sufficient to satisfy legal funding requirements.
In February 1994, the Board of Directors passed a resolution to amend the
plan by discontinuing participation in the plan by newly hired employees and
freezing the level of service and salaries used to compute the plan benefit to
February 28, 1994 levels. This plan amendment resulted in a curtailment which
reduced the projected benefit obligation by $3.8 million. Additionally, as a
result of employee terminations associated with the Bank's downsizing and cost
curtailment programs during 1994, many lump sum payouts were made by the plan
which resulted in a partial settlement of the plan's liabilities. As a
consequence, the Bank recorded at December 31, 1994, a minimum pension liability
of $3.2 million of which $2.8 million was offset to the equity account.
The Bank funded the Retirement Income Plan such that the fair value of plan
assets exceeded the projected benefit obligation. The funding of the plan
resulted in the elimination of the minimum pension liability and minimum pension
adjustment to the equity account.
The components of net pension costs are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................... $ -- $ 219 $ 943
Interest cost..................... 218 542 688
Actual return on plan assets...... (371) 444 (632)
Net amortization and deferral..... 92 (945) (87)
Effect of partial settlements..... 252 1,389 --
------ ------ ------
$ 191 $1,649 $ 912
====== ====== ======
</TABLE>
25
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLANS--(CONTINUED)
- ------------------------------------
The funded status of this plan, as of the dates indicated, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested.................................................... $ 2,663 $ 4,307
Nonvested................................................. 123 587
------- -------
$ 2,786 $ 4,894
======= =======
Projected benefit obligation................................. $(2,786) $(4,894)
Fair value of plan assets.................................... 2,589 1,685
------- -------
Deficiency of assets under projected benefit obligation...... (197) (3,209)
Unrecognized net transition gain............................. -- --
Unrecognized net loss from experience differences............ -- --
Unrecognized prior service cost.............................. -- --
Minimum liability adjustment................................. 988 2,813
------- -------
Prepaid pension (liability) cost.......................... $ 791 $ (396)
======= =======
Actuarial assumptions:
Discount rate............................................. 7.25% 8.00%
Expected long-term rate of return on plan assets.......... 9.00% 9.00%
</TABLE>
401(k) Plan
The Bank has a 401(k) defined contribution plan available to all employees who
have been with the Bank for one year and have reached the age of 21. Employees
may generally contribute up to 15% of their salary each year, and the Bank
matches 12.5% up to the first 6% contributed by the employee; the matching
contribution was adjusted down from 50% to 12.5% during 1995. In addition, the
Bank may elect, at its discretion, to match an amount based on the Bank's
profitability and determined on an annual basis by the board of directors. The
Bank's contribution expense was $0.3 million in the year ended December 31,
1995, and $0.5 million in 1994 and 1993.
Director Retirement Plan
In November 1994, the Board of Directors approved a retirement plan for non-
employee directors who have at least three years of Board service, including
service on the Board prior to the 1994 Restructuring and Recapitalization.
An eligible director shall, after termination from Board service for any
reason other than cause, be entitled to receive a quarterly payment equal to one
quarter of his/her average annual compensation (including compensation for
service on the Board of any of the Bank's subsidiaries), including all retainers
and meeting fees, received during his/her last three years of Board service.
Such payments shall commence at the beginning of the first fiscal quarter
subsequent to termination and continue for a 3-year period. If a director's
Board membership is terminated for cause, no benefits are payable under this
plan.
26
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 11--BENEFIT PLAN--(CONTINUED)
If a director's Board membership is terminated within two years following the
effective date of a change in control, then he/she also shall be eligible for a
lump sum payment in an amount that is the greater of: (1) 150% times average
annual compensation during the preceding 3-year period, (2) the sum of all
retirement benefits payable under normal retirement provisions described in the
preceding paragraph or (3) $78,000. The Bank's accumulated benefit obligation
and net pension costs at and for the year ended December 31, 1995 were $0.2
million and $0.2 million, respectively.
NOTE 12--INCOME TAXES
Income tax expense/benefit was comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal................................. $ -- $ (1,744) $(50,229)
State................................... 4 9 (1,090)
---- -------- --------
4 (1,735) (51,319)
---- -------- --------
Deferred income tax expense (benefit):
Federal................................. -- (14,789) 17,784
State................................... -- -- (2,258)
---- -------- --------
-- (14,789) 15,526
---- -------- --------
$ 4 $(16,524) $(35,793)
==== ======== ========
</TABLE>
Income tax liability/receivable was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current income tax (receivable) liability:
Federal.................................... $ 477 $ (5,416)
State...................................... -- 52
-------- --------
477 (5,364)
-------- --------
Deferred income tax (receivable) liability:
Federal.................................... (35,225) (13,270)
Valuation allowance--Federal............... 35,225 12,075
State...................................... (10,217) (4,265)
Valuation allowance--State................. 10,217 3,841
-------- --------
-- (1,619)
-------- --------
$ 477 $ (6,983)
======== ========
</TABLE>
27
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
The components of the net deferred tax liability/asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FEDERAL:
Deferred tax liabilities:
Loan fees and interest............................... $ 7,583 $ 10,067
FHLB stock dividends................................. 12,545 11,691
California franchise tax............................. -- --
Unrealized gain on securities available for sale..... 244 --
Other................................................ 6,672 3,031
-------- ---------
Gross deferred tax liabilities.......................... 27,044 24,789
Deferred tax assets: -------- ---------
Bad debt and loan loss deduction..................... 27,836 12,953
Net operating loss carryover......................... 24,196 18,321
REO operations/acquisition costs..................... 965 633
Deposit base intangibles............................. 6,481 3,866
Unrealized loss on securities available for sale
transferred to held to maturity.................... -- 1,195
Unrealized loss on securities available for sale..... -- 386
Other................................................ 2,791 705
-------- ---------
Gross deferred tax assets............................... 62,269 38,059
Valuation allowance..................................... (35,225) (12,075)
