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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28292
------------------------------
BANK PLUS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4571410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 241-6215
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 2, 1998, was $271,562,956.
As of March 2, 1998, Registrant had outstanding 19,382,683 shares of Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's 1998
Annual Meeting of Stockholders are incorporated by reference in Part III hereof.
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BANK PLUS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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PART I
Item 1. Business.................................................................................... 1
General..................................................................................... 1
Recent Developments......................................................................... 1
Business Strategy........................................................................... 2
Retail Financial Services................................................................... 4
Lending Activities.......................................................................... 5
Credit Administration....................................................................... 13
Credit Loss Experience...................................................................... 23
Foreclosure Policies........................................................................ 26
Real Estate Acquired in Settlement of Loans................................................. 26
Bulk Sales.................................................................................. 29
Treasury Activities......................................................................... 29
Sources of Funds............................................................................ 31
Interest Rate Risk Management............................................................... 35
Competition................................................................................. 35
Employees................................................................................... 36
Regulation and Supervision.................................................................. 36
Item 2. Properties.................................................................................. 48
Item 3. Legal Proceedings........................................................................... 49
Item 4. Submission of Matters to a Vote of Security Holders......................................... 50
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 51
Item 6. Selected Financial Data..................................................................... 52
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 54
Forward-looking Statements.................................................................. 54
Results of Operations....................................................................... 54
Acquisitions................................................................................ 55
Writedown of Mortgage-backed Securities..................................................... 55
Asset Growth................................................................................ 56
Asset/Liability Management.................................................................. 56
Market Risk................................................................................. 59
Asset Quality............................................................................... 60
Net Interest Income......................................................................... 65
Noninterest Income/Expense.................................................................. 67
Operating Expenses.......................................................................... 68
Income Taxes................................................................................ 70
Regulatory Capital Compliance............................................................... 72
Capital Resources and Liquidity............................................................. 74
Item 8. Financial Statements and Supplementary Data................................................. F-1
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure......... II-1
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... II-1
Item 11. Executive Compensation...................................................................... II-1
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. II-1
Item 13. Certain Relationships and Related Transactions.............................................. II-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ II-1
Signatures.................................................................................. II-5
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PART I
ITEM 1. BUSINESS
BANK PLUS CORPORATION
GENERAL
Bank Plus Corporation ("Bank Plus"), through its wholly-owned subsidiaries,
Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries ("Fidelity"
or the "Bank"), and Gateway Investment Services, Inc., ("Gateway")
(collectively, the "Company"), offers a broad range of consumer financial
services, including demand and term deposits and loans to consumers. Fidelity
operates through 38 full-service branches, which are primarily located in
southern California. The Bank makes available to its customers residential
mortgages and consumer loans, which the Bank does not underwrite or fund, by
referral to certain established providers of mortgage and consumer loan products
with which the Bank has negotiated strategic alliances. In addition, through
Gateway, a National Association of Securities Dealers, Inc. ("NASD") registered
broker/dealer, the Bank provides customers with uninsured investment products,
including mutual funds and annuities.
The Company derives its income primarily from the interest it receives on real
estate loans and investment securities and, to a lesser extent, from fees
received from the sale of uninsured investment products and fees in connection
with loans and deposit services, as well as other services. Its major expenses
are the interest it pays on deposits and on borrowings and general operating
expenses. The Company's operations, like those of other financial institutions,
are significantly influenced by general economic conditions, by the strength of
the real estate market, by the monetary, fiscal and regulatory policies of the
federal government and by the policies of financial institution regulatory
authorities.
Fidelity's deposits are highly concentrated in Los Angeles and Orange
counties. The retail branches held average deposit balances of $78.2 million and
total balances of approximately $2.9 billion at December 31, 1997. At December
31, 1997, the Bank's gross mortgage loan portfolio aggregated approximately $2.8
billion, 57% of which was secured by residential properties containing 5 or more
units, 33% of which was secured by single family and multifamily residential
properties containing 2 to 4 units and 7% of which was secured by commercial and
other property. At that same date, 94% of the Bank's loans consisted of
adjustable-rate mortgages.
Unless the context otherwise requires, all references to the "Company" in this
Annual Report on Form 10-K (the "Form 10-K") include Bank Plus and its
subsidiaries on a consolidated basis. All references to Fidelity or the Bank
with respect to the period after August 3, 1994 and before Bank Plus became the
holding company for Fidelity on May 16, 1996 (the "Reorganization") include
Gateway, which was a wholly-owned subsidiary of the Bank's former holding
company, Citadel Holding Corporation ("Citadel"), during a portion of the
periods covered hereby, and on August 3, 1994, became a wholly-owned subsidiary
of Fidelity until the Reorganization. The principal executive offices of Bank
Plus and Fidelity are located at 4565 Colorado Boulevard, Los Angeles,
California 90039, telephone number (818) 241-6215.
RECENT DEVELOPMENTS
On July 29, 1997, the Company completed the acquisition of all of the
outstanding stock of Hancock Savings Bank, FSB ("Hancock"), which had five
branches, assets of approximately $210.1 million and deposits of approximately
$203.7 million at June 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 $12.0 million.
1
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On September 19, 1997, the Company completed a purchase of approximately $48.8
million of deposits from a branch of Coast Federal Bank, FSB ("Coast"), located
in Westwood, California. See Note 1 and 2 of the Notes to Consolidated Financial
Statements for additional discussion of the Hancock and Coast acquisitions.
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 received 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 December 31, 1997.
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 Common Stock in connection
with the acquisition of Hancock. The Board of Directors of Bank Plus (or an
authorized committee thereof) will negotiate, determine and approve on behalf of
the Company any Acquisition Shares to be issued in any future acquisition, and
the terms and conditions of all agreements to be entered into by the Company in
connection therewith. Offers, if any, to sell Acquisition Shares will be made
only pursuant to the prospectus constituting a part of the Acquisition S-4.
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, and
mortgages) with the offering of investment products through Gateway and consumer
credit products through strategic alliances. As a part of such strategy,
management continues to explore new opportunities to expand the retail network,
to increase fee income growth, and to build upon the use of technology in
delivering financial products and services.
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 develop new customer bases and provide
customers with a wider array of internally and externally sourced products
through a variety of delivery channels. The Company is pursuing the use of
various electronic delivery systems, which include an Internet bank, and
software to enhance customer convenience and the Company's fee income
opportunities.
Expansion of Retail Network
The Hancock acquisition and the acquisition of the Coast branch deposits
provide a number of benefits to the Company including an increased customer base
and branch network, and operating efficiencies through consolidation. The
acquired branch network and associated customer base include approximately
14,200 and 7,100 transaction and time deposit accounts, respectively, and will
provide new territory in which to implement Fidelity's sales platform of credit
and investment products. The Company will introduce to the acquired customer
base a wide range of investment, insurance and consumer loan products to enhance
the Company's fee income. The Company has reduced consolidated operating
expenses resulting from the acquisitions through the closure and consolidation
of the administrative office of Hancock and the consolidation of two of the
branches acquired into existing Fidelity branches.
2
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In 1997, the Company commenced two new programs which provide for the
wholesale acquisition of retail customers: credit card issuance for affinity
groups and financial education and planning and investment product sales for the
members of the California Public Employees' Retirement System ("CalPERS").
Fidelity has formed a plan to develop credit card issuance programs with
affinity partners. The affinity card program involves the solicitation of
prospective individual customers from identifiable groups with a common interest
or affiliation. These programs will include unsecured credit cards and credit
cards secured by real estate or by cash deposits. Fidelity will serve as issuer
and owner of the credit card accounts and will develop the card portfolio from
prospects provided by the affinity partner. Fidelity retains the right to market
other products to the card members and expects to offer multiple financial
products related to significant life events of the typical household, such as
home purchase, insurance and retirement planning. At December 31, 1997,
outstanding credit cards and balances associated with the affinity program were
approximately 30,000 and $50.7 million, respectively. See "--Lending Activities"
below for further discussion of the affinity card programs.
Effective July 1, 1997 Gateway was awarded the contract to serve as the
Financial Education Presenter for the more than one million members of CalPERS.
Under the terms of the contract, Gateway's primary responsibility is to provide
financial education information through seminars and customized financial plans
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
assurance 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, and the offer of personal
consultations to seminar attendees (which will include the development of a
personalized financial plan). The program is expected to generate fee income
from the sale of uninsured investment products, such as mutual funds, annuities
and insurance products. The Company is seeking other similar opportunities to
provide financial planning for customer groups with specific affiliations and
will be introducing the financial planning products to its customers in the
current branch network.
Strategic Alliances
Through strategic alliances with third party providers, the Company has
introduced a wide range of investment, insurance and consumer loan products to
increase fee income. The use of strategic partners allows the Company to
emphasize or de-emphasize particular products based on consumer demand and other
business or market factors without the traditional costs of modification or
discontinuance of product lines. At this time, the Company provides residential
mortgages and consumer loans, which the Company does not underwrite or fund, to
its retail bank customers by referral to certain established providers of those
products with which the Company has negotiated strategic alliances.
The Company's credit product channel is responsible for providing the retail
bank distribution system with a variety of consumer credit products to satisfy
customers' financial needs and objectives. Strategic alliances are in place with
established providers of auto, boat and recreational vehicle loans, credit
cards, home equity lines of credit and first mortgage products. The Company uses
the strength of its strategic allies to attempt to maximize product
availability, minimize product risk, operating expenses and development costs.
The Company has implemented its strategy to integrate sales of investment
products along with traditional banking products in its branches. The Company's
investment product channel is responsible for providing the retail bank
distribution system with a variety of investment products, such as mutual funds,
fixed and variable annuities and insurance products. Through Gateway, the
Company has developed strategic relationships with nationally known providers of
investment and insurance products. The use of strategic allies' products shifts
market acceptance risk away from the Company, and enhances product and name
recognition through relationships with nationally known entities, which also
provide marketing support.
3
<PAGE>
Implementation of the Company's principal business strategy has resulted in an
increase in general and administrative expenses due to increased infrastructure
and growth of the customer base, business lines and retail network. These
expenses may significantly increase in future periods as the Company further
expands its business lines and franchise network. The targeted benefits of this
transformation, namely increased interest margin and higher fee income, may lag
the increase in expenditures depending on the timing of the investment in new
business lines and the increase in revenues that is intended to result from the
investment.
RETAIL FINANCIAL SERVICES
Fidelity operates 37 of the 38 branches in Los Angeles, Orange and San
Bernardino counties. At each of its branch locations, Fidelity offers loan
products, financial services and investment products to current and potential
customers. These products and services are provided either directly or through
Gateway. Fidelity's deposits are concentrated in Los Angeles and Orange
counties. Six branches exceed $100 million in deposits, sixteen branches have
deposits between $60 million and $100 million and fifteen of the branches are in
the $30 million to $60 million deposit range.
Fidelity is expanding its delivery channels to include Internet banking.
Management believes a transactional Internet site is essential to remain
competitive in the highly technological environment of the financial services
industry. The Internet site will also serve as a conduit for delivering
financial products to the customers of the affinity card and CalPERS programs
that maybe located in areas of the country not currently serviced by the Bank's
existing branch network. 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 1998 at the Internet address of http://www.iBank.com. iBank will
initially 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.
The Internet site will also complement the newest branch opened by the Bank in
the Mall of America in Bloomington, Minnesota. The branch opened to the mall
merchants in December 1997 and to retail customers in March 1998, replacing
First Bank as the mall's sole banking institution. This branch operates under
the name "iBank", and represents a departure from the traditional branch
concept. It is a highly automated center, allowing customers to browse and
experiment with new and different access devices, including screen telephones,
personal computers and self-service ATM machines. Additionally, the branch will
reach into the mall community to stimulate business with merchants and employees
of the mall, offering merchant services that have not previously been part of
the Bank's product array. The Mall of America is the largest mall in America
with over 500 merchants, 12,000 employees and 40 million visitors a year. At
December 31, 1997, the branch had new deposits of $5.0 million.
In June 1997, Fidelity entered into an arrangement with Americash L.L.C.
("Americash") in which Fidelity acts as cash services provider for Americash's
newly established and rapidly expanding network of cash-dispensing automatic
teller machines. Fidelity has agreed to provide cash for Americash ATMs
throughout the United States, and is entitled to fees based on the volume of
cash withdrawal transactions. If the transaction volume is below certain agreed
upon minimums, the fees to which Fidelity is entitled are calculated using a
formula designed to ensure Fidelity a minimum return for the use of its cash.
The average cash balance in use for the Americash program during the third and
fourth quarters of 1997 was $34.8 million, and the program generated fees, which
are reported as noninterest income, of $1.0 million during the same period. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")--Net Interest Income" for the impact of the Americash
program on net interest margin.
During 1997, the average transaction volume for the Americash ATM network was
insufficient to
4
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generate transaction fees above the minimum threshold provided for in the
agreement between Americash and Fidelity. Therefore, Fidelity's fees during 1997
were calculated using the minimum return formula described above. At the request
of Americash, Fidelity has agreed to defer collection of a portion of those
accrued fees in order to assist Americash with its cash flow needs during the
initial rollout period. As a result of this deferral of fees, an accounts
receivable of $1.0 million from Americash was recorded as of December 31, 1997.
This fee-deferral arrangement is temporary, and management anticipates that
Americash will secure other sources of financing for its capital requirements
during 1998. Until such alternative financing is obtained, management believes
the Bank has adequate remedies under its agreement with Americash to ensure full
and prompt collection of the fee receivable referred to above.
The recently declining interest rate environment along with major stock and
bond market fluctuations have made insured savings deposit products more
attractive relative to certain uninsured products, such as mutual funds and
annuities. Net deposit inflow in 1997 was $395.9 million which included two
acquisitions closed in 1997. The acquisition of Hancock and the Coast branch
accounted for $252.3 million in transaction accounts and certificate of deposit
accounts at the respective acquisition dates. The Company may consider exploring
potential sales or purchases of branches from time to time to further its
business strategy.
LENDING ACTIVITIES
The Bank closed its wholesale correspondent single family origination network
and its multifamily origination operations in the third quarter of 1994. 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 retail branch customers are referred to
and underwritten, funded and serviced by the strategic partners. See "--Business
Strategy--Strategic Alliances."
Although the Bank closed its origination operations in 1994, the Bank
originated $11.5 million and $5.8 million, in 1997 and 1996, respectively, in
first and second trust deed mortgages, principally in connection with the sale
of real estate owned ("REO").
Fidelity has formed a plan to develop credit card issuance programs with
affinity groups. The Bank has entered into contracts to establish such programs
with several entities. Fidelity will serve as issuer and owner of certain credit
card accounts and will develop the card portfolio from prospects provided by the
affinity groups. Generally, there are two types of affinity programs: credit
enhancement programs and shared risk programs. In both programs, the Bank is
responsible for the risk management associated with the extensions of credit.
The Bank develops and implements the underwriting standards as well as the
supporting risk management support systems. Underwriting is primarily based on
industry-accepted Fair Isaac Company ("FICO") credit scoring methodology. The
Bank establishes reserve requirement levels based on the loss expectation by
credit tranche, and reserves are adjusted at least monthly based on actual
volumes outstanding in the programs.
Under the credit enhancement programs, the affinity partners have the right to
purchase outstanding card receivables 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 include funding by
the affinity counter party of a reserve account or pledging of collateral as
receivables are funded by the Bank. As a result of the credit enhancements
provided under these affinity programs, the Bank does not record any loan loss
provisions associated with the outstanding balances. The Bank has committed to
fund up to an aggregate outstanding balance of $425 million under the credit
enhancement programs. At December 31, 1997, outstanding credit card balances
associated with these affinity programs were approximately $50.7 million.
Under the shared risk programs, the Bank and the affinity counter party share
the net earnings or loss of the program based on contracted percentages. The net
earnings or loss is determined after consideration of all direct revenues and
expenses, including loan loss provisions and the Bank's cost of funding card
balances, plus an appropriate interest rate spread. In January 1998, the Bank
began issuing cards under a shared risk program with an affinity counter party
which has an affiliation with approximately 17 million members. The Bank intends
to offer cards with limits ranging from $300 to $5,000 to the full credit
spectrum of borrowers.
5
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Generally speaking, credit card loss provisions are initially established
based on a multiple of the loss experience, i.e., industry average charge-offs,
associated with specific tranches of the FICO based credit scores. The shared
risk programs are expected to significantly increase the Bank's loan loss
provisions and allowance for estimated loan loss in 1998. Credit card industry
averages for net charge-off ratios can range from 5% to 7%, which is
significantly higher than the Bank's charge-off ratio in 1997 for single family
and multifamily mortgage loans of 1.2%.
Fidelity is 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 ultimate success
of any of these transactions.
The Bank currently outsources all card processing and customer service to
third party providers. However, the Company is establishing a credit processing
center to handle card-related services internally. The Company believes that
customer satisfaction and the Company's responsiveness and availability are key
factors that will enhance and extend the Company's relationship with its card
customers, and that its ability to achieve customer satisfaction is
significantly enhanced by developing and maintaining a credit processing center
internally. The credit processing center will operate as a new subsidiary of
Bank Plus named Bank Plus Credit Services Corporation. The Company has recently
employed senior and middle management with significant credit card operations
experience to start up and operate the credit processing center, as such
experience was not previously resident in the Company. The establishment of this
processing center requires funding of significant start-up costs, and no
assurances can be given that these costs will be recovered.
The Bank offers overdraft protection for checking account customers through
its "Instant Reserve" personal line of credit. Instant Reserve is available to
new and existing checking customers with average credit limits of approximately
$1,500. The committed Instant Reserve lines of credit at December 31, 1997 and
1996 totaled $28.9 million and $19.7 million, respectively. The outstanding
balance of Instant Reserve lines of credit at December 31, 1997 and 1996 totaled
$2.6 million and $2.0 million, respectively.
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Portfolio statistics
All presentations of the total loan portfolio include loans receivable and
loans held for sale unless stated otherwise. The following table sets forth the
composition of total loans by type of security at the dates indicated:
<TABLE>
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DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ---------------- ------------------ ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
LOANS BY TYPE OF SECURITY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans:
Single family............... $ 638,539 22.16% $ 517,288 18.72% $ 594,019 19.58% $ 755,253 22.44% $ 792,054 20.80%
Multifamily:
2 to 4 units............... 322,309 11.18 319,281 11.55 345,884 11.40 393,943 11.71 505,219 13.27
5 to 36 units.............. 1,343,597 46.62 1,408,317 50.95 1,521,056 50.13 1,612,926 47.93 1,795,374 47.16
37 units and over.......... 308,473 10.70 307,741 11.13 329,916 10.87 345,287 10.26 406,330 10.67
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total multifamily......... 1,974,379 68.50 2,035,339 73.63 2,196,856 72.40 2,352,156 69.90 2,706,923 71.10
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total residential
loans................... 2,612,918 90.66 2,552,627 92.35 2,790,875 91.98 3,107,409 92.34 3,498,977 91.90
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Other real estate loans:
Commercial and
industrial................. 204,656 7.10 203,510 7.36 234,384 7.72 248,255 7.38 295,761 7.77
Land and land
improvements............... 1,656 0.06 1,670 0.06 3,032 0.10 2,050 0.06 3,736 0.10
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other real estate
loans..................... 206,312 7.16 205,180 7.42 237,416 7.82 250,305 7.44 299,497 7.87
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Gross mortgage loans......... 2,819,230 97.82 2,757,807 99.77 3,028,291 99.80 3,357,714 99.78 3,798,474 99.77
Loans secured by savings
accounts and other non-
real estate loans........... 62,912(2) 2.18 6,373 0.23 6,040 0.20 7,251 0.22 8,758 0.23
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans, gross........... 2,882,142 100.00% 2,764,180 100.00% 3,034,331 100.00% 3,364,965 100.00% 3,807,232 100.00%
---------- ====== ---------- ====== ---------- ====== ---------- ====== ---------- ======
Less:
Undisbursed loan funds...... 1,710 -- -- 259 --
Unearned (premiums)
discounts, net............. (2,722) 1,974 2,463 1,980 210
Deferred loan fees.......... 9,039 12,767 7,317 7,221 11,139
Allowance for estimated
losses..................... 50,538(1) 57,508(1) 89,435(1) 67,202 83,832
---------- ---------- ---------- ---------- ----------
58,565 72,249 99,215 76,662 95,181
---------- ---------- ---------- ---------- ----------
Total loans, net........... $2,823,577 $2,691,931 $2,935,116 $3,288,303 $3,712,051
========== ========== ========== ========== ==========
</TABLE>
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(1) At December 31, 1997, 1996 and 1995, the allowance for estimated loan
losses includes $14.4 million, $16.7 million and $36.7 million,
respectively, of remaining loan general valuation allowance ("GVA") and
specific valuation allowance ("SVA") for the Accelerated Asset Resolution
Plan (the "Plan"). See Item 7. "MD&A--Asset Quality--Accelerated Asset
Resolution Plan."
(2) Includes $50.7 million of credit card loans at December 31, 1997.
The following table sets forth the composition of loans held for sale, which
are included in the table above, by type of security at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ----------------- ------------------ ---------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS BY TYPE OF SECURITY AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- ------------------------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans:
Single family............... $ -- --% $ -- --% $ -- --% $47,339 97.98% $239,371 65.10%
Multifamily (2 to 4 units).. -- -- -- -- -- -- 976 2.02 128,317 34.90
----- ---- ----- ---- ---- ---- ------- ------ -------- ------
Total loans held for sale.. $ -- --% $ -- --% $ -- --% $48,315 100.00% $367,688 100.00%
===== ==== ===== ==== ==== ==== ======= ====== ======== ======
</TABLE>
7
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The following table presents gross mortgage loans by type and location as of
December 31, 1997:
<TABLE>
<CAPTION>
COMMERCIAL
MULTIFAMILY AND INDUSTRIAL
------------------------------ --------------------- PERCENTAGE
SINGLE 2 TO 4 5 TO 36 37 UNITS HOTEL/ OTHER OF
FAMILY UNITS UNITS AND OVER MOTEL C&I TOTAL TOTAL
------ -------- --------- -------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California:
Southern California
Counties:
Los Angeles................ $263,949 $118,731 $ 973,980 $200,830 $10,220 $ 93,282 $1,660,992 58.9%
Orange..................... 95,138 119,871 146,893 21,965 20,256 36,359 440,482 15.6
San Diego.................. 30,694 10,552 75,369 33,469 -- 4,580 154,664 5.5
San Bernardino............. 22,393 12,269 29,016 14,712 -- 7,433 85,823 3.0
Riverside.................. 22,311 7,277 19,274 12,904 -- 7,414 69,180 2.5
Ventura.................... 29,560 6,192 29,859 2,368 -- 5,065 73,044 2.6
Other...................... 17,354 8,531 24,876 7,035 2,430 3,702 63,928 2.3
-------- -------- ---------- -------- ------- -------- ---------- -----
481,399 283,423 1,299,267 293,283 32,906 157,835 2,548,113 90.4
Northern California
Counties:
Santa Clara................ 32,736 17,808 27,094 175 -- 204 78,017 2.8
Other...................... 72,060 13,547 17,236 12,229 1,178 5,821 122,071 4.3
-------- -------- ---------- -------- ------- -------- ---------- -----
Total California.......... 586,195 314,778 1,343,597 305,687 34,084 163,860 2,748,201 97.5
-------- -------- ---------- -------- ------- -------- ---------- -----
Arizona...................... 1,969 -- -- 2,786 -- 5,869 10,624 0.4
Maryland..................... 4,175 185 -- -- 1,987 -- 6,347 0.2
All other states............. 46,200 7,346 -- -- -- 512 54,058 1.9
-------- -------- ---------- -------- ------- -------- ---------- -----
Total out-of-state........ 52,344 7,531 -- 2,786 1,987 6,381 71,029 2.5
-------- -------- ---------- -------- ------- -------- ---------- -----
Gross mortgage loans......... $638,539 $322,309 $1,343,597 $308,473 $36,071 $170,241 $2,819,230 100.0%
======== ======== ========== ======== ======= ======== ========== =====
</TABLE>
The following table sets forth the types of loans by repricing attributes at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- -------------------- ----------------- ---------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- -------- ------- -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable rate Loans...... $2,711,975(1) 94.10% $2,675,425 96.79% $2,939,807 96.88% $3,257,368 96.80% $3,649,714 95.83%
Fixed rate loans............. 170,167 5.90 88,755 3.21 94,524 3.12 107,597 3.20 157,518 4.17
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- -----
Total loans, gross........... 2,882,142 100.00% 2,764,180 100.00% 3,034,331 100.00% 3,364,965 100.00% 3,807,232 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan funds....... 1,710 -- -- 259 --
Unearned (premiums)
discounts, net.............. (2,722) 1,974 2,463 1,980 210
Deferred loan fees........... 9,039 12,767 7,317 7,221 11,139
Allowance for estimated
losses...................... 50,538(2) 57,508(1) 89,435(1) 67,202 83,832
--------- --------- --------- -------- --------
58,565 72,249 99,215 76,662 95,181
--------- --------- --------- -------- --------
Total loans, net............ $2,823,577 $2,691,931 $2,935,116 $3,288,303 $3,712,051
========== ========== ========== ========== ==========
</TABLE>
- ----------------
(1) Includes $50.7 million of credit card loans at December 31, 1997.
(2) At December 31, 1997, 1996 and 1995, the allowance for estimated loan losses
includes $14.4 million, $16.7 million and $36.7 million, respectively, of
remaining loan GVA and SVA for the Plan. See Item 7. "MD&A--Asset Quality--
Accelerated Asset Resolution Plan."
8
<PAGE>
The following table sets forth, by contractual maturity and interest rate, the
fixed rate and adjustable rate loan portfolios at December 31, 1997. The table
does not consider the prepayment experience of the loan portfolio when
scheduling the maturities of loans. See Item 7. "MD&A--Asset/Liability
Management."
