<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to_______________
COMMISSION FILE NUMBER 0-28292
BANK PLUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4571410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 241-6215
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No __
As of October 31, 1997, Registrant had outstanding 19,340,840 shares of Common
Stock, par value $.01 per share.
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BANK PLUS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Financial Condition as of September 30, 1997 and
December 31, 1996..................................................................... 1
Consolidated Statements of Operations for the quarters and nine months ended
September 30, 1997 and 1996........................................................... 2
Consolidated Statements of Cash Flows for the quarters and nine months ended
September 30, 1997 and 1996........................................................... 3
Notes to Consolidated Financial Statements............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 30
Item 2. Changes in Securities.................................................................. 32
Item 3. Defaults Upon Senior Securities........................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders.................................... 32
Item 5. Other Information...................................................................... 32
Item 6. Exhibits and Reports on Form 8-K....................................................... 33
a. Exhibits............................................................................ 33
b. Reports on Form 8-K................................................................. 35
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents.................... $ 198,198 $ 70,126
Certificate of deposit....................... 1,089 --
Investment securities available for
sale, at fair value........................ 123,999 156,251
Investment securities held to maturity
at amortized cost (market value of
$5,428 and $5,198 at September 30,
1997 and December 31, 1996,
respectively).............................. 5,411 5,178
Mortgage-backed securities held for
trading.................................... 42,289 14,121
Mortgage-backed securities available
for sale, at fair value.................... 540,384 179,403
Mortgage-backed securities held to
maturity, at amortized cost (market
value of $27,169 at December 31, 1996)..... -- 30,024
Loans receivable, net of allowances of
$58,408 and $57,508 at September 30,
1997 and December 31, 1996,
respectively............................... 2,832,559 2,691,931
Interest receivable.......................... 22,797 20,201
Investment in Federal Home Loan Bank
("FHLB") stock............................. 56,086 52,330
Real estate owned, net....................... 18,469 24,663
Premises and equipment, net.................. 33,082 31,372
Other assets................................. 45,894 54,690
---------- ----------
$3,920,257 $3,330,290
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits................................... $2,802,183 $2,495,933
FHLB advances.............................. 859,846 449,851
Commercial paper........................... -- 40,000
Mortgage-backed notes...................... -- 100,000
Senior notes............................... 51,478 --
Other liabilities.......................... 29,267 31,099
---------- ----------
3,742,774 3,116,883
---------- ----------
Minority Interest: Preferred stock of
consolidated subsidiary.................... 272 51,750
Stockholders' equity:
Common Stock:
Common stock, par value $.01 per
share; 78,500,000 shares authorized;
19,340,840 and 18,245,265 shares
outstanding at September 30, 1997
and December 31, 1996, respectively.... 194 182
Paid-in capital............................ 274,212 261,902
Unrealized (losses) gains on
securities............................... (6,600) 1,043
Accumulated deficit........................ (90,595) (101,470)
---------- ----------
177,211 161,657
---------- ----------
$3,920,257 $3,330,290
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
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BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans.................................. $ 52,817 $ 52,142 $ 152,041 $ 162,418
Mortgage-backed securities............. 7,784 1,617 16,761 2,877
Investment securities and other........ 4,930 5,261 13,891 13,335
----------- ----------- ----------- -----------
Total interest income............... 65,531 59,020 182,693 178,630
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits............................... 33,166 29,808 91,878 90,630
FHLB advances.......................... 10,841 3,827 24,818 10,669
Other borrowings....................... 1,091 4,140 4,881 12,482
----------- ----------- ----------- -----------
Total interest expense.............. 45,098 37,775 121,577 113,781
----------- ----------- ----------- -----------
NET INTEREST INCOME...................... 20,433 21,245 61,116 64,849
Provision for estimated loan losses.... 4,251 3,900 12,753 11,710
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES................. 16,182 17,345 48,363 53,139
----------- ----------- ----------- -----------
NONINTEREST INCOME (EXPENSE):
Loan fee income........................ 563 462 1,583 1,836
Gains on loan sales, net............... 2 3 30 9
Fee income from sale of uninsured
investment products.................. 1,384 1,005 4,447 3,296
Fee income on deposits and other
income............................... 1,131 575 2,677 2,239
Gains on securities and trading
activities, net...................... 362 610 2,578 762
----------- ----------- ----------- -----------
3,442 2,655 11,315 8,142
----------- ----------- ----------- -----------
Provision for estimated real estate
losses............................... 333 (731) (1,029) (1,977)
Direct costs of real estate
operations, net...................... (1,426) (1,393) (4,190) (4,417)
----------- ----------- ----------- -----------
(1,093) (2,124) (5,219) (6,394)
----------- ----------- ----------- -----------
Total noninterest income............... 2,349 531 6,096 1,748
----------- ----------- ----------- -----------
OPERATING EXPENSE:
Personnel and benefits................. 7,631 7,358 21,418 21,164
Occupancy.............................. 3,080 2,490 8,368 7,896
FDIC insurance......................... 755 1,850 1,836 5,812
Professional services.................. 3,097 2,922 7,855 8,205
Office-related expenses................ 1,025 867 2,705 2,799
Other.................................. 893 1,946 3,676 4,722
----------- ----------- ----------- -----------
16,481 17,433 45,858 50,598
SAIF special assessment............... -- 18,000 -- 18,000
----------- ----------- ----------- -----------
Total operating expense................ 16,481 35,433 45,858 68,598
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST IN SUBSIDIARY........ 2,050 (17,557) 8,601 (13,711)
Income tax benefit.................... (1,700) (1,186) (6,500) (1,093)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE MINORITY
INTEREST IN SUBSIDIARY.................. 3,750 (16,371) 15,101 (12,618)
Minority interest in subsidiary
(dividends on subsidiary
preferred stock)..................... 342 1,553 4,228 3,105
----------- ----------- ----------- -----------
NET EARNINGS (LOSS)...................... 3,408 (17,924) 10,873 (15,723)
Preferred stock dividends.............. -- -- -- 1,553
----------- ----------- ----------- -----------
EARNINGS (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS............................ $ 3,408 $ (17,924) $ 10,873 $ (17,276)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE......... $ 0.18 $ (0.98) $ 0.58 $ (0.95)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................. 19,310,813 18,242,715 18,605,514 18,242,549
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
2
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BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................ $ 3,408 $ (17,924) $ 10,873 $ (15,723)
Adjustments to reconcile net
earnings to net cash provided
by (used in) operating activities:
Provisions for estimated loan and
real estate losses................... 3,918 4,631 13,782 13,687
Gains on sale of loans and
securities........................... (364) (613) (2,608) (771)
Capitalized loan origination
costs................................ (17) -- (30) --
Amortization of deferred
items, net........................... (3,054) (670) (5,129) (1,679)
FHLB stock dividend.................... (822) (804) (2,481) (2,179)
Depreciation and amortization.......... 1,431 961 3,194 2,931
Purchases of mortgage-backed
securities ("MBS") held for trading...... (50,738) (25,013) (60,717) (25,013)
Principal repayments of MBS held for
trading.................................. 661 38 1,013 38
Proceeds from sales of MBS held for
trading.................................. 18,841 24,971 31,915 24,971
Interest receivable decrease
(increase)............................... (1,988) 257 (1,478) (949)
Other assets decrease (increase)........... 2,496 (355) 33,916 (7,121)
Deferred income tax benefit................ (2,012) -- (7,013) --
Interest payable (decrease) increase....... 2,189 2,418 (2,910) 2,500
Other liabilities (decrease) increase...... (4,581) 28,500 (2,847) 33,165
---------- --------- ---------- ----------
Net cash (used in) provided by
operating activities............... (30,632) 16,397 9,480 23,857
---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hancock acquisition........................ -- -- 52,908 --
Westwood branch acquisition................ 47,489 -- 47,489 --
Purchases of investment securities
available for sale....................... -- (50,288) -- (201,313)
Maturities of investment securities
available for sale....................... -- -- -- 2,950
Proceeds from sales of investment
securities available for sale............ 32,575 48,765 32,575 48,765
Purchases of MBS available for sale........ (382,605) (98,200) (598,551) (137,161)
Principal repayments of MBS
available for sale....................... 13,197 488 29,187 3,247
Proceeds from sales of MBS available
for sale................................. 48,798 20,332 234,747 40,490
Purchases of MBS held to maturity.......... -- (15,869) -- (15,869)
Principal repayments of MBS held to
maturity................................. 977 -- 3,037 --
Maturities of certificate of deposits...... 493 -- 493 --
Loans receivable (increase) decrease....... (66,195) 48,807 (46,585) 147,003
Net proceeds from sales of real
estate owned............................. 24,572 8,777 42,318 26,374
Premises and equipment additions, net...... (1,849) (90) (3,051) (1,111)
---------- --------- ---------- ----------
Net cash used in investing
activities......................... (282,548) (37,278) (205,433) (66,625)
---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook
savings, net decrease.................... (1,686) (15,343) (9,295) (117,083)
Certificate accounts, net increase
(decrease)............................... 53,234 (20,834) 63,016 32,983
Payments of preferred stock dividend....... -- -- -- (1,553)
Proceeds from FHLB advances................ 410,000 106,631 895,941 106,631
Repayments of FHLB advances................ (120,000) (303) (485,946) (60,303)
Short-term borrowings (decrease)
increase................................. -- (57,357) (40,000) 45,000
Repayments of long-term borrowings......... -- -- (100,000) --
Net proceeds from issuance of
capital stock............................ 271 -- 309 --
Other financing activity................... -- (232) -- (268)
---------- --------- ---------- ----------
Net cash provided by financing
activities......................... 341,819 12,562 324,025 5,407
---------- --------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents...... 28,639 (8,319) 128,072 (37,361)
Cash and cash equivalents at the
beginning of the period............ 169,559 65,752 70,126 94,794
---------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD...................................... $ 198,198 $ 57,433 $ 198,198 $ 57,433
========== ========= ========== ==========
(Continued on following page)
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the
period for:
Interest on deposits, advances and
other borrowings..................... $ 42,801 $ 34,844 $ 123,622 $ 109,414
Income tax payment (refund)............ 150 45 393 (257)
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Additions to real estate acquired
through foreclosure.................... 20,935 14,205 41,712 35,425
Loans originated to finance sale
of real estate owned................... 1,867 -- 7,955 1,379
Transfer between available for
sale and to held to maturity
Portfolios:
Investment securities.............. -- 7,378 -- 7,378
MBS................................ 26,998 15,552 26,998 15,552
Exchange of preferred stock for
senior notes:
Senior notes......................... 51,478 -- 51,478 --
Minority Interest: Preferred
stock of consolidated subsidiary... (51,478) -- (51,478) --
DETAILS OF ACQUISITION:
Fair value of assets and
intangible acquired.................... -- -- 212,693 --
Goodwill................................. -- -- 6,589 --
Liabilities assumed...................... -- -- 207,270 --
Common stock issued...................... -- -- 12,012 --
Cash acquired............................ -- -- 52,908 --
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In the opinion of Bank Plus Corporation ("Bank Plus") and Bank Plus together
with its subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements, prepared from the Company's books and records, contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of September 30, 1997 and
December 31, 1996, and the results of operations and statements of cash flows
for the three and nine months ended September 30, 1997 and 1996.
Bank Plus is the holding company for Fidelity Federal Bank, a Federal Savings
Bank, and its subsidiaries (the "Bank" or "Fidelity") and Gateway Investment
Services, Inc. ("Gateway"). The Company's headquarters are in Los Angeles,
California. The Company offers a broad range of consumer financial services,
including demand and term deposits, uninsured investment products, insurance
products and loans to consumers, through 37 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 1997 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
The financial information provided herein, including the information under the
heading Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" ("MD&A"), is written with the presumption that the users
of the interim financial statements have read, or have access to, the most
recent Annual Report on Form 10-K which contains the latest available audited
consolidated financial statements and notes thereto, as of December 31, 1996,
together with the MD&A as of such date.
Supplementary Earnings/Loss per Share Data
Net earnings per common share for the three and nine months ended September
30, 1997 and 1996, as adjusted to reflect the dividends on preferred stock of
subsidiary, was determined based on 19,310,813, 18,605,514, 18,242,715 and
18,242,549 shares outstanding, respectively. Common stock equivalents for the
three and nine months ended September 30, 1997 and 1996 did not impact the
calculation of net earnings per common share.
2. MORTGAGE-BACKED SECURITIES TRANSFER
As of September 30, 1997, the Company transferred two securities with a total
amortized cost of $27.0 million and a total estimated fair value of $22.5
million from the held-to-maturity portfolio to the available-for-sale portfolio.