-------- ---------
Deferred tax assets, net of allowance................... 27,044 25,984
-------- ---------
Net deferred tax (asset) liability...................... $ -- $ (1,195)
======== =========
STATE:
Deferred tax liabilities:
Loan fees and interest............................... $ 3,248 $ 3,299
FHLB stock dividends................................. 4,050 3,831
Unrealized gain on securities available for sale..... 87 --
Other................................................ 1,783 1,334
-------- ---------
Gross deferred tax liabilities.......................... 9,168 8,464
-------- ---------
Deferred tax assets:
Bad debt and loan loss deduction..................... 13,739 5,778
Net operating loss carryover......................... 2,505 1,930
Deposit base intangibles............................. 1,620 1,584
Unrealized loss on securities available for sale
transferred to held to maturity.................... -- 424
Unrealized loss on securities available for sale..... -- 137
Other................................................ 1,521 2,876
-------- ---------
Gross deferred tax assets............................... 19,385 12,729
Valuation allowance..................................... (10,217) (3,841)
-------- ---------
Deferred tax assets, net of allowance................... 9,168 8,888
-------- ---------
Net deferred tax (asset) liability...................... $ -- $ (424)
======== =========
</TABLE>
28
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
- ---------------------------------
Valuation allowances under SFAS No. 109 have been provided for both federal
and state purposes to the extent uncertainty exists as to the recoverability of
the deferred assets. As of December 31, 1995, valuation allowances were provided
for the total net deferred tax assets. As of December 31, 1994, valuation
allowances were also provided for the total net deferred tax assets, with the
exception of tax benefits associated with unrealized losses on available for
sale securities that were transferred to held to maturity. Future reductions in
the valuation allowance will be dependent upon a more likely than not
expectation of recovery of tax benefits.
In conjunction with the implementation of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," certain securities were
classified as available for sale during a portion of 1994 but were subsequently
classified as held to maturity at December 31, 1994. Under SFAS No. 115,
adjustments to the fair market value of securities held as available for sale
are reflected through an adjustment to stockholders' equity. For those
securities transferred from available for sale to held to maturity in 1994,
deferred tax benefits for unrealized losses reflecting the reduced fair market
value through the date of transfer were provided. As these securities were to be
held to maturity, unrealized losses as of the date of transfer were not expected
to be realized and, as a consequence, recovery of the related tax benefits was
expected. Accordingly, no valuation allowances have been provided for these
amounts at December 31, 1994. Since the securities were reclassified to
available for sale as of June 30, 1995, the related unrealized losses were
expected to be realized with the recovery of the related tax benefits uncertain.
As a result, full valuation allowances have been provided on these amounts.
A reconciliation from the consolidated statutory federal income tax benefit to
the consolidated effective income tax benefit follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Expected federal income tax benefit............................ $(24,141) $(50,739) $(35,588)
Increases (reductions) in taxes resulting from:
Franchise tax expense (benefit), net of federal
income tax and valuation allowance........................ 4 6 (4,386)
Addition to valuation allowance............................. 23,779 11,689 --
Goodwill.................................................... -- -- 3,108
Limitation of net operating loss carryover benefits
due to 1994 Restructuring and Recapitalization............ -- 19,507 --
Bad debt recapture.......................................... -- 4,678 --
Limitation of tax benefit on intercompany transactions...... -- 3,235 --
Redetermination of tax...................................... -- (5,600) --
Other, net.................................................. 362 700 1,073
-------- -------- --------
Income tax expense (benefit)................................... $ 4 $(16,524) $(35,793)
======== ======== ========
</TABLE>
29
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
The Internal Revenue Service (the "Service") has completed its examination of
the Bank's federal income tax returns through 1991. The California Franchise Tax
Board has completed its examination of the California franchise tax returns
through 1988 and is currently examining the returns for years 1989 through 1991.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations thereunder generally provide that,
following an ownership change of a corporation with a net operating loss (an
"NOL"), a net unrealized built-in loss (a "NUBIL"), or tax credit carryovers,
the amount of annual post-ownership change taxable income that can be offset by
pre-ownership change NOLs, or recognized built-in losses, and the amount of
post-ownership change tax liability that can be offset by pre-ownership change
tax credits, generally cannot exceed a limitation prescribed by Section 382. The
Section 382 annual limitation generally equals the product of the fair market
value of the equity of the corporation immediately before the ownership change
(subject to various adjustments) and the federal long-term tax-exempt rate
prescribed monthly by the Service.
As a result of the 1994 Restructuring and Recapitalization, the Bank underwent
an ownership change and ceased to be a member of the Citadel consolidated group.
The Bank incurred an NOL in its taxable year ended August 4, 1994 and has
alternative minimum and general business tax credits carryover to taxable year
ended December 31, 1994 that are subject to limitation under Sections 382 and
383. The Bank had a NUBIL to the extent the tax basis in its assets exceeded the
fair market value of its assets on August 4, 1994. Any portion of the NUBIL
recognized during the 5-year period following the 1994 Restructuring and
Recapitalization will generally be subject to limitation under Section 382. The
Bank believes this NUBIL does not exceed $10 million. As a result, a de minimis
exception will apply, and the recognition of this NUBIL in the future will not
be subject to limitation under Section 382.
Fidelity and its subsidiaries' taxable loss for the period ended August 4,
1994 was included in Citadel's consolidated federal income tax return for the
year ended December 31, 1994. The NOL carryover generated by this return was
allocated to the respective companies in proportion to their individual company
taxable losses in accordance with the Code and applicable Treasury Regulations
thereunder. Citadel's taxable loss did not have a material impact on the NOL
carryover allocated to Fidelity and its subsidiaries.
Fidelity and its subsidiaries incurred an NOL for the period August 5, 1994
through December 31, 1994. This NOL can be used to offset taxable income in
subsequent years subject to limitation under Section 382 as a result of the 1995
change of ownership.