<TABLE>
<CAPTION>
SUBTOTAL
MATURITIES MATURES IN
GREATER ----------------------------------------------------------
TOTAL LOANS MATURES THAN 2001- 2003- 2008- AFTER
RECEIVABLE IN 1998 ONE YEAR 1999 2000 2002 2007 2012 2012
---------- ------- ---------- ------- ------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable rate loans:
Under 5.00%................. $ 24 $ 24 $ -- $ -- $ -- $ -- $ -- $ -- $ --
05.00% - 6.99%.............. 58,136 5 58,131 -- -- 128 2,160 1,122 54,721
07.00% - 8.99%.............. 2,600,170 60,837 2,539,333 10,846 60,373 93,380 543,009 122,036 1,709,689
09.00% - 10.99%............. 49,654 3,437 46,217 2,013 6,207 7,013 2,345 6,599 22,040
11.00% - 12.99%............. 1,431 286 1,145 -- 480 -- 665 -- --
Over 13.00%................. 2,560 -- 2,560 -- -- 2,560 -- -- --
---------- ------- ---------- ------- ------- -------- -------- -------- ----------
Total adjustable rate loans 2,711,975 64,589 2,647,386 12,859 67,060 103,081 548,179 129,757 1,786,450
---------- ------- ---------- ------- ------- -------- -------- -------- ----------
Fixed rate loans:
Under 5.00%................. 572 457 115 -- -- -- -- -- 115
05.00% - 6.99%.............. 9,351 855 8,496 16 -- 30 117 1,877 6,456
07.00% - 8.99%.............. 120,818 5,909 114,909 411 394 2,882 5,917 3,282 102,023
09.00% - 10.99%............. 33,866 586 33,280 41 96 742 9,142 5,711 17,548
11.00% - 12.99%............. 2,275 560 1,715 1 10 -- 98 382 1,224
Over 13.00%................. 3,285 2,691 594 -- -- -- 85 453 56
---------- ------- ---------- ------- ------- -------- -------- -------- ----------
Total fixed rate loans..... 170,167 11,058 159,109 469 500 3,654 15,359 11,705 127,422
---------- ------- ---------- ------- ------- -------- -------- -------- ----------
Total loans, gross......... 2,882,142 $75,647 $2,806,495 $13,328 $67,560 $106,735 $563,538 $141,462 $1,913,872
========== ======= ========== ======= ======= ======== ======== ======== ==========
Less:
Undisbursed loan funds...... 1,710
Unearned (premiums)
discounts, net............. (2,722)
Deferred loan fees.......... 9,039
Allowance for estimated
losses..................... 50,538(1)
----------
58,565
----------
Total loans, net........... $2,823,577
==========
</TABLE>
- -----------------
(1) At December 31, 1997, the allowance for estimated loan losses includes
$14.4 million of remaining loan GVA and SVA for the Plan. See Item 7.
"MD&A--Asset Quality--Accelerated Asset Resolution Plan."
(2) Includes $50.7 million of credit card loans at December 31, 1997.
9
<PAGE>
The following table sets forth, by contractual maturity and property type, the
loan portfolio at December 31, 1997. The table does not consider the prepayment
experience of the loan portfolio when scheduling the maturities of loans. See
Item 7. "MD&A--Asset/Liability Management."
<TABLE>
<CAPTION>
SUBTOTAL
MATURITIES MATURES IN
GREATER -----------------------------------------------
TOTAL LOANS MATURES THAN 2001 - 2003 -
RECEIVABLE IN 1998 ONE YEAR 1999 2000 2002 2007
------------ -------- ---------- ------ ----- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential loans:
Single family............... $ 638,539 $ 5,080 $ 633,459 $ 1,541 $ 2,883 $ 2,446 $ 5,878
Multifamily:
2 to 4 units............... 322,309 141 322,168 13 7,426 4,189 8,257
5 to 36 units.............. 1,343,597 646 1,342,951 1,090 31,077 28,273 376,482
37 units and over.......... 308,473 -- 308,473 -- 1,690 12,577 86,146
---------- ------- ---------- ------- ------- -------- --------
Total multifamily......... 1,974,379 787 1,973,592 1,103 40,193 45,039 470,885
---------- ------- ---------- ------- ------- -------- --------
Total residential loans.. 2,612,918 5,867 2,607,051 2,644 43,076 47,485 476,763
---------- ------- ---------- ------- ------- -------- --------
Other real estate loans:
Commercial and industrial... 204,656 9,673 194,983 10,636 24,133 56,690 85,312
Land and land improvements.. 1,656 822 834 -- -- -- 795
---------- ------- ---------- ------- ------- -------- --------
Total other real estate
loans..................... 206,312 10,495 195,817 10,636 24,133 56,690 86,107
---------- ------- ---------- ------- ------- -------- --------
Gross mortgage loans......... 2,819,230 16,362 2,802,868 13,280 67,209 104,175 562,870
---------- ------- ---------- ------- ------- -------- --------
Loans secured by savings
accounts and other
non-real estate loans (1)... 62,912 59,285 3,627 48 351 2,560 668
---------- ------- ---------- ------- ------- -------- --------
Total loans, gross........... 2,882,142 $75,647 $2,806,495 $13,328 $67,560 $106,735 $563,538
======= ========== ======= ======== ========= ========
Less:
Undisbursed loan funds...... 1,710
Unearned (premiums)
discounts, net............. (2,722)
Deferred loan fees.......... 9,039
Allowance for estimated
loan losses................ 50,538(2)
----------
58,565
----------
Total loans, net........... $2,823,577
==========
<CAPTION>
MATURES IN
---------------------------
2008- AFTER
2012 2012
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Residential loans:
Single family............... $ 12,592 $ 608,119
Multifamily:
2 to 4 units............... 2,409 299,874
5 to 36 units.............. 95,205 810,824
37 units and over.......... 26,946 181,114
-------- ----------
Total multifamily......... 124,560 1,291,812
-------- ----------
Total residential loans.. 137,152 1,899,931
-------- ----------
Other real estate loans:
Commercial and industrial... 4,310 13,902
Land and land improvements.. -- 39
-------- ----------
Total other real estate
loans..................... 4,310 13,941
-------- ----------
Gross mortgage loans......... 141,462 1,913,872
-------- ----------
Loans secured by savings
accounts and other
non-real estate loans (1)... -- --
-------- ----------
Total loans, gross........... $141,462 $1,913,872
======== ==========
Less:
Undisbursed loan funds......
Unearned (premiums)
discounts, net.............
Deferred loan fees..........
Allowance for estimated
loan losses................
Total loans, net...........
</TABLE>
- ------------------
(1) Includes $50.7 million of credit card loans at December 31, 1997.
(2) At December 31, 1997, the allowance for estimated loan losses includes $14.4
million of remaining loan GVA and SVA for the Plan. See Item 7. "MD&A--Asset
Quality--Accelerated Asset Resolution Plan."
10
<PAGE>
The following table details the activity in the loan portfolio for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
========================================================================
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Principal balance at beginning of
Period................................. $2,691,931 $2,935,116 $3,288,303 $3,712,051 $3,990,449
Real estate loans originated:
Conventional:
Single family......................... 836 -- 3,411 238,944 271,316
Multifamily:
2 to 4 units........................ -- -- 515 38,100 42,931
5 to 36 units....................... 7,373 1,673 4,743 68,862 89,935
37 units and over................... 1,144 3,628 3,207 65,940 12,887
---------- ---------- ---------- ---------- ----------
Total multifamily.................. 8,517 5,301 8,465 172,902 145,753
Commercial and industrial............. 2,150 533 6,586 5,597 1,335
---------- ---------- ---------- ---------- ----------
Total real estate loans
originated (1)..................... 11,513 5,834 18,462 417,443 418,404
---------- ---------- ---------- ---------- ----------
Real estate loans purchased:
Single family (2)..................... 195,333 7,444 (1,237) 100,756 --
Multifamily:
2 to 4 units........................ 23,749 319 -- 250 --
5 to 36 units....................... 338 -- -- 2,466 3,741
37 units and over................... 2,184 -- -- 665 --
---------- ---------- ---------- ---------- ----------
Total multifamily.................. 26,271 319 -- 3,381 3,741
Commercial and industrial............. -- 262 2,171 -- 210
---------- ---------- ---------- ---------- ----------
Total real estate loans
purchased.......................... 221,604 8,025 934 104,137 3,951
---------- ---------- ---------- ---------- ----------
Total real estate loans
funded............................ 233,107 13,859 19,396 521,580 422,355
---------- ---------- ---------- ---------- ----------
Loans sold or securitized:
Whole loans........................... (13,516) (4,508) (123,080) (326,797) (137,870)
Bulk sales............................ -- -- -- (341,432) --
Repurchases........................... 6,842 6,577 9,850 9,072 22,867
---------- ---------- ---------- ---------- ----------
Total loans sold or securitized..... (6,674) 2,069 (113,230) (659,157) (115,003)
---------- ---------- ---------- ---------- ----------
Payments and refinances................. (311,774) (286,577) (236,650) (310,697) (575,348)
Hancock loans acquired.................. 146,802 -- -- -- --
Increase (decrease) in non-real
estate loans........................... 56,539(3) 333 (1,211) (1,507) 720
Other increase (decrease) in total
loans, net............................. 6,676 (4,796) 741 9,403 8,433
Decrease (increase) in reserves for
loan losses............................ 6,970 31,927 (22,233) 16,630 (19,555)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in total loans,
net.................................... 131,646 (243,185) (353,187) (423,748) (278,398)
---------- ---------- ---------- ---------- ----------
Principal balance at end of period...... $2,823,577 $2,691,931 $2,935,116 $3,288,303 $3,712,051
========== ========== ========== ========== ==========
Loans serviced for others............... $ 308,761 $ 433,767 $ 600,288 $1,147,015 $ 888,362
========== ========== ========== ========== ==========
</TABLE>
- -------------------
(1) Includes loans originated to finance sales of REO of $8.4 million, $4.8
million, $9.0 million, $27.0 million and $51.6 million for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Net of repurchases.
(3) Includes $50.7 million of credit card loans at December 31, 1997.
11
<PAGE>
Sale of Loans
Over the past several years, the Bank has sold a portion of its loans in the
secondary mortgage market. During 1997, 1996 and 1995, respectively, the Bank
sold $13.5 million, $4.5 million and $10.2 million of loans and repurchased $6.8
million, $6.6 million and $9.8 million of loans sold in prior periods as
described below. In addition, sales of mortgage backed securities ("MBSs")
totaled $266.7 million, $65.5 million, and $160.7 million, for the years ended
December 31, 1997, 1996 and 1995, respectively. Fidelity is an approved
originator and servicer for the Federal National Mortgage Association (the
"FNMA"), the Federal Home Loan Mortgage Corporation (the "FHLMC") and the
Federal Housing Administration (the "FHA").
As of December 31, 1997, the Company had certain loans with a gross principal
balance of $85.0 million, of which $71.0 million had been sold in the form of
mortgage pass-through certificates, over various periods of time, to four
investor financial institutions leaving a balance of $14.0 million in loans
retained by the Company. These mortgage pass-through certificates provide a
credit enhancement to the investors in the form of the Company's subordination
of its retained percentage interest to that of the investors. In this regard,
the aggregate of $71.0 million held by the investors are deemed Senior Mortgage
Pass-Through Certificates and the $14.0 million in loans held by the Company are
subordinated to the Senior Mortgage Pass-Through Certificates in the event of
borrower default. Full recovery of the $14.0 million is subject to this
contingent liability due to its subordination. In 1993, the Bank repurchased as
an investment a portion of the mortgage pass-through certificates, and at
December 31, 1997, the balance of the repurchased certificate was $24.9 million
and was included in the MBSs available for sale portfolio and accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115.
The other Senior Mortgage Pass-Through Certificates totaling $46.1 million at
December 31, 1997 are owned by other investor institutions. Charge-offs
resulting from the subordination of the Company's retained percentage interest
have been $0.3 million, $0.1 million and $4.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Due to the subordination of the
retained percentage interest, the Company considers all the loans underlying the
Senior Mortgage Pass-Through Certificates in determining its allowance for loan
losses and any estimated losses are reflected in the provision for loan losses.
During 1992, the Company also effected the securitization by FNMA of $114.3
million of multifamily mortgages wherein $114.3 million in whole loans were
swapped for Triple A rated MBSs through FNMA's Alternative Credit Enhancement
Structure ("ACES") program. These MBSs were sold in December 1993 and the
current outstanding balance as of December 31, 1997 of $70.9 million is serviced
by the Company.
As part of a credit enhancement to absorb losses relating to the ACES
transaction, the Company has pledged and placed in a trust account, as of
December 31, 1997, $13.1 million, comprised of $9.9 million in cash and $3.2
million in U.S. Treasury securities at book value. The Company shall absorb
losses, if any, which may be incurred on the securitized multifamily loans to
the extent of $13.1 million. FNMA is responsible for any losses in excess of the
$13.1 million. The Company has charged off less than $0.1 million, $3.8 million
and $3.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The corresponding contingent liability for credit losses secured
by the trust assets was $2.9 million and $6.6 million at December 31, 1997 and
1996, respectively, and is included in other liabilities.
As a result of the Hancock acquisition, the Company has assumed the commitment
to absorb losses from Hancock's loan sale and securitization to FNMA under the
ACES program. Loans sold subject to recourse provisions had remaining unpaid
principal balances at December 31, 1997 of $28.0 million. At December 31, 1997,
the Company has pledged U.S. Treasury securities and MBSs of $4.7 million as
security for the recourse contingencies associated with the loans. The
corresponding contingent liability for credit losses secured by the pledged
assets was $1.1 million at December 31, 1997 and is included in other
liabilities. Charge-offs resulting from the subordination of Hancock's retained
percentage interest was $0.3 million for the year ended December 31, 1997.
12
<PAGE>
Sale of Servicing
As a cost reduction measure, the Bank sold the servicing rights to
substantially all of the single family and 2-4 unit loans in the Bank's loan
portfolio during the second quarter of 1996. The servicing rights to $938.5
million in loans were transferred for a total sale price of $10.0 million. Such
sales proceeds have been accounted for as a reduction in the carrying value of
the loans based on the relative fair values of the servicing sold and loans
retained and is to be accreted over the estimated life of the loans. Accretion
of this amount of the deferred revenue totaled $2.2 million and $1.5 million
during 1997 and 1996, respectively.
ARM Loans
Prior to the closure of its mortgage origination operation in the third
quarter of 1994, Fidelity emphasized the origination of adjustable rate
mortgages ("ARMs") for its portfolio to assist in reducing the sensitivity of
its earnings to interest rate fluctuations. ARMs help to improve the matching of
interest rate repricing between Fidelity's asset and liability portfolios. ARMs
reduce the interest rate risk inherent in a portfolio of long-term mortgages by
repricing each individual asset at regular intervals over the life of the asset.
The initial period before the first adjustment varies between one month and five
years. ARM loans represented 94% of the total loan portfolio at December 31,
1997. Of Fidelity's ARMs, 92% bear an interest rate which periodically adjusts
at a stated margin (the "contractual spread") above the Federal Home Loan Bank
(the "FHLB") Eleventh District Cost of Funds Index ("COFI"), which is the index
that most closely matches Fidelity's liability base.
ARMs may have greater vulnerability to default than fixed rate loans during
times of increasing interest rates due to the potential for substantial
increases in the amount of a borrower's payments or erosion of a borrower's
equity in the underlying property, to the extent payments do not increase, as in
the case of negatively amortizing mortgages. Risks of default may be reduced on
certain loans by caps on both the maximum interest that can be charged and the
amount by which a borrower's payments can be periodically increased. However,
during periods of significant interest rate increases, interest rate caps can
adversely affect interest rate margins and payment caps can increase borrower
exposure to negative amortization, unless the loan contains a prohibition on
negative amortization. When the borrower's payment is not sufficient to cover
the computed interest amount, negative amortization occurs and the difference
then increases the principal balance of the loan. Fidelity uses a combination of
interest rate caps and payment caps to reduce risk of default and, to date,
negative amortization has not adversely affected Fidelity's default ratios.
There was $0.5 million of negative amortization included in the loan portfolio
at December 31, 1997 and $0.8 million at December 31, 1996.
During periods of declining interest rates, ARMs with high interest rate caps
relative to market are vulnerable to prepayment as borrowers refinance into ARMs
with lower caps or into fixed rate loans. Fidelity has also attempted to
minimize the risk of default associated with all ARMs by using the COFI (a
relatively stable index) for adjustment, thereby limiting interest rate
volatility over short periods, and requiring loan-to-value ratios generally not
in excess of 80% unless private mortgage insurance is obtained. During periods
of declining interest rates, ARMs with negative amortization potential will
experience accelerated amortization, thereby offsetting, in whole or in part,
previously incurred negative amortization, if any, or reducing the principal
balance ahead of the original schedule.
CREDIT ADMINISTRATION
The credit administration function identifies, measures and establishes SVAs
and assesses and establishes the allowance for loan losses in conformity with
regulatory guidelines and generally accepted accounting principles ("GAAP"). See
"--Credit Loss Experience."
13
<PAGE>
Loan Portfolio Risk Elements
Fidelity's loan portfolio risk elements and credit loss experience may be more
clearly understood when the following sections are read in conjunction with Item
7. "MD&A--Asset Quality."
The following table presents net delinquent mortgage loans at December 31,
1997, by property type and location.
<TABLE>
<CAPTION>
MULTIFAMILY
--------------------------------
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL
------ ------ ------- -------- -------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California:
Southern California
Counties:
Los Angeles................ $4,253 $ 958 $ 8,973 $1,430 $ 736 $16,350
Orange..................... 1,532 855 -- -- 481 2,868
San Bernardino............. 851 72 375 -- -- 1,298
Santa Barbara.............. 647 143 -- -- -- 790
San Diego.................. 94 -- 680 -- -- 774
Ventura.................... 106 -- 631 -- -- 737
Riverside.................. 692 -- -- -- -- 692
------ ------ ------- ------ ------ -------
8,175 2,028 10,659 1,430 1,217 23,509
Northern California
Counties:
Santa Clara................ 791 287 61 -- -- 1,139
Merced..................... 135 -- -- 531 -- 666
Fresno..................... -- -- -- 660 -- 660
Alameda.................... 243 -- -- -- -- 243
Contra Costa............... 169 -- -- -- -- 169
------ ------ ------- ------ ------ -------
1,338 287 61 1,191 -- 2,877
Hawaii....................... 216 -- -- -- -- 216
------ ------ ------- ------ ------ -------
Total delinquent loans... $9,729 $2,315 $10,720 $2,621 $1,217 $26,602
====== ====== ======= ====== ====== =======
</TABLE>
14
<PAGE>
The following table presents delinquencies as a percentage of the loan
mortgage portfolio by property type and location at December 31, 1997, with
ratios calculated net of SVA and writedowns.
<TABLE>
<CAPTION>
MULTIFAMILY
=========================================
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL
------ ------ ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
California:
Southern California Counties:
Los Angeles............................ 1.6% 0.8% 0.9% 0.7% 0.7% 1.0%
Orange................................. 1.6% 0.7% -- -- 0.8% 0.7%
San Bernardino......................... 3.7% 0.6% 1.3% -- -- 1.5%
Santa Barbara.......................... 4.4% 1.9% -- -- -- 1.7%
San Diego.............................. 0.3% -- 0.9% -- -- 0.5%
Ventura................................ 0.4% -- 2.1% -- -- 1.0%
Riverside.............................. 3.1% -- -- -- -- 1.0%
Percent of Southern California
delinquencies by property type........ 1.7% 0.7% 0.8% 0.5% 0.6% 0.9%
Northern California
Counties:
Santa Clara............................ 2.3% 1.6% 0.2% -- -- 1.4%
Merced................................. 11.2% -- -- 28.4% -- 14.4%
Fresno................................. -- -- -- 13.4% -- 5.7%
Alameda................................ 1.8% -- -- -- -- 1.3%
Contra Costa........................... 1.7% -- -- -- -- 1.5%
Percent of Northern California
delinquencies by property type........ 1.3% 0.9% 0.1% 10.0% -- 1.5%
Hawaii................................... 4.5% -- -- -- -- --
Percent of out-of-state delinquencies
by property type...................... 0.4% -- -- -- -- 0.3%
Percent of total delinquencies by
property type........................... 1.5% 0.7% 0.8% 0.9% 0.6% 0.9%
</TABLE>
The following table presents net delinquent mortgage loans at December 31,
1997, by property type and year of origination.
<TABLE>
<CAPTION>
YEAR OF ORIGINATION
=================================================================================================
TOTAL 1996 1995 1994 1993 1992 1991 1990 1989
------- ----- ----- ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property type:
Single Family............... $ 9,729 $ 1 $ 2 $2,146 $ 583 $ 365 $ 525 $1,638 $ 571
Multifamily loans:
2 to 4 units............... 2,315 -- -- -- 246 -- 447 574 601
5 to 36 units.............. 10,720 -- -- -- 236 1,009 613 5,328 1,559
37 units and over.......... 2,621 -- -- -- -- 660 -- -- --
------- ----- ----- ------ ------ ------ ------ ------ ------
Total multifamily......... 15,656 -- -- -- 482 1,669 1,060 5,902 2,160
Commercial and other........ 1,217 48 -- -- -- -- -- 58 --
------- ----- ----- ------ ------ ------ ------ ------ ------
Total delinquent loans..... $26,602 $ 49 $ 2 $2,146 $1,065 $2,034 $1,585 $7,598 $2,731
======= ===== ===== ====== ====== ====== ====== ====== ======
Percent of net delinquent
loans to remaining
portfolio................. 0.9% 0.1% --% 0.8% 0.6% 1.2% 0.9% 1.6% 0.8%
======= ===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR OF ORIGINATION
======================
1988 AND PRIOR
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Property type:
Single Family............... $3,898
Multifamily loans:
2 to 4 units............... 447
5 to 36 units.............. 1,975
37 units and over.......... 1,961
------
Total multifamily......... 4,383
Commercial and other........ 1,111
------
Total delinquent loans..... $9,392
======
Percent of net delinquent
loans to remaining
portfolio................. 0.9%
======
</TABLE>
15
<PAGE>
The following tables present net delinquent loans, including credit card
loans, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
-------------- --------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total delinquencies:
30 to 59 days................ $11,905 $12,618 $11,638 $16,828
60 to 89 days................ 5,527 3,661 7,370 6,565
90 days and over............. 14,583 21,914 28,449 39,482
------- ------- ------- -------
$32,015(1) $38,193(1) $47,457 $62,875
======= ======= ======= =======
</TABLE>
- --------------------
(1) Included in the net delinquent loan balance at December 31, 1997 and
September 31, 1997, are $5.4 million and $1.1 million, respectively, of
credit card balances related to the credit enhancement affinity program. No
losses are expected from these delinquencies as a result of the credit
enhancements provided by the affinity partner.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
-------------- --------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total delinquencies:
30 to 59 days................ $14,959 $22,748 $23,467 17,135
60 to 89 days................ 11,668 8,260 8,026 9,552
90 days and over............. 35,853 36,249 43,292 40,111
------- ------- ------- -------
$62,480 $67,257 $74,785 $66,798
======= ======= ======= =======
</TABLE>
The following table details net loans which are 30 to 89 days delinquent at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
====================================================
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans 30 to 59 days contractually
delinquent:
Single family......................... $ 4,153 $ 4,986 $ 4,283 $ 4,413 $ 7,480
Multifamily:
2 to 4 units......................... 1,111 1,023 1,748 4,281 3,599
5 to 36 units........................ 3,638 5,617 5,434 15,438 16,948
37 units and over.................... 531 2,461 304 -- 4,114
------- ------- ------- ------- -------
Total multifamily.................. 5,280 9,101 7,486 19,719 24,661
Commercial and industrial............. -- 872 958 264 2,048
Credit card........................... 2,472 -- -- -- --
------- ------- ------- ------- -------
11,905 14,959 12,727 24,396 34,189
------- ------- ------- ------- -------
Loans 60 to 89 days contractually
delinquent:
Single family......................... 1,354 3,479 924 1,016 2,497
Multifamily:
2 to 4 units......................... 257 1,790 282 904 1,707
5 to 36 units........................ 2,329 6,130 5,801 5,247 12,770
37 units and over.................... -- -- -- 2,272 5,035
------- ------- ------- ------- -------
Total multifamily.................. 2,586 7,920 6,083 8,423 19,512
Commercial and industrial............. 155 269 213 1,385 1,723
Credit card........................... 1,432 -- -- -- --
------- ------- ------- ------- -------
5,527 11,668 7,220 10,824 23,732
------- ------- ------- ------- -------
Total loans delinquent 30 to 89 $17,432 $26,627 $19,947 $35,220 $57,921
days.............................. ======= ======= ======= ======= =======
</TABLE>
Nonaccruing Loans
The Bank places a loan on nonaccrual status whenever the payment of interest
is 90 or more days delinquent, or earlier if management determines that it is
warranted. Loans on nonaccrual status are resolved by the borrower bringing the
loan current, by the Bank and the borrower agreeing to modify the terms of the
loan or by foreclosure of the collateral securing the loan. See "--Restructured
Loans" and "--Foreclosure Policies."
16
<PAGE>
The following table presents net nonaccruing loans by property type at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Single family............... $ 4,221 $ 8,019 $ 7,226 $ 7,775 $12,661
Multifamily:
2 to 4 units.............. 948 5,959 6,671 6,590 15,652
5 to 36 units............. 4,753 18,071 14,312 23,112 34,746
37 units and over......... 2,090 2,671 3,190 7,088 17,973
------- ------- ------- ------- -------
Total multifamily........... 7,791 26,701 24,173 36,790 68,371
Commercial and industrial... 1,062 1,405 20,511(1) 27,049(1) 12,443
------- ------- ------- ------- -------
Total nonaccruing loans... $13,074 $36,125 $51,910 $71,614 $93,475
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes two loans on one hotel property with a total balance of $15.9
million at December 31, 1995 and one loan on the same hotel property with a
balance of $13.8 million at December 31, 1994.
It is the Bank's policy to reserve all earned but unpaid interest on loans
placed on nonaccrual status. The reduction in income related to such reserves,
net of interest recognized on cured delinquencies, was $3.9 million, $6.0
million, and $5.8 million for the years ended December 31, 1997, 1996, and 1995,
respectively.
The following table presents net nonaccruing loans by property type and
geographic location at December 31, 1997.
<TABLE>
<CAPTION>
MULTIFAMILY
------------------------- PERCENTAGE
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL OF
FAMILY UNITS UNITS AND OVER AND INDUSTRIAL TOTAL TOTAL
------ ------ ------- -------- -------------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California:
Southern California
Counties:
Los Angeles................ $2,287 $441 $4,090 $1,430 $ 735 $ 8,983 68.7%
Orange..................... 593 435 -- -- 327 1,355 10.4
San Bernardino............. 551 72 261 -- -- 884 6.8
Riverside.................. 467 -- -- -- -- 467 3.6
Ventura.................... 93 -- 235 -- -- 328 2.5
San Diego.................. 19 -- 167 -- -- 186 1.4
------ ---- ------ ------ ------ ------- -----
4,010 948 4,753 1,430 1,062 12,203 93.4
Northern California
Counties:
Fresno..................... -- -- -- 660 -- 660 5.0
Santa Clara................ 193 -- -- -- -- 193 1.5
Alameda.................... 18 -- -- -- -- 18 0.1
------ ---- ------ ------ ------ ------- -----
211 -- -- 660 -- 871 6.6
------ ---- ------ ------ ------ ------- -----
Total nonaccruing loans.. $4,221 $948 $4,753 $2,090 $1,062 $13,074 100.0%
====== ==== ====== ====== ====== ======= =====
</TABLE>
17
<PAGE>
Restructured Loans
The Bank will consider modifying the terms of a loan when the borrower is
experiencing financial difficulty and the Bank determines that the loan, as
modified, is likely to result in a greater ultimate recovery to the Bank than
taking title to the property.