The transfer was the result of significant deterioration in the creditworthiness
of the borrowers of the underlying loans collateralizing the securities. The
estimated fair value of the securities was based on management's estimates of
cash flows, as the securities are not readily marketable. Because of the limited
market for this type of security, management's process for estimating fair
market value is inherently subjective. Accordingly, future estimates of fair
market value or the actual sales price of the securities could differ
substantially from the currently estimated fair market values. The unrealized
holding loss of $4.5 million at September 30, 1997 is reported in a separate
component of shareholders' equity.
The Company is taking necessary steps to mitigate any losses and has currently
determined the decline in the securities' fair value below the amortized cost
basis is not other than temporary.
3. ACQUISITION
On July 29, 1997, the Company completed the acquisition of all of the
outstanding common stock of Hancock Savings Bank, F.S.B. ("Hancock"), a Los
Angeles-based federal savings bank with five branches. As of June 30,
5
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1997 Hancock had assets of approximately $210.1 million and deposits of
approximately $203.7 million. The total consideration paid to the Hancock
stockholders was 1,058,575 million shares of Bank Plus Common Stock valued at
$11.347 per share.
The acquisition of Hancock was accounted for as a purchase and was reflected
in the consolidated statement of condition of the Company at June 30, 1997. The
Company's consolidated statement of operations includes the revenues and
expenses of the acquired business beginning July 1, 1997. The purchase price
was allocated to the assets purchased (including identifiable intangible assets)
and the liabilities assumed based upon their estimated fair values at the date
of acquisition. The Company identified a core deposit intangible of
approximately $8.6 million, which will be amortized over seven years, the
estimated average life of the deposits acquired. The excess of the purchase
price over the estimated fair value of net assets acquired amounted to
approximately $6.6 million, which has been accounted for as goodwill and will be
amortized over 15 years using the straight-line method.
4. DERIVATIVE FINANCIAL INSTRUMENTS
As part of its trading program, the Company has employed interest rate swaps,
caps, floors and commitments for forward purchase and sale of securities to
manage the risks and returns of the program. These financial instruments are
carried at fair value with realized and unrealized changes in fair value
recognized in earnings in the period in which the change occurs. The premiums
paid for interest rate caps and floors are capitalized and amortized over the
life of the contracts using the straight-line method.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and "Disclosure
of Information about Capital Structure" ("SFAS 129") in February 1997, and
issued "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") in June 1997.
SFAS 128 - Earnings Per Share
SFAS 128 simplifies the standards for computing and presenting earnings per
share ("EPS") as previously prescribed by Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from
issuance of common stock that then shared in earnings. SFAS 128, also requires
dual presentation of basic and diluted EPS on the face of the income statement
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, and earlier application is not permitted. If the Company had
adopted SFAS 128 as of January 1, 1997, pro forma basic EPS would have been
$0.58 and pro forma diluted EPS would have been $0.57 for the nine months ending
September 30, 1997.
6
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SFAS 129 - Disclosure of Information about Capital Structure
SFAS 129 consolidates existing reporting standards for disclosing information
about an entity's capital structure. SFAS 129 also supersedes specific
requirements found in previously issued accounting statements. SFAS 129 must be
adopted for financial statements for periods ending after December 15, 1997.
SFAS 130 - Reporting Comprehensive Income
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS 131 - Disclosures about Segments of an Enterprise and Related Information
SFAS 131 establishes standards for the reporting by public business
enterprises of information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 supersedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise," but retains the
requirements to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS 131 does
not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be
7
<PAGE>
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods in the
second year of application.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included in this Form 10-Q, including without limitation
statements containing the words ''believes,'' ''anticipates,'' ''intends,''
''expects'' and words of similar import, constitute ''forward-looking
statements'' within the meaning of the Private Securities Litigation Reform Act.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the continuing impact of
California's economic recession on collateral values and the ability of certain
borrowers to repay their obligations to Fidelity; the potential risk associated
with the Bank's level of nonperforming assets and other assets with increased
risk; changes in or amendments to regulatory authorities' capital requirements
or other regulations applicable to Fidelity; fluctuations in interest rates;
increased levels of competition for loans and deposits; and other factors
referred to in this Form 10-Q. Given these uncertainties, undue reliance should
not be placed on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements included herein to reflect
future events or developments.
OVERVIEW
Bank Plus, through Fidelity, operates 37 full-service branches, all of
which are located in Southern California, principally in Los Angeles and Orange
Counties. The Company offers a broad range of consumer financial services
including demand and term deposits and loans to consumers. The Bank closed its
wholesale correspondent single family loan origination network and its
multifamily loan origination operations in the third quarter of 1994 due to the
economic and competitive environments. Since that time the Bank has entered into
strategic partnerships with established providers of consumer credit products
pursuant to which all consumer credit products made available to the Bank's
customers are referred to and underwritten, funded and serviced by the strategic
partners. In addition, through Gateway, a National Association of Securities
Dealers, Inc. ("NASD") registered broker/dealer, the Company provides customers
with uninsured investment products, including a number of mutual funds,
annuities and insurance products.
RECENT DEVELOPMENTS
Registration of Common Stock
In the first quarter of 1997, the Company filed a Registration Statement on
Form S-4 (the "Acquisition S-4") for up to approximately $75.0 million in shares
of Bank Plus Common Stock (the "Acquisition Shares") that may be issued from
time to time as consideration (in whole or in part) for possible future
acquisitions. The Securities and Exchange Commission (the "SEC") declared the
Acquisition S-4 effective on June 2, 1997. Under the Acquisition S-4, the
Company, on July 29, 1997, issued 1,058,575 shares of Bank Plus Common Stock in
connection with the acquisition of Hancock Savings Bank, FSB ("Hancock") (see "-
- -Hancock Merger"). The Board of Directors of Bank Plus (the "Board") (or an
authorized committee thereof) will negotiate, determine and approve on behalf of
the Company the number of Acquisition Shares to be issued in any acquisition and
the terms and conditions of all agreements to be entered into by the Company in
connection therewith. Offers to sell any of the Acquisition Shares, if any,
will be made only pursuant to the prospectus constituting a part of the
Acquisition S-4.
Hancock Merger
On July 29, 1997, the Company completed the acquisition of all of the
outstanding stock of Hancock, which had five branches, assets of approximately
$210.1 million and deposits of approximately $203.7 million at June
9
<PAGE>
30, 1997. The Company acquired all of the stock of Hancock in exchange for
1,058,575 shares of Bank Plus Common Stock in a transaction valued at
approximately $12 million.
The acquisition of Hancock was accounted for as a purchase and was
reflected in the consolidated statement of condition of the Company at June 30,
1997 and in all amounts and ratios reported throughout Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as of
June 30, 1997. The Company's consolidated statements of operations include the
revenues and expenses of the acquired business beginning July 1, 1997. The
purchase price was allocated to the assets purchased (including identifiable
intangible assets) and the liabilities assumed based upon their estimated fair
market values at the date of acquisition. The Company identified a core deposit
intangible of approximately $8.6 million, which will be amortized over seven
years, the estimated average life of the deposits acquired. The excess of the
purchase price over the estimated fair value of net assets acquired amounted to
approximately $6.6 million, which has been accounted for as goodwill and will be
amortized over 15 years using the straight-line method.
The acquisition of Hancock provides a number of benefits to the Company
including an increased customer base and larger branch network, lower yielding
deposits and operating efficiencies through consolidation. The acquired branch
network and associated customer base at July 29, 1997, included approximately
11,300 and 6,000 transaction and time deposit accounts, respectively, and will
provide new territory in which to implement Fidelity's sales platform of credit
and investment products. Through strategic alliances with third party
providers, the Company will introduce to the Hancock customer base a wide range
of securities, insurance and consumer loan products to enhance the Company's fee
income.
The Company has reduced consolidated operating expenses as a result of the
merger through the closure and consolidation of the administrative office of
Hancock and the consolidation of two of the five branches acquired into existing
Fidelity branches.
Deposit Purchase
On September 19, 1997, the Company completed the purchase of deposits from
Coast Federal Bank, FSB ("Coast"). The Coast branch, located in Westwood,
California, had deposits of approximately $48.6 million at September 19, 1997.
The Company identified a core deposit intangible of approximately $1.5 million,
which will be amortized over seven years, the estimated average life of the
deposits acquired.
Exchange Offer
On July 18, 1997, the Company completed an exchange offer (the "Exchange
Offer") of the Company's 12% Senior Notes due July 18, 2007 (the "Senior Notes")
for the outstanding shares of 12% Noncumulative Exchangeable Perpetual Stock,
Series A (the "Series A Preferred Stock") issued by Fidelity in 1995. The
Company accepted 2,059,120 shares of Series A Preferred Stock in exchange for
approximately $51.5 million principal amount of Senior Notes. Holders of
approximately 11,000 shares of the Series A Preferred Stock elected not to
participate in the Exchange Offer and are reflected as minority interest on the
Statement of Financial Condition as of September 30, 1997.
CalPERS
Effective July 1, 1997 Gateway was awarded the contract to serve as the
Financial Education Presenter for the California Public Employees' Retirement
System ("CalPERS"), which has more than one million members. Under the terms of
the contract Gateway's primary responsibility will be to coordinate with CalPERS
the development and production of financial planning seminars to provide
financial education information to CalPERS members. The contract is for an
initial one-year term and is thereafter renewable for a two-year period at the
option of CalPERS, but no assurances can be given that the contract will, in
fact, be renewed. Under the contract, Gateway will be providing, among other
services, experienced speakers at CalPERS-scheduled and coordinated financial
planning seminars throughout California, customized seminar materials, the offer
of personal consultations to seminar attendees (which will include the
development of a personalized financial plan) and quarterly reports of all
investment products and services sold to CalPERS members. The Company
anticipates
10
<PAGE>
that these seminars and personal consultations will generate fee income from the
sale of uninsured investment products, such as mutual funds, annuities and
insurance products.
AmeriCash
On June 12, 1997, Fidelity entered into an agreement pursuant to which it
acts as cash services provider for a national network of cash dispensing
automatic teller machines operated by AmeriCash, L.L.C. The Bank has agreed to
provide up to $50 million of its cash for Americash ATMs throughout the United
States, and is paid fees based on the volume of cash withdrawal transactions.
The average cash balance outstanding in the AmeriCash program for the third
quarter was $7.8 million, and the program generated fees of $0.1 million for the
period which are reported as noninterest income. See the net interest income
table on page 12 for the impact the AmeriCash program has on net interest
margin.
BUSINESS STRATEGY
The Company's business strategy is to be a consumer-focused provider of
financial services, by enhancing its franchise to integrate its traditional
services and products (deposit services, checking and savings accounts) with the
offering of investment products through Gateway and consumer credit products
through strategic partners. As a part of such strategy, management continues to
explore new opportunities to expand the integrated sales platform, to increase
fee income growth, and to build upon the use of technology in delivering
financial products and services. In addition to the CalPERS and AmeriCash
programs discussed above, the Company is pursuing the following activities:
Affinity Credit Cards
Fidelity has formed a plan to develop affinity credit card issuance
programs with strategic allies. These programs will include unsecured credit
cards and credit cards secured by real estate or by cash deposits. The Bank has
entered into contracts to establish such programs with two separate entities.
Fidelity will serve as issuer and owner of certain credit card accounts and will
develop the card portfolio from prospects provided by the strategic allies. As
part of the affinity agreements, certain strategic allies may have the right to
purchase outstanding receivables of these accounts at par and, in exchange,
provide credit enhancements to guarantee full repayment of the Bank's
outstanding receivables in the event of cardholder defaults. The credit
enhancements will include the funding of a reserve account or pledging of
collateral as receivables are funded by the Bank. The Bank has committed to fund
up to an aggregate outstanding balance of $425 million under the current
programs. At September 30, 1997, outstanding credit card balances associated
with the affinity program were approximately $21.0 million.
Fidelity is in the process of evaluating other affinity credit card
transactions with several potential strategic allies. These transactions, if
consummated, would involve the issuance of substantial numbers of credit cards,
and both the risks and benefits associated with these programs would be shared
with Fidelity's strategic allies. No assurances can be given as to whether any
of these transactions will be consummated or, if consummated, as to the
profitability of any of these transactions. In connection with the affinity
credit card program, the Company is contemplating establishing a credit
processing center, which would handle the processing for the various credit card
programs. The establishment of this processing center would require funding of
significant start-up costs, and no assurances can be given that these costs
would be recovered.