As a result of the 1995 Recapitalization, the Bank again underwent an
ownership change for purposes of Section 382. The Bank will incur an NOL for its
1995 taxable year that is subject to limitation under Section 382. Based on
current estimates, the Bank had a NUBIL at the time of the 1995 change of
ownership. Any portion of the NUBIL recognized during the 5-year period
following such change in ownership will be subject to limitation under Section
382. If the NUBIL does not exceed $10 million, a de minimis exception will
apply, and the recognition of this NUBIL in the future will not be subject to
limitation under Section 382. These limitations are inclusive of the limitations
imposed by the 1994 change of ownership.
30
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 12--INCOME TAXES--(CONTINUED)
At December 31, 1995, the Bank had an estimated nol carryover for federal
income tax purpose of $69.1 million, of which $19.1 million is subject to annual
utilization limitations as a result of the 1994 change of ownership and expires
by year 2008, $20.1 million expires by year 2009 and $29.9 million expires by
year 2010 (all of which are subject to annual and aggregate utilization
limitations as a result of the 1995 change of ownership), if not utilized. For
California franchise tax purposes, there was an estimated NOL carryover of $22.2
million, of which $5.0 million expires by year 1997 and $0.9 million expires by
year 1998 (both of which are subject to annual utilization limitations as a
result of the 1994 change of ownership), $15.8 million expires by year 1999 and
$0.5 million expires by year 2000 (all of which are subject to annual and
aggregate utilization limitations as a result of the 1995 change of ownership)
if not utilized. The deferred tax assets related to these NOLs have been
recorded with a corresponding valuation allowance in an equal amount under SFAS
No. 109.
Savings institutions are allowed a bad debt deduction for federal income tax
purposes based on either 8% of taxable income or the savings institution's
actual loss experience. The Bank's bad debt deductions for all years presented
were based on actual loss experience.
Under the provisions of SFAS No. 109, a deferred tax liability has not been
provided for tax bad debt and loan loss reserves which arose in tax years prior
to December 31, 1987. The Bank had $34.7 million of such reserves at December
31, 1995, for which $12.2 million of taxes have not been provided. If these
reserves are used for any purpose other than to absorb bad debt losses, federal
taxes would have to be provided at the then current income tax rate. It is not
contemplated that the accumulated reserves will be used in a manner that will
create a tax liability.
NOTE 13--COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank and certain of its subsidiaries had
a number of lawsuits and claims pending at December 31, 1995. The Bank's
management and its counsel believe that the lawsuits and claims are without
merit. There is a risk that the final outcome of one or more of these claims
could result in the payment of monetary damages which could be material in
relation to the financial condition or results of operations of the Bank. The
Bank does not believe that the likelihood of such a result is probable and has
not established any specific litigation reserves with respect to such lawsuits.
Fidelity enters into agreements to extend credit to customers on an ongoing
basis. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Most commitments are expected to be
drawn upon and, therefore, the total commitment amounts generally represent
future cash requirements. At December 31, 1995, the Bank had no commitments to
fund loans.
As of December 31, 1995, the Bank had certain loans with a gross principal
balance of $105.9 million, of which $88.2 million had been sold in the form of
mortgage pass-through certificates, over various periods of time, to four
investor financial institutions leaving a balance of $17.7 million retained by
the Bank. These mortgage pass-through certificates provide a credit enhancement
to the investor financial institutions in the form of the Bank's subordination
of its retained percentage interest to that of the investor
31
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
financial institutions. In this regard, the aggregate of $88.2 million held by
the investor financial institutions are deemed Senior Mortgage Pass-Through
Certificates and the $17.7 million held by the Bank are subordinated to the
Senior Mortgage Pass-Through Certificates in the event of borrower default. Full
recovery of the $17.7 million is subject to this contingent liability due to its
subordination. In 1993, the Bank repurchased one of the Senior Mortgage Pass-
Through Certificates with a face value of $38.3 million, from one of the
investor institutions. At December 31, 1995, the balance of the repurchased
certificate was $28.2 million and was included in the mortgage-backed securities
held for sale portfolio. The other Senior Mortgage Pass-Through Certificates
totaling $60.0 million at December 31, 1995 are owned by other investor
institutions. The Bank considers all the loans in this pool in determining its
allowance for loan losses and any estimated losses are reflected in the
provision for loan losses.
During 1992, the Bank also effected the securitization by FNMA of $114.3
million of multifamily mortgages wherein $114.3 million in whole loans were
swapped for Triple A rated mortgage-backed securities through FNMA's Alternative
Credit Enhancement Structure ("ACES") program. These mortgage-backed securities
were sold in December 1993 and the current outstanding balance as of December
31, 1995 of $84.6 million is serviced by the Bank.
As part of a credit enhancement to absorb losses relating to the ACES
transaction, the Bank has pledged and placed in a trust account, as of December
31, 1995, $12.5 million, comprised of $5.3 million in cash and $7.2 million in
U.S. Treasury securities at book value. The Bank shall absorb losses, if any,
which may be incurred on the securitized multifamily loans to the extent of
$12.5 million. FNMA is responsible for any losses in excess of the $12.5
million. The corresponding contingent liability for credit losses secured by the
trust assets was $3.8 million and $4.8 million at the end of 1995 and 1994,
respectively, and is included in other liabilities.
Congress has discussed proposing legislation to address the disparity in bank
and thrift deposit insurance premiums. The proposed legislation would, among
other things, impose a requirement on all SAIF member institutions to fully
recapitalize the SAIF by paying a one-time special assessment of approximately
80 basis points on all assessable deposits as of a certain date.