According to SFAS No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring," a troubled debt restructuring ("TDR") occurs when a
creditor, for economic or legal reasons related to a debtor's difficulties,
grants a concession to the debtor that it would not otherwise consider.
Generally, Fidelity restructures loans by temporarily or permanently reducing
interest rates, allowing interest only payments, reducing the loan balance,
extending property tax repayment plans, extending maturity dates or recasting
principal and interest payments. However, debt restructuring is not necessarily
a TDR even if the borrower is experiencing some difficulties, as long as the
restructuring terms are consistent with current market rates and risk. The
adoption of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosures," requires that TDRs be measured for
impairment in the same manner as any impaired loan. A loan is considered
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due (contractual interest and
principal) according to the contractual terms of the loan agreement.
The following table presents TDRs by property type at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
==========================================================
1997 1996 1995 1994 1993
----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Property type:
Single family............... $ 575 $ 1,178 $ 1,162 $ 459 $ 633
Multifamily:
2 to 4 units.............. 3,287 4,260 2,597 2,511 3,171
5 to 36 units............. 14,972 11,647 15,189 35,347 13,648
37 units and over......... 6,485 5,805 9,109 10,292 11,090
---------- ---------- ------- ------- -------
Total multifamily....... 24,744 21,712 26,895 48,150 27,909
Commercial and industrial... 18,674(1) 22,306(1) 3,688 1,645 --
Land........................ -- -- 946 1,890 171
---------- ---------- ------- ------- -------
Total TDRs.............. $43,993 $45,196 $32,691 $52,144 $28,713
========== ========== ======= ======= =======
</TABLE>
- -----------------
(1) Includes a hotel property loan with a balance of $18.1 million and $18.4
million at December 31, 1997 and 1996, respectively.
18
<PAGE>
The following table presents TDRs at December 31, 1997 by property type and
geographic location.
<TABLE>
<CAPTION>
MULTIFAMILY
-------------------------------------- PERCENTAGE
SINGLE 2 TO 4 5 TO 37 UNITS COMMERCIAL OF
FAMILY UNITS 36 UNITS AND OVER AND INDUSTRIAL TOTAL TOTAL
------ ------ -------- -------- -------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Southern California:
Los Angeles................. $516 $1,650 $10,000 $5,537 $ -- $17,703 40.2%
Orange...................... -- 1,637 3,124 -- 18,674(1) 23,435 53.3
San Diego................... -- -- 1,514 948 -- 2,462 5.6
Riverside................... 59 -- 334 -- -- 393 0.9
---- ------ ------- ------ ------- ------- ------
Total TDRs................. $575 $3,287 $14,972 $6,485 $18,674 $43,993 100.0%
==== ====== ======= ====== ======= ======= ======
</TABLE>
(1) Includes a hotel property loan with a balance of $18.1 million at December
31, 1997.
Loan Monitoring
The Bank has a loan review system that is designed to meet the following
objectives:
. To identify, in a timely manner, loans with potential credit or
collateral weaknesses and to appropriately classify loans with well
defined weaknesses that jeopardize loan repayment so that timely action
can be taken and credit losses can be mitigated.
. To project relevant trends that affect the collectibility of the loan
portfolio and to isolate potential problem areas that may exhibit adverse
trends.
. To provide essential information to assess the adequacy of the allowance
for loan losses and to identify and recognize in a timely manner
estimated specific loan losses.
. To assess the adequacy of and adherence to the Bank's internal credit
policies and loan administration procedures and to monitor compliance
with the foregoing and with relevant laws and regulations.
The Bank considers such risk factors as payment history, collateral value,
income property cash flow, property condition, and the borrower's financial
capacity and property management experience in its monitoring and risk grading
process. Current property operating statements are requested on a periodic basis
for substantially all income property collateral and property inspections are
conducted. The assignment of loan grades in the Bank's asset review process is
subjective and greatly dependent upon having current and accurate information
regarding the borrower's financial capability and willingness to repay the debt
as well as the collateral property's condition, operating results and fair
value. If current and accurate data is not available, it is critical to have
current knowledge of the general economic conditions affecting the borrower and
the collateral property.
Although these general key information elements are desired for accurate loan
grading, the Bank is required to assign loan grades notwithstanding the lack of
any one or more of these elements. Loan grading decisions are made using
judgment based on the best and most current information available including, but
not limited to, the borrower's payment history with the Bank on all existing
credits, real estate property tax and hazard insurance payment records, the
borrower's payment record, current financial statements of the borrower,
guarantors, and principals or general partners of the borrower, property
inspection reports, rent rolls and operating statements for income properties
and loan "work-out" status, if applicable.
19
<PAGE>
When a borrower requests a modification of loan terms, the loan is considered
to be in a possible work-out status. The Bank will consider a workout of a loan
when the borrower is experiencing financial difficulty and the Bank determines
that the loan, as modified, is likely to result in a greater ultimate recovery
to the Bank than taking title to the property. A work-out may range from (i) a
modification, allowing the payment of interest only for a short period of time
and then returning to payments of principal and interest, to (ii) a complex
agreement which may include, among other things, the Bank writing off a portion
of loan principal or forgiving accrued and unpaid interest. A loan work-out,
therefore, could be a modification or a TDR. See "--Credit Loss Experience." For
purposes of loan classification and grading, a loan where work-out negotiations
are in progress is classified in a manner that reflects the asset's
circumstances at the time of review.
The Bank also analyzes its multifamily loans, which represent the largest
portion of the Bank's portfolio, by geographic submarkets. In this process, the
Bank utilizes a national real estate consulting firm and the Bank's appraisal
department to understand key real estate market trends in those submarkets.
Loan Grading System
In the second half of 1995, the Bank enhanced its existing policy of
specifically identifying loans in the portfolio through implementation of a loan
grading system ("LGS") that management believes improved the grading process.
Since implementing the LGS in the latter half of 1995, over 79% of the
multifamily and non-residential loan portfolios have been reviewed. The
evaluation of each loan is based on four key risk attributes: (1) ability of
income from the property to act as the primary source of repayment, (2) value of
the collateral if a sale is required, (3) ability and willingness of the
borrower to pay, and (4) market trends in the area around the property.
Asset Classification
Credit risk is graded based on the Bank's internal asset review policies and
procedures, and individual loans are categorized as Pass, Special Mention,
Substandard, Doubtful or Loss depending on the risk characteristics of each
loan. All such grading requires the application of subjective judgment by the
Bank. A brief description of these categories follows:
A Pass asset is considered of sufficient quality to preclude designation as
Special Mention or a substandard asset. Pass assets generally are protected by
the current net worth and paying capacity of the obligor and by the value of the
underlying collateral.
An asset designated as Special Mention does not currently expose an
institution to a sufficient degree of risk to warrant an adverse classification.
However, it does possess credit deficiencies or potential weaknesses deserving
management's close attention. If uncorrected, such weaknesses or deficiencies
may expose an institution to an increased risk of loss in the future. Special
Mention assets are also referred to as criticized.
An asset classified as Substandard is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged.
Assets so classified have a well-defined weakness or weaknesses. They are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have all the weaknesses inherent in those
classified as Substandard. In addition, these weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable or improbable. The Bank will generally classify
assets as Doubtful when inadequate data is available or when such uncertainty
exists as to preclude a Substandard classification.
20
<PAGE>
Assets classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. A Loss classification does not mean that an asset has
absolutely no recovery or salvage value; rather it means that it is not
practical or desirable to defer establishing a specific allowance for a
basically worthless asset even though partial recovery may be effected in the
future. The Bank will generally classify as Loss the portion of assets
identified as exceeding the asset's fair market value and a specific reserve is
established for such excess.
The following table presents net classified assets by property type at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1997 1996
------------ ------------- -------- --------- ------------
(DOLLAIN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Performing classified loans:
Single family.......................... $ 3,551 $ 3,521 $ 3,331 $ 2,757 $ 4,555
Multifamily:
2 to 4 units.......................... 4,241 4,455 4,856 5,527 6,030
5 to 36 units......................... 63,777 58,694 62,509 50,306 60,785
37 units and over..................... 22,704 24,551 20,761 12,196 10,375
-------- -------- -------- -------- --------
Total multifamily properties......... 90,722 87,700 88,126 68,029 77,190
Commercial and other................... 10,412 11,373 9,788 9,342 29,503(2)
-------- -------- -------- -------- --------
Total performing classified loans..... 104,685 102,594 101,245 80,128 111,248
-------- -------- -------- -------- --------
Nonperforming classified loans:
Single family.......................... 4,222 4,501 5,980 7,001 8,019
Multifamily:
2 to 4 units.......................... 948 1,721 2,677 5,527 5,959
5 to 36 units......................... 4,752 10,006 15,745 21,041 18,071
37 units and over..................... 2,090 5,139 4,929 4,162 2,671
-------- -------- -------- -------- --------
Total multifamily properties......... 7,790 16,866 23,351 30,730 26,701
Commercial and other................... 1,062 437 3,845 1,982 1,405
-------- -------- -------- -------- --------
Total nonperforming classified loans.. 13,074 21,804 33,176 39,713 36,125
-------- -------- -------- -------- --------
Total classified loans............... 117,759 124,398 134,421 119,841 147,373
-------- -------- -------- -------- --------
Real estate owned:
Single family.......................... 2,611 2,992 4,095 5,211 3,185
Multifamily:
2 to 4 units.......................... 1,091 1,326 2,215 2,766 3,410
5 to 36 units......................... 5,318 10,911 12,992 11,218 13,574
37 units and over..................... 3,149 3,105 3,106 2,812 1,844
-------- -------- -------- -------- --------
Total multifamily properties......... 9,558 15,342 18,313 16,796 18,828
Commercial and other................... 624 635 2,432 2,933 3,950
-------- -------- -------- -------- --------
Net REO before REO GVA................ 12,793 18,969 24,840 24,940 25,963
REO GVA................................ (500) (500) (1,200) (1,300) (1,300)
-------- -------- -------- -------- --------
Total real estate owned............... 12,293 18,469 23,640 23,640 24,663
-------- -------- -------- -------- --------
Other classified assets................. 23,450(1) 14,027(1) 1,404 1,382 2,060
-------- -------- -------- -------- --------
Total classified assets............... $153,502 $156,894 $159,465 $144,863 $174,096
======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) Includes the Libor Asset Trust investment securities with a book value of
$20.9 million and $12.3 million at December 31, 1997 and September 30,
1997, respectively, which were classified due to the performance of the
underlying collateral. These assets were sold in January 1998.
(2) Includes a hotel property loan with a balance of $18.4 million at December
31, 1996.
21
<PAGE>
The following table summarizes net classified assets at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
========================================================================
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming assets ("NPAs"):
Nonaccruing loans.................... $ 13,074 $ 36,125 $ 51,910 $ 71,614 $ 93,475
ISFs(1).............................. -- -- -- -- 28,362
REO(2)............................... 12,293 24,663 19,521 14,115 113,784
-------- -------- -------- -------- --------
Total NPAs........................ 25,367 60,788 71,431 85,729 235,621
-------- -------- -------- -------- --------
Performing classified loans:
Single family........................ 3,551 4,555 4,368 544 5,749
Multifamily:
2 to 4 units...................... 4,241 6,030 8,297 951 7,616
5 to 36 units..................... 63,777 60,785 85,581 28,872 56,485
Over 37 units..................... 22,704 10,375 39,301 19,925 51,965
-------- -------- -------- -------- --------
Total multifamily.............. 90,722 77,190 133,179 49,748 116,066
Commercial and industrial............ 10,412 29,503(4) 10,099 5,515 3,905
-------- -------- -------- -------- --------
Total performing classified
Loans........................... 104,685 111,248 147,646 55,807 125,720
-------- -------- -------- -------- --------
Other classified assets................ 23,450(3) 2,060 -- -- 11,161
-------- -------- -------- -------- --------
Total classified assets........... $153,502 $174,096 $219,077 $141,536 $372,502
======== ======== ======== ======== ========
NPAs to total assets................... 0.61% 1.83% 2.16% 2.31% 5.37%
======== ======== ======== ======== ========
Classified assets to total assets...... 3.68% 5.23% 6.64% 3.82% 8.49%
======== ======== ======== ======== ========
</TABLE>
- -----------------
(1) On January 1, 1994 the Bank implemented SFAS No. 114, which effectively
eliminated the in-substance foreclosure ("ISF") designation. Loans
previously considered ISFs are included in loans beginning in 1994.
(2) For presentation purposes, NPAs include REO net of REO GVA, if any.
(3) Includes the Libor Asset Trust investment securities with a book value of
$20.9 million at December 31, 1997 which were classified due to the
performance of the underlying collateral. These assets were sold in January
1998.
(4) Includes a hotel property loan with a balance of $18.4 million at December
31, 1996.
22
<PAGE>
The following tables present net classified assets for the quarters indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
---------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NPAs:
Nonaccruing loans.................. $ 13,074 $ 21,804 $ 33,176 $ 39,713
REO, before REO GVA................ 12,793 18,969 24,840 24,940
REO GVA............................ (500) (500) (1,200) (1,300)
---------- ----------- -------- --------
Total NPAs........................ 25,367 40,273 56,816 63,353
Performing classified loans......... 104,685 102,594 101,245 80,128
Other classified assets............ 23,450(1) 14,027(1) 1,404 1,382
---------- ----------- -------- --------
Total classified assets........... $ 153,502 $ 156,894 $159,465 $144,863
========== =========== ======== ========
NPAs to total assets................ 0.61% 1.03% 1.61% 1.92%
========== =========== ======== ========
Classified assets to total assets... 3.68% 4.00% 4.51% 4.40%
========== =========== ======== ========
</TABLE>
- ---------------------
(1) Includes the Libor Asset Trust investment securities with a book value of
$20.9 million and $12.3 million at December 31, 1997 and September 30,
1997, respectively, which were classified due to the performance of the
underlying collateral. These assets were sold in January 1998.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
---------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NPAs:
Nonaccruing loans................. $ 36,125 $ 36,480 $ 43,292 $ 40,111
REO, before REO GVA............... 25,963 26,216 21,219 23,933
REO GVA........................... (1,300) (1,000) (700) (400)
-------- -------- -------- --------
Total NPAs..................... 60,788 61,696 63,811 63,644
Performing classified loans......... 111,248 248,967 251,847 222,279
Other classified assets........... 2,060 2,503 3,100 2,979
-------- -------- -------- --------
Total classified assets........ $174,096 $313,166 $318,758 $288,902
======== ======== ======== ========
NPAs to total assets................ 1.83% 1.86% 1.94% 1.94%
======== ======== ======== ========
Classified assets to total assets... 5.23% 9.42% 9.67% 8.81%
======== ======== ======== ========
</TABLE>
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of originating and retaining loans.
The portfolio monitoring procedures discussed earlier (see "--Credit
Administration--Loan Portfolio Risk Elements" and "--Loan Monitoring") assist
the Bank in early identification of potential problem loans and losses. The
Bank's loan service and special assets departments are responsible for working
with borrowers to resolve problem loans and minimize credit losses. The Bank's
REO department is responsible for selling properties acquired through
foreclosure.
The Company establishes allowances for estimated losses on loans and REO which
represent the Company's estimate of identified and unidentified losses in the
Company's portfolios. These estimates, while based upon historical loss
experience and other relevant data, are ultimately subjective and inherently
uncertain. The Company has established valuation allowances for estimated losses
on specific loans and REO ("specific valuation allowances" or "SVA") and for the
inherent risk in the loan and REO portfolios which has yet to be specifically
identified ("general valuation allowances" or "GVA"). SVAs are allocated from
the GVA when, in the Company's judgment, a loan is impaired or REO has declined
in value and the loss is probable and estimable. When these estimated losses are
determined to be permanent, such as when a loan is foreclosed and the related
property is transferred to REO, specific valuation allowances are charged off.
23
<PAGE>
On January 1, 1994, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures." This statement
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in TDRs.
SFAS No. 114 states that a loan is impaired when it is probable that a creditor
will be unable to collect all principal and interest amounts due according to
the contracted terms of the loan agreement. A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
the fair value of the collateral for a collateral dependent asset. Regardless of
the measurement method, a creditor shall measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is
probable. The statement also clarifies the existing accounting for ISFs by
stating that a collateral dependent real estate loan would be reported as REO
only if the lender had taken possession of the collateral.
In measuring the risk of the loan portfolio, the Bank reviews and classifies
loans through its internal asset review process principally utilizing the LGS.
This process involves the evaluation of loans in order to determine if a SVA
should be placed against those assets which exhibit characteristics of inherent
risk of loss although actual loss may not be certain at the time such an SVA is
established.
The Company establishes the level of GVA utilizing several models and
methodologies which are based upon a number of factors, including historical
loss experience, the level of nonperforming and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and management's judgment. Additions to GVA, in the form of
provisions, are reflected in current operations.
The amount of the Bank's allowance for loan losses represents management's
estimate of the amount of loan losses likely to be incurred by the Bank, based
upon various assumptions as to economic and other conditions. As such, the
allowance for loan losses does not represent the amount of such losses that
could be incurred under adverse conditions that management does not consider to
be the most likely to arise. In addition, management's classification of assets
and evaluation of the adequacy of the allowance for loan losses is an ongoing
process. Consequently, there can be no assurance that material additions to the
Bank's allowance for loan losses will not be required in the future, thereby
adversely affecting earnings and the Bank's ability to maintain or build
capital. While management believes that the current allowance is adequate to
absorb the known and inherent risks in the loan portfolio, no assurances can be
given that the allowance is adequate or that economic conditions which may
adversely affect the Bank's market area or other circumstances will not result
in future loan losses, which may not be covered completely by the current
allowance or may require an increased provision which could have a significant
adverse effect on the Bank's financial condition, results of operations and
levels of regulatory capital.
24
<PAGE>
The following table sets forth the allowance for estimated loan losses broken
out by GVA and SVA for loan or REO at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
================================= ==================================
LOANS REO TOTAL LOANS REO TOTAL
------------- ------- -------- ------------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GVA... $ 32,426 $ 500 $32,926 $ 25,308 $1,300 $26,608
SVA... 18,112 623 18,735 32,200 781 32,981
---------- ------ ------- ---------- ------ -------
$ 50,538(1) $1,123 $51,661 $ 57,508(1) $2,081 $59,589
========== ====== ======= ========== ====== =======
</TABLE>
(1) At December 31, 1997 and 1996, the allowance for estimated loan losses
includes $14.4 million and $16.7 million, respectively, of remaining loan
GVA and SVA for the Plan. See Item 7. "MD&A--Asset Quality--Accelerated
Asset Resolution Plan."
The following table summarizes the activity in the allowance for estimated
loan and REO losses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
===============================================================
1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 59,589 $ 92,927 $ 69,520 $ 101,547 $ 80,727
Provision for estimated loan and REO
losses................................ 14,064 18,829 73,090(2) 74,327 95,300
Charge-offs........................... (44,000) (55,471) (52,636) (72,505) (79,444)
GVA charged off on bulk sale assets... -- -- -- (38,391) --
Allowances related to acquisition (1). 12,890 -- -- -- --
Recoveries and other.................. 9,118 3,304 2,953 4,542 4,964
--------- --------- ---------- --------- ---------
Balance at end of period................ $ 51,661 $ 59,589 $ 92,927 $ 69,520 $ 101,547
========= ========= ========== ========= =========
</TABLE>
- --------------------------
(1) Included in the estimated loan losses related to the Hancock acquisition is
$5.8 million associated with the Plan. See Item 7. "MD&A--Asset Quality
Accelerated Asset Resolution Plan."
(2) Included in the provision for estimated loan losses for 1995 is the $45
million loan portfolio charge associated with the Plan. See Item 7. "MD&A --
Asset Quality Accelerated Asset Resolution Plan."
The following table presents loan and REO charge-offs by property type for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
==========================================
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Single family............... $ 3.3 $ 4.3 $ 2.7 $ 4.1 $ 3.5
Multifamily loans:
2 to 4 units............... 6.3 6.2 5.2 8.6 5.0
5 to 36 units.............. 28.7 33.1 33.9 39.1 44.0
37 units and over.......... 3.6 6.0 8.2 16.3 21.8
----- ----- ----- ----- -----
Total multifamily......... 38.6 45.3 47.3 64.0 70.8
Commercial and industrial... 2.1 5.8 2.6 4.4 5.1
----- ----- ----- ----- -----
Total charge-offs......... $44.0 $55.4 $52.6 $72.5 $79.4
===== ===== ===== ===== =====
</TABLE>
25
<PAGE>
The following table presents loan and REO recoveries by property type and net
charge-offs for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
===============================================
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Single family........................... $ 2.2 $ 0.6 $ 0.1 $ 0.1 $ 0.4
Multifamily loans:
2 to 4 units........................... 1.3 0.3 0.1 0.2 --
5 to 36 units.......................... 4.6 1.2 1.8 3.2 3.3
37 units and over...................... 0.2 0.5 0.8 0.7 0.9
----- ----- ----- ----- -----
Total multifamily..................... 6.1 2.0 2.7 4.1 4.2
Commercial and industrial............... 0.8 0.7 0.2 0.3 0.4
----- ----- ----- ----- -----
Total recoveries...................... $ 9.1 $ 3.3 $ 3.0 $ 4.5 $ 5.0
----- ----- ===== ===== =====
Total charge-offs, net of recoveries.... $34.9 $52.1 $49.6 $68.0 $74.4
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding.... 1.2% 1.8% 1.6% 1.9% 1.9%
===== ===== ===== ===== =====
</TABLE>
Though the southern California economy continues to be characterized by higher
unemployment than the national and state averages and real estate values that,
in some cases, continue to decline, there are indicators that imply the economy
is beginning to recover. There can be no assurances that the southern California
economy will recover in the near term as many factors key to recovery may be
impacted adversely by the Federal Reserve Board's interest rate policy as well
as other factors. Consequently, rents and real estate values may not stabilize,
which may affect future delinquency and foreclosure levels and may adversely
impact the Company's asset quality, earnings performance and capital levels.
FORECLOSURE POLICIES
The Bank typically initiates foreclosure proceedings between 30 and 90 days
after a borrower defaults on a loan. The proceedings take at least four months
before the collateral for the loan can become property of the Bank, and this
period can be extended under certain circumstances, such as, if the borrower
files bankruptcy or if the Bank enters into negotiations with the borrower to
restructure the loan. In California, foreclosure proceedings almost always take
the form of a nonjudicial foreclosure, upon the completion of which the lender
is left without recourse against the borrower for any deficiency or shortfall
from the difference between the value of the collateral and the amount of the
loan, and in most cases the Bank obtains title to the property. In some cases,
while the foreclosure proceedings are underway, the borrower requests
forbearance from foreclosure in order to have more time to cure the default or
restructure the loan. The Bank agrees to restructure when it determines that the
loan, as modified, is likely to result in a greater ultimate recovery than
taking title to the property. Among the factors the Bank considers in
restructuring a loan is the extent to which the borrower pays down the loan,
furnishes additional collateral or makes a further investment in the property by
way of repairs or refurbishment, and demonstrates an awareness and ability to
manage the property according to a reasonable operating plan.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate is acquired in settlement of loans when property collateralizing a
loan is foreclosed upon or otherwise acquired in satisfaction of the loan and
the Bank takes title to the property. Prior to January 1, 1994, certain loans
were also included in REO when they exhibited characteristics more closely
associated with the risk of real estate ownership than with loans. These loans
were designated as ISF if they met the
26
<PAGE>
following criteria: (a) the borrower currently has little or no equity at fair
market value in the underlying collateral, (b) the only source of repayment is
the property securing the loan and (c) the borrower has abandoned the property
or will not be able to rebuild equity in the foreseeable future. As a result of
the adoption of SFAS No. 114, beginning January 1, 1994, loans that meet the
criteria for ISF designation are no longer reported as REO, although they
continue to be valued based on the fair value of the collateral and generally
continue to be included in NPAs.
The following table presents net REO, including ISFs (prior to 1994), by
property type at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
==============================================================
1997 1996 1995 1994 1993
--------- --------- --------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single family............... $ 2,611 $ 3,185 $ 2,952 $ 930 $ 6,942
Multifamily:
2 to 4 units............... 1,091 3,410 2,598 198 10,345
5 to 36 units.............. 5,318 13,574 8,421 4,884 41,177
37 units and over.......... 3,149 1,844 -- 1,041 47,565
------- -------- -------- ---------- --------
Total multifamily....... 9,558 18,828 11,019 6,123 99,087
Commercial and industrial... 624 3,950 7,850 7,062 44,559
REO GVA....................... (500) (1,300) (2,300) -- (8,442)
------- -------- -------- ---------- --------
Total net REO (1).......... $12,293 $ 24,663 $ 19,521 $ 14,115(2) $142,146
======= ======== ======== ========== ========
Total ISFs included above..... $ -- $ -- $ -- $ -- $ 28,362
======= ======== ======== ========== ========
</TABLE>
- -----------------------
(1) Foreclosed real estate is shown net of first trust deed loans to others,
where applicable.
(2) Bulk sales of REO in the third and fourth quarters of 1994 contributed to
the significant decrease in REO.
27
<PAGE>
The following table presents the Bank's real estate acquired in settlement of
loans by location and property type at December 31, 1997.
<TABLE>
<CAPTION>
MULTIFAMILY
============================================
SINGLE 2 TO 4 5 TO 36 37 UNITS COMMERCIAL
FAMILY UNITS UNITS AND OVER & INDUSTRIAL TOTAL
------ ------ ------- -------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California:
Southern California
Counties:
Los Angeles................ $1,086 $ 531 $4,213 $ 765 $ -- $ 6,595
Orange..................... 217 452 -- -- 624 1,293
Riverside.................. 597 -- 78 -- -- 675
San Bernardino............. 92 -- 648 -- -- 740
San Diego.................. 63 -- 379 -- -- 442
Kern....................... 316 -- -- -- -- 316
Ventura 68 -- -- -- -- 68
------ ------ ------ ------ ---- -------
2,439 983 5,318 765 624 10,129
------ ------ ------ ------ ---- -------
Northern California Counties:
Sacramento................. -- -- -- 1,844 -- 1,844
Fresno..................... -- 108 -- 540 -- 648
Contra Costa............... 172 -- -- -- -- 172
------ ------ ------ ------ ---- -------
172 108 -- 2,384 -- 2,664
------ ------ ------ ------ ---- -------
Total REO................... $2,611 $1,091 $5,318 $3,149 $624 12,793
====== ====== ====== ====== ====
REO GVA................................................................................................................ (500)
-------
Total REO, net of GVA............................................................................................... $12,293
=======
</TABLE>
In the current market, the Bank rarely sells REO for a price equal to or
greater than the gross loan balance, and the losses suffered are impacted by the
market factors discussed elsewhere in this document. REO is recorded at
acquisition at the lower of the recorded investment in the subject loan or the
fair market value of the assets received. The fair market value of the assets
received is based upon a current appraisal adjusted for estimated carrying,
rehabilitation and selling costs. Most income-producing properties acquired by
the Bank through foreclosure are managed by third party contract managers, under
the supervision of Bank personnel.