Internet Bank
Management believes that, given the highly competitive nature of the
financial services industry and the regulatory constraints that the Company
faces in competing with unregulated companies, the Company must continue to
expand from its historical business focus and provide customers with a wider
array of products through a variety of delivery channels. The Company is
pursuing the use of various electronic delivery systems to enhance customer
convenience and the Company's fee income opportunities. Fidelity is in the
process of completing the first phase of its Internet bank site which will open
to customers under the name "iBank" in early
11
<PAGE>
1998 at the Internet address of http://www.iBank.com. iBank will offer on-line
transactional capabilities for selected Bank services, with plans to expand such
offerings to include the investment products currently sold through the
Company's integrated sales platform.
Asset Growth
Additionally, as a part of its business strategy, the Company has developed
a plan to grow assets (loans and securities) by approximately $600 million in
1997. This plan, in general terms, is based upon certain risk adjusted return
and liquidity objectives and is designed to increase the Company's securities
and loan portfolios to enhance the Company's earning capabilities. The proposed
increase in earning assets may be at a lower interest rate spread than the
Company's assets are currently yielding depending on available financing
sources. Accordingly, if the plan is implemented, the Company's interest rate
spread may decline. In conjunction with this plan, the Company continues its
exploration of other asset origination capabilities, customer base expansion and
acquisition opportunities for financial services institutions. If such
opportunities are pursued or if the interest rate environment is not desirable
for growth, these may limit the asset growth strategy discussed above to an
amount significantly less than $600 million.
RESULTS OF OPERATIONS
The Company reported net earnings available to common stockholders of $3.4
million, after minority interest in subsidiary (dividend on subsidiary preferred
stock) of $0.3 million ($0.18 per common share; computed on the basis of
19,310,813 weighted average common shares outstanding) for the three months
ended September 30, 1997. For the nine months ended September 30, 1997, net
earnings available to common stockholders were $10.9 million, after minority
interest in subsidiary (dividends on subsidiary preferred stock) of $4.2 million
($0.58 per common share; computed on the basis of 18,605,514 weighted average
common shares outstanding). This compares to net losses available to common
stockholders of $17.9 million after minority interest in subsidiary of $1.6
million ($0.98 per common share; computed on the basis of 18,242,715 weighted
average common shares outstanding) for the three months ended September 30,
1996. For the nine months ended September 30, 1996, net losses available for
common stockholders were $17.3 million after minority interest in subsidiary and
dividends on preferred stock totaling $4.7 million ($0.95 per common share;
computed on the basis of 18,242,549 weighted average common shares outstanding).
Net earnings for the three months ended September 30, 1997, as compared to
the same period in 1996, reflect: (a) decreased operating expenses of $19.0
million primarily due to lower Federal Deposit Insurance Corporation ("FDIC")
insurance costs resulting from the special one-time recapitalization payment of
$18.0 million to the Savings Association Insurance Fund (the "SAIF") in the
third quarter of 1996 and an upgrade in the Bank's assessment classification and
(b) increased noninterest income of $1.8 million due primarily to lower costs
associated with real estate operations and increased fee income on deposits from
cash services fees and retirement income plan assessment fees. These favorable
changes were partially offset by (a) decreased net interest income of $0.8
million primarily due to a higher average volume of interest bearing liabilities
offset by higher average interest earning assets and (b) increased provision for
estimated loan losses of $0.4 million
Net earnings for the nine months ended September 30, 1997, as compared to
the same period in 1996, reflect: (a) decreased operating expenses of $22.7
million primarily due to lower FDIC insurance costs resulting from the special
one-time recapitalization payment of $18.0 million to the SAIF in the third
quarter of 1996 and an upgrade in the Bank's assessment classification, (b)
increased noninterest income of $4.3 million due primarily to gains on sales of
mortgage-backed securities ("MBS"), fee income from sale of uninsured investment
products and lower costs associated with real estate operations and (c)
increased income tax benefit of $5.4 million (see "--Income Taxes"). These
favorable changes were partially offset by (a) decreased net interest income of
$3.7 million primarily due to lower rates on average interest earning assets and
higher levels of average borrowing balances and (b) increased provision for
estimated loan losses of $1.0 million.
12
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans, MBS
and investment securities ("interest-earning assets") and interest paid on
savings deposits and borrowings ("interest-bearing liabilities"). For the three
months ended September 30, 1997, net interest income totaled $20.4 million,
decreasing by $0.8 million from $21.2 million for the comparable period in 1996.
For the nine months ended September 30, 1997, net interest income totaled $61.1
million, decreasing by $3.7 million from $64.8 million for the comparable period
in 1996.
Net interest income is affected by (a) the average volume and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities, (b) the level and volatility of market interest rates, (c) the
level of nonaccruing loans ("NPLs") and (d) the interest rate spread between the
yields earned and the rates paid.
The following table presents the primary determinants of net interest
income for the three months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1997 1996
----------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................................................. $ 2,873,673 $ 52,817 7.35% $ 2,866,162 $ 52,142 7.28%
MBS.................................................... 452,608 7,784 6.88 89,335 1,617 7.24
Investment securities.................................. 258,542 4,108 6.32 255,518 4,457 6.94
Investment in FHLB stock............................... 55,841 822 5.86 51,308 804 6.23
------------ ------- ----------- ---------
Total interest-earning assets..................... 3,640,664 65,531 7.20 3,262,323 59,020 7.24
------- ---------
Noninterest-earning assets.............................. 115,916 56,713
------------ -----------
Total assets...................................... $ 3,756,580 $ 3,319,036
============ ===========
Interest-bearing liabilities:
Deposits:
Demand deposits....................................... $ 318,536 865 1.08 $ 293,778 791 1.07
Savings deposits...................................... 133,144 882 2.63 130,985 950 2.88
Time deposits......................................... 2,278,428 31,419 5.42 2,102,184 28,067 5.30
------------ ------- ----------- ---------
Total deposits...................................... 2,730,108 33,166 4.82 2,526,947 29,808 4.68
------------ ------- ----------- ---------
Borrowings............................................. 799,766 11,932 5.92 514,817 7,967 6.14
------------ ------- ----------- ---------
Total interest-bearing liabilities.................... 3,529,874 45,098 5.07 3,041,764 37,775 4.93
------------ ------- ----------- ---------
Noninterest-bearing liabilities......................... 38,535 52,893
Preferred stock issued by consolidated subsidiary....... 10,789 51,750
Stockholders' equity.................................... 177,382 172,629
------------ -----------
Total liabilities and equity............................ $ 3,756,580 $ 3,319,036
============ ===========
Net interest income; interest rate spread (1)........... $ 20,433 2.13% $ 21,245 2.31%
========= ===== ========= =====
Net yield on interest-earning assets ("net interest
margin") (1).......................................... 2.28% 2.64%
===== =====
Average nonaccruing loan balance
included in average loan balance...................... $ 36,470 $ 55,318
============ ===========
Net delinquent interest reserve removed
from interest income.................................. $ 449 $ 1,178
========= =========
Reduction in net yield on interest-earning assets due
to delinquent interest................................ 0.05% 0.14%
===== =====
</TABLE>
(1) Net interest income and margin for the quarter ended September 30, 1997
would have been $20.6 million and 2.30%, respectively, if the fees generated
from the Americash program were recorded as interest income rather than
noninterest income.
13
<PAGE>
The following table presents the primary determinants of net interest income
for the nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1997 1996
------------------------------------ ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans................................................... $2,773,904 $152,041 7.31% $2,934,439 $162,418 7.38%
MBS..................................................... 315,178 16,761 7.09 54,136 2,877 7.09
Investment securities.................................... 236,452 11,410 6.45 211,158 11,156 7.06
Investment in FHLB stock................................ 54,124 2,481 6.13 50,604 2,179 5.75
---------- -------- ---------- --------
Total interest-earning assets...................... 3,379,658 182,693 7.21 3,250,337 178,630 7.33
-------- --------
Noninterest-earning assets............................... 83,872 59,812
---------- ----------
Total assets....................................... $3,463,530 $3,310,149
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits........................................ $ 301,937 2,470 1.09 $ 299,661 2,307 1.03
Savings deposits....................................... 122,540 2,713 2.96 142,715 2,767 2.58
Time deposits.......................................... 2,150,624 86,695 5.37 2,109,293 85,556 5.40
---------- -------- ---------- --------
Total deposits........................................ 2,575,101 91,878 4.77 2,551,669 90,630 4.73
---------- -------- ---------- --------
Borrowings.............................................. 639,477 29,699 6.21 489,701 23,151 6.30
---------- -------- ---------- --------
Total interest-bearing liabilities.................. 3,214,578 121,577 5.06 3,041,370 113,781 4.98
---------- -------- ---------- --------
Noninterest-bearing liabilities.......................... 40,014 42,400
Preferred stock issued by consolidated subsidiary........ 40,956 51,750
Stockholders' equity..................................... 167,982 174,629
---------- ----------
Total liabilities and equity............................. $3,463,530 $3,310,149
========== ==========
Net interest income; interest rate spread................ $ 61,116 2.15 % $ 64,849 2.35 %
======== ===== ======== =====
Net yield on interest-earning assets ("net interest
margin")................................................ 2.40 % 2.67 %
===== =====
Average nonaccruing loan balance
included in average loan balance......... $ 47,841 $ 62,744
=========== ===========
Net delinquent interest reserve removed
from interest income..................... $ 3,298 $ 4,496
======== ========
Reduction in net yield on interest-earning assets due
to delinquent interest.................................. 0.13 % 0.18 %
===== =====
</TABLE>
14
<PAGE>
The following tables present the dollar amount of changes in interest income
and expense for each major component of interest-earning assets and interest-
bearing liabilities and the amount of change attributable to changes in average
balances and average rates for the periods indicated. Because of numerous
changes in both balances and rates, it is difficult to allocate precisely the
effects thereof. For purposes of these tables, the change due to volume is
initially calculated as the change in average balance multiplied by the average
rate during the prior period and the change due to rate is calculated as the
change in average rate multiplied by the average volume during the prior period.
Any change that remains after such calculations is allocated proportionately to
changes in volume and changes in rates.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1996
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
--------------------------------------- -------------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest income:
Loans........................ $ (183) $ 858 $ 675 (8,843) $ (1,534) $ (10,377)
Mortgage-backed securities... 6,251 (84) 6,167 13,884 -- 13,884
Investment securities........ 50 (399) (349) 1,249 (995) 254
Investment in FHLB stock..... 66 (48) 18 153 149 302
-------- ------ -------- -------- -------- ---------
Total interest income..... 6,184 327 6,511 6,443 (2,380) 4,063
-------- ------ -------- -------- -------- ---------
Interest expense:
Deposits:
Demand deposits............. (67) (7) (74) (19) (144) (163)
Savings deposits............ (16) 84 68 424 (370) 54
Time deposits............... (2,396) (956) (3,352) (1,385) 246 (1,139)
-------- ------ -------- -------- -------- ---------
Total deposits............ (2,479) (879) (3,358) (980) (268) (1,248)
Borrowings................... (5,414) 1,449 (3,965) (5,048) (1,500) (6,548)
-------- ------ -------- -------- -------- ---------
Total interest expense...... (7,893) 570 (7,323) (6,028) (1,768) (7,796)
-------- ------ -------- -------- -------- ---------
Decrease in net interest $ (1,709) $ 897 $ (812) $ 415 $( 4,148) $ (3,733)
income....................... ======== ====== ======== ======== ======== =========
</TABLE>
The $0.8 million decrease in net interest income between the third quarter
1997 and the third quarter 1996 was primarily the result of an increase in the
level of average interest-bearing liabilities offset by an increase in the
average level of interest-earning assets. The $3.7 million decrease in net
interest income between the nine months ended September 30, 1997 and the
comparable period in 1996 was primarily due to decreased rates on average
interest-earning assets combined with an increase in rates and the average level
of interest-bearing liabilities. This was partially offset by an increase in
the level of interest-earning assets.
ASSET/LIABILITY MANAGEMENT
The objective of interest rate risk management is to maximize the net interest
income of the Company while controlling interest rate risk exposure. Banks and
savings institutions are subject to interest rate risk when assets and
liabilities mature or reprice at different times (duration risk), against
different indices (basis risk) or for different terms (yield curve risk). The
decision to control or accept interest rate risk can only be made with an
understanding of the probability of various scenarios occurring. Having
liabilities that reprice more quickly than assets is beneficial when interest
rates fall, but may be detrimental when interest rates rise.
The Company manages interest rate risk by, among other things, maintaining a
portfolio consisting primarily of adjustable rate mortgage ("ARM") loans. ARM
loans comprised 95% of the total loan portfolio at September 30, 1997 and 97% at
September 30, 1996. The percentage of monthly adjustable ARMs to total loans was
approximately 73% and 76% at September 30, 1997 and 1996, respectively.