While the outcome of the proposed legislation cannot be predicted with
certainty, it is possible that some kind of legislative or regulatory action
will be taken that will impact the Bank's insured deposits. A one-time special
assessment of 80 basis points would result in the Bank paying approximately $22
million in additional SAIF premiums, gross of related tax benefits, if any. The
enactment of such legislation may have the effect of immediately reducing the
regulatory capital of SAIF member institutions by the amount of the fee,
although provisions are included in the legislation that could exempt a savings
association from paying the assessment in a lump sum if the payment would result
in the association becoming undercapitalized. As of December 31, 1995, after
giving effect to the payment and deduction of an 80 basis point assessment, the
Bank's core and risk-based capital ratios would have been approximately 6.29%
and 11.35%, respectively, and the Bank would have been considered well
capitalized under the PCA regulations.
Due to the uncertainty of the legislative process generally, management cannot
predict whether legislation reducing SAIF premiums and/or imposing a special
one-time assessment will be adopted, or, if adopted, the amount of the
assessment, if any, that would be imposed on the Bank.
32
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Bank conducts portions of its operations from leased facilities. All of
the Bank's leases are operating leases. At December 31, 1995, aggregate minimum
rental commitments on operating leases with noncancelable terms in excess of one
year were as follows:
<TABLE>
<CAPTION>
YEAR OF COMMITMENT AMOUNT
------------------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1996......................... $ 4,621
1997......................... 4,619
1998......................... 4,625
1999......................... 4,221
2000......................... 3,707
Thereafter................... 19,083
-------
$40,876
=======
</TABLE>
Operating expense includes rent expense of $3.1 million in 1995, $2.9 million
in 1994 and $3.0 million in 1993.
The bulk sale agreements associated with the 1994 Restructuring and
Recapitalization include certain representations and warranties relating to the
assets transferred. For a period of time ranging from 60 to 180 days after the
related closings, the purchasers of the assets under the bulk sale agreements
have the right to require Fidelity, at Fidelity's option, either to repurchase
bulk sale assets as to which representations and warranties are discovered to be
inaccurate or to cure such breach. The repurchase price for each bulk sale
asset repurchased is equal to the allocated purchase price paid plus amounts
expended by the purchaser post-closing, minus amounts received by the purchasers
post-closing with respect to such asset.
The Bank has received approximately $18.3 million in claims of which $3.9
million relate to claims of environmental or structural defects and were
required to be made from one bulk sale purchaser within 60 days after closing.
Under the Stockholders' Agreement between the Bank and Citadel, Citadel must
reimburse the Bank in an amount not to exceed $4 million for certain losses
incurred by the Bank in either repurchasing Bulk Sale Assets in the event of
breached environmental or structural representations and warranties or curing
such breaches. The $3.9 million of claims made with respect to environmental or
structural defects are subject to a cure threshold resulting in net claims of
$2.8 million. There can be no assurance that Citadel will have sufficient
liquid assets to satisfy any reimbursement obligations.
The remaining $14.4 million of claims were received within the 180-day period
for filing claims of breach of general representations and warranties and are
not subject to reimbursement by Citadel. The same purchaser has also made a
general claim in an unspecified amount of misrepresentation and concealment of
material facts.
The Bank has evaluated these claims and believes that such claims are without
merit.
33
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 14--RECAPITALIZATION
1995 Recapitalization
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity through the sale of 2,070,000 of Series A Preferred Stock and
47,000,000 of Class A Common Stock. As part of the 1995 Recapitalization,
Fidelity adopted the Accelerated Asset Resolution Plan which is designed to
aggressively dispose of, resolve or otherwise manage a pool of multifamily
loans. As a result, the Bank recorded a $45.0 million loan portfolio charge
which represents the estimated additional losses expected to be incurred.
The 1995 Recapitalization expenses of $2.6 million were charged directly
against equity while the $45.0 million loan portfolio restructuring charge is
reflected in the statement of operations.
1994 Restructuring and Recapitalization
During 1994, Fidelity and Citadel completed the 1994 Restructuring and
Recapitalization pursuant to which (a) Fidelity raised approximately $109
million in net new equity, and Citadel's ownership interest in Fidelity was
reduced to 16.2% of the then outstanding common stock and was retroactively
reclassified into 4,202,243 shares of Class A Common Stock; (b) Fidelity
purchased Gateway Investment Services, Inc. ("Gateway") from Citadel; (c)
Citadel, through a wholly-owned subsidiary, purchased certain real properties
from Fidelity, a portion of which was financed by Fidelity; (d) Citadel received
from Fidelity, by way of dividend, options to acquire, at the then net book
value, certain real properties utilized in the operations of the Bank, portions
of which would be leased back; (e) Fidelity redeemed its $60 million of
subordinated notes; (f) Fidelity consummated the Branch Sales; and (g) Fidelity
consummated the Bulk Sales, including certain assets sold to Citadel (see item
(c) above), of nonperforming and other primarily problem assets with an
aggregate gross book value of $563.3 million.
The 1994 Restructuring and Recapitalization charges as reflected in the
statement of operations are comprised of the following:
<TABLE>
<S> <C>
Provisions for estimated Bulk Sale
losses............................... $(56,296)
1994 Restructuring and
Recapitalization charges
and expenses........................ (14,146)
Gain on the Branch Sales.............. 5,048
--------
$(65,394)
========
</TABLE>
See Note 13 regarding representations and warranties made by the Bank in
connection with the Bulk Sales.
34
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the OTS to implement a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe, the lower the institution's capital. Under FDICIA, the OTS issued
regulations establishing specific capital ratios for five separate capital
categories. The five categories of ratios are:
<TABLE>
<CAPTION>
CORE CAPITAL TO
ADJUSTED TOTAL CORE CAPITAL TO TOTAL CAPITAL TO
ASSETS RISK-WEIGHTED RISK-WEIGHTED
CAPITAL CATEGORIES: (LEVERAGE RATIO) ASSETS RATIO ASSETS RATIO
- ------------------ ---------------- --------------- ----------------
<S> <C> <C> <C>
Well capitalized................. 5% or above 6% or above 10% or above
Adequately capitalized........... 4% or above 4% or above 8% or above
Undercapitalized................. Under 4% Under 4% Under 8%
Significantly undercapitalized... Under 3% Under 3% Under 6%
Critically undercapitalized...... Ratio of tangible equity to adjusted total
assets of 2% or less
</TABLE>
The following table summarizes the minimum required capital ratios of the well
capitalized category and Fidelity's regulatory capital at December 31, 1995 as
compared to such ratios. As indicated in the table, Fidelity's capital levels
exceeded the four minimum capital ratios of the well capitalized category.