During 1997, the Bank sold 318 REO properties with a net book balance of $60.3
million for net sales proceeds of $67.9 million. The Bank made 21 loans in
connection with the sales of these REO properties for a total of $8.4 million
during the year. Of these, one loan in the amount of $1.6 million contained
terms favorable to the borrower that were not available to borrowers for the
purchase of non-REO property.
During 1996, the Bank sold 203 REO properties with a net book balance of $41.7
million for net sales proceeds of $40.3 million. The Bank made six loans in
connection with the sales of these REO properties for a total of $4.8 million
during the year. Of these, one loan in the amount of $1.1 million contained
terms favorable to the borrower that were not available to borrowers for the
purchase of non-REO property.
During 1997, the Bank foreclosed on 257 properties with an aggregate gross
loan balance of $75.4 million and acquired 18 properties with an aggregate gross
loan balance of $5.3 million through the acquisition of Hancock. The average
gross book value per asset foreclosed or acquired in 1997 was $0.3 million.
During 1996 and 1995, the Bank foreclosed on 226 and 270 assets with gross loan
balances of $77.6 million and $92.7 million, respectively. The average gross
book balance per asset foreclosed in 1996 and 1995 was $0.3 million.
28
<PAGE>
BULK SALES
During 1994, the Bank completed bulk sales of $563.3 million of NPAs and other
problem assets. The table below presents the composition of the gross book
balance of assets sold.
<TABLE>
<CAPTION>
PERFORMING NONACCRUAL
LOANS LOANS TDRS REO TOTAL
---------- ---------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single family residences........... $ 2,766 $ 14,413 $ -- $ 10,856 $ 28,035
Multifamily:
2 to 4 units..................... 2,947 15,030 1,209 14,081 33,267
5 units and over................. 138,869 75,725 24,484 146,764 385,842
Commercial and other real estate... 26,612 39,377 -- 50,142 116,131
-------- -------- ------- -------- --------
$171,194 $144,545 $25,693 $221,843 $563,275
======== ======== ======= ======== ========
</TABLE>
At the date of sale, SVA and writedowns of $116.4 million were associated with
these assets. Net proceeds from the sales were $354.9 million.
TREASURY ACTIVITIES
Investments
At December 31, 1997, the Bank maintained an available for sale portfolio to
provide a source of liquid earning assets to meet funding and other
requirements.
As a consequence of concerns regarding the Bank's ability to maintain minimum
regulatory capital levels to remain adequately capitalized, the Bank
reclassified all held to maturity investment securities and MBSs to its
available for sale portfolio in the second quarter of 1995. Subsequent to their
reclassification, certain available for sale securities were sold within the
quarter. In the third quarter of 1996, the Company identified certain MBSs and
investment securities for which it had the ability and intent to hold to
maturity, and transferred them from its available for sale portfolio to its held
to maturity portfolio, at fair value. In the third quarter 1997, the Company
transferred certain MBSs at fair value 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. See Item 7, "MD&A--Writedown of Mortgage-backed
Securities."
Fidelity is required by federal regulations to maintain a minimum level of
liquid assets which may be invested in certain government and other specified
securities. See "--Regulation and Supervision--Fidelity--Activities Regulation
Not Related to Capital Compliance." Investment decisions are made within
guidelines approved by Fidelity's Board of Directors. Investment portfolios are
managed in an effort to maximize yields consistent with maintaining safety of
principal and compliance with applicable regulations.
29
<PAGE>
The securities portfolio consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Whole loan investment
repurchase agreements....... $ 28,000 7.19% $ -- --% $ -- --%
Federal funds sold........... -- -- 29,000 7.00 -- --
---------- -------- --------
28,000 7.19 29,000 7.00 -- --
---------- -------- --------
Investment securities:
Available for sale:
U.S. Government and agency
obligations............... 100,837 5.53 156,251 6.20 87,184 4.66
Other investments.......... -- -- -- -- 7,471 5.54
---------- -------- --------
100,837 5.53 156,251 6.20 94,655 4.70
---------- -------- --------
Held to maturity:
Other investments.......... 3,189 6.00 5,178 5.77 -- --
---------- -------- --------
Total investment
securities............... 104,026 5.54 161,429 6.19 94,655 4.70
---------- -------- --------
MBSs:
Available for sale:
FHLMC...................... 10,275 6.35 62,362 7.87 3,038 5.51
FNMA....................... 230,509 6.96 55,548 7.24 91 2.72
GNMA....................... 222,808 6.98 35,680 6.54 -- --
Participation certificates. 24,860 6.04 25,813 6.72 28,604 7.01
CMO........................ 343,212 7.22 -- -- -- --
LIBOR Asset Trust.......... 20,940 7.47 -- -- -- --
---------- -------- --------
852,604 7.05 179,403 7.51 31,733 6.85
---------- -------- --------
Held to maturity:
LIBOR Asset Trust.......... -- -- 30,024 7.52 -- --
---------- -------- --------
Trading:
GNMA....................... 41,050 6.66 14,121 6.52 -- --
---------- -------- --------
Total MBSs................ 893,654 7.03 223,548 7.51 31,733 6.85
---------- -------- --------
FHLB stock................... 60,498 6.10 52,330 6.00 49,425 5.00
---------- -------- --------
$1,086,178 6.85 $466,307 6.85 $175,813 5.18
========== ======== ========
</TABLE>
30
<PAGE>
The following table summarizes the maturity and weighted average yield of
investment securities at December 31, 1997.
<TABLE>
<CAPTION>
MATURES IN
--------------------------------------------
1999 THROUGH
TOTAL 1998 2002
------------------------ ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Whole loan investment repurchase
agreements........................... $ 28,000 7.19% $ 28,000 7.19% -- --%
Investment securities:
U.S. Government and
agency obligations:
Available for sale................. 100,837 5.53 65,909 4.92 24,928 6.26
Held to maturity................... 3,189 6.00 2,171 5.91 1,018 6.19
---------- -------- ---------
Total investment securities........... 104,026 5.54 68,080 4.95 25,946 6.26
---------- -------- ---------
MBSs:
Available for sale................... 852,604 7.05 123,732 6.68 -- --
Trading.............................. 41,050 6.66 -- -- -- --
---------- -------- ---------
Total MBSs............................ 893,654 7.03 123,732 6.68 -- --
---------- -------- ---------
FHLB stock............................ 60,498 6.10 60,498 6.21 -- --
---------- -------- ---------
$1,086,178 6.85 $280,310 6.21 $25,946 6.26
========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
MATURES IN
--------------------------------------------------------
2003 THROUGH 2008 and
2007 THEREAFTER
-------------------------- --------------------------
WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD
------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Whole loan investment repurchase
agreements.......................... $ -- --% $ -- --%
Investment securities:
U.S. Government and
agency obligations:
Available for sale................. -- -- 10,000 7.75
Held to maturity................... -- -- -- --
-------- ------- -------- --------
Total investment securities........... 10,000 7.75
-------- ------- --------
MBSs:
Available for sale................... -- -- 728,872 7.11
Trading.............................. -- -- 41,050 6.66
------- ------- --------
Total MBSs............................ -- -- 769,922 7.09
------- ------- --------
FHLB stock............................ -- -- -- --
------- ------- --------
$ -- -- $779,922 7.10
======= ========
</TABLE>
SOURCES OF FUNDS
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.
31
<PAGE>
Deposits
The largest source of funds for the Company is deposits. Customer deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum
amount permitted by law up to $100,000 per account. The Company has several
types of deposit accounts designed to attract both short-term and long-term
deposits. The following table sets forth the weighted average interest rates
paid and the amounts of deposits held at the dates indicated:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RATES AT DEPOSITS AT
DECEMBER 31, DECEMBER 31,
=========================== ==================================
1997 1996 1995 1997 1996 1995
------- ------- ------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking--no minimum term:
NOW...................................... 1.7% 1.5% 1.3% $ 232,932 $ 214,985 $ 232,554
Money market checking.................... 2.8 2.8 2.8 3,529 2,287 3,363
Noninterest bearing...................... - - - 99,575 70,439 73,148
Savings--no minimum term:
Passbook................................. 2.0 2.0 2.0 67,502 53,665 62,934
Money market savings..................... 4.2 4.1 3.1 55,885 65,605 93,901
Certificate accounts:
Original term:
Less than 3 months...................... 3.8 3.5 3.3 6,033 3,870 7,053
3 months to 5 months.................... 4.8 4.7 4.3 23,583 22,108 29,258
6 months to 11 months (1)............... 5.4 5.1 4.9 250,037 223,800 271,951
12 months to 23 months (1).............. 5.4 5.1 5.6 1,963,318 1,565,662 1,464,757
24 months to 59 months.................. 5.9 6.0 5.5 123,467 117,082 142,454
60 months and over...................... 5.8 6.4 6.7 65,940 156,430 219,496
--------- --------- ---------
Total certificate accounts................ 5.4 5.3 5.6 2,432,378 2,088,952 2,134,969
--------- --------- ---------
Total deposits........................ 4.8% 4.7% 4.9% $2,891,801 $2,495,933 $2,600,869
========== ========== ==========
</TABLE>
- --------------
(1) At December 31, 1997, there were no accounts with product features including
withdrawal and deposit options without penalty. Included in the above
balances at December 31, 1996, and 1995, are $0.1 million, and $771.5
million, respectively, of certain accounts with product features including
withdrawal and deposit options without penalty.
The following tables provide additional deposit information by remaining
maturity at December 31, 1997.
<TABLE>
<CAPTION>
OVER 6 OVER 12 OVER 24
OVER 3 MONTHS MONTHS MONTHS
MONTHS BUT BUT BUT
BUT WITHIN WITHIN WITHIN
WITHIN WITHIN 12 24 36 OVER 36
3 MONTHS 6 months MONTHS MONTHS MONTHS MONTHS TOTAL
----------- --------- --------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Type of account,
Weighted-average interest rate:
Passbook, 2.00%.................................. $ 67,502 $ -- $ -- $ -- $ -- $ -- $ 67,502
Checking and money market checking, 1.17%........ 336,036 -- -- -- -- -- 336,036
Money market passbook, 4.17%..................... 55,885 -- -- -- -- -- 55,885
Certificate accounts:
Under 3.00%..................................... 4,264 277 634 81 49 54 5,359
3.01--4.00%..................................... 7,618 4,241 93 -- -- -- 11,952
4.01--5.00%..................................... 350,184 130,419 289,660 65,380 177 442 836,262
5.01--6.00%..................................... 359,482 200,778 533,012 167,076 7,329 20,786 1,288,463
6.01--7.00%..................................... 32,795 55,084 142,065 31,442 7,086 11,530 280,002
7.01--8.00%..................................... 423 -- 31 8,631 607 243 9,935
Over 8.01%...................................... -- 170 44 80 111 -- 405
---------- -------- -------- -------- ------ ------- ----------
Total certificates............................. 754,766 390,969 965,539 272,690 15,359 33,055 2,432,378
---------- -------- -------- -------- ------ ------- ----------
Total deposits................................. $1,214,189 $390,969 $965,539 $272,690 $15,359 $33,055 $2,891,801
========== ======== ======== ======== ======= ======= ==========
</TABLE>
32
<PAGE>
Certificates of deposit of $100,000 or more totaled $721.2 million and
represented 24.9% of all deposits at December 31, 1997 and totaled $543.3
million and represented 21.8% of all deposits at December 31, 1996. The Company
intends to continue to use such certificates of deposits as a source of funds to
manage its liquidity.
The following table summarizes certificates of deposits of $100,000 or more by
remaining maturity and weighted average rate at December 31, 1997.
<TABLE>
<CAPTION>
Weighted
Percent of Total Average
Remaining term to maturity (in months) AMOUNT Deposits Rate
-------------------------------------- ----------- ---------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Within three.............................................. $ 21,881 0.8% 5.56%
Over three but within six................................. 12,518 0.4 5.55
Over six but within twelve................................ 27,208 0.9 5.58
Over twelve............................................... 659,599 22.8 5.61
-------- ----
$721,206 24.9% 5.61
======== ====
</TABLE>
The distribution of certificate accounts by date of maturity is an important
indicator of the relative stability of a major source of funds. Longer term
certificate accounts generally provide greater stability as a source of funds,
but currently entail greater interest costs than passbook accounts. The
following tables summarize certificate accounts by maturity, as a percentage of
total deposits and weighted average rate at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
=================================================
Weighted
Percent of Total Average
Matures in quarter ended: Amount Deposits Rate
------------------------- -------------- ---------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
March 31, 1998........................... $ 754,766 26.1% 5.31%
June 30, 1998............................ 390,969 13.4 5.29
September 30, 1998....................... 556,261 19.1 5.36
December 31, 1998........................ 409,278 14.2 5.31
March 31, 1999........................... 128,183 4.4 5.25
June 30, 1999............................ 108,946 3.8 5.22
September 30, 1999....................... 19,409 0.7 5.28
December 31, 1999........................ 16,152 0.6 5.21
March 31, 2000........................... 4,395 0.2 5.18
June 30, 2000............................ 4,490 0.2 5.23
September 30, 2000....................... 2,939 0.1 5.25
December 31, 2000........................ 3,535 0.1 5.23
After December 31, 2000.................. 33,055 1.2 5.49
---------- ----
$2,432,378 84.1% 5.41
========== ====
</TABLE>
The Bank may, from time to time, utilize brokered deposits as a short-term
means of funding. These deposits are obtained or placed by or through a deposit
broker and are subject to certain regulatory limitations. Should the Bank become
undercapitalized, it would be prohibited from accepting, renewing or rolling
over deposits obtained through a deposit broker. Although the Bank is currently
eligible to accept brokered deposits, at December 31, 1997, 1996 and 1995, no
brokered deposits were outstanding. See "--Regulation and Supervision--Fidelity-
- -Capital Requirements and Capital Categories--Mandatory Restrictions on
Undercapitalized Institutions."
33
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Borrowings
The Company utilizes FHLB advances as a source of funds for operations. The
FHLB System functions as a source of credit to financial institutions which are
members of a Federal Home Loan Bank. See "--Regulation and Supervision--Federal
Home Loan Bank System." Fidelity may apply for advances from the FHLB secured by
the capital stock of the FHLB owned by Fidelity and certain of Fidelity's
mortgages and other assets (principally obligations issued or guaranteed by the
U.S. Government or agencies thereof). Advances can be requested for any business
purpose in which Fidelity is authorized to engage, except that advances with a
term greater than five years can be granted only for the purpose of providing
funds for residential housing finance. In granting advances, the FHLB considers
a member's creditworthiness and other relevant factors. FHLB advances to
Fidelity totaled $1.0 billion and $449.9 million at December 31, 1997 and 1996,
respectively. The increase in FHLB advances of $550.1 million in 1997 is
primarily due to the Company's business strategy to grow assets. See Item 7. "MD
& A--Asset Growth". Included in the FHLB advances outstanding at December 31,
1997 were advances of $400.0 million backed by specifically pledged securities.
Fidelity's available FHLB line of credit is based primarily on a portion of
Fidelity's residential loan portfolio pledged for such purpose, up to a maximum
of 35% of total assets. The commercial paper program expired on August 5, 1997
and was not renewed by the decision of the Bank. Based on the total collateral
pledged as of December 31, 1997, Fidelity's remaining available FHLB line of
credit was $359.9 million.
The Company has utilized the capital markets to obtain funds for its
operations. The only such borrowing outstanding during 1997 and 1996 was an
8.50% mortgage-backed medium-term note, Series A, due April 15, 1997 (the
"MTN"). The Bank retired its $100 million mortgage-backed bonds on April 15,
1997. The funds were replaced with FHLB advances.
On July 18, 1997, the Company issued approximately $51.5 million of its Senior
Notes in exchange for the outstanding shares of Series A Preferred Stock issued
by Fidelity in 1995. Holders of approximately 11,000 shares of the Series A
Preferred Stock elected not to exchange their stock for Senior Notes and are
reflected as preferred stock issued by consolidated subsidiary on the Statement
of Financial Condition as of December 31, 1997.
From time to time, Fidelity enters into reverse repurchase agreements by which
it sells securities with an agreement to repurchase the same securities at a
specific future date (overnight to one year). The Company deals only with
dealers who are recognized as primary dealers in U.S. Treasury securities by the
Federal Reserve Board or perceived by management to be financially strong. There
were no reverse repurchase agreements outstanding at December 31, 1997 or 1996.
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The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
======================================
1997 1996 1995
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Fixed rate advances.................... $ 835,000 $237,151 $ 80,000
Floating rate advances................. 174,960 212,700 212,700
---------- -------- --------
1,009,960 449,851 292,700
---------- -------- --------
Other borrowings:
Senior notes........................... 51,478 -- --
Mortgage-backed notes.................. -- 100,000 100,000
Commercial paper....................... -- 40,000 50,000
---------- -------- --------
51,478 140,000 150,000
---------- -------- --------
Total borrowings....................... $1,061,438 $589,851 $442,700
========== ======== ========
Weighted average interest rate on all
borrowings............................ 6.13% 6.02% 6.05%
========== ======== ========
Percent of total borrowings to total
liabilities and stockholders'
equity................................ 25.46% 17.71% 13.42%
========== ======== ========
</TABLE>
INTEREST RATE RISK MANAGEMENT
The Asset/Liability Committee ("ALCO") of the Bank management convenes
periodically to manage the interest rate risk exposure of the Bank. For a
discussion of the Bank's management of interest rate risk, see Item 7. "MD&A--
Asset/Liability Management."
COMPETITION
The Company believes that the traditional role of thrift institutions as the
nation's primary housing lenders has diminished, and that thrift institutions
are subject to increasing competition from commercial banks, mortgage bankers
and others for both depositor funds and lending opportunities. In addition, with
assets of approximately $4.2 billion at December 31, 1997, the Company faces
competition from a number of substantially larger institutions. The ability of
thrift institutions, such as Fidelity, to compete by diversifying into lending
activities other than real estate lending and by offering investments other than
deposit-like investments is subject to certain regulatory and legal
restrictions. The ability of thrift institutions to compete is also limited by
their lack of experience in such other activities. However, the Company believes
these nontraditional activities and the related fee income is vital for future
success. See "--Business Strategy."
The Company faces significant competition in attracting savings deposits and
in originating loans as many of the nation's largest depository and other
financial institutions are headquartered or have a significant number of
branches in the areas where Fidelity conducts its business. Competition for
customers' funds comes principally from other savings and thrift institutions,
commercial banks, mutual funds, insurance companies, credit unions, corporate
and government debt securities, pension funds and investment banks and
investment brokerage firms. The principal basis of competition for investable
funds is the interest rate paid or effective return, the perceived credit risk
and the quality, types, and costs of services offered. In addition to offering
competitive rates and terms, the Company attracts customers through advertising,
readily accessible office locations, the diversity of its products, and the
quality of its customer service. Management believes that in the past the
Company's financial condition has, in some cases, also hindered its ability to
attract and retain employees.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal
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Act"), commercial banks will be able to open branch offices outside of their
home state after June 1, 1997, although the extent of their ability to branch
into a new state will depend on the law of the state. California adopted an
early "opt-in" statute that was effective on October 2, 1995. The new
legislation permits out-of-state banks to acquire California banks that satisfy
a five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry through
acquisition of individual branches of California institutions and "de novo"
branching into California are not permitted. The Riegle-Neal Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which Fidelity operates.
Effective January 1, 1997 through June 30, 1997, the FDIC lowered risk based
deposit insurance premiums for Savings Association Insurance Fund ("SAIF")
insured depository institutions to a range of 0 to 27 basis points. The new
rates are identical to those effective for Bank Insurance Fund ("BIF") member
institutions and eliminate the previously existing premium differential (23
basis points for institutions in the lowest risk category), which was
competitively disadvantageous to SAIF members. However, assessment rates to pay
interest on Financing Corporation bonds incurred in an effort to recapitalize
the former Federal Savings and Loan Insurance Corporation (the "FSLIC") are
higher for SAIF members (6.48 basis points for the first six months of 1997)
than for BIF members (1.3 basis points for such period). By law the Financing
Corporation assessment rate for BIF members is required to be one-fifth the rate
for SAIF members until the earlier of January 1, 2000 or such time as the two
insurance funds may be merged.
EMPLOYEES
At December 31, 1997, the Company had 644 employees (including both full-time
and part-time employees) with 506 average full-time equivalent ("FTEs") for the
1997 year and 563 FTEs for the month of December 1997, none of whom were
represented by a collective bargaining group. Eligible employees are provided
with 401(k) and other benefits, including life, medical, dental, vision
insurance and short and long-term disability insurance.
The Company increased total employee headcount during 1997 by 105 to achieve
organizational goals involving the acquisition of Hancock and changes in product
and strategic focus. Areas which experienced employee increases in 1997 included
the Retail Financial Services Group (an increase of 74 employees), the Consumer
Lending and Credit Group (an increase of 13 employees), the Gateway Investment
Services Group (an increase of 13 employees), and other administrative services
(an increase of 5 employees). In line with the Company's business strategy, it
is anticipated that the FTE count of the Company will significantly increase in
the future as the business strategy is implemented.
REGULATION AND SUPERVISION
General
Bank Plus is a savings and loan holding company and, as such, is subject to
the Office of Thrift Supervision (the "OTS") regulation, examination,
supervision and reporting requirements. Fidelity is a federally chartered
savings bank, a member of the FHLB of San Francisco, and its deposits are
insured by the FDIC through the SAIF to the maximum extent permitted by law.
Fidelity is subject to extensive regulation by the OTS, as its chartering
agency, and by the FDIC, as its deposit insurer. In addition to the statutes and
regulations discussed below, Fidelity must undergo at least one full scope, on-
site safety and soundness examination every year. The Director of the OTS is
authorized to impose assessments on Fidelity to fund OTS operations, including
the cost of examinations. The FDIC has "back-up" authority to take enforcement
action against Fidelity if the OTS fails to take such action after a
recommendation by the FDIC. The FDIC may also impose assessments on Fidelity to
cover the cost of FDIC examinations. Finally, Fidelity is subject
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<PAGE>
to regulation by the Board of Governors of the Federal Reserve System ("FRB")
with respect to certain aspects of its business.
Changes in legislation and regulatory policy and the interpretations thereof
have materially affected the business of the Company and other financial
institutions in the past and are likely to do so in the future. There can be no
assurance that future changes in the regulations or their interpretation will
not adversely affect the business of Fidelity. Future legislation and regulatory
policy could also alter the structures and competitive relationships among
financial institutions. Regulatory authorities also have the power, in certain
circumstances, to prohibit or limit the payment of dividends or other
distributions by Fidelity. In addition, certain regulatory actions, including
general increases in federal deposit insurance premiums, additional insurance
premium assessments to recapitalize the SAIF or the application of the risk-
based insurance premium system to Fidelity, may increase Fidelity's operating
expenses in future periods and may have a material adverse impact on Fidelity's
capital levels and results of operations.
Bank Plus Regulation
Bank Plus is a unitary savings and loan holding company within the meaning of
the Home Owners' Loan Act of 1933, as amended ("HOLA"). As such, Bank Plus is
required to be registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. Among other things, the
OTS has enforcement authority which permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
Activities Restrictions. There are generally no restrictions on the activities
of a unitary savings and loan holding company. However, if the savings
institution subsidiary of such a holding company fails to meet the qualified
thrift lender ("QTL") test, then such unitary holding company also will become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, will have to register as, and become subject to the
restrictions applicable to, a bank holding company. See "--Fidelity--Activities
Regulation Not Related to Capital Compliance."
If Bank Plus were to acquire control of another savings institution, other
than through merger or other business combination with Fidelity, Bank Plus would
thereupon become a multiple savings and loan holding company. Except under
limited circumstances, the activities of Bank Plus and any of its subsidiaries
(other than Fidelity or other subsidiary savings institutions) would thereafter
be subject to further extensive limitations. In general, such holding company
would be limited primarily to activities permissible for bank holding companies
under the Bank Holding Company Act and other activities in which multiple
savings and loan companies were authorized by regulation to engage as of March
5, 1987.
Restrictions on Acquisitions. Except under limited circumstances, savings and
loan holding companies are prohibited from acquiring, without prior approval of
the Director of the OTS, (i) control of any other savings institution or savings
and loan holding company or substantially all the assets thereof or (ii) more
than 5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director of the
OTS, no director or officer of a savings and loan holding company or person
owning or controlling by proxy or otherwise more than 25% of such company's
stock, may acquire control of any savings institution, other than a subsidiary
savings institution, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to
37
<PAGE>
acquire control of the savings institution pursuant to the emergency acquisition
provisions of the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes
of the state in which the institution to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
Fidelity Regulation--Capital Requirements and Capital Categories
FIRREA Capital Requirements. The OTS capital regulations, as required by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
include three separate minimum capital requirements for the savings institution
industry--a "tangible capital requirement," a "leverage limit" and a "risk-based
capital requirement." These capital standards must be no less stringent than the
capital standards applicable to national banks. The OTS also has the authority,
after giving the affected institution notice and an opportunity to respond, to
establish an individual minimum capital requirement ("IMCR") for a savings
institution which is higher than the industry minimum requirements, upon a
determination that an individual minimum capital requirement is necessary or
appropriate in light of the institution's particular circumstances, such as if
the institution is expected to have losses resulting in capital inadequacy, has
a high degree of exposure to credit risk, has a high amount of nonperforming
loans, has a high degree of exposure to concentration of credit risk or risks
arising from nontraditional activities, or fails to adequately monitor and
control the risks presented by concentration of credit and nontraditional
activities.
The industry minimum capital requirements are as follows:
Tangible capital of at least 1.5% of adjusted tangible assets. Tangible
capital is composed of (1) common stockholders' equity, noncumulative perpetual
preferred stock and related earnings, nonwithdrawable accounts and pledged
deposits qualifying as core capital and minority interests in the equity
accounts of fully consolidated subsidiaries, after deducting (a) intangible
assets other than certain purchased or originated mortgage servicing rights,
(b) equity and debt investments in subsidiaries engaged in activities not
permissible for a national bank (except as otherwise provided), and (c) the
amount by which investments in subsidiaries engaged as principal in activities
not permissible for national banks exceeds the amount of such investments as of
April 12, 1989 and the lesser of the institution's investments in and extensions
of credit to such subsidiaries, net of any reserves established against such
investments, (i) as of April 12, 1989 and (ii) as of the date on which the
institution's tangible capital is being determined. In general, adjusted
tangible assets equal the institution's consolidated tangible assets, minus any
assets that are deducted in calculating capital.