Interest sensitive assets provide the Company with a degree of long-term
protection from rising interest rates. At September 30, 1997 and 1996,
approximately 93% of Fidelity's total loan portfolio consisted of loans which
mature or reprice within one year. Fidelity has in recent periods been
negatively impacted by the fact that increases in the interest rates accruing on
Fidelity's ARM loans lagged the increases in interest rates accruing on its
deposits due to reporting delays and contractual look-back periods contained in
the Bank's loan documents. At September 30, 1997, 89% of the Bank's
15
<PAGE>
loans, which are indexed to the Eleventh District Cost of Funds Index ("COFI"),
as with all COFI portfolios in the industry, do not reprice until some time
after the industry liabilities composing COFI reprice. The Company's liabilities
reprice generally in line with the cost of funds of institutions which comprise
the Federal Home Loan Bank (the "FHLB") Eleventh District. In the Company's
case, the lag between the repricing of its liabilities and its ARM loans indexed
to COFI is approximately four months. Thus, in a rising rate environment there
will be upward pressure on rates paid on deposit accounts and wholesale
borrowings, and the Company's net interest income will be adversely affected
until the majority of its interest-earning assets fully reprice. Conversely, in
a falling interest rate environment interest income will be positively affected.
The Company 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 Company usually does not require
collateral or other security from other parties to these instruments. The
Company manages its credit exposure to counterparties through credit approvals,
credit limits and other monitoring procedures. The Company's Credit Policy
Committee makes recommendations regarding counterparties and credit limits which
are subject to approval by the Board of Directors.
The Company may employ interest rate swaps, caps and floors in the management
of interest rate risk. An interest rate swap agreement is a financial
transaction where two counterparties agree to exchange different streams of
payments over time. An interest rate swap involves no exchange of principal
either at inception or upon maturity; rather, it involves the periodic exchange
of interest payments arising from an underlying notional principal amount.
Interest rate caps and floors generally involve the payment of a one-time
premium to a counterparty who, if interest rates rise or fall above or below a
predetermined level, will make payments to the Company at an agreed upon rate on
a notional amount of money for the term of the agreement, until such time as
interest rates fall below or rise above the cap or floor level.
During the third quarter of 1996, the Company entered into an advisory
agreement with an investment advisor, pursuant to which the advisor will
recommend investments, subject to prior approval and direction of the Company,
and execute investment purchases in accordance with the Company's investment
strategy. Under this agreement, outstanding forward commitments to purchase
adjustable rate MBS totaled $15.1 million at September 30, 1997. Also
outstanding in relation to this managed portfolio at September 30, 1997, were
$71.0 million notional amount of interest rate caps which will mature in 2007,
$5.0 million notional amount interest rate swaps which will mature in 2002 and
$5.9 million notional amount of put options on treasury futures with an exercise
date in 1997.
As of September 30, 1997, the Company transferred two securities with a total
amortized cost of $27.0 million and a total estimated fair value of $22.5
million from the held-to-maturity portfolio to the available-for-sale portfolio.
The transfer was the result of significant deterioration in the credit
worthiness of the borrowers of the underlying loans collateralizing the
securities. The estimated fair value of the securities was based on
management's estimates of cash flows, as the securities are not readily
marketable. Because of the limited market for this type of security,
management's process for estimating fair market value is inherently subjective.
Accordingly, future estimates of fair market value or the actual sales price of
the securities could differ substantially from the currently estimated fair
market values. The unrealized holding loss of $4.5 million at September 30,
1997 is reported in a separate component of shareholders' equity.
The Company is taking necessary steps to mitigate any losses and has currently
determined the decline in the securities' fair value below the amortized cost
basis is not other than temporary.
The Company has plans to grow assets (loans and securities) of approximately
$600 million in 1997. See "--Business Strategy."
16
<PAGE>
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of September 30,
1997. "Gap," as reflected in the table, represents the estimated difference
between the amount of interest-earning assets and interest-bearing liabilities
repricing during future periods as adjusted for interest-rate swaps and other
financial instruments as applicable, and based on certain assumptions, including
those stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
MATURITY OR REPRICING
-------------------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
----------- ------------ -------------- ------------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash........................................ $ 137,442 $ 1,089 $ -- $ -- $ -- $ 138,531
Investment securities (1) (2)............... 58,356 39,123 53,033 -- 34,984 185,496
MBS (1)...................................... 143,549 -- -- -- 439,124 582,673
Loans receivable:
ARMs and other adjustables (3).............. 2,345,940 353,483 69,427 1,886 -- 2,770,736
Fixed rate loans............................ 8,643 2,122 4,289 15,303 102,060 132,417
---------- ---------- ------------ ---------- -------- ----------
Total gross loans receivable.............. 2,354,583 355,605 73,716 17,189 102,060 2,903,153
---------- ---------- ------------ ---------- -------- ----------
Total.................................... 2,693,930 395,817 126,749 17,189 576,168 $3,809,853
---------- ---------- ------------ ---------- -------- ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts (4)......... 377,390 -- -- -- -- $ 377,390
Money market accounts (4)................. 74,124 -- -- -- -- 74,124
Fixed maturity deposits:
Retail customers......................... 46,000 566,270 1,707,927 18,406 1,728 2,340,331
Wholesale customers..................... -- 702 9,636 -- -- 10,338
---------- ---------- ------------ ---------- -------- ----------
Total deposits............................ 497,514 566,972 1,717,563 18,406 1,728 2,802,183
---------- ---------- ------------ ---------- -------- ----------
Borrowings:
FHLB advances (3)......................... 249,846 200,000 220,000 190,000 -- 859,846
Other..................................... -- -- -- 51,478 -- 51,478
---------- ---------- ------------ ---------- -------- ----------
Total borrowings......................... 249,846 200,000 220,000 241,478 -- 911,324
---------- ---------- ------------ ---------- -------- ----------
Total..................................... 747,360 766,972 1,937,563 259,884 1,728 $3,713,507
---------- ---------- ------------ ---------- -------- ==========
IMPACT OF HEDGING............................ (85,000) -- (5,000 ) 90,000 --
---------- ---------- ------------ ---------- --------
REPRICING GAP................................ $1,861,570 $ (371,155) $ (1,815,814) $ (152,695) $574,440
========== ========== ============ ========== ========
GAP TO TOTAL ASSETS.......................... 47.49 % (9.42)% (46.32)% (3.90)% 14.65%
CUMULATIVE GAP TO TOTAL ASSETS............... 47.49 % 38.02 % (8.30) % (12.20)% 2.45%
</TABLE>
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $56.1 million.
(3) ARMs and variable rate borrowings from the FHLB system ("FHLB advances") are
primarily in the shorter categories as they are subject to interest rate
adjustments.
(4) These liabilities are subject to daily adjustments and are therefore
included in the "Within 3 Months" category.
Analysis of the Gap provides only a static view of the Company's interest rate
sensitivity at a specific point in time. The actual impact of interest rate
movements on the Company's net interest income may differ from that implied by
any Gap measurement. The actual impact on net interest income may depend on the
direction and magnitude of the interest rate movement, as well as competitive
and market pressures.
17
<PAGE>
ASSET QUALITY
General
The Company's loan portfolio is primarily secured by assets located in
Southern California and is comprised principally of single family and
multifamily (2 units or more) residential loans. At September 30, 1997, 22% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 11% and 59% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively.
The performance of the Company's loans secured by multifamily and commercial
properties has been adversely affected by Southern California economic
conditions. These portfolios are particularly susceptible to the potential for
further declines in the Southern California economy, such as increasing vacancy
rates, declining rents, increasing interest rates, declining debt coverage
ratios, and declining market values for multifamily and commercial properties.
In addition, the possibility that investors may abandon properties or seek
bankruptcy protection with respect to properties experiencing negative cash
flow, particularly where such properties are not cross-collateralized by other
performing assets, can also adversely affect the multifamily loan portfolio.
There can be no assurances that current improved economic indicators will have a
material impact on the Bank's portfolio in the near future as many factors key
to recovery may be impacted adversely by the Federal Reserve Board's interest
rate policy as well as other factors.
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 general
valuation allowance ("GVA") and specific valuation allowance ("SVA").
Accelerated Asset Resolution Plan
In the fourth quarter of 1995, the Bank adopted the Accelerated Asset
Resolution Plan (the "Plan"), which was designed to aggressively dispose of,
resolve or otherwise manage a pool (the "AARP Pool") of primarily multifamily
loans and REO that at that time were considered by the Bank to have higher risk
of future nonperformance or impairment relative to the remainder of the Bank's
multifamily loan portfolio. The Plan reflected both acceleration in estimated
timing of asset resolution, as well as a potential change in recovery method
from the normal course of business. In an effort to maximize recovery on loans
and REO included in the AARP Pool, the Plan allowed for a range of possible
methods of resolution including, but not limited to, (i) individual loan
restructuring, potentially including additional extensions of credit or write-
offs of existing principal, (ii) foreclosure and sale of collateral properties,
(iii) securitization of loans, (iv) the bulk sale of loans and (v) bulk sale or
accelerated disposition of REO properties.
The AARP Pool originally consisted of 411 assets with an aggregate gross book
balance of approximately $213.3 million, comprised of $137.0 million in gross
book balance of loans and $76.3 million in gross book balance of REO. As a
consequence of the adoption of the Plan, the Bank recorded a $45.0 million loan
portfolio charge in the fourth quarter of 1995, which was reflected as a credit
to the Bank's allowance for estimated loan and REO losses. This amount
represented the estimated additional losses, net of SVAs, anticipated to be
incurred by the Bank in executing the Plan. Such additional losses represented,
among other things, estimated reduced recoveries from restructuring loans and
the acceptance of lower proceeds from the sale of individual REO and the
estimated incremental losses associated with recovery through possible bulk
sales of performing and nonperforming loans and REO.
In conjunction with the acquisition of Hancock, the Bank identified a pool of
Hancock assets, with similar risk profiles to the assets included in the Bank's
AARP Pool, for inclusion in the Plan. The Bank identified 54 Hancock assets
with an aggregate gross book balance of approximately $31.1 million, comprised
of $25.8 million in gross book balance of loans and $5.3 million in gross book
balance of REO. Simultaneously with the consummation of the acquisition, the
Bank recorded $5.8 million as an addition to the allowance for estimated loan
losses representing the estimated reduced recoveries in executing the Plan.
18
<PAGE>
Through September 30, 1997, (i) $38.6 million in gross book balances of AARP
Pool loans had been resolved through either a negotiated sale or discounted
payoff, (ii) $8.4 million in gross book balances of AARP Pool loans were
collected through normal principal amortization or paid off through the normal
course without loss, (iii) $24.4 million in gross book balances of AARP Pool
loans had been modified or restructured and retained in the Bank's mortgage
portfolio, (iv) $15.4 million in gross book balances of AARP Pool loans were
removed from the AARP Pool upon management's determination that such assets no
longer met the risk profile for inclusion in the AARP Pool or that accelerated
resolution of such assets was no longer appropriate and (v) $116.8 million in
gross book balances of REO were sold ($46.2 million in gross book balances of
AARP Pool loans were taken through foreclosure and acquired as REO since the
inception of the AARP). As of September 30, 1997, the AARP Pool consisted of 74
assets with an aggregate gross book balance of $40.9 million, comprised
primarily of accruing and nonaccruing multifamily real estate loans totaling
approximately $29.7 million and REO properties totaling approximately $11.2
million, which are reported as real estate owned on the statement of financial
condition. Through September 30, 1997, of the $50.8 million of reserves
established in connection with the Plan, including the $5.8 million established
for the Hancock assets, $29.0 million had been charged off and $10.0 million had
been allocated to SVAs or REO writedowns in connection with the Bank's estimate
of recovery for AARP Pool assets. Due to the addition of the Hancock assets to
the Plan, it is anticipated that the remaining AARP Pool will be resolved by
1998.
Notwithstanding the actions taken by the Bank in implementing the Plan, there
can be no assurance that the AARP Pool assets retained by the Bank will not
result in additional losses. The Bank's allowance for loan and REO losses and
the SVAs established in connection with such assets are ultimately subjective
and inherently uncertain. There can be no assurance that further additions to
the Bank's allowance for loan and REO losses will not be required in the future
in connection with such assets, which could have an adverse effect on the Bank's
financial condition, results of operations and levels of regulatory capital.
Classified Assets
Total classified assets decreased $17.2 million or 9.9% from December 31,
1996, to $156.9 million at September 30, 1997. This decrease was primarily due
to a decrease in performing classified loans and the large volume of REO sales
during the nine months ended 1997. The ratio of nonperforming assets ("NPAs")
to total assets decreased from 1.83% at December 31, 1996, to 1.03% at September
30, 1997. This decrease is primarily due to decreased levels of NPAs at
September 30, 1997, compared to December 31, 1996 and to an increase in total
assets at September 30, 1997 compared to December 31, 1996.