<TABLE>
<CAPTION>
TANGIBLE CAPITAL TO CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO
ADJUSTED ADJUSTED TOTAL ASSETS RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS (LEVERAGE RATIO) ASSETS RATIO ASSETS RATIO
--------------------- --------------------- ------------------- ----------------------
BALANCE % BALANCE % BALANCE % BALANCE %
----------- ------- ----------- ------- ----------- ----- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regulatory capital... $ 227,800 6.91% $ 228,100 6.92% $ 228,100 11.16% $ 254,000 12.43%
Well capitalized
requirement......... 98,900 3.00 164,900 5.00 122,600 6.00 204,400 10.00
---------- ----- ---------- ----- ---------- ------ ---------- ------
Excess capital....... $ 128,900 3.91% $ 63,200 1.92% $ 105,500 5.16% $ 49,600 2.43%
========== ===== ========== ===== ========== ====== ========== ======
Adjusted assets(1)... $3,297,500 $3,297,900 $2,044,100 $2,044,100
========== ========== ========== ==========
</TABLE>
- --------------
(1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. Section 567.1(bb) for purposes of risk-based capital
requirements.
As of December 31, 1995, after giving effect to the payment and deduction of
an 80 basis point additional SAIF premium of approximately $22 million, the
Bank's tangible capital ratio to adjusted total assets would have been 6.28%,
core capital to adjusted total assets (leverage ratio) 6.29%, core capital to
risk-weighted assets ratio 10.09% and total capital to risk-weighted assets
ratio 11.35%. See "Note 13--Commitments and Contingencies."
35
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The OTS capital regulations, as required by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") include three separate minimum
capital requirements for the savings institution industry-- a "tangible capital
requirement," a "leverage limit" and a "risk-based capital requirement." These
capital standards must be no less stringent than the capital standards
applicable to national banks. The OTS also has the authority, after giving the
affected institution notice and an opportunity to respond, to establish
individual minimum capital requirements ("IMCR") for a savings institution which
are higher than the industry minimum requirements, upon a determination that an
IMCR is necessary or appropriate in light of the institution's particular
circumstances, such as if the institution is expected to have losses resulting
in capital inadequacy, has a high degree of exposure to credit risk, or has a
high amount of nonperforming loans. The OTS has promulgated a regulation that
adds to the list of circumstances in which an IMCR may be appropriate for a
savings association the following: a high degree of exposure to concentration of
credit risk or risks arising from nontraditional activities, or failure to
adequately monitor and control the risks presented by concentration of credit
and nontraditional activities.
Under FDICIA, the OTS was required to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities. The OTS
added an interest rate risk capital component to its risk-based capital
requirement originally effective September 30, 1994. However, the OTS has
temporarily postponed the implementation of the rule implementing the interest
rate risk capital component until the OTS has collected sufficient data to
determine whether the rule is effective in monitoring and managing interest rate
risk. This capital component will require institutions deemed to have above
normal interest rate risk to hold additional capital equal to 50% of the excess
risk. No interest rate risk component would have been required to be added to
the Bank's risk-based capital requirement at December 31, 1995 had the rule been
in effect at that time.
Effective January 17, 1995, the OTS amended the risk-based capital standards
by explicitly identifying concentration of credit risk and the risks arising
from non-traditional activities, as well as an institution's ability to manage
those risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The Bank does not believe
that this final rule will have a material impact on the Bank's capital
requirements.
36
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The following table summarizes the fully phased-in regulatory capital
requirements for Fidelity under FIRREA at December 31, 1995. As indicated in the
table, Fidelity's capital levels exceed all three of the currently applicable
minimum FIRREA capital requirements.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------------- ---------------------- -----------------------
BALANCE % BALANCE % BALANCE %
----------- ------- ------------ ------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Stockholder's Equity(1).......... $ 229,000 $ 229,000 $ 229,000
Unrealized loss on securities.... (800) (800) (800)
Adjustments:
Intangible assets.............. (300) -- --
Nonincludable subsidiaries..... (100) (100) (100)
General valuation allowances... -- -- 25,900
---------- ---------- ----------
Regulatory capital(2)............ 227,800 6.91 % 228,100 6.92 % 254,000 12.43 %
Required minimum................. 49,500 1.50 98,900 3.00 163,500 8.00
---------- ------ ---------- ------ ---------- -------
Excess capital................... $ 178,300 5.41 % $ 129,200 3.92 % $ 90,500 4.43 %
========== ====== ========== ====== ========== =======
Adjusted assets(3)............... $3,297,500 $3,297,900 $2,044,100
========== ========== ==========
</TABLE>
- --------------
(1) Fidelity's total stockholder's equity, calculated in accordance with
generally accepted accounting principles, was 6.94% of its total assets at
December 31, 1995.
(2) At periodic intervals, both the OTS and the FDIC routinely examine the Bank
as part of their legally prescribed oversight of the industry. Based on
their examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
(3) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. Section 567.1(a) for purposes of tangible and core
capital requirements, and for purposes of risk-based capital requirements,
refers to the term "risk-weighted assets" as defined in 12 C.F.R. Section
567.1(bb).
As of December 31, 1995, after giving effect to the payment and deduction of
an 80 basis point additional SAIF premium of approximately $22 million, the
Bank's tangible capital ratio would have been 6.28%, core capital ratio 6.29%
and risk-based capital ratio 11.35%. See "Note 13--Commitments and
Contingencies."