Core capital of at least 3% of adjusted tangible assets (the "leverage
limit"). Core capital consists of tangible capital plus (1) qualifying goodwill
resulting from pre-April 12, 1989 acquisitions of troubled savings institutions
and (2) certain qualifying intangible assets and mortgage servicing rights.
Certain deferred tax assets must also be deducted from core capital.
Total capital of at least 8% of risk-weighted assets (the "risk-based capital
requirement"). Total capital includes both core capital and "supplementary"
capital items deemed less permanent than core capital, such as subordinated debt
and general loan loss allowances (subject to certain limits). Equity investments
(with the exception of investments in subsidiaries and investments permissible
for national banks) and portions of certain high-risk land loans and
nonresidential construction loans must be deducted from total capital. At least
half of total capital must consist of core capital.
Risk-weighted assets are determined by multiplying each category of an
institution's assets, including off balance sheet asset equivalents, by an
assigned risk weight based on the credit risk associated with those assets, and
adding the resulting products. The four risk weight categories range from 0% for
cash and government securities to 100% for assets (including past-due loans and
real estate owned) that do not qualify for preferential risk-weighting.
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<PAGE>
On March 18, 1994, the OTS published a final regulation effective on that date
that permits a loan secured by multifamily residential property, regardless of
the number of units, to be risk-weighted at 50% for purposes of the risk-based
capital standards if the loan meets specified criteria relating to the term of
the loan, timely payments of interest and principal, loan-to-value ratio and
ratio of net operating income to debt service requirements. Under the prior
regulation, only loans secured by multifamily residential properties consisting
of 5 to 36 units were eligible for risk-weighting at 50%, and then only if such
loans had a loan-to-value ratio at origination of not more than 80% and the
collateral property had an average annual occupancy rate of at least 80% for a
year or more.
Any loans that qualified for risk-weighting under the prior regulation as of
March 18, 1994 will be "grandfathered" and will continue to be risk-weighted at
50% as long as they continue to meet the criteria of the prior regulation. Thus
occupancy rates, which recently have been decreasing generally, will continue to
affect the risk-weighting of such grandfathered multifamily loans unless such
loans qualify for 50% risk-weighting under the criteria of the new rule, which
criteria do not include an occupancy requirement.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the OTS was required to revise its risk-based capital standards to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and risks of nontraditional activities. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under the rule, savings institutions with "above normal" interest rate risk
exposure would be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. An institution whose interest
rate risk exposure (measured as set forth in the rule) exceeded 2% would be
required to deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2% multiplied by the estimated economic value of the
bank's assets. That dollar amount would be deducted from a bank's total capital
in calculating compliance with its risk-based capital requirement. Under the
rule, there is a lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that data.
The rule also provides that the Director of the OTS may waive or defer a bank's
interest rate risk component on a case-by-case basis. The OTS has postponed the
implementation of the new rule until the OTS has collected sufficient data to
determine whether the rule is effective in monitoring and managing interest rate
risk. No interest rate risk component would have been required to be added to
the Bank's risk-based capital requirement at December 31, 1997 had the rule been
in effect at that time.
FDICIA Prompt Correction Action Regulations. FDICIA required the OTS to
implement a system requiring regulatory sanctions against institutions that are
not adequately capitalized, with the sanctions growing more severe the lower the
institution's capital. The OTS has established specific capital ratios under the
Prompt Corrective Action ("PCA") Regulations for five separate capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
Under the OTS regulations implementing FDICIA, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is at
least 10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%,
its ratio of core capital to adjusted tangible assets is at least 5.0%, and it
is not subject to any order or directive by the OTS to meet a specific capital
level. An institution will be adequately capitalized if its ratio of total
capital to risk-weighted assets is at least 8.0%, its ratio of core capital to
risk-weighted assets is at least 4.0%, and its ratio of core capital to adjusted
tangible assets (leverage ratio) is at least 4.0% (3.0% if the institution
receives the highest rating on the OTS financial institutions rating system).
An institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0% total capital
to risk-weighted assets, 3.0% core capital to risk-weighted assets, or 3.0% core
capital to adjusted tangible assets, it will be treated as significantly
undercapitalized. Finally, an institution will be treated as critically
undercapitalized if its ratio of "tangible equity" (core capital plus cumulative
perpetual preferred
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stock minus intangible assets other than supervisory goodwill and certain
originated and purchased mortgage servicing rights) to adjusted tangible assets
is equal to or less than 2.0%. At December 31, 1997, the Bank was well
capitalized. See Item 7. "MD&A--Regulatory Capital Compliance."
Mandatory Restrictions on Undercapitalized Institutions. There are numerous
mandatory restrictions on the activities of undercapitalized institutions. An
institution that is undercapitalized must submit a capital restoration plan to
the OTS that the OTS may approve only if it determines that the plan is likely
to succeed in restoring the institution's capital and will not appreciably
increase the risks to which the institution is exposed. In addition, the
institution's performance under the plan must be guaranteed by every company
that controls the institution, up to specified limits. An institution that is
undercapitalized may not acquire an interest in any company, open a new branch
office or engage in a new line of business without OTS or FDIC approval. An
undercapitalized institution also may not increase its average total assets
during any quarter except in accordance with an approved capital restoration
plan. An undercapitalized savings institution generally may not pay any
dividends or make other capital distributions. Undercapitalized institutions
also may not pay management fees to any company or individual that controls the
institution. An undercapitalized savings institution cannot accept, renew, or
rollover deposits obtained through a deposit broker, and may not solicit
deposits by offering interest rates that are more than 75 basis points higher
than market rates. Savings institutions that are adequately capitalized but not
well capitalized must obtain a waiver from the FDIC in order to accept, renew,
or rollover brokered deposits, and even if a waiver is granted may not solicit
deposits, through a broker or otherwise, by offering interest rates that exceed
market rates by more than 75 basis points. The Bank is currently eligible to
accept brokered deposits.
Restrictions on Significantly and Critically Undercapitalized Institutions. In
addition to the above mandatory restrictions which apply to all undercapitalized
savings institutions, institutions that are significantly undercapitalized may
not without the OTS' prior approval (a) pay a bonus to any senior executive
officer or (b) increase any senior executive officer's compensation over the
average rate of compensation (excluding bonuses, options and profit-sharing)
during the 12 months preceding the month in which the institution became
undercapitalized. The same restriction applies to undercapitalized institutions
that fail to submit or implement an acceptable capital restoration plan. If a
savings institution is critically undercapitalized, the institution is also
generally prohibited from making payments of principal or interest on
subordinated debt beginning 60 days after the institution becomes critically
undercapitalized. In addition, the institution cannot without prior FDIC
approval enter into any material transaction outside the ordinary course of
business. Critically undercapitalized savings institutions must be placed in
receivership or conservatorship within 90 days of becoming critically
undercapitalized unless the OTS, with the concurrence of the FDIC, determines
that some other action would better resolve the problems of the institution at
the least possible long-term loss to the insurance fund, and documents the
reasons for its determination.
Discretionary Sanctions. With respect to an undercapitalized institution, the
OTS, under certain circumstances, has the authority, among other things, to
order the institution to recapitalize by selling shares of capital stock or
other securities, order the institution to agree to be acquired by another
depository institution holding company or combine with another depository
institution, restrict transactions with affiliates, restrict the interest rates
paid by the institution on new deposits to the prevailing rates of interest in
the region where the institution is located, require the institution to divest
any subsidiary or the institution's holding company to divest the institution or
any other subsidiary or take any other action that the OTS determines will
better resolve the institution's problems at the least possible loss to the
deposit insurance fund. With respect to significantly undercapitalized
institutions and certain undercapitalized institutions, the OTS must take
certain of the above mentioned actions.
In addition to the mandatory appointment of a conservator or receiver for
critically undercapitalized institutions, described above, the OTS or FDIC may
appoint a receiver or conservator for an undercapitalized institution if it (a)
has no reasonable prospect of becoming adequately capitalized, (b) fails to
submit a capital restoration plan within the required time period or (c)
materially fails to implement its capital restoration
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<PAGE>
plan.
Finally, the OTS can apply to an institution in a particular capital category
the sanctions that apply to the next lower capital category, if the OTS
determines, after providing the institution notice and opportunity for a
hearing, that (a) the institution is in an unsafe or unsound condition or (b)
the institution received, in its most recent report of examination, a less-than-
satisfactory rating for asset quality, management, earnings or liquidity, and
the deficiency has not been corrected. The OTS cannot, however, use this
authority to require an adequately capitalized institution to file a capital
restoration plan, or to subject a significantly undercapitalized institution to
the sanctions applicable to critically undercapitalized institutions.
Fidelity Regulation--Activities Regulation Not Related to Capital Compliance
Safety and Soundness Standards. In addition to the PCA provisions discussed
above based on an institution's regulatory capital ratios, FDICIA contains
several measures intended to promote early identification of management problems
at depository institutions and to ensure that regulators intervene promptly to
require corrective action by institutions with inadequate operational and
managerial standards.
FDICIA requires the OTS to prescribe minimum acceptable operational and
managerial standards, and standards for asset quality, earnings, and valuation
of publicly traded shares, for savings institutions and their holding companies.
The operational standards must cover internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth and employee
compensation. The asset quality and earnings standards must specify a maximum
ratio of classified assets to capital, minimum earnings sufficient to absorb
losses, and minimum ratio of market value to book value for publicly traded
shares.
Any institution or holding company that fails to meet the standards must
submit a plan for corrective action within 30 days. If a savings institution
fails to submit or implement an acceptable plan, the OTS must order it to
correct the safety and soundness deficiency, and may restrict its rate of asset
growth, prohibit asset growth entirely, require the institution to increase its
ratio of tangible equity to assets, restrict the interest rate paid on deposits
to the prevailing rates of interest on deposits of comparable amounts and
maturities, or require the institution to take any other action that the OTS
determines will better carry out the purpose of prompt corrective action.
Imposition of these sanctions is within the discretion of the OTS in most cases
but is mandatory if the savings institution commenced operations or experienced
a change in control during the 24 months preceding the institution's failure to
meet the safety and soundness standards, or underwent extraordinary growth
during the preceding 18 months.
The OTS has adopted guidelines for operational and managerial standards
relating to internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits and excessive
compensatory arrangements for executive officers, employees, directors or
principal shareholders.
In addition, each depository institution with assets above $500 million must
annually prepare a report, signed by the chief executive officer and chief
financial officer, on the effectiveness of the institution's internal control
structures and procedures for financial reporting, and on the institution's
compliance with laws and regulations relating to safety and soundness. The
institution's independent public accountant must attest to, and report
separately on, management's assertions in that report. The report and the
attestations, along with financial statements and such other disclosure
requirements as the FDIC and the OTS may prescribe, must be submitted to the
FDIC and the OTS. Such institutions must also have an audit committee of its
Board of Directors made up entirely of directors who are independent of the
management of the institution. Audit committees of "large" institutions (defined
by the FDIC as an institution with more than $3
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other billion in assets, which includes Fidelity) must include members with
banking or financial management expertise, may not include members who are large
customers of the institution, and must have access to independent counsel.
In May 1997, the OTS completed its annual safety and soundness examination and
the Company has addressed the OTS' recommendations.
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a limited list of
qualified thrift investments, primarily investments related to housing loans. If
Fidelity fails to satisfy the QTL test and does not requalify as a QTL within
one year, any entity in control of Fidelity must register and be regulated as a
bank holding company, and Fidelity must either convert to a commercial bank
charter or become subject to restrictions on branching, business activities and
dividends as if it were a national bank. Portfolio assets consist of tangible
assets minus (a) assets used to satisfy liquidity requirements and (b) property
used by the institution to conduct its business. In 1996, the Economic Growth
and Regulatory Paperwork Reduction Act ("EGRPRA") was adopted, amending the QTL
requirements to allow educational loans, small business loans and credit card
loans to count as qualified thrift assets without limit and to allow loans for
personal, family or household purposes to count as qualified thrift assets in
the category limited to 20% of portfolio assets. Prior to EGRPRA, small business
loans were included in qualified thrift assets only if made in a credit-needy
area and educational and credit card loans were included subject to a 10% of
portfolio assets limit. The previous limit for loans for personal, family or
household purposes was also 10% of portfolio assets. Finally, EGRPRA provided
that as an alternative to the QTL test, thrifts may choose to comply with the
Internal Revenue Service's domestic building and loan tax code test.
Investments and Loans. In general, federal savings institutions such as
Fidelity may not invest directly in equity securities, noninvestment grade debt
securities or real estate, other than real estate used for the institution's
offices and related facilities. Indirect equity investment in real estate
through a subsidiary is permissible, but subject to certain limitations and
deductions from regulatory capital. Loans by a savings institution to a single
borrower are generally limited to 15% of an institution's "unimpaired capital
and unimpaired surplus," which is similar but not identical to total capital.
Aggregate loans secured by nonresidential real property are generally limited to
400% of an institution's total capital. Commercial loans may not exceed 10% of
an institution's total assets, and consumer loans may not exceed 35% of an
institution's total assets.
Activities of Subsidiaries. A savings institution seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC and
OTS. A subsidiary of Fidelity may be able to engage in activities that are not
permissible for Fidelity directly, if the OTS determines that such activities
are reasonably related to Fidelity's business, but Fidelity may be required to
deduct its investment in such a subsidiary from capital. The OTS has the power
to require a savings institution to divest any subsidiary or terminate any
activity conducted by a subsidiary that the OTS determines to be a serious
threat to the financial safety, soundness or stability of such savings
institution or to be otherwise inconsistent with sound banking practices.
Real Estate Lending Standards. The OTS and the other federal banking agencies
have adopted regulations which require institutions to adopt and at least
annually review written real estate lending policies. The lending policies must
include diversification standards, underwriting standards (including loan-to-
value limits), loan administration procedures, and procedures for monitoring
compliance with the policies. The policies must reflect consideration of
guidelines adopted by the banking agencies. Among the guidelines adopted by the
agencies are maximum loan-to-value ratios for unimproved land loans (65%);
development loans (75%); construction loans (80%-85%); loans on owner-occupied 1
to 4 family property, including home equity lines of credit (no limit, but loans
at or above 90% require private mortgage insurance); and loans on other
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improved property (85%). The guidelines permit institutions to make loans in
excess of the supervisory loan-to-value limits if such loans are supported by
other credit factors, but the aggregate of such nonconforming loans should not
exceed the institution's risk-based capital, and the aggregate of nonconforming
loans secured by real estate other than 1 to 4 family property should not exceed
30% of risk-based capital.
Notification of New Officers and Directors. A federal savings bank that has
undergone a change in control in the preceding two years, is subject to a
supervisory agreement with the OTS or is deemed to be in "troubled condition" by
the OTS, must give the OTS 30 days notice prior to any change in its Board of
Directors or its senior executive officers. The OTS must disapprove such change
if the competence, experience or integrity of the affected individual indicates
that it would not be in the best interests of the public to permit the
appointment. Fidelity is not currently subject to this notice requirement.
Payment of Dividends and Other Capital Distributions. The payment of
dividends, stock repurchases, and other capital distributions by Fidelity to
Bank Plus is subject to regulation by the OTS. Currently, 30 days' prior notice
to the OTS of any capital distribution is required.
The OTS has promulgated a "safe-harbor" regulation that permits capital
distributions of certain amounts after providing notice to the OTS, but without
prior approval. Institutions can distribute amounts in excess of the safe harbor
only with the prior approval of the OTS. For institutions ("Tier 1
institutions") that meet their fully phased-in capital requirements (the
requirements that will apply when the phase-out of supervisory goodwill and
investments in certain subsidiaries from capital is complete), the safe harbor
amount is the greater of (a) 75% of net income for the prior four quarters, or
(b) the sum of (1) the current year's net income and (2) the amount that would
reduce the excess of the institution's total capital to risk-weighted assets
ratio over 8% to one-half of such excess at the beginning of the year in which
the dividend is paid. For institutions that meet their current minimum capital
requirements but do not meet their fully phased-in requirements ("Tier 2
institutions"), the safe harbor distribution is 75% of net income for the prior
four quarters reduced by prior distributions during the period. Savings
institutions that do not meet their current minimum capital requirements before,
or on a pro forma basis after giving effect to a proposed distribution, ("Tier 3
institutions") may not make any capital distributions, with certain exceptions.
At December 31, 1997, Fidelity was a Tier 1 institution.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under the regulation if the OTS determines that the distribution
would constitute an unsafe or unsound practice. The OTS also may reclassify a
Tier 1 institution as a Tier 2 or Tier 3 institution by notifying the
institution that it is in need of more than normal supervision. Further, an
adequately capitalized institution may not make a capital distribution if such
payment would cause the institution to become undercapitalized.
The OTS recently revised its proposed ruemaking to amend the capital
distribution rule to conform to the PCA system. Under the proposed rule, an
institution would be able to make a capital distribution (i) without prior
notice to the OTS if it is not owned by a savings and loan holding company and,
after the proposed capital distribution, will remain at least "adequately
capitalized," the distribution would not reduce the amount of common or
preferred stock or retire debt that is included in capital, and the distribution
would not otherwise violate any statutory regulatory or other prohibition; (ii)
without an application if the institution has a composite rating of "1" or "2",
is otherwise elegible for expedited treatment and the distribution does not
exceed a specified amount; and (iii) without notice or application if all of the
conditions specified above are met. If the regulation is adopted as proposed,
Fidelity would still be required to obtain OTS approval prior to making a
capital distribution.
Required Liquidity. OTS regulations require savings institutions to maintain,
for each calendar quarter, an average daily balance of liquid assets (including
cash, certain time deposits, bankers' acceptances, certain mortgage-related
securities, certin loans secured by first liens on residential property,
specified United States government, state and federal agency obligations, and
balances maintained in satisfaction of the FRB reserve requirements described
below) equal to at least 4% of either (i) the prior quarter end
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balance of its net withdrawable accounts due in one year or less plus borrowings
due in one year or less (the "liquidity base") or (ii) the average daily balance
of the liquidity base during the prior calendar quarter. In addition, savings
institutions must comply with a general non-quantitative requirement to maintain
a safe and sound level of liquidity. The OTS may change this liquidity
requirement from time to time to an amount within a range of 4% to 10% of such
accounts and borrowings depending upon economic conditions and the deposit flows
of member institutions, and may exclude from the definition of liquid assets any
item other than cash and the balances maintained in satisfaction of FRB reserve
requirements. Fidelity's average regulatory liquidity ratio for the fourth
quarter of 1997 was 22.75%, and accordingly Fidelity was in compliance with the
liquidity requirement. Monetary penalties may be imposed for failure to meet
liquidity ratio requirements.
Classification of Assets. Savings institutions are required to classify their
assets on a regular basis, to establish appropriate allowances for losses and
report the results of such classification quarterly to the OTS. A savings
institution is also required to set aside adequate valuation allowances, and to
establish liabilities for off-balance sheet items, such as letters of credit,
when a loss becomes probable and estimable. The OTS has the authority to review
the institution's classification of its assets and to determine whether
additional assets must be classified, or the institution's valuation allowances
must be increased. See "--Credit Administration--Loan Monitoring."
Assets are classified as "pass", "special mention", "substandard", "doubtful"
or "loss." An asset which possesses no apparent weakness or deficiency is
designated "satisfactory". An asset which possesses weaknesses or deficiencies
deserving close attention is designated as "special mention". An asset, or a
portion thereof, is generally classified as "substandard" if it possesses a
well-defined weakness which could jeopardize the timely liquidation of the asset
or realization of the collateral at the asset's book value. Thus, these assets
are characterized by the possibility that the institution will sustain some loss
if the deficiencies are not corrected. An asset, or portion thereof, is
classified as "doubtful" if a probable loss of principal and/or interest exists
but the amount of the loss, if any, is subject to the outcome of future events
which are indeterminable at the time of classification. If an asset, or portion
thereof, is classified as "loss", the institution must either establish a SVA
equal to the amount classified as loss or charge off such amount.
Fidelity--Deposit Insurance
General. Fidelity's deposits are insured by the FDIC to the maximum limits
permitted by law. Under FIRREA, the FDIC administers two separate deposit
insurance funds: the BIF which insures the deposits of institutions that were
insured by the FDIC prior to FIRREA, and the SAIF which maintains a fund to
insure the deposits of institutions, such as Fidelity, that were insured by the
FSLIC prior to FIRREA.
Insurance Premium Assessments. The FDICIA directed the FDIC to establish a
risk-based system for setting deposit insurance premium assessments. The FDIC
has implemented such a system, under which an institution's insurance
assessments will vary depending on the level of capital the institution holds
and the degree to which it is the subject of supervisory concern to the FDIC.
Legislation was enacted on September 30, 1996 to address the disparity in bank
and thrift deposit insurance premiums. Such legislation imposed a requirement on
all SAIF member institutions to fully recapitalize the SAIF by paying a one-time
special assessment of approximately 65.7 basis points on all assessable deposits
as of March 31, 1995. This one-time special assessment of 65.7 basis points
resulted in the Bank recording $18.0 million in additional SAIF premiums. As of
December 31, 1997, after giving effect to the deduction of 65.7 basis point
assessment, the Bank's core and risk-based capital ratios are 5.48% and 11.99%,
respectively, and the Bank remains well capitalized under the PCA regulations.
Termination of Deposit Insurance. The FDIC may initiate a proceeding to
terminate an institution's deposit insurance if, among other things, the
institution is in an unsafe or unsound condition to continue operations. It is
the policy of the FDIC to deem an insured institution to be in an unsafe or
unsound condition if its ratio of Tier 1 capital to total assets is less than
2%. Tier 1 capital is similar to core capital but includes
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certain investments in and extensions of credit to subsidiaries engaged in
activities not permitted for national banks.
Conversion of Deposit Insurance. Generally, under a moratorium imposed by
FIRREA, savings institutions may not convert from SAIF membership to BIF
membership until SAIF has increased its reserves to 1.25% of insured deposits.
However, a savings institution may convert to a bank charter, if the resulting
bank remains a SAIF member, and may merge with a BIF-member institution as long
as deposits attributable to the savings institution remain subject to assessment
by the SAIF. In addition, under an exception to the moratorium, savings
institutions may transfer and convert to BIF insurance (for example, in a branch
sale to a BIF-member institution) up to 35% of their deposits. Institutions that
convert from SAIF to BIF membership, either under an exception during the
moratorium or after expiration of the moratorium, must pay exit fees to SAIF and
entrance fees to BIF. In addition, legislation has been proposed that would
require all savings and loans to convert to banks.
Regulation of Fidelity Affiliates
Affiliate and Insider Transactions. The ability of Bank Plus and its non-
depository subsidiaries to deal with Fidelity is limited by the affiliate
transaction rules, including Sections 23A and 23B of the Federal Reserve Act,
which also govern BIF-insured banks. With very limited exceptions, these rules
require that all transactions between Fidelity and an affiliate must be on arms'
length terms. The term "affiliate" covers any company that controls or is under
common control with Fidelity, but does not include individuals and generally
does not include Fidelity's subsidiaries.
Under Section 23A and Section 11 of the HOLA, specific restrictions apply to
transactions in which Fidelity provides funding to its affiliates: Fidelity may
not purchase the securities of an affiliate, make a loan to any affiliate that
is engaged in activities not permissible for a bank holding company, or acquire
from an affiliate any asset that has been classified, a nonaccrual loan, a
restructured loan, or a loan that is more than 30 days past due. As to
affiliates engaged in bank holding company-permissible activities, the aggregate
of (a) loans, guarantees, and letters of credit provided by the savings bank
for the benefit of any one affiliate and (b) purchases of assets by the savings
bank from the affiliate, may not exceed 10% of the savings bank's capital stock
and surplus (20% for the aggregate of permissible transactions with all
affiliates). All loans to affiliates must be secured by collateral ranging from
100% to 130% of the amount of the loan, depending on the type of collateral.
In addition, OTS regulations on affiliate transactions require, among other
things, that savings institutions retain records of their affiliate transactions
that reflect such transactions in reasonable detail. If a savings institution
has been the subject of a change of control application or notice within the
preceding two-year period, does not meet its minimum capital requirements, has
entered into a supervisory agreement, is subject to a formal enforcement
proceeding, or is determined by the OTS to be the subject of supervisory
concern, the institution may be required to provide the OTS with 30 days' prior
notice of any affiliate transaction.
Under these regulatory limitations, loans by Fidelity to directors, executive
officers and 10% stockholders of Fidelity, Bank Plus, and Bank Plus'
subsidiaries (collectively, "insiders"), or to a corporation or partnership that
is at least 10% owned by an insider (a "related interest") are subject to limits
separate from the affiliate transaction rules. However, a company that controls
a savings institution is excluded from the coverage of the insider lending rules
even if it owns 10% or more of the stock of the institution, and is subject only
to the affiliate transaction rules. All loans to insiders and their related
interests must be underwritten and made on non-preferential terms; loans in
excess of $500,000 must be approved in advance by Fidelity's Board of Directors;
and Fidelity's total of such loans may not exceed 100% of Fidelity's capital.
Loans by Fidelity to its executive officers are subject to additional limits
which are even more stringent. In
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addition to these regulatory limitations, Fidelity has adopted a policy which
requires prior approval of its Board of Directors for any loans to insiders or
their related interests.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or opportunity
for a hearing, which directive may (a) limit the payment of dividends by the
savings institution, (b) limit transactions between the savings institution and
its holding company or its affiliates and (c) limit any activity of the
association that creates a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or loss
of voting rights in the event such party took any action for or toward causing,
bringing about, participating in, counseling, or aiding and abetting a violation
of law or unsafe or unsound practice by a savings institution.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify and delineate the communities served through
and by the institution's offices and to affirmatively meet the credit needs of
its delineated communities and to market the types of credit the institution is
prepared to extend within such communities. The CRA also requires the OTS to
assess the performance of the institution in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
applications for mergers, acquisitions, and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application.
Performance is assessed on the basis of an institution's actual lending, service
and investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with other
procedural requirements. In connection with its assessment of CRA performance,
the OTS assigns a rating of "outstanding," "satisfactory," "needs improvement"
or "substantial noncompliance." Based on its most recent examination, Fidelity
was rated "satisfactory."
Federal Home Loan Bank System
The Federal Home Loan Banks provide a credit facility for member institutions.