19
<PAGE>
The following table presents net classified assets by property type at the
dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
-------------- ---------- ---------- ------------- --------------
(DOLLARS IN THOUSANDS)
Performing classified loans:
<S> <C> <C> <C> <C> <C>
Single family.......................... $ 3,521 $ 3,331 $ 2,757 $ 4,555 $ 10,054
Multifamily:
2 to 4 units........................... 4,455 4,856 5,527 6,030 9,374
5 to 36 units.......................... 58,694 62,509 50,306 60,785 146,050
37 units and over...................... 24,551 20,761 12,196 10,375 42,861
--------- -------- -------- --------- ----------
Total multifamily properties....... 87,700 88,126 68,029 77,190 198,285
Commercial and other...................... 11,373 9,788 9,342 29,503(1) 40,628(1)
--------- -------- -------- --------- ----------
Total performing classified loans..... 102,594 101,245 80,128 111,248 248,967
--------- -------- -------- --------- ----------
Nonperforming classified loans:
Single family............................. 4,501 5,980 7,001 8,019 7,478
Multifamily:
2 to 4 units.......................... 1,721 2,677 5,527 5,959 4,897
5 to 36 units......................... 10,006 15,745 21,041 18,071 19,200
37 units and over..................... 5,139 4,929 4,162 2,671 1,665
--------- -------- -------- --------- ----------
Total multifamily properties....... 16,866 23,351 30,730 26,701 25,762
Commercial and other...................... 437 3,845 1,982 1,405 3,240
--------- -------- -------- --------- ----------
Total nonperforming classified loans.. 21,804 33,176 39,713 36,125 36,480
--------- -------- -------- --------- ----------
Total classified loans............. 124,398 134,421 119,841 147,373 285,447
--------- -------- -------- --------- ----------
REO:
Single family............................. 2,992 4,095 5,211 3,185 3,548
Multifamily:
2 to 4 units.......................... 1,326 2,215 2,766 3,410 4,018
5 to 36 units......................... 10,911 12,992 11,218 13,574 12,331
37 units and over..................... 3,105 3,106 2,812 1,844 1,844
--------- -------- -------- --------- ----------
Total multifamily properties....... 15,342 18,313 16,796 18,828 18,193
Commercial and other...................... 635 2,432 2,933 3,950 4,475
--------- -------- -------- --------- ----------
Net REO before REO GVA................ 18,969 24,840 24,940 25,963 26,216
REO GVA................................... (500) (1,200) (1,300) (1,300) (1,000)
--------- -------- -------- --------- ----------
Total REO............................. 18,469 23,640 23,640 24,663 25,216
--------- -------- -------- --------- ----------
Other classified assets...................... 14,027(2) 1,404 1,382 2,060 2,503
--------- -------- -------- --------- ----------
Total classified assets............... $ 156,894 $159,465 $144,863 $ 174,096 $ 313,166
========= ======== ======== ========= ==========
</TABLE>
(1) Includes a hotel property loan with a balance of $18.4 million at
December 31, 1996.
(2) Includes the Libor Asset Trust 9601 investment security with a book value of
$12.3 million which was classified due to the performance of the underlying
collateral.
20
<PAGE>
Delinquent Loans
During the third quarter of 1997, total delinquent mortgage loans decreased
$10.4 million, or 21.9%, from June 30, 1997. The following table presents loan
delinquencies by number of days delinquent and by property type as of the dates
indicated. All assets are reported net of specific reserves and writedowns.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997
-------------- --------- ----------
(DOLLARS IN THOUSANDS)
Delinquencies by number of days:
<S> <C> <C> <C>
30 to 59 days................................................... 0.42% 0.41% 0.63%
60 to 89 days................................................... 0.12 0.26 0.24
90 days and over................................................ 0.76 1.01 1.48
------- ------- -------
Mortgage loan delinquencies to net mortgage loan portfolio........ 1.30% 1.68% 2.35%
======= ======= =======
Delinquencies by property type:
Single family:
30 to 59 days................................................... $ 3,881 $ 3,514 $ 4,933
60 to 89 days................................................... 1,246 1,469 1,947
90 days and over................................................ 4,501 5,617 6,770
------- ------- -------
9,628 10,600 13,650
------- ------- -------
Percent to applicable mortgage loan portfolio................. 1.53% 1.85% 2.72%
Multifamily (2 to 4 units):
30 to 59 days................................................... 1,161 1,528 1,856
60 to 89 days................................................... 436 741 958
90 days and over................................................ 1,608 2,544 5,527
------- ------- -------
3,205 4,813 8,341
------- ------- -------
Percent to applicable mortgage loan portfolio................. 0.99% 1.52% 2.70%
Multifamily (5 to 36 units):
30 to 59 days................................................... 5,198 2,894 5,100
60 to 89 days................................................... 1,627 5,160 3,545
90 days and over................................................ 10,006 13,406 21,041
------- ------- -------
16,831 21,460 29,686
------- ------- -------
Percent to applicable mortgage loan portfolio................. 1.23% 1.54% 2.18%
Multifamily (37 units and over):
30 to 59 days.................................................. 995 3,156 1,755
60 to 89 days................................................... -- -- --
90 days and over................................................ 5,139 3,037 4,162
------- ------- -------
6,134 6,193 5,917
------- ------- -------
Percent to applicable mortgage loan portfolio................. 1.96% 1.94% 1.94%
Commercial and Industrial:
30 to 59 days................................................... 824 545 3,184
60 to 89 days................................................... -- -- 115
90 days and over................................................ 437 3,846 1,982
------- ------- -------
1,261 4,391 5,281
------- ------- -------
Percent to applicable mortgage loan portfolio................. 0.58% 1.96% 2.70%
Total mortgage loan delinquencies, net............................ $37,059 $47,457 $62,875
======= ======= =======
Mortgage loan delinquencies to net mortgage loan portfolio........ 1.30% 1.68% 2.35%
======= ======= =======
</TABLE>
The following table presents net delinquent mortgage loans at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
------------- -------- --------- ------------ -------------
(DOLLARS IN THOUSANDS)
Number of days delinquent:
<S> <C> <C> <C> <C> <C>
30 to 59 days................................. $12,059 $11,638 $16,828 $14,959 $22,748
60 to 89 days................................. 3,309 7,370 6,565 11,668 8,260
90 days and over 21,691 28,449 39,482 35,853 36,249
------- ------- ------- ------- -------
Total delinquencies........................... $37,059 $47,457 $62,875 $62,480 $67,257
======= ======= ======= ======= =======
</TABLE>
21
<PAGE>
Nonperforming Assets
All assets and ratios are reported net of specific reserves and writedowns
unless otherwise stated. The following table presents asset quality details at
the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1996 1996
-------------- ---------- ---------- ------------- --------------
(DOLLARS IN THOUSANDS)
NPAs by Type:
<S> <C> <C> <C> <C> <C>
NPLs $ 21,804 $ 33,176 $ 39,713 $ 36,125 $ 36,480
REO, net of REO GVA........................ 18,469 23,640 23,640 24,663 25,216
---------- -------- -------- ----------- -----------
Total NPAs $ 40,273 $ 56,816 $ 63,353 $ 60,788 $ 61,696
========== ======== ======== =========== ===========
NPAs by Composition:
Single family residences $ 7,493 $ 10,075 $ 12,212 $ 11,204 $ 10,968
Multifamily 2 to 4 units................... 3,047 4,892 8,293 9,369 8,974
Multifamily 5 units and over............... 29,161 36,772 39,233 36,160 35,040
Commercial and other....................... 1,072 6,277 4,915 5,355 7,714
REO GVA.................................... (500) (1,200) (1,300) (1,300) (1,000)
---------- -------- -------- ----------- -----------
Total NPAs................................. 40,273 56,816 63,353 60,788 61,696
Total troubled debt restructuring
------------- --------- --------- ------------ -------------
("TDR").................................... 46,447 44,828 42,696 45,196 49,575
---------- -------- -------- ----------- -----------
Total TDRs and NPAs $ 86,720 $101,644 $106,049 $ 105,984 $ 111,271
========== ======== ======== =========== ===========
Classified Assets:
NPAs $ 40,273 $ 56,816 $ 63,353 $ 60,788 $ 61,696
Performing classified loans................ 102,594 101,245 80,128 111,248(1) 248,967(1)
Other classified assets.................... 14,027(2) 1,404 1,382 2,060 2,503
---------- -------- -------- ----------- -----------
Total classified assets $ 156,894 $159,465 $144,863 $ 174,096 $ 313,166
========== ======== ======== =========== ===========
Classified Asset Ratios:
NPLs to total assets.......................... 0.56% 0.94% 1.21% 1.08% 1.10%
NPAs to total assets.......................... 1.03% 1.61% 1.92% 1.83% 1.86%
TDRs to total assets.......................... 1.18% 1.27% 1.30% 1.36% 1.49%
NPAs and TDRs to total assets................. 2.21% 2.88% 3.22% 3.18% 3.35%
Classified assets to total assets............. 4.00% 4.51% 4.40% 5.23% 9.42%
REO to NPAs................................... 45.86% 41.61% 37.31% 40.57% 40.87%
NPLs to NPAs.................................. 54.14% 58.39% 62.69% 59.43% 59.13%
</TABLE>
- ----------------
(1) Includes a hotel property loan with a balance of $18.4 million.
(2) Includes the Libor Asset Trust 9601 investment security with a book value of
$12.3 million which was classified due to the performance of the underlying
collateral.
Direct costs of foreclosed real estate operations totaled approximately $1.4
million for the three months ended September 30, 1997 and 1996, and $4.2 million
and $4.4 million for the nine months ended September 30, 1997 and 1996,
respectively. The following table provides information about the change in the
book value and the number of properties owned and obtained through foreclosure
for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ --------------------------
1997 1996 1997 1996
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
REO net book value............................. $ 18,469 $25,216 $ 18,469 $25,216
Net (decrease) increase in REO for the......... $ (5,171) $ 4,697 $ (6,194) $ 5,695
period
Number of real properties owned................ 110 152 110 152
Increase (decrease) increase in number of
properties.................................... (32) 32 (21) 43
owned for the period
Number of properties foreclosed for the........ 61 60 210 182
period
Gross book value of properties foreclosed...... $ 16,977 $20,875 $ 58,772 $57,258
Average gross book value of properties......... $ 278 $ 348 $ 280 $ 315
foreclosed
</TABLE>
22
<PAGE>
Allowance for Estimated Loan and REO Losses
The following table summarizes the Bank's reserves, writedowns and certain
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
----------------- ------------------ -----------------
Loans: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GVA............................................................. $ 34,664 $25,308 $29,281
SVA............................................................. 23,744 32,200 33,551
-------- ------- -------
Total allowance for estimated losses (1) (2)................... $ 58,408 $57,508 $62,832
======== ======= =======
Writedowns (3).................................................. $ 183 $ 146 $ 216
======== ======= =======
Total allowance and loan writedowns to gross loans (3).......... 2.02% 2.09% 2.23%
Total loan allowance to gross loans (4)......................... 2.01% 2.08% 2.22%
Loan GVA to loans (4)........................................... 1.21% 0.93% 1.06%
Loan GVA to NPLs................................................ 158.98% 70.06% 80.27%
NPLs to total loans............................................. 0.77% 1.34% 1.33%
REO:
REO GVA......................................................... $ 500 $ 1,300 $ 1,000
SVA............................................................. 951 781 1,975
-------- ------- -------
Total allowance for estimated losses........................... $ 1,451 $ 2,081 $ 2,975
======== ======= =======
Writedowns (3).................................................. $ 9,581 $14,819 $15,242
======== ======= =======
Total REO allowance and REO writedowns to
gross REO......................................................... 37.40% 40.66% 41.94%
Total REO allowance to gross REO (5)............................ 7.28% 7.78% 10.55%
REO GVA to REO (4)......................................... 2.64% 5.01% 3.81%
Total Loans and REO:
GVA............................................................. $ 35,164 $26,608 $30,281
SVA............................................................. 24,695 32,981 35,526
-------- ------- -------
Total allowance for estimated losses (2)....................... $ 59,859 $59,589 $65,807
======== ======= =======
Writedowns (3).................................................. $ 9,764 $14,965 $15,458
======== ======= =======
Total allowance and writedowns to gross loans and
REO............................................................... 2.37% 2.66% 2.83%
Total allowance to gross loans and REO (4)...................... 2.05% 2.14% 2.30%
Total GVA to loans and REO (4).................................. 1.22% 0.97% 1.08%
Total GVA to NPAs............................................... 86.24% 42.86% 48.30%
</TABLE>
(1) All allowances for loan losses are for the Bank's portfolio of mortgage
loans.