OTS Examinations and OTS Supervisory Agreement
In April 1995, the Bank received the report of the safety and soundness
examination completed by the OTS in March 1995. Areas of regulatory concern
principally related to the Bank's capital levels, operating losses, interest
rate risk, asset quality relative to peer thrifts, and internal asset review
administration. While the Bank believes that the corrective actions it has
taken will address OTS concerns, there can be no assurance that the OTS will
agree that the corrective actions fully satisfy its requirements in every
aspect.
37
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
On June 28, 1995, as a result of findings in the OTS' March 1995 report of
examination, the Bank entered into a supervisory agreement (the "Supervisory
Agreement") with the OTS. Among other things, the Supervisory Agreement
required the Bank to develop and adopt a three-year business plan (i) to
increase the Bank's capital levels to those meeting the criteria for a well-
capitalized institution pursuant to the PCA regulations, (ii) to improve
earnings and (iii) that would include a schedule to reduce, within a twelve
month period, classified assets to less than 50% of the sum of tangible capital
and the GVA. In addition, the Supervisory Agreement required the Bank to
enhance its internal asset review policy and system to address issues raised in
the report of examination.
Upon the successful completion of the 1995 Recapitalization the OTS agreed to
terminate the Supervisory Agreement. Notwithstanding the termination of the
Supervisory Agreement, the Bank remains committed to resolving the various
regulatory concerns expressed by the OTS in the recent examination.
Capitalized Software Costs
The Bank was notified by the OTS West Regional Office in April 1995 by a
written directive that certain computer software implementation or enhancement
related costs capitalized in accordance with GAAP are required to be immediately
expensed in the Bank's TFR and deducted from regulatory capital as required in
the instructions to the TFR and by OTS policy. In June 1995 the Bank filed an
appeal with the OTS Director of Supervision requesting that the directive to
immediately expense capitalized software costs be rescinded and that the Bank be
permitted to capitalize the costs in question in accordance with its existing
practice. Alternatively, the Bank requested the OTS address the issue of
whether software costs should be expensed or capitalized through the notice and
comment rulemaking process. The Bank also asked that it be relieved of any
obligation to comply with the directive during the pendency of the appeal. The
OTS granted the Bank's request for a stay of the effectiveness of the letter
directive while it considered the Bank's appeal. In February 1996 the Bank was
orally advised that the appeal was denied. As of December 31, 1995, the full
amount in question, approximately $4.3 million, was reserved.
Stock Option Plans
On December 11, 1995, the Board of Directors of the Bank adopted, subject to
stockholder approval, a stock option plan (the "1996 Stock Option Plan") which
replaced the then existing stock option plan of the Bank. On February 9, 1996
(the "Plan Effective Date"), the Bank's stockholders approved the 1996 Stock
Option Plan which provides that a maximum of 1,375,000 shares (after giving
effect to the Reverse Stock Split) of the Bank's Class A Common Stock be
reserved for awards granted under the 1996 Stock Option Plan to key employees
and the Bank's non-employee directors, subject to adjustment as set forth in the
1996 Stock Option Plan. The 1996 Stock Option Plan is administered by the
Compensation/Stock Option Committee of the Board of Directors, which is
authorized to select award recipients, establish award terms and conditions, and
make other related administrative determinations in accordance with the
provisions of the 1996 Stock Option Plan. Unexercised options granted under the
1996 Stock Option Plan expire on the earlier of the tenth anniversary of the
Plan Effective Date or 90 days following the effective date of a recipient's
termination of employment or Board service for reasons other than cause. In the
event of an optionee's termination for cause, all outstanding options are
cancelled as of the effective date of such termination.
38
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 15--STOCKHOLDERS' EQUITY--(CONTINUED)
The options were granted by the Board on December 11, 1995 at an exercise
price of $2.10 ($8.35 after giving effect to the Reverse Stock Split), at which
time the market value of the underlying Class A Common Stock was $2.00 per share
($8.00 after giving effect to the Reverse Stock Split). The options vest at a
rate of 10 percent at February 14, 1996 and, thereafter, 30 percent per year
over the next three years at the anniversary of the Plan Effective Date. Of the
total options granted, 1,025,000 were granted to six executives of the Bank,
87,500 were granted to other key employees of the Bank and 184,000 were granted
to the seven non-employee directors of the Bank, leaving 78,500 shares for which
options may be granted in the future.
No options have been exercised as of December 31, 1995.
NOTE 16--RELATED PARTY TRANSACTIONS
Citadel Indemnity
Fidelity agreed to cooperate with Citadel and certain related persons in the
defense of any claim or action that may be brought by any stockholder of
Fidelity against Citadel or any such persons arising out of or in any way
related to the 1994 Restructuring and Recapitalization. Except in certain
circumstances, if Fidelity is also a party to such claim or action, Fidelity
will provide Citadel and such persons with the defense thereof, with counsel
reasonably acceptable to Citadel.
Administrative and Operational Services
Pursuant to the terms of a Service Agreement between Fidelity and Citadel
until the consummation of the 1994 Restructuring and Recapitalization, Fidelity
provided Citadel with all payroll, marketing, legal, management information
services, accounts payable, human resources and general administrative services
for a fee equal to a pro rata share of Fidelity's overhead costs and expenses
associated with Bank employees who render such services to Citadel plus a 10%
profit margin. Citadel paid Fidelity $0.9 million and $1.6 million under this
Service Agreement in 1994 and 1993, respectively. No such costs were paid to
Fidelity in 1995.
Tax Sharing
The tax sharing agreement between Citadel and Fidelity was terminated prior to
the closing of the 1994 Restructuring and Recapitalization on August 4, 1994
(the "Closing"). In connection with such termination, Citadel and Fidelity
agreed that certain amounts, estimated to be approximately $3.2 million, that
would otherwise become payable by Citadel to Fidelity under the terms of such
agreement as a result of losses recognized by Fidelity during the second quarter
of 1994, would not be payable.