As a member of the FHLB of San Francisco, Fidelity is required to own capital
stock in the FHLB of San Francisco in an amount at least equal to the greater of
1% of the aggregate principal amount of its unpaid home loans, home purchase
contracts and similar obligations at the end of each calendar year, assuming for
such purposes that at least 30% of its assets were home mortgage loans, or 5% of
its advances from the FHLB of San Francisco. At December 31, 1997, Fidelity was
in compliance with this requirement with an investment in the stock of the FHLB
of San Francisco of $60.5 million. Long-term FHLB advances may be obtained only
for the purpose of providing funds for residential housing finance and all FHLB
advances must be secured by specific types of collateral.
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Federal Reserve System
The FRB requires savings institutions to maintain noninterest-earning reserves
against certain of their transaction accounts (primarily deposit accounts that
may be accessed by writing unlimited checks) and non-personal time deposits. For
the calculation period at December 31, 1997, Fidelity was required to maintain
$8.8 million in noninterest-earning reserves and was in compliance with this
requirement. The balances maintained to meet the reserve requirements imposed by
the FRB may be used to satisfy Fidelity's liquidity requirements discussed
above.
As a creditor and a financial institution, Fidelity is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation B
(Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including Fidelity, may be subject to
potential liability under various statutes and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property. See "--Regulation and Supervision--Non-
Banking Regulation."
Non-Banking Regulation
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous substances on, under or in such
property. In addition, any person or entity who arranges for the disposal or
treatment of hazardous substances may also be liable for the costs of removal or
remediation of hazardous substances at the disposal or treatment facility. Such
laws and regulations often impose liability regardless of fault and liability
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. Pursuant to these
laws and regulations, under certain circumstances, a lender may become liable
for the environmental liabilities in connection with its borrowers' properties,
if, among other things, it either forecloses or participates in the management
of its borrowers' operations or hazardous substance handling or disposal
practices. Although the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA") and certain state counterparts provide
exemptions for secured lenders, the scope of such exemptions is limited and a
rule issued by the Environmental Protection Agency clarifying such exemption
under CERCLA has recently been held invalid. In addition, CERCLA and certain
state counterparts impose a statutory lien, which may be prior to a bank's
interest securing a loan, for certain costs incurred in connection with removal
or remediation of hazardous substances. Other laws and regulations may also
require the removal or remediation of hazardous substances located on a property
before such property may be sold or transferred.
It is the Bank's current policy to identify and review certain environmental
issues pertaining to its borrowers and the properties securing the loans of its
borrowers prior to making any loan and foreclosing on any multifamily property.
If such review reveals any environmental issues, a Phase I environmental audit
(which generally involves a physical inspection without any sampling) and under
certain circumstances, a Phase II environmental audit (which generally involves
sampling) may be conducted by an independent environmental consultant. It is
also the Bank's current policy with respect to loans secured by residential
property with five or more units to automatically conduct a Phase I
environmental audit prior to foreclosing on such property. Under certain
circumstances, the Bank may decide not to foreclose on a property. There can be
no assurances that such review, Phase I environmental audits or Phase II
environmental audits have identified or will identify all potential
environmental liabilities that may exist with respect to a foreclosed property
or a property securing any loan or that historical, current or future uses of
such property or surrounding properties will not result in the imposition of
environmental liability on the Bank.
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The Bank is aware that certain current or former properties on which it has
foreclosed and properties securing its loans contain contamination or hazardous
substances, including asbestos and lead paint. Under certain circumstances, the
Bank may be required to remove or remediate such contamination or hazardous
substances. Although the Bank is not aware of any environmental liability
relating to these properties that it believes would have a material adverse
effect on its business or results of operations, there can be no assurances that
the costs of any required removal or remediation would not be material or
substantially exceed the value of affected properties or the loans secured by
the properties or that the Bank's ability to sell any foreclosed property would
not be adversely affected.
Gateway
Gateway has been an NASD registered broker/dealer since October 1993 and
offers securities products, such as mutual funds and variable annuities, to
customers of the Bank and others. Fixed annuities are offered through the Bank's
insurance agency, Citadel Service Corporation, dba, Fidelity Insurance Agency of
Glendale. Gateway does not maintain security or cash accounts for customers or
perform custodial functions relating to customer securities.
Gateway is required to conduct its activities in compliance with the February
1994 interagency guidelines of the federal bank and thrift regulators on retail
sales of uninsured, nondeposit investment products by federally insured
financial institutions. The interagency guidelines require that, among other
things, customers are fully informed that investment products are not insured,
are not deposits of or guaranteed by the Bank and involve investment risk
including the potential loss of principal.
The securities business is subject to regulation by the SEC and other federal
and state agencies. Regulatory violations can result in the revocation of
broker/dealer licenses, the imposition of censures or fines and the suspension
or expulsion from the securities business of a firm, its officers or employees.
With the enactment of the Insider Trading and Securities Fraud Enforcement Act
of 1988, the SEC and the securities exchanges have intensified their regulation
of broker/dealers, emphasizing in particular the need for supervision and
control by broker/dealers of their own employees. In 1994, Gateway was audited
by the NASD, SEC and the State of California Department of Corporations.
The NASD has incorporated changes to its Conduct Rules effective February 15,
1998. The new rules apply exclusively to the activities of NASD members that are
conducting broker/dealer services on the premises of a financial institution
where retail deposits are taken. The main focus of the new rules is to minimize
confusion by retail customers. The new rules cover the location setting,
networking and brokerage affiliate agreements, customer disclosure and written
acknowledgment, communications with the public and notifications of
terminations.
As a broker/dealer registered with the NASD, Gateway is subject to the SEC's
uniform net capital rules, designed to measure the general financial condition
and liquidity of a broker/dealer. Gateway is required to file monthly reports
with the NASD and annual reports with the NASD and SEC containing detailed
financial information with respect to its broker/dealer operation.
ITEM 2. PROPERTIES
The executive offices of Fidelity are located at 4565 Colorado Boulevard, Los
Angeles, California 90039. This facility also houses the Bank's administrative
operations and has approximately 130,000 square feet of office space. Present
local zoning entitlements will allow for the construction of approximately
300,000 square feet of additional office space plus parking on this 7.75-acre
parcel. The potential for increasing the amount of office space at this Los
Angeles site would satisfy Company's anticipated facilities requirements for the
foreseeable future.
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The aggregate net book value of all owned administrative facilities was
approximately $15.1 million as of December 31, 1997. On December 31, 1997,
Fidelity owned 13 of its branch facilities having an aggregate net book value of
approximately $7.3 million, and leased the remaining 25 of its branch facilities
under leases with terms (including optional extension periods) expiring from
1998 through 2027. The aggregate annual rent under leases as of December 31,
1997 was approximately $2.9 million and the aggregate net book value of
Fidelity's leasehold improvements associated with leased premises was
approximately $1.7 million. At December 31, 1997, Fidelity owned furniture,
fixtures and equipment, related to both owned and leased facilities, having a
net book value of approximately $8.5 million.
All owned and leased office facilities are located in southern California with
the exception of the leased space for the iBank branch located in Bloomington,
Minnesota and the credit processing center located in Beaverton, Oregon.
ITEM 3. 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, 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 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.
On November 14, 1997 the Bank and Harbor entered into a settlement agreement
through which Harbor relinquished all claims against the Bank and all other
defendants named in the litigation. No money was paid to Harbor by the Bank or
any other defendant in connection with the settlement. As a part of such
settlement
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the Bank conditionally relinquished its claims for attorney's fees under the
State Court order. Resulting from the settlement, all appeals initiated by
Harbor from both the Federal and State Court proceedings were dismissed and
all of Harbor's claims against the Bank and all other named defendants arising
out of the Bank's 1994 restructuring and recapitalization have been released.
In addition, the Bank is a defendant in several individual and class actions
brought by several borrowers which raise claims with respect to the manner in
which the Bank serviced certain adjustable rate mortgages which were originated
during the period 1983 through 1988. Six actions were filed between July 1,
1992 and February of 1995, one in Federal District Court and five in California
Superior Court. In the federal case the Bank won a summary judgment in the
District Court. This judgment was appealed and the Ninth Circuit Court of
Appeals affirmed in part, reversed in part and remanded back to the District
Court for further proceedings. The District Court has ruled in favor of
certifying a class in that action. Three of the California Superior Court cases
resulted in final judgments in favor of the Bank, after the plaintiffs
unsuccessfully appealed the trial court judgments in favor of the Bank. Two
other cases are pending in the California Superior Court. In one of these
actions the parties have reached a tentative settlement, subject to final
documentation and approval by the court. The plaintiffs' principal claim in
these actions is that the bank selected an inappropriate review date to consult
the index upon which the rate adjustment is based that was one or two months
earlier than what was required under the notes. In a declining interest rate
environment, the lag effect of an earlier review date defers the benefit to the
borrower of such decline, and the reverse would be true in a rising interest
rate environment. The Bank strongly disputes these contentions and is
vigorously defending these suits. The legal responsibility and financial
exposure of these claims presently cannot be reasonably ascertained and,
accordingly, there is a risk that the outcome of one or more of the remaining
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 reerves 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Effective March 14, 1996, Fidelity's Common Stock was listed and quoted on
Nasdaq National Market ("NASDAQ"). Commencing May 1996, in connection with the
Reorganization, the Company's Common Stock was listed and quoted on NASDAQ
replacing Fidelity's Common Stock.
The following table sets forth the high and low daily closing sales prices of
the Common Stock on NASDAQ commencing May 5, 1996 and the high and low bid price
on the Over the Counter Bulletin Board (the "OTCBB") between January 1, 1996 and
May 5, 1996 for each of the following quarters. Closing sale prices reflect the
one-for-four Reverse Stock Split approved by the stockholders on February 9,
1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
1997:
<S> <C> <C>
Fourth quarter.............................. $13.69 $11.06
Third quarter............................... 13.25 10.75
Second quarter.............................. 11.50 9.63
First quarter............................... 13.75 10.38
1996:
Fourth quarter.............................. 11.75 10.63
Third quarter............................... 10.63 8.75
Second quarter.............................. 9.50 8.63
First quarter............................... 9.75 8.50
</TABLE>
HOLDERS OF RECORD
The number of holders of record of the Company's Common Stock at March 2,
1998 was 811.
DIVIDENDS
Bank Plus has paid no dividends on the Common Stock since its formation in
May 1996. Prior thereto, Fidelity had not paid dividends on its Common Stock
since August 1994. Bank Plus currently has no plans to pay dividends on the
Common Stock. Bank Plus is a holding company with no significant assets other
than its investment in the Bank and Gateway, and is substantially dependent on
dividends from such subsidiaries to meet its cash requirements, including its
interest obligations on the Senior Notes. The ability of the Bank to pay
dividends or to make certain loans or advances to Bank Plus is subject to
significant restrictions. See Item 1. "Business--Regulation and Supervision--
Fidelity--Activities Regulation Not Related to Capital Compliance" and " --
Regulation of Fidelity Affiliates."
51
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
The table below sets forth certain historical financial data regarding the
Company. This information is derived in part from, and should be read in
conjunction with, the Company's consolidated financial statements and notes
thereto included in Item 8.--Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $4,167,806 $3,330,290 $3,299,444 $3,709,838 $4,389,781
Total loans, net...................................... 2,823,577 2,691,931 2,935,116 3,288,303 3,712,051
Deposits.............................................. 2,891,801 2,495,933 2,600,869 2,697,272 3,368,664
FHLB advances......................................... 1,009,960 449,851 292,700 332,700 326,400
Senior notes.......................................... 51,478 - - - -
Other borrowings...................................... - 140,000 150,000 500,000 407,830
Preferred stock issued by consolidated subsidiary..... 272 51,750 - - -
Subordinated notes.................................... - - - - 60,000
Stockholders' equity.................................. 181,345 161,657 229,043 156,547 182,284
Stockholders' equity per common share (1)(2).......... 9.36 8.86 9.72(3) 24.11 173.51
Common shares outstanding (1)(2)...................... 19,367,215 18,245,265 18,242,465 6,492,465 1,050,561
OPERATING DATA:
Interest income....................................... $ 255,007 $ 237,913 $ 246,477 $ 241,465 $ 289,331
Interest expense...................................... 174,009 152,623 174,836 155,828 188,494
---------- ----------- ---------- ----------- ----------
Net interest income................................... 80,998 85,290 71,641 85,637 100,837
Provision for estimated loan losses................... 13,004 15,610 69,724(4) 65,559 65,100
---------- ----------- ---------- ----------- ----------
Net interest income after provision for estimated
loan losses.......................................... 67,994 69,680 1,917 20,078 35,737
Gains (losses) on loans held for sale, net............ 37 22 522 (3,963) 194
Gains (losses) on securities activities, net.......... 2,670 1,336 4,098 1,130 1,304
Writedown of MBSs, available for sale................. (4,838) - - - -
Gains on sales of servicing........................... - - 4,604 - -
Fee income from sale of uninsured investment
products (5)......................................... 5,959 4,456 4,117 3,419 -
Loans, retail banking and other fees.................. 6,535 5,339 6,866 9,040 8,660
Real estate operations................................ (6,473) (8,907) (9,145) (17,419) (48,843)
SAIF special assessment............................... - (18,000) - - -
1994 restructuring and recapitalization charges,
net.................................................. - - - (65,394) -
Operating expense other than SAIF special
assessment and 1994 restructuring
and recapitalization charges......................... (63,096) (64,451) (81,954) (91,859) (98,732)
---------- ----------- ---------- ----------- ----------
Earnings (loss) before income taxes................... 8,788 (10,525) (68,975) (144,968) (101,680)
Income tax (benefit) expense.......................... (8,100) (1,093) 4 (16,524) (35,793)
---------- ----------- ---------- ----------- ----------
Net earnings (loss) before minority interest in
subsidiary........................................... 16,888 (9,432) (68,979) (128,444) (65,887)
Minority interest in subsidiary (dividends on
subsidiary preferred stock).......................... (4,235) (4,657) - - -
---------- ----------- ---------- ----------- ----------
Net earnings (loss)................................... 12,653 (14,089) (68,979) (128,444) (65,887)
Preferred stock dividends............................. (1,553) - - -
---------- ----------- ---------- ----------- ----------
Net earnings (loss) available for common $ 12,653 $ (15,642)$ (68,979) $ (128,444)$ (65,887)
Stockholders......................................... ========== =========== ========== =========== ==========
Basic earnings (loss) per common share (1)(2) $ 0.67 $ (0.86)$ (8.84) $ (39.08)$ (62.72)
========== =========== ========== =========== ==========
Basic weighted average common shares
Outstanding (1)(2).................................. 18,794,887 18,242,887 7,807,201 3,286,960 1,050,561
========== =========== ========== =========== ==========
Diluted earnings (loss) per common share (1)(2) $ 0.66 $ (0.85)$ (8.83) $ (39.07)$ (62.72)
========== =========== ========== =========== ==========
Diluted weighted average common shares
Outstanding (1)(2)................................ 19,143,233 18,438,454 7,815,560 3,287,757 1,050,561
========== =========== ========== ============ ==========
</TABLE>
(continued)
52
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(continued) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Return (loss) on average assets....................... 0.35% (0.42)% (1.92)% (3.17)% (1.43)%
Return (loss) on average equity....................... 7.43% (7.01)% (42.31)% (83.00)% (29.99)%
Average equity divided by average assets.............. 4.67% 6.71% 4.54% 3.82% 4.77%
Ending equity divided by ending assets................ 4.35% 4.85% 6.94% 4.22% 4.15%
Operating expense to average assets (6)............... 1.73% 1.94% 2.28% 2.27% 2.14%
Efficiency ratio (7).................................. 67.46% 67.77% 89.81% 97.58% 79.66%
Interest rate spread for the period................... 2.05% 2.31% 1.89% 2.24% 2.31%
Net yield on interest-earning assets.................. 2.27% 2.63% 2.05% 2.22% 2.31%
ASSET QUALITY DATA:
NPAs (8).............................................. $ 25,367 $ 60,788 $ 71,431 $ 85,729 $235,621
NPAs to total assets.................................. 0.61% 1.83% 2.16% 2.31% 5.37%
Nonaccruing loans..................................... $ 13,074 $ 36,125 $ 51,910 $ 71,614 $ 93,475
Nonaccruing loans to total loans, net................. 0.46% 1.34% 1.77% 2.18% 2.52%
Classified assets..................................... $153,502 $174,096 219,077 $141,536 $372,502
Classified assets to total assets..................... 3.68% 5.23% 6.64% 3.82% 8.49%
REGULATORY CAPITAL RATIOS:
Tangible capital ratio................................ 5.27% 6.28% 6.91% 4.28% 4.10%
Core capital ratio.................................... 5.48% 6.29% 6.92% 4.29% 4.15%
Risk-based capital ratio.............................. 11.99% 11.85% 12.43% 8.28% 9.32%
OTHER DATA:
Sales of investment products (5)...................... $159,791 $118,061 $ 89,824 $112,430 $ 96,253
Real estate loans funded.............................. $233,108 $ 13,859 $ 19,396 $521,580 $422,355
Average interest rate on new loans.................... 7.62% 8.41% 9.61% 5.85% 6.75%
Loans sold, net (9)................................... $ 6,674 $ (2,069) $ 390 $273,272 $115,003
Number of:
Real estate loan accounts (in thousands)............ 12 11 12 14 16
Deposit accounts (in thousands)..................... 205 194 207 216 241
- -------------
</TABLE>
(1) For the periods prior to August 4, 1994, Fidelity's one share owned by
Citadel, its former holding company and sole stockholder, has been
retroactively reclassified into 1,050,561 shares of Class A Common Stock.
(2) On February 9, 1996, the Bank's stockholders approved the Reverse Stock
Split. All per share data and weighted average common shares outstanding
have been retroactively adjusted to reflect this change.
(3) Calculation excludes $51.8 million of preferred stock issued by consolidated
subsidiary.
(4) In 1995, the Bank recorded $45 million loan portfolio charge in connection
with its adoption of the Plan. See Item 7. "MD&A--Accelerated Asset
Resolution Plan."
(5) Includes 100% of Gateway investment product sales.
(6) Excludes the impact of the SAIF special assessment and the net 1994
restructuring and recapitalization charges.
(7) The efficiency ratio is computed by dividing total operating expense by net
interest income and noninterest income, excluding infrequent items,
provisions for estimated loan and real estate losses, direct costs of real
estate operations and gains/losses on the sale and writedown of securities.
(8) NPAs include nonaccruing loans and foreclosed real estate, net of SVAs,
writedowns and REO GVA, if any.
(9) Excludes loans sold in certain bulk sales consummated in 1994, and is net of
repurchases.
53
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Form 10-K,
including without limitation statements containing the words "believes,"
"anticipates," "intends," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of 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; start-up risks associated with new business lines, including affinity
card programs and credit processing activities; and other factors referred to in
this Form 10-K. 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.
RESULTS OF OPERATIONS
The Company reported net earnings available to common stockholders of $12.7
million ($0.67 per basic common share; computed on the basis of 18,794,887 basic
weighted average common shares outstanding and $0.66 per diluted common share;
computed on the basis of 19,143,233 diluted weighted average common shares
outstanding) for the year ended December 31, 1997. This compares to net losses
available to common stockholders of $15.6 million $(0.86) per basic common
share; computed on the basis of 18,242,887 basic weighted average common shares
outstanding and $(0.85) per diluted common share; computed on the basis of
18,438,454 diluted weighted average common shares outstanding) for the year
ended December 31, 1996.
Results of operations for the year ended December 31, 1997, as compared to the
same period in 1996, reflect: (a) decreased operating expenses of $19.4 million
primarily due to lower FDIC insurance costs of $22.4 million resulting from the
special one-time SAIF recapitalization payment of $18.0 million in the third
quarter of 1996 and an upgrade in the Bank's assessment classification, (b)
increased income tax benefit of $7.0 million (see "--Income Taxes"), (c)
decreased provisions for estimated loan and REO losses of $4.8 million and (d)
and increased noninterest income of $4.1 million related to higher volumes of
uninsured investment product sales, MBSs sales and deposit and ATM cash services
activities. These favorable changes were partially offset by (a) decreased net
interest income of $4.3 million primarily due to lower rates on average interest
earning assets and higher levels of average borrowing balances and (b) the
writedown of the LIBOR asset trust securities of $4.8 million due to the credit
deterioration of the securities underlying collateral.
The Company reported a net loss available to common stockholders of $15.6
million $(0.86) per basic and diluted common share; computed on the basis of
18,242,887 basic weighted average common shares outstanding and $(0.85) per
diluted common share; computed on the basis of 18,438,454 diluted weighted
average common shares outstanding) for the year ended December 31, 1996. Without
the SAIF special assessment of $18.0 million, the Company would have reported
earnings available to common stockholders of $2.4 million for the year ended
December 31, 1996. This compares to a net loss of $69.0 million $(8.84) per
basic common share; computed on the basis of 7,807,201 basic weighted average
common shares outstanding and $(8.83) per diluted common share; computed on the
basis of 7,815,560 diluted weighted average common shares outstanding) for the
year ended December 31, 1995.
54
<PAGE>
Results of operations for the year ended December 31, 1996, excluding the SAIF
special assessment of $18.0 million, as compared to the same period in 1995,
reflect: (a) a decrease in provisions for loan losses of $54.1 million due in
part to the 1995 loan portfolio charge of $45 million which was a consequence of
the adoption of the Accelerated Asset Resolution Plan, with no comparable amount
in 1996, and the reduction of NPAs during 1996, (b) increased net interest
income of $13.6 million due primarily to the impact of lower interest rates on
the Company's interest-bearing liabilities and utilization of the capital raised
in 1995 and (c) an increase of $1.1 million in income tax benefits resulting
from the filing of various amended federal income tax returns to reflect a
specified liability loss carryback under Internal Revenue Code ("IRC") Section
172 (f). These favorable changes were partially offset by, (a) decreased gains
on sales of loans, investment securities and MBSs of $3.3 million, (b) a gain on
sale of servicing of $4.6 million in 1995 with no comparable amounts in 1996,
(c) decreased loan fee income of $1.3 million primarily due to the sale of
servicing in 1995, and (d) preferred stock dividends of the Bank of $6.2 million
with no comparable amounts in 1995.
ACQUISITIONS
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 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. 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.
On September 19, 1997, the Company completed the purchase of deposits from
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.
The acquisitions of Hancock and the Coast branch provide a number of benefits
to the Company including an increased customer base and larger branch network
and operating efficiencies through consolidation. The acquired branch network
and associated customer base included approximately 14,200 and 7,100 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 acquired 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 branches acquired into existing
Fidelity branches.
WRITEDOWN OF MORTGAGE-BACKED SECURITIES
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
55
<PAGE>
borrowers of the underlying loans collateralizing the securities. The unrealized
holding loss of $4.5 million at September 30, 1997 was reported in a separate
component of shareholders' equity as the decline in fair value was not believed
to be other than temporary. The continued poor performance of the securities
underlying collateral in the three months subsequent to September 30, 1997
motivated management to seek a buyer for the securities rather than risk
possible continued decline in fair value. The securities were sold in January
1998 at a loss of $4.8 million, which was recorded through earnings in 1997 as
the loss was now considered to be other than temporary.
ASSET GROWTH
As a part of the business strategy in 1997, the Company developed a plan to
grow assets (loans and securities) by approximately $600 million. This plan, in
general terms, was based upon certain risk adjusted return and liquidity
objectives and was designed to increase the Company's securities and loan
portfolios to enhance the Company's earning capabilities. Under this plan, the
Company purchased $1.0 billion in investment and MBSs and $221.6 million in
single family whole loans in 1997. The asset growth was primarily funded through
FHLB advances. The increase in earning assets generally had lower interest rate
spreads than the Company's existing assets, see "--Asset/Liability Management"
for a discussion on the Company's interest rate spread for the year ended 1997
and the change from the year ended 1996.
ASSET/LIABILITY MANAGEMENT
Net interest income is the difference between interest earned on the Company's
loans, MBSs and investment securities ("interest-earning assets") and interest
paid on its deposits and borrowings ("interest-bearing liabilities"). Net
interest income is affected by the interest rate spread, which is the difference
between the rates earned on the Company's interest-earning assets and rates paid
on its interest-bearing liabilities, as well as the relative amounts of its
interest-earning assets and interest-bearing liabilities. The Company's average
interest rate spread for the years ended December 31, 1997, 1996, and 1995 was
2.05% 2.31%, and 1.89%, respectively.
The objective of interest rate risk management is to maximize the net income
of the Company while controlling interest rate risk exposure. Banks and savings
institutions are subject to interest rate risk when assets and liabilities
mature or reprice at different times (duration risk), against different indices
(basis risk) or for different terms (yield curve risk). The decision to control
or accept interest rate risk can only be made with an understanding of the
probability of various scenarios occurring. Having liabilities that reprice more
quickly than assets is beneficial when interest rates fall, but may be
detrimental when interest rates rise.
The Company manages interest rate risk by, among other things, maintaining a
portfolio consisting primarily of ARM loans. ARM loans comprised 94%, of the
total loan portfolio at December 31, 1997, and 97% at December 31, 1996, and
1995. The percentage of monthly adjustable ARMs to total loans was approximately
71%, 76%, and 75% at December 31, 1997, 1996, and 1995, respectively. Interest
sensitive assets provide the Company with a degree of long-term protection from
rising interest rates. At December 31, 1997, approximately 93% of Fidelity's
total loan portfolio consisted of loans which mature or reprice within one year,
compared to approximately 93% at December 31, 1996 and 94% at December 31, 1995.
Fidelity has in recent periods been negatively impacted by the fact that
increases in the interest rates accruing on Fidelity's ARMs lagged the increases
in interest rates accruing on its deposits due to reporting delays and
contractual look-back periods contained in the Bank's loan documents. At
December 31, 1997, 86% of the Bank's loans, which are indexed to COFI at
December 31, 1997, as with all COFI portfolios in the industry, do not reprice
until some time after the industry liabilities composing COFI reprice. The
Company's liabilities reprice generally in line with the cost of funds of
institutions which comprise the FHLB Eleventh District. In the Company's case,
the lag between the repricing of its liabilities and its ARM loans indexed to
COFI is approximately four months. Thus, in a rising rate environment there will
be upward pressure on rates paid on deposit accounts and wholesale borrowings,
and the Company's net interest income will be
56
<PAGE>
adversely affected until the majority of its interest-earning assets fully
reprice. Conversely, in a falling interest rate environment, net interest income
will be positively affected.
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
for the term of the agreement until such time as interest rates fall below or
rise above the cap or floor level.