(2) At September 30, 1997, December 31, 1996 and September 30, 1996, the
allowance for estimated loan losses includes $16.9 million, $16.7 million
and $19.1 million, respectively, of remaining loan GVA and SVA for the Plan.
See "--Asset Quality--Accelerated Asset Resolution Plan."
(3) Writedowns include cumulative charge-offs on outstanding loans and REO as of
the dates indicated.
(4) Loans and REO, as applicable, in these ratios are calculated prior to their
reduction for loan and REO GVA, respectively, but are net of specific
reserves and writedowns.
(5) Net of writedowns.
23
<PAGE>
The following schedule summarizes the activity in the Bank's allowances for
estimated loan and real estate losses:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------
REAL ESTATE REAL ESTATE
LOANS (1) OWNED TOTAL LOANS (1) OWNED TOTAL
--------- ------------ --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance on July 1,........................... $59,964 $ 2,599 $ 62,563 $ 73,722 $2,787 $ 76,509
Provision for losses...................... 4,251 (333) 3,918 3,900 731 4,631
Charge-offs............................... (8,184) (1,094) (9,278) (15,199) (543) (15,742)
Recoveries and other...................... 2,377 279 2,656 409 -- 409
------- -------- -------- --------- ------ ---------
Balance on September 30,..................... $58,408 $ 1,451 $ 59,859 $ 62,832 $2,975 $ 65,807
======= ======== ======== ========= ====== =========
</TABLE>
- ------------------
(1) All allowances for loan losses are for the Bank's portfolio of mortgage
loans.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------
REAL ESTATE REAL ESTATE
LOANS (1) OWNED TOTAL LOANS (1) OWNED TOTAL
---------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance on January 1,........................ $ 57,508 $ 2,081 $ 59,589 $ 89,435 $ 3,492 $ 92,927
Provision for losses...................... 12,753 1,029 13,782 11,705 1,978 13,683
Charge-offs............................... (30,688) (2,369) (33,057) (40,209) (2,495) (42,704)
Allowances related to acquisition (2)..... 12,770 120 12,890 -- -- --
Recoveries and other...................... 6,065 590 6,655 1,901 -- 1,901
--------- -------- --------- --------- -------- ---------
Balance on September 30,..................... $ 58,408 $ 1,451 $ 59,859 $ 62,832 $ 2,975 $ 65,807
========= ======== ========= ========= ======== =========
</TABLE>
(1) All allowances for loan losses are for the Bank's portfolio of mortgage
loans.
(2) Included in the estimated loan losses related to the Hancock acquisition is
$5.8 million associated with the Plan. See "--Asset Quality-- Accelerated
Asset Resolution Plan."
The following table details the activity affecting specific loss reserves for
the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
-------------------------------------- ----------------------------------------
REAL REAL
ESTATE ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period... $ 26,474 $ 1,399 $ 27,873 $ 32,200 $ 781 $ 32,981
Allocations from GVA to
specific................... 5,454 646 6,100 19,117 2,419 21,536
reserves
Charge-offs................... (8,184) (1,094) (9,278) (30,688) (2,369) (33,057)
Specific loss reserves from
acquisition................ -- -- -- 3,115 120 3,235
-------- -------- -------- --------- -------- ---------
Balance at end of period......... $ 23,744 $ 951 $ 24,695 $ 23,744 $ 951 $ 24,695
indicated....................... ======== ======== ======== ========= ======== =========
</TABLE>
24
<PAGE>
NONINTEREST INCOME (EXPENSE)
Noninterest income has three major components: (a) noninterest income from
ongoing operations, which includes loan fee income, gains or losses on loans
held for sale, fees earned on the sale of uninsured investment products and
retail banking fees, (b) income/expenses associated with REO, which includes
both the provision for real estate losses as well as income/expenses incurred by
the Bank associated with the foreclosure and operation of its REO properties and
(c) gains and losses on the sales of loan servicing, investment securities and
MBS. Items (b) and (c) can fluctuate widely, and could therefore mask the
underlying fee generating performance of the Company on an ongoing basis.
Net noninterest income increased by $1.8 million from $0.5 million in the
third quarter 1996 to $2.3 million in the third quarter 1997. The major
components of this increase are: (a) decreased real estate operations of $1.0
million primarily due to gains on sales of foreclosed properties and adjustments
to the level of REO GVA required based on recent experience, (b) fee income on
deposits and other income increased by $0.6 million primarily as a result of
cash service fees and retirement income plan assessment fees, (b) fee income
from uninsured investment products increased by $0.4 million primarily as a
result of increased sales. These favorable variances were partially offset by a
decrease in net gains from securities activities of $0.2 million primarily as a
result of decreased sales during the third quarter of 1997.
Net noninterest income increased by $4.3 million from net noninterest income
of $1.7 million in the nine months ended September 30, 1996 to net noninterest
income of $6.1 million in the nine months ended September 30, 1997. The major
components of this increase are: (a) net gains from securities activities in the
first nine months of 1997 increased by $1.9 million primarily as a result of
increased sales due to the interest rate environment and (b) fee income from
uninsured investment products increased by $1.2 million primarily as a result of
increased sales and (c) decreased real estate operations of $1.2 million
primarily due to gains on sales of foreclosed properties and adjustments to the
level of REO GVA required based on recent experience.
OPERATING EXPENSES
Operating expenses decreased by $19.0 million to $16.5 million for the third
quarter 1997 compared to $35.4 million for the third quarter 1996. The change
was primarily due to a decrease of $19.1 million of FDIC insurance costs
resulting from the special one-time recapitalization payment of $18.0 million to
the SAIF in the third quarter of 1996 and an upgrade in the Bank's assessment
classification.
Operating expenses decreased by $22.7 million to $45.9 million for the first
nine months of 1997 compared to $68.6 million for the comparable 1996 period.
The change was primarily due to (a) a decrease of $22.0 million of FDIC
insurance costs resulting from the special one-time recapitalization payment of
$18.0 million to the SAIF in the third quarter of 1996 and an upgrade in the
Bank's assessment classification and (b) a decrease of $1.0 million in other
expenses primarily due to lower legal settlement costs related to certain
litigation. These favorable variances were partially offset by increases in
occupancy expense primarily due to the acquisition of five branches associated
with the Hancock acquisition completed in the second quarter of 1997.
Decreased operating expenses resulted in a decrease in the annualized
operating expense ratio to 1.77% for the nine months ended September 30, 1997
from 2.04% for the same period in 1996, based on the total average asset size of
the Company of approximately $3.5 billion for the nine months ended September
30, 1997 and approximately $3.3 billion for the same 1996 period.
Due to the sensitivity of the operating expense ratio to changes in the size
of the balance sheet, management also looks at trends in the efficiency ratio to
assess the changing relationship between operating expenses and income. The
efficiency ratio measures the amount of cost expended by the Company to generate
a given level of revenues in the normal course of business. It is computed by
dividing total operating expense by net interest income and noninterest income,
excluding infrequent items. A decrease in the efficiency ratio is favorable in
that it indicates less expenses were incurred to generate a given level of
revenue.
25
<PAGE>
The efficiency ratio improved to 70.09% for the third quarter 1997 from 74.85%
for the third quarter 1996. The efficiency ratio also improved between the nine
months ended September 30, 1997 and 1996 reducing to 65.65% from 70.05%,
respectively. This decrease was due to increased noninterest income and
decreased operating expense.
Year 2000
The Company utilizes numerous computer software programs and systems across
the organization to support ongoing operations. Many of these programs and
systems may not be able to appropriately interpret and process dates into the
year 2000. To the extent that programs and systems are unable to process into
the year 2000, some degree of modification or replacement of such systems may be
necessary. The Company has established a task force to develop a comprehensive
year 2000 plan with the goal of completing updates to key systems by December
31, 1998. Given information currently known about the Company's systems and
servicers, the preliminary expense estimate for year 2000 corrective activities
is $3.5 to $4.0 million, of which a significant portion would be incurred as
part of normal operations. No assurances can be given that the Company will be
successful in addressing the year 2000 issues within this estimated timeframe
and cost.
INCOME TAXES
The Company's combined federal and state statutory tax rate is approximately
42.0% of earnings before income taxes. The effective tax benefit rates of 82.9%
and 75.6% on earnings before income taxes for the quarter and nine months ended
September 30, 1997, respectively, reflect the federal and state tax benefit
attributable to the utilization of net operating loss carryforwards, and the
partial recognition of the deferred tax asset. The tax benefit of $1.7 million
for the quarter ended September 30, 1997 consisted of a $2.0 million reduction
in the valuation allowance for the Company's deferred tax asset offset by a $0.3
million current tax expense. This is compared to the tax benefit of $7.0
million from the reduction of the related valuation allowance offset by a $0.5
million current tax expense for the nine months ended September 30, 1997. The
effective tax benefit rates of 6.8% and 8.0% on earnings before income taxes for
the quarter and nine months ended September 30, 1996, respectively, reflect the
federal income tax benefit attributable to the third quarter filing of a loss
carryback claim under Internal Revenue Code ("IRC") Section 172(f), as
discussed in the following paragraph.
Various federal Form 1120Xs "Amended U.S. Corporation Income Tax Return" were
filed in 1996 for years 1986 through 1989, 1991, 1992 and 1994 to reflect the
10-year loss carryback under IRC Section 172(f) for qualifying deductions
through August 4, 1994. These returns were filed jointly with the Bank's former
holding company, Citadel Holding Corporation. These amended returns, if
accepted in total, would result in a net refund of $19.4 million to Fidelity.
IRC Section 172(f) is an area of the tax law without significant legal
precedent. Fidelity anticipates that the Internal Revenue Service may challenge
all or part of Fidelity's carryback qualifying deductions under IRC Section
172(f). Therefore, no assurances can be made as to Fidelity's entitlement to
such claim. Fidelity has recorded $1.1 million of the tax benefit with respect
to these amended tax returns.
As of December 31, 1996 a valuation allowance was provided for the total net
deferred tax asset. Under Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes, the reduction in valuation allowance is
dependent upon a "more likely than not" expectation of realization of the
deferred tax asset, based upon the weight of available evidence. The Company
has realized book earnings, before unusual items, for each of the seven
consecutive quarters ended September 30, 1997. The loss reflected for the
quarter ended September 30, 1996, was attributable to a one-time $18 million
SAIF assessment which is considered a nonrecurring item. After consideration of
the Company's recent earnings history and other available evidence, management
of the Company determined that under the criteria of SFAS No. 109 it was
appropriate to record a $1.7 million and $6.5 million net tax benefit for the
quarter and nine months ended September 30, 1997, respectively.
The analysis of available evidence is performed each quarter utilizing the
"more likely than not" criteria required by SFAS 109 to determine the amount, if
any, of the deferred tax asset to be realized. Accordingly, there can be no
assurance that the Company will recognize additional portions of its deferred
tax asset in future
26
<PAGE>
periods. Moreover, the criteria of SFAS No. 109 could require the partial or
complete recapture of the deferred tax benefit into expense in future periods.
REGULATORY CAPITAL COMPLIANCE
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the Office of Thrift Supervision (the "OTS") to implement a system
providing for regulatory sanctions against institutions that are not adequately
capitalized. The severity of these sanctions increases to the extent that an
institution's capital continues to decline. Under FDICIA, the OTS issued the
Prompt Corrective Action ("PCA") regulations which established specific capital
ratios for five separate capital categories as set forth below:
<TABLE>
<CAPTION>
CORE CAPITAL TO CORE CAPITAL
ADJUSTED TO TOTAL CAPITAL
TOTAL ASSETS RISK-WEIGHTED TO
(LEVERAGE RATIO) ASSETS RISK-WEIGHTED ASSETS
--------------------------------------------------------------------
<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 capital ratios required by FDICIA for an
institution to be considered well capitalized and Fidelity's regulatory capital
at September 30, 1997 as compared to such ratios.
<TABLE>
<CAPTION>
CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO
ADJUSTED RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS ASSETS ASSETS
--------------------- ---------------------- ----------------------------
BALANCE % BALANCE % BALANCE %
----------- ------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Fidelity's regulatory capital $ 225,800 5.76% $ 225,800 10.38% $ 253,100 11.63%
Well capitalized requirement 195,800 5.00 130,500 6.00 217,600 10.00%
---------- ----- ---------- ------ ---------- ------
Excess capital $ 30,000 0.76% $ 95,300 4.38% $ 35,500 1.63%
========== ===== ========== ====== ========== ======
Adjusted assets (1) $3,916,300 $2,175,600 $2,175,600
========== ========== ==========
</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 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.
FDICIA also required the OTS and the federal bank regulatory agencies to
revise their risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk, and risks
of nontraditional activities. On January 1, 1994, the OTS proposed an interest
rate risk component for its regulatory capital rule. Under the proposed rule,
savings institutions with "above-normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. No interest rate risk component would have
been required to be added to the Bank's risk-based capital requirement at
September 30, 1997 had the rule been in effect.