Citadel and Fidelity entered into a tax disaffiliation agreement (the "Tax
Disaffiliation Agreement") which sets forth each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state, local or
foreign taxes for periods before and after the Closing and related matters such
as the filing of tax returns and the conduct of Internal Revenue Service and
other examinations.
39
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
In general, under the Tax Disaffiliation Agreement, Fidelity is responsible
for (a) all adjustments to the tax liability of Fidelity and its subsidiaries
for periods before the Closing relating to operations of Fidelity, (b) any tax
liability of Fidelity and its subsidiaries for the taxable year that begins
before and ends after the Closing in respect to that part of the taxable year
through the date of the Closing, and (c) any tax liability of Fidelity and its
subsidiaries for periods after the Closing. For this purpose, any liability for
taxes for periods ending on or before the Closing shall be measured by
Fidelity's actual liability for taxes after applying tax benefits attributable
to periods prior to the Closing otherwise available to Fidelity. With certain
exceptions, the Bank is entitled to any refunds relating to those liabilities.
In general, Citadel is responsible for all tax liabilities of Citadel and its
subsidiaries (other than Fidelity and its subsidiaries) for all periods. Citadel
is entitled to any refunds relating to those liabilities.
Purchase of Gateway Capital Stock
In connection with the 1994 Restructuring and Recapitalization, Fidelity
purchased from Citadel all the outstanding capital stock of Gateway for a
purchase price equal to approximately $1 million in cash, the book value of such
capital stock at the Closing. As a result, Gateway became a wholly-owned
subsidiary of Fidelity.
Citadel Building Purchase Option
As part of the 1994 Restructuring and Recapitalization, Fidelity transferred
to Citadel, by way of dividend, one-year transferable options to acquire two
office buildings used in the operations of Fidelity (its headquarters building
and another office building which houses a branch) for an aggregate exercise
price of $9.3 million (the approximate net book value at June 30, 1994).
Citadel Realty, Inc. ("CRI"), a subsidiary of Citadel, exercised both options on
February 2, 1995.
The acquisition of the headquarters building closed in May 1995. At the
closing, CRI and Fidelity entered into a 10-year, full-service gross lease for
four of the six floors. The rental rate for the first five years of the lease
term will be approximately $26,600 per month including parking for the ground
floor and approximately $75,000 per month including parking for the fourth,
fifth, and sixth floors. This lease would provide for annual rental increases at
the lower of the increase in the Consumer Price Index ("CPI") or 3%. After the
first five years of the lease term, the rental rate in the sixth year of the
lease will be adjusted to the then current market rate in accordance the lease
terms. Fidelity has the option to extend the lease of the ground floor for two
consecutive five-year terms at a market rental rate and the option to purchase
the headquarters building at market value at the expiration of the lease term,
provided that CRI then owns the building. The lease also permits Fidelity to
sublease the building, subject to certain approval by CRI.
In the first quarter of 1995, an assignee of CRI purchased the other office
building from Fidelity which includes a branch office and two additional floors.
Upon the sale of the building, Fidelity and the new owner entered into a seven-
year, triple net, master lease pursuant to which Fidelity will pay approximately
$29,950 per month in rent, including parking. The rent will increase each year
at the lower of the increase in the CPI or 3%. At the expiration of the master
lease term, Fidelity will have the option to enter into a lease of the ground
floor branch space for two consecutive five-year terms at a market rental rate.
40
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 16--RELATED PARTY TRANSACTIONS--(CONTINUED)
Sale and Financing of Certain REO Properties
In connection with the 1994 Restructuring and Recapitalization, the Bank sold
to CRI assets with a net book value of $23.2 million at June 30, 1994 (prior to
the reserve for bulk sale losses), for a price of $19.8 million. Fidelity
financed $13.9 million of the purchase price of three of the four Citadel Sale
Assets by making three separate loans to CRI at Fidelity's standard market rates
secured by the respective properties. With respect to each of the two Citadel
Sale Assets consisting of multifamily properties, Fidelity made a ten-year loan,
amortized over 30 years, at an adjustable rate of interest tied to the one-year
Treasury rate plus approximately 3.75% per annum, with an initial interest rate
of 7.25%. The loan secured by the third Citadel Sale Asset, which is a
commercial office building has a seven-year term, amortizes over 25 years, and
has an adjustable rate of interest tied to the six-month LIBOR rate plus 4.50%
per annum, with an initial interest rate of 9.25% per annum. The loans have
other standard features commensurate with the respective properties and loan
program types, including loan fees paid to Fidelity. At December 31, 1994, one
of the loans secured by multifamily properties was paid and as a result the
outstanding balance of the remaining two loans totaled to $10.2 million.
41
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Bank using available market information and appropriate
valuation methodologies. However, considerable judgement is required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Bank could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents.............. $ 94,444 $ 94,444 $ 74,065 $ 74,065
Investment securities available
for sale.............................. 94,655 94,655 24,158 24,158
Investment securities held to maturity. -- -- 125,233 128,437
Mortgage-backed securities
available for sale.................... 31,733 31,733 46,028 46,028
Loans held for sale.................... -- -- 48,315 48,315
Loans receivable....................... 2,935,116 2,921,478 3,239,988 3,199,442
Interest receivable.................... 20,162 20,162 20,256 20,256
Investment in FHLB stock............... 49,425 49,425 47,017 47,017
Mortgage servicing rights.............. 4,632 4,632 4,072 4,072
FINANCIAL LIABILITIES:
Deposits............................... 2,600,869 2,612,197 2,697,272 2,666,200
FHLB advances.......................... 292,700 293,370 332,700 324,000
Commercial paper....................... 50,000 50,113 400,000 401,100
Mortgage-backed notes.................. 100,000 105,294 100,000 100,900
Interest payable....................... 9,438 9,438 1,421 1,421
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Interest rate swap contracts........... -- (29,400)
Interest rate floor contracts.......... -- (3,100)
Interest rate options sold............. -- 355
</TABLE>
42
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following is a summary of the notional amounts of the Bank's financial
instruments with off-balance-sheet risk as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest rate swap contracts.... $ -- $1,100,000
Interest rate floor contracts... -- 100,000
Interest rate options sold...... -- 223,500
</TABLE>
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash and Cash Equivalents
The book value amounts reported in the statement of financial condition for
cash and cash equivalents approximate the fair value of such assets, because of
the short maturity of such investments.