During the first quarter of 1995, the Bank terminated interest rate swap
agreements with a notional amount of $700 million, resulting in a deferred gain
of $1.2 million which was fully amortized in 1995. Also, during the fourth
quarter of 1995, the Bank terminated its remaining interest swap agreements,
which were entered into in 1993 and 1994, with a notional amount of $446.7
million and as a result recorded a deferred loss of $3.2 million that is being
amortized as a yield adjustment over the remaining life of the original
transactions. These interest rate swap agreements were intended to modify the
repricing characteristics of specific assets and liabilities. In 1997 the Bank
entered into an interest rate swap agreement with a notional amount of $90.0
million to convert a fixed rate FHLB advance to a floating rate. The swap was
terminated in the fourth quarter of 1997 and as a result recorded a deferred
gain of $0.6 million that is being amortized as a yield adjustment over the
remaining life of the FHLB advance.
57
<PAGE>
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of December 31,
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 DECEMBER 31, 1997 MATURITY OR REPRICING
--------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
---------- ------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Cash and cash equivalents.......................... $ 41,622 $ 594 $ -- $ -- $ -- $ 42,216
Investment securities(1)(2)........................ 60,498 68,080 25,946 -- 10,000 164,524
MBSs (1)........................................... 122,197 1,535 -- -- 769,922 893,654
Loans receivable:
ARMs and other adjustables(3)..................... 2,247,917 421,010 39,719 3,329 -- 2,711,975
Fixed rate loans.................................. 9,636 1,055 4,759 14,565 140,152 170,167
---------- ------------ ---------- ---------- -------- ----------
Total gross loans receivable..................... 2,257,553 422,065 44,478 17,894 140,152 2,882,142
---------- ------------ ---------- ---------- -------- ----------
Total interest-earning assets................... 2,481,870 492,274 70,424 17,894 920,074 3,982,536
---------- ------------ ---------- ---------- -------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts(4).................. 400,009 -- -- -- -- 400,009
Money market accounts(4).......................... 59,414 -- -- -- -- 59,414
Fixed maturity deposits:
Retail customers................................. 651,954 1,437,190 331,119 847 1,619 2,422,729
Wholesale customers.............................. 749 800 8,100 -- -- 9,649
---------- ------------ ---------- ---------- -------- ----------
Total deposits.................................. 1,112,126 1,437,990 339,219 847 1,619 2,891,801
---------- ------------ ---------- ---------- -------- ----------
Borrowings:
FHLB advances(3).................................. 224,960 150,000 445,000 190,000 -- 1,009,960
Other............................................. -- -- -- 51,478 -- 51,478
---------- ------------ ---------- ---------- -------- ----------
Total borrowings................................. 224,960 150,000 445,000 241,478 -- 1,061,438
---------- ------------ ---------- ---------- -------- ----------
Total interest-bearing liabilities.............. 1,337,086 1,587,990 784,219 242,325 1,619 $3,953,239
---------- ------------ ---------- ---------- -------- ----------
Impact of hedging................................... 5,000 -- (5,000) -- --
---------- ------------ ---------- ---------- --------
Repricing Gap....................................... $1,149,784 $ (1,095,716) $ (718,795) $ (224,431) $918,455
========== ============ ========== ========== ========
Gap to total assets................................ 27.59% (26.29)% (17.25)% (5.38)% 22.04%
========== ============ ========== ========== ========
Cumulative Gap to Total Assets..................... 27.59% 1.30 % (15.95)% (21.33)% 0.71%
========== ============ ========== ========== ========
</TABLE>
- --------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $60.5 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.
58
<PAGE>
Other Derivative Instruments
During the third quarter of 1996, the Company entered into an advisory
agreement with an investment advisor, pursuant to which the advisor will
recommend trading related investments, subject to prior approval and direction
of the Company, and execute trading activities in accordance with the Company's
investment strategy. Such strategy includes the use of derivative instruments
for trading or yield enhancement purposes. Realized and unrealized changes in
fair values of the instruments are recognized in earnings in the period in which
the changes occur. Under the advisory agreement, outstanding forward commitments
to purchase and sell adjustable rate MBSs totaled $30.0 million and $15.0
million, respectively, at December 31, 1997. Also outstanding in relation to
this managed portfolio at December 31, 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 $6.5 million notional amount
of call options on treasury futures with an exercise date in 1998.
In 1997, as part of the growth strategy, the Company purchased approximately
$360.0 million in fixed rate U.S. Agency MBSs, which were categorized as
available for sale. Due to the higher price volatility of fixed rate securities
during interest rate fluctuations as compared to adjustable rate securities,
management began a strategy to hedge the fluctuations of the fair value of the
fixed rate MBSs. The Company used futures on Treasury Notes which have a high
correlation with Agency MBSs. Outstanding at December 31, 1997 were $205.9
million notional amount of futures on Treasury Notes. The derivative instruments
used to hedge the fluctuations in fair values of available for sale securities
are carried at fair value, with realized and unrealized changes in fair value
reported as a separate component of stockholders' equity. Realized changes in
fair value are amortized as a yield adjustment over the life of the hedged
instrument.
MARKET RISK
The Company's ALCO, which includes senior management representatives, monitors
and considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in net portfolio value ("NPV") and net interest
income. A primary purpose of the Company's asset/liability management is to
manage interest rate risk to effectively invest the Company's capital and to
preserve the value created by its core business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in NPV in the event of hypothetical changes in interest rates
and interest rate sensitivity gap analysis is used to determine the repricing
characteristics of the Bank's assets and liabilities.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV is equal to the estimated market value of
assets minus the market value of liabilities, with adjustments made for off-
balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained one hundred to four
hundred basis points increase or decrease in the market interest rates. The
interest rate risk policy of the Fidelity Board establishes maximum decreases in
NPV of 20%, 30%, 60% and 80% in the event of sudden and sustained one hundred to
four hundred basis point increases in market rates. The
59
<PAGE>
policy also establishes maximum decreases in NPV of 10%, 20%, 30% and 40% in the
event of sudden and sustained one hundred to four hundred basis point decreases
in market rates. The following table presents the Company's projected change in
NPV for the various rate shock levels as of December 31, 1997.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------
NET PORTFOLIO VALUE AS A % OF
PORTFOLIO VALUE ASSETS
------------------------------
Dollar Dollar Percent Board NET PORTFOLIO BASIS POINT
Rate Shock Amount Change Change Limit VALUE RATIO CHANGE
- ------------------- -------------- --------------- --------------- ------------- ------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
+400 $220 $ (59) (21)% (80)% 5.51% (111)
+300 237 (43) (15) (60) 5.84 (78)
+200 252 (27) (10) (30) 6.14 (48)
+100 267 (13) (4) (20) 6.41 (21)
Base Case 280 -- -- -- 6.62 --
-100 287 8 3 (10) 6.72 10
-200 293 13 5 (20) 6.76 14
-300 306 27 10 (30) 6.97 35
-400 315 35 13 (40) 7.06 44
</TABLE>
The preceding table indicates that at December 31, 1997, in the event of an
increase in prevailing market interest rates, the Company's NPV would be
expected to decrease, and that in the event of a decrease in prevailing market
interest rates, the Company's NPV would be expected to increase. At December 31,
1997, the Company's estimated changes in NPV were within the targets established
by the Board of Directors.
NPV is calculated by the Company pursuant to the guidelines established by the
OTS. The calculation is based on the net present value of estimated discounted
cash flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of
December 31, 1997, with adjustments made to reflect the shift in the treasury
yield curve as appropriate. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and deposits decay, and should
not be relied upon as indicative of actual results. Further, the computations do
not contemplate any actions the ALCO could undertake in response to changes in
interest rates.
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 December 31, 1997, 22.2% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 11.2% and 57.3% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively. At December 31,
1996, 18.7% of Fidelity's real estate loan portfolio (including loans held for
sale) consisted of California single family residences while another 11.6% and
62.0% 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
60
<PAGE>
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 GVA and
SVA. See Item 1. "Business--Credit Loss Experience."
Accelerated Asset Resolution Plan
An important component of the Company's business strategy is the reduction of
risk in the Bank's loan and REO portfolios. In the fourth quarter of 1995, the
Bank adopted 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, Hancock
recorded $5.8 million as an addition to the allowance for estimated loan losses
representing the estimated reduced recoveries in executing the Plan.
Through December 31, 1997, (i) $40.5 million in gross book balances of AARP
Pool loans had been resolved through either a negotiated sale or discounted
payoff, (ii) $8.5 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) $126.6 million in
gross book balances of REO were sold ($52.6 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 December 31, 1997, the AARP Pool consisted of 55
assets with an aggregate gross book balance of $29.0 million, comprised of
accruing and nonaccruing multifamily real estate loans totaling approximately
$21.4 million and REO properties totaling approximately $7.6 million, which are
reported as real estate owned on the statement of financial condition. Through
December 31, 1997, of the $50.8 million of reserves established in connection
with the Plan, including the $5.8 million established by Hancock, $8.8 million
had been charged off and $31.6 million had been allocated to SVAs or REO
writedowns in connection with the Bank's
61
<PAGE>
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 in 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 $20.6 million or 11.8% from December 31,
1996, to $153.5 million at December 31, 1997. This decrease was due to lower
levels of nonperforming and performing classified loans and the large volume of
REO sales during 1997, offset by an increase in other classified assets of $21.4
million related to the classification of the LIBOR Asset Trust securities due to
the performance of the underlying collateral. The ratio of NPAs to total assets
decreased from 1.83% at December 31, 1996, to 0.61% at December 31, 1997. This
decrease is due to both a decrease in the level of NPAs at December 31, 1997,
compared to December 31, 1996 and to an increase in total assets at December 31,
1997 compared to December 31, 1996.
All assets and ratios are reported net of SVA and writedowns unless otherwise
stated. The following table presents asset quality details at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NPAs by type:
Nonaccruing loans..................................... $ 13,074 $ 36,125
REO, net of REO GVA................................... 12,293 24,663
---------- -----------
Total NPAs.......................................... $ 25,367 $ 60,788
========== ===========
NPAs by composition:
Single family residences.............................. $ 6,833 $ 11,204
Multifamily 2 to 4 units.............................. 2,039 9,369
Multifamily 5 units and over.......................... 15,309 36,160
Commercial and other.................................. 1,686 5,355
REO GVA............................................... (500) (1,300)
---------- -----------
Total NPAs.......................................... 25,367 60,788
Total TDRs(2)........................................... 43,993 45,196
---------- -----------
Total TDRs and NPAs................................. $ 69,360 $ 105,984
========== ===========
Classified assets:
NPAs.................................................. $ 25,367 $ 60,788
Performing classified loans........................... 104,685 111,248(1)
Other classified assets............................... 23,450(2) 2,060
---------- -----------
Total classified assets............................. $ 153,502 $ 174,096
========== ===========
Classified asset ratios:
Nonaccruing loans to total assets..................... 0.31% 1.08 %
NPAs to total assets.................................. 0.61% 1.83 %
TDRs to total assets.................................. 1.06% 1.36 %
NPAs and TDRs to total assets......................... 1.66% 3.18 %
Classified assets to total assets..................... 3.68% 5.23 %
REO to NPAs........................................... 48.46% 40.57 %
Nonaccruing loans to NPAs............................. 51.54% 59.43 %
</TABLE>
- -----------
(1) Includes a hotel property loan with a balance of $18.4 million at December
31, 1996.
(2) Includes the Libor Asset Trust investment securities with a book value of
$20.9 million which were classified due to the performance of the
underlying collateral. The securities were sold in January 1998.
62
<PAGE>
REO
Direct costs of foreclosed real estate operations totaled $5.4 million, $5.7
million and $5.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease was primarily due to decreases in both the average
number of REO outstanding and the average gross book value of properties
foreclosed. The following table provides information about the change in the
book value and the number of properties owned and foreclosed for the periods
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REO net book value........................................................ $ 12,293 $24,663
(Decrease) increase in REO for the period................................. $(12,370) $ 5,142
Number of real properties owned........................................... 88 131
(Decrease) increase in number of properties owned for the period.......... (43) 22
Number of properties foreclosed for the period............................ 257 226
Gross book value of properties foreclosed................................. $ 75,385 $77,585
Average gross book value of properties foreclosed......................... $ 294 $ 343
</TABLE>
63
<PAGE>
Allowance for Estimated Loan and REO Losses
The following table summarizes the reserves, writedowns and certain coverage
ratios at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans:
GVA .......................................................................... $32,426 $25,308
SVA............................................................................. 18,112 32,200
------- -------
Total allowance for estimated loan losses (1) (2)............................. $50,538 $57,508
======= =======
Writedowns (3).................................................................. $ 183 $ 146
======= =======
Total loan allowances and loan writedowns to gross loans (4).................... 1.76% 2.09%
Total loan allowances to gross loans............................................ 1.75% 2.08%
Loan GVA to loans (4)........................................................... 1.14% 0.93%
Loan GVA to nonaccruing loans................................................... 248.02% 70.06%
Nonaccruing loans to total loans, net........................................... 0.46% 1.34%
Real estate owned:
REO GVA......................................................................... $ 500 $ 1,300
SVA .......................................................................... 623 781
------- -------
Total REO allowance for estimated losses...................................... $ 1,123 $ 2,081
======= =======
Writedowns (3).................................................................. $ 7,227 $14,819
======= =======
Total REO allowances and REO writedowns to gross REO............................ 40.45% 40.66%
Total REO allowances to gross REO (5)........................................... 8.37% 7.78%
REO GVA to REO (4).............................................................. 3.91% 5.01%
Total loans and REO:
GVA............................................................................. $32,926 $26,608
SVA............................................................................. 18,735 32,981
------- -------
Total allowance for estimated losses (2)...................................... $51,661 $59,589
======= =======
Writedowns (3).................................................................. $ 7,410 $14,965
======= =======
Total allowances and writedowns to gross loans and REO.......................... 2.03% 2.66%
Total allowances to gross loans and REO (4)..................................... 1.78% 2.14%
Total GVA to loans and REO (4).................................................. 1.15% 0.97%
Total GVA to NPAs............................................................... 127.29% 42.86%
</TABLE>
- ---------------
(1) All allowances for loan losses are for the Bank's portfolio of mortgage
loans.
(2) At December 31, 1997 and 1996, the allowance for estimated loan losses
includes $14.4 million and $16.7 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 SVA and
writedowns.
(5) Net of writedowns.
64
<PAGE>
The following tables summarize the activity in the allowances for estimated
loan and REO losses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- --------------------------------
LOANS(1) REO TOTAL LOANS(1) REO TOTAL
---------- -------- --------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1,............................... $ 57,508 $ 2,081 $ 59,589 $ 89,435 $ 3,492 $ 92,927
Provision for losses.............................. 13,004 1,060 14,064 15,610 3,219 18,829
Charge-offs....................................... (41,190) (2,810) (44,000) (50,841) (4,630) (55,471)
Allocations related to acquisition (2)............ 12,770 120 12,890 -- -- --
Recoveries........................................ 8,446 672 9,118 3,304 -- 3,304
-------- ------- -------- -------- ------- --------
Balance on December 31.............................. $ 50,538 $ 1,123 $ 51,661 $ 57,508 $ 2,081 $ 59,589
======== ======= ======== ======== ======= ========
</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 SVA for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- --------------------------------
LOANS(1) REO TOTAL LOANS(1) REO TOTAL
---------- -------- --------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1,............................... $ 32,200 $ 781 $ 32,981 $ 40,514 $ 1,192 $ 41,706
Allocations from GVA to SVA....................... 23,987 2,532 26,519 42,527 4,219 46,746
Charge-offs....................................... (41,190) (2,810) (44,000) (50,841) (4,630) (55,471)
Allocations related to acquisition................ 3,115 120 3,235 -- -- --
-------- ------- -------- -------- ------- --------
Balance on December 31.............................. $ 18,112 $ 623 $ 18,735 $ 32,200 $ 781 $ 32,981
======== ======= ======== ======== ======= ========
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans, MBSs
and investment securities ("interest-earning assets") and interest paid on
savings deposits and borrowings ("interest-bearing liabilities"). For the year
ended December 31, 1997, net interest income totaled $81.0 million, decreasing
by $4.3 million from $85.3 million for the year-end 1996. Net interest income in
1996 increased by $13.7 million from 1995.
Net interest income is primarily affected by (a) the average volume and
repricing characteristics of the Company's interest-earning assets and interest-
bearing liabilities, (b) the level and volatility of market interest rates, (c)
the level of nonaccruing loans ("NPLs") and (d) the interest rate spread between
the yields earned and the rates paid.
65
<PAGE>
The following table presents the primary determinants of net interest income
for the periods indicated. For the purpose of this analysis, nonaccrual loans
are included in the average balances, and delinquent interest on such loans has
been deducted from interest income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................................... $2,810,193 $ 205,275 7.30% $2,901,908 $213,013 7.34%
MBSs..................................... 429,483 29,435 6.85 78,242 5,772 7.38
Investment securities.................... 263,573 16,822 6.38 233,797 16,056 6.87
Investment in FHLB stock................. 55,129 3,475 6.30 50,976 3,072 6.03
---------- ---------- ---------- --------
Total interest-earning assets........... 3,558,378 255,007 7.16 3,264,923 237,913 7.29
---------- --------
Noninterest-earning assets................ 88,119 57,351
---------- ----------
Total assets............................ $3,646,497 $3,322,274
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits......................... $ 282,886 3,451 1.22 $ 298,287 3,098 1.04
Savings deposits........................ 112,904 6,135 5.43 137,885 3,743 2.71
Time deposits........................... 2,246,770 117,131 5.18 2,103,369 113,424 5.38
---------- ---------- ---------- --------
Total deposits......................... 2,642,560 126,717 4.80 2,539,541 120,265 4.72
Borrowings............................... 764,350 47,292 6.19 515,435 32,358 6.26
---------- ---------- ---------- --------
Total interest-bearing liabilities...... 3,406,910 174,009 5.11 3,054,976 152,623 4.98
---------- --------
Noninterest-bearing liabilities........... 40,621 44,251
Preferred stock issued by
consolidated subsidiary.................. 28,640 51,750
Stockholders' equity...................... 170,326 171,297
---------- ----------
Total liabilities and equity............. $3,646,497 $3,322,274
========== ==========
Net interest income; interest
rate spread.............................. $ 80,998(1) 2.05% $ 85,290 2.31%
========== ===== ======== =====
Net yield on interest
earning assets........................... 2.27%(1) 2.63%
===== =====
Average nonaccruing loan
balance included in average
loan balance................ $ 43,117 $ 60,364
========== ==========
Net delinquent interest removed
from interest income..................... $ 3,909 $ 6,018
========== ========
Reduction in net yield on
interest-earning assets
due to delinquent interest............... 0.11% 0.18%
===== =====
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995
------------------------------------
AVERAGE AVERAGE
DAILY YIELD/
BALANCE INTEREST RATE
---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans.................................... $3,196,024 $227,710 7.12%
MBSs..................................... 55,538 3,535 6.37
Investment securities.................... 201,243 12,794 6.36
Investment in FHLB stock................. 48,373 2,438 5.04
---------- --------
Total interest-earning assets........... 3,501,178 246,477 7.04
--------
Noninterest-earning assets................ 87,525
----------
Total assets............................ $3,588,703
==========
Interest-bearing liabilities:
Deposits:
Demand deposits......................... $ 304,644 2,767 0.91
Savings deposits........................ 167,000 4,469 2.68
Time deposits........................... 2,207,145 121,006 5.47
---------- --------
Total deposits......................... 2,678,789 128,242 4.79
Borrowings............................... 716,267 46,594 6.51
---------- --------
Total interest-bearing liabilities...... 3,395,056 174,836 5.15
--------
Noninterest-bearing liabilities........... 30,615
Preferred stock issued by
consolidated subsidiary..................
Stockholders' equity...................... 163,032
----------
Total liabilities and equity............. $3,588,703
==========
Net interest income; interest
rate spread.............................. $ 71,641 1.89%
======== =====
Net yield on interest
earning assets........................... 2.05%
=====
Average nonaccruing loan
balance included in average
loan balance................ $ 76,758
==========
Net delinquent interest removed
from interest income..................... $ 5,813
========
Reduction in net yield on
interest-earning assets
due to delinquent interest............... 0.17%
=====
</TABLE>
- --------------------------
(1) At December 31, 1997, the impact of the Americash program on net interest
income and margin would be increases of $1.1 million and 2 basis points,
respectively.
66
<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 unallocated after such calculations is allocated
proportionately to changes in volume and changes in rates.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
------------------------------------ -------------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans.......................................... $ (6,600) $(1,138) $ (7,738) $(21,530) $ 6,833 $(14,697)
MBSs........................................... 24,107 (444) 23,663 1,612 625 2,237
Investment securities.......................... 1,926 (1,160) 766 2,181 1,081 3,262
Investment in FHLB stock....................... 253 149 403 136 498 634
-------- ------- -------- -------- ------- --------
Total interest income......................... 19,686 (2,593) 17,094 (17,601) 9,037 (8,564)
-------- ------- -------- -------- ------- --------
Interest expense:
Deposits:
Demand deposits............................... 166 (519) (353) 59 (390) (331)
Savings deposits.............................. 781 (3,173) (2,392) 776 (50) 726
Time deposits................................. (7,411) 3,704 (3,707) 5,379 2,203 7,582
-------- ------- -------- -------- ------- --------
Total deposits.............................. (6,464) 12 (6,452) 6,214 1,763 7,977
Borrowings..................................... (12,709) (2,225) (14,934) 11,563 2,673 14,236
-------- ------- -------- -------- ------- --------
Total interest expense........................ $(19,173) (2,213) (21,386) 17,777 4,436 22,213
-------- ------- -------- -------- ------- --------
(Decrease) increase in net interest income...... $ 513 $(4,806) $ (4,292) $ 176 $13,473 $ 13,649
======== ======= ======== ======== ======= ========
</TABLE>
The $4.3 million decrease in net interest income between 1997 and 1996 was
primarily due to decreased rates on average interest-earning assets combined
with an increase in rates and the average level of interest-bearing liabilities.
This was partially offset by an increase in the level of interest-earning
assets.
The $13.7 million increase in net interest income between 1996 and 1995 was
primarily the result of generally decreasing rates and the lag effect on the
COFI portfolio, (see "--Asset/Liability Management") utilization of new capital
raised in 1995, and a lower level of average interest-bearing liabilities. This
was partially offset by a decline in the level of average interest-earning
loans.
The Company's net interest income, interest rate margin and operating results
have been negatively affected by the level of loans on nonaccrual status. Gross
balances of nonaccruing loans averaged $43.1 million, $60.4 million, and $76.8
million in 1997, 1996, and 1995, respectively. As a result, the Company's net
interest rate margin was decreased by 0.11%, 0.18%, and 0.17% in those years,
respectively.
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
annuities and retail banking fees, (b) income/expenses associated with owned
real estate, which includes both the provision for real estate losses as well as
income/expenses incurred by the Company associated with the operations of its
owned real estate properties and (c) gains and losses on the sales of loan
servicing, investment securities and MBSs. Items (b) and (c) can fluctuate
widely, and could therefore mask the underlying fee generating performance of
the Company on an ongoing basis.
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<PAGE>
Noninterest income increased by $1.7 million from $2.2 million in the year
ended December 31, 1996 to $3.9 million in the year ended December 31, 1997. The
major component of this increase are (a) fee income from sale of uninsured
investment products increased by $1.5 million as a result of increased sales,
(b) fee income on deposits and other income increased by $0.3 million primarily
as a result of a higher average volume of deposit balances in 1997 as compared
to 1996, (c) net gains on securities activities in the year ended December 31,
1997 increased by $1.3 million from the 1996 twelve month period primarily due
to increased sales, (d) fee income on Americash increased $1.0 million as a
result of cash service fees received in 1997, with no comparable amounts in 1996
and (e) decreased real estate operations of $2.4 million primarily due to
improved execution on sales of foreclosed properties. These favorable variances
were partially offset by the writedown of MBSs of $4.8 million (see "--Writedown
of Mortgage-backed Securities").
Noninterest income decreased by $8.8 million from net noninterest income of
$11.1 million in the year ended December 31, 1995 to $2.3 million in the year
ended December 31, 1996. The major components of this decrease are: (a) other
noninterest income (expense) decreased by $4.5 million as a result of a net gain
of $4.6 million realized in 1995 from the sale of $495.5 million in rights to
service loans for others, with no comparable amounts in 1996; (b) loan servicing
fees decreased by $1.3 million primarily as a result of the sale of the rights
to service loans in the first quarter of 1995 and the second quarter of 1996;
(c) net gains on sales of MBSs decreased during the year ended December 31, 1996
by $0.6 million from the 1995 twelve-month period; and (d) net gains on
securities activities in the year ended December 31, 1996 decreased by $2.2
million from the 1995 twelve month period. The increased sales activity in
loans, MBSs and investment securities in 1995 was primarily for regulatory
capital maintenance purposes.
OPERATING EXPENSES
Operating expenses decreased by $19.4 million to $63.1 million for the year
ended December 31, 1997 compared to $82.5 million (including the SAIF special
assessment of $18.0 million) for the year ended December 31, 1996. The change
was primarily due to (a) a decrease of $22.4 million of FDIC insurance costs
resulting from the special one-time recapitalization payment of $18.0 million to
the SAIF in the third quarter of 1996 and an upgrade in the Bank's assessment
classification, (b) a decrease of $1.0 million in other expenses primarily due
to lower legal settlement costs related to certain litigation. These favorable
variances were partially offset by (a) a $2.5 million increase in personnel and
benefit expense due to an increase of 104 or 22.7% in FTEs during 1997 primarily
due to the Hancock acquisition and implementation of the business strategy; (b)
an increase of $1.3 million in occupancy costs primarily due to Hancock and
Coast branch acquisitions completed in 1997.
The Company increased total employee headcount during 1997 by 105 related to
the acquisition of Hancock and implementation of the business strategy. Areas
which experienced employee increases in 1997 included the Retail Financial
Services Group (an increase of 74 employees), the Consumer Lending and Credit
Group (an increase of 13 employees), the Gateway Investment Services Group (an
increase of 13 employees), and other administrative services (an increase of 5
employees). In line with the Company's business strategy, it is anticipated that
the FTE count of the Company will significantly increase in the future as the
business strategy is implemented.
While the Company intends to continue to control operating expenses, the level
of expenses are expected to significantly increase as the business initiatives
described under Item 1. "Business--Business Strategy" are implemented. The
Company also intends to expend resources as it evaluates and pursues earning
asset acquisition opportunities.