The Bank is also subject to OTS capital regulations under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). These
regulations require Fidelity to maintain: (a) tangible capital of at least 1.5%
of adjusted total assets (as defined in the regulations), (b) core capital of at
least 3% of adjusted total assets (as defined in the regulations) and (c) total
capital of at least 8.0% of risk-weighted assets (as defined in the
regulations).
27
<PAGE>
The following table summarizes the regulatory capital requirements under
FIRREA for Fidelity at September 30, 1997. As indicated in the table, Fidelity's
capital levels at September 30, 1997 exceeded all three of the currently
applicable minimum FIRREA capital requirements.
<TABLE>
<CAPTION>
RISK-BASED
TANGIBLE CAPITAL CORE CAPITAL CAPITAL
------------------------- ------------------------- --------------------------
BALANCE % BALANCE % BALANCE %
------------ ---------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Stockholders' equity (1)............... $ 226,000 $ 226,000 $ 226,000
Unrealized losses on securities........ 6,600 6,600 6,600
Adjustments
Goodwill............................ (6,500) (6,500) (6,500)
Intangible assets................... (10,100) (300) (300)
Nonqualifying mortgage servicing
rights.......................... -- -- --
Nonincludable subsidiaries.......... -- -- --
Equity investments.................. -- -- --
GVA................................. -- -- 27,300
---------- ---------- ----------
Regulatory capital (2)................. 216,000 5.53% 225,800 5.76% 253,100 11.63%
Required minimum....................... 58,600 1.50 117,500 3.00 174,000 8.00
---------- --------- ---------- --------- ---------- ----------
Excess capital......................... $ 157,400 4.03% $ 108,300 2.76% $ 79,100 3.63%
========== ========= ========== ========= ========== ==========
Adjusted assets (3).................... $3,906,600 $3,916,300 $2,175,600
========== ========== ==========
</TABLE>
(1) Fidelity's total stockholders' equity, in accordance with generally accepted
accounting principles, was 5.88% of its total assets at September 30, 1997.
(2) Both the OTS and the FDIC may examine the Bank as part of their legally
prescribed oversight of the industry. Based on their examinations, the
regulators can direct that the Bank's financial statements be adjusted in
accordance with their findings.
(3) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital
requirements.
CAPITAL RESOURCES AND LIQUIDITY
The Bank derives funds from deposits, FHLB advances, securities sold under
agreements to repurchase, and other short-term and long-term borrowings. In
addition, funds are generated from loan payments and payoffs as well as from the
sale of loans and investments.
FHLB Advances
The Bank had net increases of FHLB advances of $410.0 million and $46.3
million for the nine months ended September 30, 1997 and 1996, respectively.
Commercial paper
Commercial paper outstanding decreased by $40.0 million during the nine months
ended September 30, 1997 compared to an increase of $45.0 million for the nine
months ended September 30, 1996. The commercial paper program expired on August
5,1997.
Mortgage-backed bond
The Bank retired its $100 million mortgage-backed bonds on April 15, 1997.
The funds were replaced with FHLB advances.
28
<PAGE>
Loan payments and payoffs
Loan principal payments, including prepayments and payoffs, provided $177.2
million for the nine months ended September 30, 1997 compared to $189.8 million
for the same period in 1996. The Bank expects that loan payments and
prepayments will remain a significant funding source.
Sales of securities
The sale of investment securities and MBS provided $299.2 million for the nine
months ended September 30, 1997 compared to $114.2 million for the nine months
ended September 30, 1996. The Bank held $664.4 million and $326.1 million of
investment securities and MBS in its available for sale portfolio as of
September 30, 1997 and 1996, respectively.
Undrawn sources
Fidelity maintains other sources of liquidity to draw upon, which at September
30, 1997 included (a) a line of credit with the FHLB with $318.1 million
available; (b) $320.6 million in unpledged securities available to be placed in
reverse repurchase agreements or sold; and (c) $663.1 million of unpledged
loans, some of which would be available to collateralize additional FHLB or
private borrowings, or be securitized.
Deposits
At September 30, 1997, Fidelity had deposits of $2.8 billion. The following
table presents the distribution of the Bank's deposit accounts:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------------------- ----------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Money market savings accounts................................. $ 74,124 2.6% $ 65,605 2.6%
Checking accounts............................................. 322,017 11.5 287,711 11.5
Passbook accounts............................................. 55,373 2.0 53,665 2.2
---------- ------ ---------- ------
Total transaction accounts................................. 451,514 16.1 406,981 16.3
---------- ------ ---------- ------
Certificates of deposit $100,000 and over..................... 629,516 22.4 543,336 21.8
Certificates of deposit less than $100,000.................... 1,721,153 61.5 1,545,616 61.9
---------- ------ ---------- ------
Total certificates of deposit.............................. 2,350,669 83.9 2,088,952 83.7
---------- ------ ---------- ------
Total deposits............................................. $2,802,183 100.0% $2,495,933 100.0%
========== ====== ========== ======
</TABLE>
The Company is currently eligible to accept brokered deposits; however, there
were no brokered deposits outstanding at September 30, 1997 and December 31,
1996.
Repurchase Agreements
From time to time the Company enters into reverse repurchase agreements by
which it sells securities with an agreement to repurchase the same securities at
a specific future date (overnight to one year). The Company deals only with
dealers who are recognized as primary dealers in U.S. Treasury securities by the
Federal Reserve Board or perceived by management to be financially strong. There
were no reverse repurchase agreements outstanding at September 30, 1997 and
December 31, 1996. In the nine months ended September 30, 1997, the Company
borrowed and repaid funds from reverse repurchase agreements of $25.5 million
compared to $171.7 million of funds borrowed and repaid during the nine months
ended September 30, 1996.
29
<PAGE>
Loan Fundings
Fidelity originated and purchased $182.3 million of gross loans (excluding
Fidelity's refinancings) in the nine months ended September 30, 1997 compared to
$1.4 million in the same period of 1996.
Contingent or potential uses of funds
The Bank had unfunded loans totaling $2.3 million at September 30, 1997 and no
unfunded loans at December 31, 1996. The unfunded loans at September 30, 1997
were assumed as part of the Hancock acquisition.
Liquidity
The OTS regulations require the maintenance of an average daily balance of
liquid assets of at least 5% of the average daily balance of the net
withdrawable accounts and short-term borrowings (the "regulatory liquidity
ratio"). The Bank's average regulatory liquidity ratio was 8.26% and 5.34% for
the month ended September 30, 1997 and 1996, respectively.
Holding Company Liquidity
At September 30, 1997, Bank Plus had cash and cash equivalents of $0.7
million and no material potential cash producing operations or assets other than
its investments in Fidelity and Gateway. Accordingly, Bank Plus is substantially
dependent on dividends from Fidelity and Gateway in order to fund its cash
needs, including its payment obligations on the $51.5 principal amount of Senior
Notes issued in exchange for Fidelity's Preferred Stock. In connection
therewith, Fidelity's Board of Directors has approved the payment of a cash
dividend to Bank Plus in the approximate amount of $1.6 million, to assist in
funding Bank Plus' future payment obligations with respect to the Senior Notes.
See "--Recent Developments--Exchange Offer". Both Gateway's and Fidelity's
ability to pay dividends or otherwise provide funds to Bank Plus are subject to
significant regulatory restrictions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank was named as a defendant in a purported class action lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock by the Bank in 1994 as part of the Bank's previously reported 1994
Restructuring and Recapitalization. The suit was filed by Harbor Finance
Partners ("Harbor") in an alleged class action complaint in the United States
District Court-Central District of California on July 28, 1995 and originally
named as defendants the Bank, Citadel Holding Corporation ("Citadel"), Richard
M. Greenwood (the Bank's chief executive officer and Citadel's former chief
executive officer), J. P. Morgan Securities, Inc., and Deloitte & Touche LLP.
The suit alleged that false or misleading information was provided by the
defendants in connection with the Bank's 1994 Restructuring and Recapitalization
and stock offering and that the defendants knew and failed to disclose negative
information concerning the Bank. A motion to dismiss the original complaint was
filed by the Bank, and was granted without opposition. Thereafter, Harbor filed
an amended complaint which did not include J. P. Morgan Securities, Inc. and
Deloitte & Touche LLP as defendants and which contained some factual and legal
contentions which were different from those set forth originally. On May 21,
1996, the court granted the Bank's, Citadel's and Greenwood's motion to dismiss
the first amended complaint, but granted leave to amend. Following the filing of
a second amended complaint, the Bank, Citadel and Greenwood filed a third motion
to dismiss. At a hearing on July 22, 1996, the court ruled that the case should
be dismissed with prejudice and a formal order to that effect was submitted to
the court for execution. Harbor lodged certain objections to the proposed order,
including objections that the state law claims in the second amended complaint
should not be dismissed with prejudice. The court's order of dismissal was
entered on August 5, 1996 and provided that all claims asserted in the second
amended complaint under federal law were dismissed with prejudice and those
under state law were dismissed without prejudice to their renewal in state court
pursuant
30
<PAGE>
to 28 U.S.C. (S)1367(b)(3). Harbor has filed a notice of appeal from the order
of dismissal. Briefing in the appeal is now concluded and the appeal awaits
hearing and disposition. On August 30, 1996, Harbor filed an alleged class
action complaint in state court containing allegations similar to those raised
in the federal court action as well as claims for unfair business practices to
which the Bank, Citadel and Greenwood filed demurrers seeking to have the case
dismissed for failure to state a legally sufficient claim. These demurrers were
sustained without leave to amend on March 13, 1997. On May 5, 1997, an order of
dismissal was entered in the trial court in response to which Harbor has filed a
notice of appeal. The Bank filed a motion to recover its attorney fees in
obtaining the order of dismissal, which was initially heard on August 4, 1997
and continued to August 29, 1997 in order to receive further evidence as to the
attorney fees claim filed by the Bank. After further hearing, the court, on
September 19, 1997, entered an order against Harbor awarding the Bank
approximately $100,000 as reasonable attorney fees arising out of the state
court proceedings. Following this order, settlement discussions were held and
such discussions are continuing.
In addition, the Bank is a defendant in several individual and purported class
actions brought by several borrowers which raise claims with respect to the
manner in which the Bank serviced certain adjustable rate mortgages which were
originated during the period 1983 through 1988. The actions have been filed
between July 1, 1992 and February of 1995. In one case the Bank won a summary
judgment in Federal District Court. This judgment was appealed. On July 25,
1996, the Ninth Circuit Court of Appeals filed its opinion which affirmed in
part, reversed in part and remanded back to the Federal District Court for
further proceedings. The Federal District Court recently ruled in favor of
certifying a class in that action. In three Los Angeles Superior Court cases
judgments in favor of the Bank were entered in all three cases. The plaintiff
has appealed the judgments in all three cases. One appeal has been dismissed.
Two appeals, one decided on June 26, 1997, and one decided on July 30, 1997,
affirmed the judgment of the Superior Court in favor of the Bank. Plaintiff, in
the latter case, has petitioned the California Superior Court for review. Two
other cases are pending in the Los Angeles Superior Court. In these actions the
plaintiffs' principal claim is that the Bank selected an inappropriate review
date to consult the index upon which the rate adjustment is based that was one
or two months earlier than what was required under the terms of the notes. In a
declining interest rate environment, the lag effect of an earlier review period
defers the benefit to the borrower of such decline, and the reverse would be
true in a rising interest rate environment. The Bank strongly disputes these
contentions and is vigorously defending these suits. The legal responsibility
and financial exposure of these claims presently cannot be reasonably
ascertained and, accordingly, there is a risk that the final outcome of one or
more of these claims could result in the payment 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 the likelihood of such a result is probable
and has not established any specific litigation reserves with respect to such
lawsuits.
In the normal course of business, the Company and certain of its subsidiaries
have a number of other lawsuits and claims pending. Although there can be no
assurance, the Company's management and its counsel believe that none of the
foregoing lawsuits or claims will have a material adverse effect on the
financial condition or business of the Company.