Investment Securities and Mortgage-backed Securities
Estimated fair values for investment and mortgage-backed securities are based
on quoted market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of comparable
instruments.
Loans
The estimated fair values of real estate loans held for sale are based on
quoted market prices. The estimated fair values of loans receivable are based on
an option adjusted cash flow valuation ("OACFV"). The OACFV includes forward
interest rate simulations and the credit quality of performing and nonperforming
loans. Such valuations may not be indicative of the value derived upon a sale of
all or part of the portfolio. The book value of accrued interest approximates
its fair value.
Investment in FHLB Stock
The book value reported in the statement of financial condition for the
investment in FHLB stock approximates fair value as the stock may be sold back
to the Federal Home Loan Bank at face value.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand. The fair value of fixed rate
certificates of deposits is estimated by using an OACFV analysis.
43
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Three Years Ended December 31, 1995
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Borrowings (Including FHLB Advances and Other Borrowings)
The estimated fair value is based on an OACFV model.
Off-balance sheet instruments, which include interest rate swaps, floors and
options
The estimated fair value for the Bank's off-balance sheet instruments are
based on quoted market prices, when available, or an OACFV analysis.
The fair value of demand deposits is the amount payable on demand at the
reporting date. Although SFAS No. 107 specifically prohibits including a
deposit-based intangible element as part of the fair value disclosure for
deposit liabilities, it does allow supplemental disclosure, which is unaudited.
The core deposit intangible is the excess of the fair value of demand deposits
over recorded amounts and represents the benefit of retaining these deposits for
an expected period of time. The core deposit intangible is estimated based upon
the premium received in the Branch Sales, to be $55 million and $50 million at
December 31, 1995 and 1994, respectively, and is not included in the above fair
values or recorded as an asset in the statement of financial condition.
44
<PAGE>
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1995
NOTE 18--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1995:
Interest income....................... $ 60,570 $ 62,521 $ 61,700 $ 61,686 $ 246,477
Interest expense...................... 42,641 45,625 43,618 42,952 174,836
Provision for estimated loan losses... 4,020 11,131 8,773 45,800 69,724
Provision for estimated real estate
losses.............................. 391 1,153 1,229 593 3,366
(Losses) of gains on loan sales, net.. (292) 938 15 (139) 522
Gains on sales of securities, net..... 939 3,159 -- -- 4,098
Operating expense..................... 19,151 19,035 20,466 23,302 81,954
Net earnings (loss)................... 1,049 (9,027) (10,579) (50,422) (68,979)
Net earnings (loss) per share......... 0.16 (1.39) (1.63) (4.31) (8.84)
Weighted average common shares
outstanding......................... 6,492,465 6,492,465 6,492,465 11,708,539 7,807,201
Market prices of common stock:
High.................................. 20.00 18.00 11.50 9.25 20.00
Low................................... 16.00 11.00 6.00 5.50 5.50
1994 (1):
Interest income....................... $ 64,074 $ 60,610 $ 57,400 $ 59,381 $ 241,465
Interest expense...................... 38,668 38,127 39,190 39,843 155,828
Provision for estimated loan losses... 15,600 25,012 3,000 21,947 65,559
Provision for estimated real estate
losses.............................. 4,300 2,067 1,459 942 8,768
(Losses) gains on loan sales, net..... (2,804) (1,528) 566 (197) (3,963)
(Losses) gains on sales of
securities, net..................... (292) 40 (681) 2,063 1,130
Operating expense (2)................. 24,179 24,597 23,428 19,655 91,859
Net (loss) earnings................... (14,151) (91,226) (8,232) (14,835) (128,444)
Net (loss) earnings per share......... (13.47) (86.84) (1.84) (2.28) (39.08)
Weighted average
common shares outstanding........... 1,050,561 1,050,561 4,481,327 6,492,465 3,286,960
Market prices of common stock (2):
High.................................. NA NA 23.50 23.00 23.50
Low................................... NA NA 21.00 17.00 17.00
1993:
Interest income....................... $ 78,187 $ 73,591 $ 69,098 $ 68,455 $ 289,331
Interest expense...................... 49,407 46,818 43,782 48,487 188,494
Provision for estimated loan losses... 7,500 14,500 19,500 23,600 65,100
Provision for estimated real estate
losses.............................. 1,000 16,000 4,000 9,200 30,200
Gains (losses) on loan sales, net..... 395 225 (34) (392) 194
Gains (losses) on sales of
securities, net..................... -- 3,489 934 (3,119) 1,304
Operating expense..................... 19,687 20,594 22,120 36,331 98,732
Net earnings (loss)................... 206 (14,734) (14,357) (37,002) (65,887)
Net earnings (loss) per share......... .20 (14.02) (13.67) (35.22) (62.72)
Weighted average common shares
outstanding......................... 1,050,561 1,050,561 1,050,561 1,050,561 1,050,561
</TABLE>
- --------------
NA--Not applicable
(1) Excludes net 1994 Restructuring and Recapitalization charges.
(2) Prior to August 4, 1994, Fidelity was wholly owned by Citadel and its stock
was not traded. As a consequence of Fidelity's 1994 Restructuring and
Recapitalization, Citadel's ownership interest was reduced to 16.2% of the
then outstanding stock and was reclassified into 1,050,561 shares. All share
and per share amounts presented have been restated to retroactively reflect
the reclassification of Citadel's ownership interest in Fidelity.
45