31
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of March 27, 1996, among Fidelity, Bank Plus
Corporation and Fidelity Interim Bank. (incorporated by reference to Exhibit 2.1 to the Form 8-B
of Bank Plus filed with the SEC on April 22, 1996 (the "Form 8-B")).*
2.2 Agreement and Plan of Merger, dated June 25, 1997, among Bank Plus Corporation, Fidelity and
Hancock Savings Bank, F.S.B (incorporated by reference to Exhibit 2.2 to the Form S-4 of Bank
Plus filed with the SEC on June 30, 1997).*
3.1 Certificate of Incorporation of Bank Plus Corporation (incorporated by reference to Exhibit 3.1 to
The Form 8-B).*
3.2 Bylaws of Bank Plus Corporation (incorporated by reference to Exhibit 3.2 to the Form 8-B).*
4.1 Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Form 8-B).*
4.2 Indenture dated as of July 18, 1997 between Bank Plus Corporation and The Bank of New York, as
trustee relating to the 12% Senior Notes due July 18, 2007 of Bank Plus Corporation (incorporated
by reference to Exhibit 4.4 of the Registration Statement on Form S-8 of Bank Plus filed on
September 4, 1997).*
10.1 Settlement Agreement between Fidelity, Citadel and certain lenders, dated as of June 3, 1994 (the
"Letter Agreement") (incorporated by reference to Exhibit 10.1 to the Form 8-B).*
10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, 1994 (incorporated by reference to
Exhibit 10.2 to the Form 8-B).*
10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 (incorporated by reference to
Exhibit 10.3 to the Form 8-B).*
10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 (incorporated by reference to
Exhibit 10.4 to the Form 8-B).*
10.5 Mutual Release, dated as of August 4, 1994, between Fidelity, Citadel and certain lenders
(incorporated by reference to Exhibit 10.5 to the Form 8-B).*
10.6 Mutual Release between Fidelity, Citadel and The Chase Manhattan Bank, NA, dated June 17,
1994 (incorporated by reference to Exhibit 10.6 to the Form 8-B).*
10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13, 1994, between Fidelity and
Colony Capital, Inc. (incorporated by reference to Exhibit 10.7 to the Form 8-B).*
10.8 Real Estate Purchase Agreement, dated as of August 3, 1994, between Fidelity and CRI
(incorporated by reference to Exhibit 10.8 to the Form 8-B).*
10.9 Loan and REO Purchase Agreement (Secondary), dated as of July 12, 1994, between Fidelity and
EMC Mortgage Corporation (incorporated by reference to Exhibit 10.9 to the Form 8-B).*
10.10 Loan and REO Purchase Agreement (Secondary), dated as of July 21, 1994, between Fidelity and
International Nederlanden (US) Capital Corporation, Farallon Capital Partners, L.P., Tinicum
Partners, L.P. and Essex Management Corporation (incorporated by reference to Exhibit 10.10 to
the Form 8-B).*
10.11 Purchase of Assets and Liability Assumption Agreement by and between Home Savings of
America, FSB and Fidelity, dated as of July 19, 1994 (incorporated by reference to Exhibit 10.11
to the Form 8-B).*
10.12 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity and related loan documents
(3943 Veselich Avenue) (incorporated by reference to Exhibit 10.12 to the Form 8-B).*
10.13 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity and related loan documents
(23200 Western Avenue) (incorporated by reference to Exhibit 10.13 to the Form 8-B).*
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
<S> <C>
10.14 Promissory Note, dated August 3, 1994, by CRI in favor of Fidelity and related loan documents
(1661 Camelback Road) (incorporated by reference to Exhibit 10.14 to the Form 8-B).*
10.15 Guaranty Agreement, dated August 3, 1994, by Citadel in favor of Fidelity (incorporated by
reference to Exhibit 10.15 to the Form 8-B).*
10.16 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and between Citadel and Fidelity
(incorporated by reference to Exhibit 10.16 to the Form 8-B).*
10.17 Option Agreement, dated as of August 4, 1994, by and between Fidelity and Citadel (incorporated
by reference to Exhibit 10.17 to the Form 8-B).*
10.18 Executive Employment Agreement, dated as of August 1, 1997, between Richard M. Greenwood and
Fidelity (incorporated by reference to Exhibit 10.18 to the quarterly report on Form 10Q for the
quarter ended June 30, 1997).*
10.19 Guaranty of Employment Agreement, dated as of August 1, 1997, between Richard M. Greenwood and
Bank Plus (incorporated by reference to Exhibit 10.19 to the quarterly report on Form 10Q for the
quarter ended June 30, 1997).*
10.20 Amended Service Agreement between Fidelity and Citadel dated as of August 1, 1994
(incorporated by reference to Exhibit 10.19 to the Form 8-B).*
10.21 Side letter, dated August 3, 1994, between Fidelity and CRI (incorporated by reference to
Exhibit 10.20 to the Form 8-B).*
10.22 Placement Agency Agreement, dated July 12, 1994, between Fidelity, Citadel and J.P. Morgan
Securities Inc. (incorporated by reference to Exhibit 10.21 to the Form 8-B).*
10.23 Stock Purchase Agreement, dated as of August 3, 1994, between Fidelity and Citadel (incorporated
by reference to Exhibit 10.22 to the Form 8-B).*
10.24 Litigation and Judgment Assignment and Assumption Agreement, dated as of August 3, 1994,
between Fidelity and Citadel (incorporated by reference to Exhibit 10.23 to the Form 8-B).*
10.25 Amended and Restated 1996 Stock Option Plan (incorporated by reference to Exhibit 10.24 to the
quarterly report on Form 10Q for the quarterly period ended March 31, 1997).*
10.26 Retirement Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.25 to the
Form 8-B).*
10.27 Form of Severance Agreement between the Bank and Mr. Sanders (incorporated by reference to
Exhibit 10.26 to the Form 8-B).*
10.28 Form of Change in Control Agreement between the Bank and Mr. Greenwood (incorporated by reference
to Exhibit 10.28 to the quarterly report on Form 10Q for the quarter ended June 30, 1997).*
10.29 Form of Severance and Change in Control Agreement between the Bank and each of Messrs. Austin,
Evans & Taylor (incorporated by reference to Exhibit 10.29 to the quarterly report on Form 10Q for
the quarter ended June 30, 1997).*
10.30 Form of Severance and Change in Control Agreement between the Bank and each of Messrs. Condon, &
Stutz (incorporated by reference to Exhibit 10.30 to the quarterly report on Form 10Q for the
quarter ended June 30, 1997).*
10.31 Form of Severance Agreement between the Bank and Mr. Renstrom (incorporated by reference to
Exhibit 10.29 to the Form 8-B).*
10.32 Form of Incentive Stock Option Agreement between the Bank and certain officers (incorporated by
reference to Exhibit 10.30 to the Form 8-B).*
10.33 Form of Amendment to incentive Stock Option Agreement between the Bank and certain officers
(incorporated by reference Exhibit 10.31 to the Form 8-B).*
10.34 Form of Non-Employee Director Stock Option Agreement between the Bank and certain directors
(incorporated by reference to Exhibit 10.32 to the Form 8-B).*
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
<S> <C>
10.35 Form of Amendment to Non-Employee Director Stock Option Agreement between the Bank and
certain directors (incorporated by reference to Exhibit 10.33 to the Form 8-B).*
10.36 Loan and REO Purchase Agreement, dated as of December 15, 1994 between Fidelity and Berkeley
Federal Bank & Trust FSB (incorporated by reference to Exhibit 10.34 to the Form 8-B).*
10.37 Standard Office Lease-Net, dated July 15, 1994, between the Bank and 14455 Ventura Blvd., Inc.
(incorporated by reference to Exhibit 10.35 to the Form 8-B).*
10.38 Standard Office Lease--Modified Gross, dated July 15, 1994, between the Bank and Citadel Realty,
Inc. (incorporated by reference to Exhibit 10.36 to the Form 8-B).*
10.39 Loan Servicing Purchase and Sale Agreement dated March 31, 1995 between the Bank and
Western Financial Savings Bank, FSB (incorporated by reference to Exhibit 10.37 to the
Form 8-B).*
10.40 Supervisory Agreement dated June 28, 1995, between Fidelity and the OTS (incorporated by
reference to Exhibit 10.38 to the Form 8-B).*
10.41 Form of Indemnity Agreement between the Bank and its directors and senior officers (incorporated
by reference to Exhibit 10.39 to the Form 8-B).*
10.42 Letter from the OTS to the Bank dated December 8, 1995, terminating the Supervisory Agreement
as of the date of the letter (incorporated by reference to Exhibit 10.40 to the Form 8-B).*
10.43 Loan Servicing Purchase and Sale Agreement dated May 15, 1996 between Fidelity and Western
Financial Savings Bank (incorporated by reference to Exhibit 10.37 to the quarterly report on Form
10-Q for the quarterly period ended June 30, 1996).*
10.44 First Amendment to Standard Office Lease--Modified Gross, dated as of May 15, 1995 between
the Bank and Citadel Realty, Inc (incorporated by reference to Exhibit 10.42 to the quarterly
report on Form 10-Q for the quarterly period ended September 30, 1996).*
10.45 Second Amendment to Standard Office Lease--Modified Gross, dated as of October 1, 1996,
between the Bank and Citadel Realty, Inc (incorporated by reference to Exhibit 10.43 to the
quarterly report on Form 10-Q for the quarterly period ended September 30, 1996).*
10.46 Form of Indemnity Agreement between Bank Plus and its directors and senior officers
(incorporated by reference to Exhibit 10.44 to the quarterly report on Form 10-Q for the
quarterly period ended September 30, 1996).*
10.55 Promissory Note, dated July 31, 1996, from Richard M. Greenwood to Bank Plus (incorporated
by reference to Exhibit 10.55 to the 1996 Form 10-K).*
10.56 Bank Plus Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.56 to
the quarterly report on Form 10Q for the quarter ended June 30, 1997).*.
27. Financial Data Schedule.
- ----------------
* Indicates previously filed documents.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the SEC on July 2, 1997 reporting on Item 5. "Other Events"
including pro forma financial statements for the acquisition of Hancock.
A current report on Form 8-K was filed with the SEC on August 13, 1997 reporting on Item 2. "Acquisition
or Disposition of Assets" and Item 7. "Financial Statements, Pro Forma Financial Information and Exhibits"
related to the Hancock acquisition.
</TABLE>
35
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
Registrant
Date: November 14, 1997 /s/ Richard M. Greenwood
--------------------------------------------
Richard M. Greenwood
President and Chief Executive Officer;
Vice Chairman of the Board
Date: November 14, 1997 /s/ Richard M. Villa
---------------------------------------------
Richard M. Villa
Senior Vice President, Controller
and Chief Accounting Officer
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 190,177
<INT-BEARING-DEPOSITS> 0 9,110
<FED-FUNDS-SOLD> 0 51,600
<TRADING-ASSETS> 0 42,289
<INVESTMENTS-HELD-FOR-SALE> 0 664,383
<INVESTMENTS-CARRYING> 0 61,497
<INVESTMENTS-MARKET> 0 61,514
<LOANS> 0 2,890,967
<ALLOWANCE> 0 58,408
<TOTAL-ASSETS> 0 3,920,257
<DEPOSITS> 0 2,802,183
<SHORT-TERM> 0 449,846
<LIABILITIES-OTHER> 0 29,267
<LONG-TERM> 0 461,478
0 0
0 0
<COMMON> 0 194
<OTHER-SE> 0 177,289<F1>
<TOTAL-LIABILITIES-AND-EQUITY> 0 3,920,257
<INTEREST-LOAN> 52,817 152,041
<INTEREST-INVEST> 11,892 28,171
<INTEREST-OTHER> 822 2,481
<INTEREST-TOTAL> 65,531 182,693
<INTEREST-DEPOSIT> 33,166 91,878
<INTEREST-EXPENSE> 45,098 121,577
<INTEREST-INCOME-NET> 20,433 61,116
<LOAN-LOSSES> 4,251 12,753
<SECURITIES-GAINS> 362 2,578
<EXPENSE-OTHER> 17,916 55,305
<INCOME-PRETAX> 2,050<F2> 8,601<F3>
<INCOME-PRE-EXTRAORDINARY> 2,050 8,601
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,408 10,873
<EPS-PRIMARY> 0.18 0.58
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 2.29 2.40
<LOANS-NON> 21,804 21,804
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 46,447 46,447
<LOANS-PROBLEM> 102,594 102,594
<ALLOWANCE-OPEN> 59,964 57,508
<CHARGE-OFFS> 8,184 30,688
<RECOVERIES> 2,377 6,065
<ALLOWANCE-CLOSE> 58,408 58,408
<ALLOWANCE-DOMESTIC> 58,408 58,408
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 34,664 34,664
<FN>
<F1>INCLUDES $272 MINORITY INTEREST: PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY.
<F2>EARNINGS BEFORE INCOME TAXES AND $342 MINORITY INTEREST IN SUBSIDIARY WHICH IS
INCLUDED IN OTHER EXPENSE.
<F3>EARNINGS BEFORE INCOME TAXES AND $4,228 MINORITY INTEREST IN SUBSIDIARY WHICH
IS INCLUDED IN OTHER EXPENSE.
</FN>
</TABLE>