Operating expenses (excluding the SAIF special assessment of $18.0 million)
decreased by $17.5 million to $64.5 million for the year ended December 31, 1996
compared to $82.0 million for the year ended December 31, 1995. The change was
primarily due to (a) a $7.8 million decrease in personnel and benefit expense
due to a decline of 152 or 23.6% in the twelve month average number of FTEs; (b)
a decrease of $2.0 million in occupancy costs; (c) a decrease of $1.3 million of
FDIC insurance costs due to the
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<PAGE>
recapitalization of the SAIF in 1996 and an upgrade in the Bank's assessment
classification, excluding the SAIF special assessment of $18.0 million; (d) a
decrease of $4.3 million resulting in provisions for capitalized software costs
in 1995 with no corresponding amount in 1996; and (e) a decrease of $2.7 million
in office-related expenses and other costs which was largely tied to the overall
reduction in personnel and overhead. These favorable variances were partially
offset by an increase of $0.6 million in professional services due largely to
cost reengineering efforts and outsourcing of certain administrative functions.
The Company decreased total employee headcount during 1996 by 97 to achieve
organizational goals involving cost reductions, outsourcing opportunities and
changes in product focus. Areas which experienced employee reductions in 1996
included the Consumer Lending Group (a reduction of 56 employees), the Finance
Group (a reduction of 21 employees) and the Retail Financial Services Group,
other administrative services and subsidiaries (a reduction of 20 employees).
Decreased operating expenses resulted in a decrease in the annualized
operating expense ratio (the ratio of operating expenses to total average
assets) to 1.73% for the year ended December 31, 1997 from 1.94%, excluding the
SAIF special assessment of $18.0 million, for the same period in 1996, based on
the total average asset size of the Company (from $3.3 billion for the year
ended December 31, 1996 to $3.6 billion for the year ended December 31, 1997).
Decreased operating expenses, excluding the SAIF special assessment of $18.0
million, resulted in a decrease in the annualized operating expense ratio (the
ratio of operating expenses to total average assets) to 1.94% for the year ended
December 31, 1996 from 2.28% for the same period in 1995, notwithstanding the
decrease in total average asset size of the Company (from $3.6 billion for the
year ended December 31, 1995 to $3.3 billion for the year ended December 31,
1996).
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 Bank 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 that less expenses were incurred to generate a given level of
revenue.
The efficiency ratio improved between the year ended December 31, 1996 and
December 31, 1997 from 67.77% to 67.46%. This decrease was due to increased
noninterest income (excluding the $4.8 million writedown on MBSs available for
sale) and decreased operating expense (excluding the SAIF special assessment of
$18.0 million), for reasons described above, which were partially offset by
decreased net interest income.
The efficiency ratio improved between the year ended December 31, 1995 and
December 31, 1996 from 89.81% to 67.77%. This decrease was due to increased net
interest income and decreased operating expense (excluding the SAIF special
assessment of $18.0 million), for reasons described above, which were partially
offset by decreased noninterest income.
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, upgrade, 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 current expense estimate for year 2000 corrective
activities is $3.6 to $4.0 million, of which a significant portion would be
related to increased staffing of technology and support personnel to complete
the modifications or upgrades necessary.
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<PAGE>
While the Company believes it will achieve year 2000 compliance, it is to some
extent dependent upon the efforts of third parties who provide systems and
services. The Company is closely monitoring the year 2000 progress of third
party vendors and has planned a program of testing key systems for compliance.
No assurance can be given that the Company will be successful in addressing year
2000 issues within this estimated timeframe or at specified cost.
INCOME TAXES
The Company's expected combined federal and state statutory tax rate is
approximately 42.0% of earnings before income taxes. The effective tax benefit
rate of 92.2% on earnings before income taxes for 1997, reflect the federal and
state tax benefit attributable to the utilization of net operating loss ("NOL")
carryforwards, and the partial recognition of the deferred tax asset based on
anticipated future operations. The effective tax benefit rate of 10.4% on losses
before income taxes for 1996 reflects the federal tax benefit attributable to
the third quarter filing of a loss carryback claim under IRC Section 172(f), as
discussed below.
As of December 31, 1996 a valuation allowance was provided for the total net
deferred tax asset. Under 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. 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 $8.3 net deferred
tax asset for the year ended December 31, 1997.
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 the deferred
tax asset in future periods. The criteria of SFAS No. 109 could require the
recording of valuation allowances against this $8.3 million net deferred tax
asset through the recording of tax expense in future periods if the "more likely
than not" criteria can no longer be met.
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 with the Bank's former parent
company, Citadel. The amended returns, if accepted in total, would result in a
net refund of $19.0 million to Fidelity. IRC Section 172(f) is an area of the
tax law without significant legal precedent. The Internal Revenue Service (the
"Service") is currently examining this issue with respect to Fidelity's ability
to carryback such losses. Therefore, no assurances can be given as to
Fidelity's entitlement to such claim. Fidelity has recorded $1.1 million of tax
benefit in 1996 with respect to these amended tax returns.
Through August 4, 1994, the 1994 restructuring and recapitalization date, the
Bank filed a consolidated federal income tax return and a combined California
franchise tax return with its former parent company, Citadel. Pursuant to the
1994 restructuring and recapitalization Fidelity raised approximately $109
million in net new equity, and Citadel's ownership interest in Fidelity was
reduced to 16.2% of the then outstanding common stock. As a result of this 1994
restructuring and recapitalization, the Bank was no longer eligible to file a
tax return on a consolidated or combined basis with Citadel. Accordingly,
Fidelity and its subsidiaries filed a consolidated federal income tax return and
a combined California franchise tax return with the Bank as the common parent
corporation for the period of August 5, 1994 through December 31, 1994 and the
1995 calendar year. Fidelity and its subsidiaries have filed a consolidated
federal income tax return and a combined California franchise tax return with
its new parent company, Bank Plus for the 1996 calendar year, and will continue
to file as such for subsequent years.
Although Fidelity ceased to be a member of the Citadel consolidated group as a
result of the 1994 restructuring and recapitalization, Fidelity will remain
severally liable for the federal income tax of the Citadel consolidated group
for those tax years during which it was a member of the Citadel consolidated
group at any time. Citadel and Fidelity are parties to a tax disaffiliation
agreement governing certain tax
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<PAGE>
matters. For additional information, see "Related Party Transactions--Tax
Sharing" at Note 17 to the consolidated financial statements.
Effective for taxable years beginning after 1995, legislation enacted in 1996
has repealed for federal purposes the reserve method of accounting for bad debts
for thrift institutions. While thrifts qualifying as "small banks" may continue
to use the experience method, Fidelity, deemed a "large bank," is required to
use the specific charge off method. In addition, this enacted legislation
contains certain income recapture provisions which are discussed below.
Thrift institutions deemed "large banks" are required to include into income
ratably over 6 years, beginning with the first taxable year beginning after
1995, the institution's "applicable excess reserves." The applicable excess
reserves are the excess of (1) the balance of the institution's reserves for
losses on loans other than supplemental reserves at the close of its last
taxable year beginning before January 1, 1996, over (2) the adjusted balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. Fidelity's applicable excess reserves at December 31, 1995 were $14.6
million. This amount will be recognized into taxable income over six years at
the rate of $2.4 million per year starting with the taxable year ended December
31, 1996. The remaining applicable excess reserves at December 31, 1997 were
$9.8 million.
The remaining adjusted pre-1988 total reserve balance of $26.0 million at
December 31, 1997, will be recaptured into taxable income in the event Fidelity
(1) ceases to be a "bank" or "thrift," or (2) makes distributions to
shareholders in excess of post-1951 earnings and profits, redemptions, or
liquidations. Based on current estimates, Fidelity had post-1951 earnings and
profits at December 31, 1997 sufficient to cover 1997 distributions to
shareholders for federal income tax purposes. As a result, Fidelity did not
trigger any reserve recapture into taxable income for 1997.
For federal income tax purposes, the maximum rate of tax applicable to savings
institutions is currently 35% for taxable income over $10 million. For
California franchise tax purposes, savings institutions are taxed as "financial
corporations" at a higher rate than that applicable to nonfinancial corporations
because of exemptions from certain state and local taxes. The California
franchise tax rate applicable to financial corporations is approximately 11%.
The Service has completed its examination of the Bank's federal income tax
returns through 1991. The Service is currently conducting an examination of the
federal income tax returns for 1992, 1993 and tax year ended August 4, 1994. The
California Franchise Tax Board (the "FTB") has completed its examination of the
California franchise tax returns through 1988, and has completed the field
examination of the California franchise tax returns for years 1989 through 1991.
However, this examination is currently in the appeals process with the FTB. For
additional information regarding the federal income and California franchise
taxes payable by the Bank, see Note 12 to the consolidated financial statements.
IRC Sections 382 and 383 and the Treasury Regulations thereunder generally
provide that, following an ownership change of a corporation with an NOL, a net
unrealized built-in loss or tax credit carryovers, the amount of annual post-
ownership change taxable income that can be offset by pre-ownership change NOLs
or recognized built-in losses, and the amount of post-ownership change tax
liability that can be offset by pre-ownership change tax credits, generally
cannot exceed a limitation prescribed by Section 382. The Section 382 annual
limitation generally equals the product of the fair market value of the equity
of the corporation immediately before the ownership change (subject to various
adjustments) and the long-term tax-exempt rate prescribed monthly by the
Service.
As a result of the 1994 restructuring and recapitalization, the Bank underwent
an ownership change, ceased to be a member of the Citadel consolidated group,
and became subject to the annual limitations under IRC Section 382. As a result
of the 1995 Recapitalization, the Bank again underwent an ownership change, and
became subject to the annual limitations under IRC Section 382. The limitations
imposed by the 1995 change of ownership are inclusive of the limitations imposed
by the 1994 change of ownership.
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Hancock was merged with and into Fidelity as of June 30, 1997 in a tax-free
reorganization within the meaning of IRC Section 368(a)(1)(A), by reason of the
application of IRC Section 368(a)(2)(D). The cumulative total of net deferred
tax assets of Hancock and the related valuation allowance are included in the
balances of net deferred taxes as of December 31, 1997. In accordance with SFAS
No. 109, any subsequent reductions in the valuation allowance associated with
the deferred tax assets of Hancock will be reflected as an adjustment to any
goodwill with respect to the acquisition that remains unamortized.
As of December 31, 1997, the Bank had an estimated NOL carryover for federal
income tax purposes of $109.1 million expiring in years 2008 through 2011. Of
this amount, $70.1 million is subject to annual utilization limitations as a
result of the 1994 and 1995 changes of ownership. Of the estimated federal NOL
carryover, $3.2 million represents Hancock NOLs which are subject to an annual
utilization limitation as a result of the 1997 change of ownership occurring as
part of its acquisition by the Bank. For California franchise tax purposes, the
Bank had an estimated NOL carryover of $43.9 million. Of the estimated
California NOL carryover, $40.3 million relates to the Bank's operations and
expire in years 1998 through 2002, with $24.9 million of this amount subject to
annual utilization limitations as a result of the 1994 and 1995 changes of
ownership. The remaining $3.6 million in estimated California NOLs represent
Hancock NOLs expiring in years 2000 through 2009 with an annual utilization
limitation as a result of the 1997 change of ownership occurring as part of its
acquisition by the Bank.
The deferred tax assets related to both the estimated federal and California
NOL carryovers at December 31, 1997 have been recorded with a partial
corresponding valuation allowance in accordance with the provisions of SFAS No.
109.
REGULATORY CAPITAL COMPLIANCE
The OTS capital regulations, as required by FIRREA include three separate
minimum capital requirements for the savings institution industry--a "tangible
capital requirement," a "leverage limit" and a "risk-based capital requirement."
These capital standards must be no less stringent than the capital standards
applicable to national banks.
As of December 31, 1997 and 1996, the Bank was "well capitalized" under PCA
regulations adopted by the OTS pursuant to FDICIA. To be categorized as "well
capitalized", the Bank must maintain minimum core capital, core risk-based
capital and risk-based capital ratios as set forth in the table below. The
Bank's capital amounts and classification are subject to review by federal
regulators about components, risk-weightings and other factors. There are no
conditions or events since December 31, 1997 that management believes have
changed the institution's category.
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<PAGE>
The Bank's actual and required capital as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------------ ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- -------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted
assets)............................... $254,200 11.99% * $169,700 * 8.00% * $212,100 * 10.00%
Core capital (to adjusted tangible
assets)............................... 227,700 5.48 * 124,600 * 3.00 * 207,700 * 5.00
Tangible capital (to tangible assets).. 218,300 5.27 * 62,200 * 1.50 N/A
Core capital (to risk-weighted
assets)............................... 227,700 10.74 N/A * 127,200 * 6.00
As of December 31, 1996:
Total capital (to risk-weighted
assets)............................... 233,600 11.85 * 157,700 * 8.00 * 197,100 * 10.00
Core capital (to adjusted tangible
assets)............................... 209,200 6.29 * 99,800 * 3.00 * 166,300 * 5.00
Tangible capital (to tangible assets).. 208,900 6.28 * 49,900 * 1.50 N/A
Core capital (to risk-weighted
assets)............................... 209,200 10.61 N/A * 118,300 * 6.00
</TABLE>
* represents greater than or equal to
Under FDICIA, the OTS was required to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities. The OTS
added an interest rate risk capital component to its risk-based capital
requirement originally effective September 30, 1994. However, the OTS has
temporarily postponed the implementation of the rule implementing the interest
rate risk capital component until the OTS has collected sufficient data to
determine whether the rule is effective in monitoring and managing interest rate
risk. This capital component will require institutions deemed to have above
normal interest rate risk to hold additional capital equal to 50% of the excess
risk. No interest rate risk component would have been required to be added to
the Bank's risk-based capital requirement at December 31, 1997 and 1996 had the
rule been in effect at these times.
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<PAGE>
The following table reconciles the Bank's capital in accordance with GAAP to
the Bank's tangible, core and risk-based capital as of December 31, 1997 and
1996.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- -------- --------
BALANCE BALANCE BALANCE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
As of December 31, 1997:
Stockholders' equity (1)............................... $230,000 $230,000 $230,000
Unrealized loss on securities.......................... 4,500 4,500 4,500
Adjustments:
Goodwill.............................................. (6,500) (6,500) (6,500)
Intangible assets..................................... (9,700) (300) (300)
GVA................................................... -- -- 26,600
Equity investments.................................... -- -- (100)
-------- -------- --------
Regulatory capital (2)................................. $218,300 $227,700 $254,200
======== ======== ========
As of December 31, 1996:
Stockholders' equity (1)............................... $210,300 $210,300 $210,300
Unrealized gains on securities......................... (1,000) (1,000) (1,000)
Adjustments:
Goodwill.............................................. (300) -- --
Intangible assets..................................... (100) (100) (100)
GVA................................................... -- -- 24,600
Equity investments.................................... -- -- (200)
-------- -------- --------
Regulatory capital (2)................................. $208,900 $209,200 $233,600
======== ======== ========
</TABLE>
- ------------------
(1) Fidelity's total stockholders' equity, in accordance with GAAP, was 5.52%
and 6.32% of its total assets at December 31, 1997 and 1996, respectively.
(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.
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.
Sales and Securitization of Loans:
During 1997 and 1996, no loans were securitized compared to $112.8 million of
single family adjustable rate mortgages that the Bank securitized during 1995
through a swap of whole loans for MBSs. See "--Sales of Securities" below. Loan
sales and securitizations in 1995 were completed for the purpose of downsizing
the Bank's assets to maintain regulatory capital ratios. Sales of loans are
dependent upon various factors, including volume of loans originated, interest
rate movements, investor demand for loan products, deposit flows, the
availability and attractiveness of other sources of funds, loan demand by
borrowers, desired asset size and evolving capital and liquidity requirements.
Due to the volatility and unpredictability of these factors, the volume of
Fidelity's sales of loans has fluctuated significantly and no estimate of future
sales can be made at this time. At December 31, 1997, 1996 and 1995, the Bank
had no loans held for sale. Sales of loans, if any, from the held for investment
portfolio, except for problem loans, would be caused by unusual events.
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<PAGE>
FHLB Advances:
The Company had a net increase in FHLB advances of $560.1 million for the year
ended December 31, 1997. This compares to a net increase of $157.2 million for
the year ended December 31, 1996, and net repayments of $40.0 million for the
year ended December 31, 1995.
Commercial Paper:
Commercial paper outstanding was reduced by $40.0 million, $10.0 million and
$350.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The commercial paper program expired on August 5, 1997 and was not
renewed by decision of the Bank.
Loan Payments and Payoffs:
Loan principal payments, including prepayments and payoffs, provided $262.8
million, $248.5 million and $194.1 million for the years ended December 31,
1997, 1996 and 1995, respectively. The Company expects that loan payments and
prepayments will remain a significant funding source.
Sales of Securities:
The sale of investment securities and MBSs provided $309.5 million, $154.9
million and $264.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Bank held $953.4 million, $335.7 million and $126.0 million of
investment securities and MBSs in its available for sale portfolio as of
December 31, 1997, 1996 and 1995, respectively.
Sale of Common and Preferred Stock:
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity through the sale of 2,070,000 shares of Series A Preferred Stock and
11,750,000 shares of Class A Common Stock.
Undrawn Sources:
The Company maintains other sources of liquidity to draw upon, which at
December 31, 1997 include (a) a line of credit with the FHLB with $359.9 million
available, (b) $395.2 million in unpledged securities available to be placed in
reverse repurchase agreements or sold and (c) $620.6 million of unpledged loans,
some of which would be available to collateralize additional FHLB or private
borrowings, or be securitized.
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<PAGE>
Deposits:
At December 31, 1997, the Company had deposits of $2.9 billion, up from the
December 31, 1996 balance of $2.5 billion. The following table presents the
distribution of deposit accounts at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- ---------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Money market accounts................... $ 55,885 1.9% $ 65,605 2.6%
Checking accounts....................... 336,036 11.7 287,711 11.5
Passbook accounts....................... 67,502 2.3 53,665 2.2
---------- ------ ---------- ------
Total transaction accounts............. 459,423 15.9 406,981 16.3
---------- ------ ---------- ------
Certificates of deposit $100,000 and over 721,206 24.9 543,336 21.8
Certificates of deposit less than $100,000 1,711,172 59.2 1,545,616 61.9
---------- ------ ---------- ------
Total certificates of deposit.......... 2,432,378 84.1 2,088,952 83.7
---------- ------ ---------- ------
Total deposits......................... $2,891,801 100.0% $2,495,933 100.0%
========== ====== ========== ======
</TABLE>
The Company is currently eligible to accept brokered deposits; however, there
were no brokered deposits outstanding at December 31, 1997 and 1996.
Reverse 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 December 31, 1997, 1996 and
1995. In the year ended December 31, 1997 and 1996, the Company borrowed and
repaid funds from reverse repurchase agreements of $25.5 million and $73.0
million, respectively. During 1995, the Bank had net repayments of reverse
repurchase agreements of $46.5 million.
Loan Fundings:
Fidelity funded, either directly or through purchases, $233.1 million of gross
loans (excluding Fidelity's refinancings) in the year ended December 31, 1997
compared to $13.9 million in the same period of 1996 and $19.1 million in the
same 1995 period. The closing of the Company's wholesale and correspondent
lending operations in the fourth quarter of 1994 resulted in reduced loan
fundings in 1995 and a significant decrease in loan fundings during the year
ended December 31, 1996.
Contingent or Potential Uses of Funds:
The Bank had unfunded loans totaling $1.7 million at December 31, 1997. The
Bank had no unfunded loans at December 31, 1996 and 1995. The unfunded loans at
December 31, 1997 were assumed as part of the Hancock acquisition.
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<PAGE>
Liquidity:
Effective November 24, 1997 the OTS revised its liquidity regulations. The
required average daily balance of liquid assets was reduced from 5% to 4% of the
liquidity base and the calculation changed from a monthly average to a quarterly
average. The liquidity base calculation changed to include only the deposits due
in one year or less rather than all deposits. Liabilities due in one year or
less continue to be included in the base calculation. Additionally, the
liquidity base is calculated only at quarter end and not based on a daily
average. The type of securities qualified for liquidity was expanded to include
all agency securities regardless of maturity. The Bank's quarterly average
regulatory liquidity ratio was 22.75% at December 31, 1997. The Bank's monthly
average regulatory liquidity ratios, under the liquidity regulations in force at
the time were 6.86% and 6.85% for December 1996 and 1995, respectively.
Holding Company Liquidity:
At December 31, 1997 and 1996, Bank Plus had cash and cash equivalents of $1.0
million and $0.8 million, respectively, 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. See Item 1."Business--General--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. See Item 1. "Business--
Regulation and Supervision--Fidelity--Activities Regulation Not Related to
Capital Compliance" and "--Regulation of Fidelity Affiliates."
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131,"Disclosures about Segments of
an Enterprise and Related Information" in June 1997.
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 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 No. 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 No. 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 No. 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 No. 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 No. 131 -- Disclosures about Segments of an Enterprise and Related
Information
SFAS No. 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 No. 131 supersedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise,"
77
<PAGE>
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 No. 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 No. 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 No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 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 No. 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 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.
78
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT..................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition................ F-3
Consolidated Statements of Operations......................... F-4
Consolidated Statements of Stockholders' Equity............... F-5
Consolidated Statements of Cash Flows......................... F-6
Notes to Consolidated Financial Statements.................... F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bank Plus Corporation
Los Angeles, California
We have audited the consolidated statements of financial condition of Bank
Plus Corporation and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Bank Plus Corporation
and subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 13, 1998
F-2
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................... $ 165,945 $ 70,126
Investment securities available for sale, at fair value................................. 100,837 156,251
Investment securities held to maturity, at amortized cost............................... 3,189 5,178
Mortgage-backed securities held for trading, at fair value.............................. 41,050 14,121
Mortgage-backed securities available for sale, at fair value............................ 852,604 179,403
Mortgage-backed securities held to maturity, at amortized cost.......................... -- 30,024
Loans receivable, net of allowances of $50,538 and $57,508
at December 31, 1997 and 1996, respectively............................................ 2,823,577 2,691,931
Interest receivable..................................................................... 24,114 20,201
Investment in Federal Home Loan Bank stock.............................................. 60,498 52,330
Real estate owned, net.................................................................. 12,293 24,663
Premises and equipment, net............................................................. 32,707 31,372
Other assets............................................................................ 50,992 54,690
---------- ----------
$4,167,806 $3,330,290
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits............................................................................... $2,891,801 $2,495,933
Federal Home Loan Bank advances........................................................ 1,009,960 449,851
Senior notes........................................................................... 51,478 --
Commercial paper....................................................................... -- 40,000
Mortgage-backed notes.................................................................. -- 100,000
Other liabilities...................................................................... 32,950 31,099
---------- ----------
3,986,189 3,116,883
---------- ----------
Commitments and contingencies
Preferred stock issued by consolidated subsidiary....................................... 272 51,750
Stockholders' equity:
Common stock:
Common stock, par value $.01 per share; 78,500,000 shares
authorized; 19,367,215 and 18,245,265 shares outstanding
at December 31, 1997 and December 31, 1996, respectively............................ 194 182
Paid-in capital........................................................................ 274,432 261,902
Unrealized (losses) gains on securities available for sale, net of taxes............... (4,467) 1,043
Accumulated deficit.................................................................... (88,814) (101,470)
---------- ----------
181,345 161,657
---------- ----------
$4,167,806 $3,330,290
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans............................................................................. $ 205,275 $ 213,013 $ 227,710
Mortgage-backed securities........................................................ 29,435 5,772 3,535
Investment securities and other................................................... 20,297 19,128 15,232
----------- ----------- ----------
Total interest income............................................................ 255,007 237,913 246,477
----------- ----------- ----------
INTEREST EXPENSE:
Deposits.......................................................................... 126,717 120,265 128,242
Federal Home Loan Bank advances................................................... 40,807 16,161 17,411
Other borrowings.................................................................. 6,485 16,197 29,183
----------- ----------- ----------
Total interest expense........................................................... 174,009 152,623 174,836
----------- ----------- ----------
NET INTEREST INCOME................................................................ 80,998 85,290 71,641
Provision for estimated loan losses............................................... 13,004 15,610 69,724
----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES...................... 67,994 69,680 1,917
----------- ----------- ----------
NONINTEREST INCOME (EXPENSE):
Loan fee income................................................................... 2,121 2,295 3,606
Gains on loans sales, net......................................................... 37 22 522
Fee income from sale of uninsured investment products............................. 5,959 4,456 4,117
Fee income on deposits and other income........................................... 3,365 3,044 3,260
Gains on sales of securities and trading activities, net.......................... 2,670 1,336 4,098
Writedown of mortgage-backed securities, available for sale....................... (4,838) -- --
Fee income on Americash........................................................... 1,049 -- --
Gains on sales of servicing....................................................... -- -- 4,604
----------- ----------- ----------
10,363 11,153 20,207
----------- ----------- ----------
Provision for estimated real estate losses........................................ (1,060) (3,219) (3,366)
Direct costs of real estate operations, net....................................... (5,413) (5,688) (5,779)
----------- ----------- ----------
(6,473) (8,907) (9,145)
----------- ----------- ----------
Total noninterest income......................................................... 3,890 2,246 11,062
----------- ----------- ----------
OPERATING EXPENSE:
Personnel and benefits............................................................ 29,564 27,022 34,859
Occupancy......................................................................... 11,647 10,353 12,337
Federal Deposit Insurance Corporation insurance................................... 2,563 6,936 8,205
Professional services............................................................. 11,054 11,156 10,601
Office-related expenses........................................................... 3,819 3,552 4,611
Capitalized software charge....................................................... -- -- 4,297
Other............................................................................. 4,449 5,432 7,044
----------- ----------- ----------
63,096 64,451 81,954
Savings Association Insurance Fund special assessment............................. -- 18,000 --
----------- ----------- ----------
Total operating expense.......................................................... 63,096 82,451 81,954
----------- ----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST IN SUBSIDIARY............................................................ 8,788 (10,525) (68,975)
Income tax (benefit) expense...................................................... (8,100) (1,093) 4
----------- ----------- ----------
EARNINGS (LOSS) BEFORE MINORITY INTEREST IN SUBSIDIARY............................. 16,888 (9,432) (68,979)
Minority interest in subsidiary (dividends on subsidiary
preferred stock)................................................................. 4,235 4,657 --
----------- ----------- ----------
NET EARNINGS (LOSS)................................................................ 12,653 (14,089) (68,979)
Preferred stock dividends......................................................... -- 1,553 --
----------- ----------- ----------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS.................................. $ 12,653 $ (15,642) $ (68,979)
=========== =========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE............................................. $ 0.67 $ (0.86) $ (8.84)
=========== =========== ==========
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................... 18,794,887 18,242,887 7,807,201
=========== =========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE........................................... $ 0.66 $ (0.85) $ (8.83)
=========== =========== ==========
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................. 19,143,233 18,438,454 7,815,560
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ----------- ------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.......... - $ - 19,860,474 $ 199 4,202,243 $ 42 1,907,143 $ 19
Reclass Class B Stock to Class
A Stock(1)..................... - - 4,202,243 42 (4,202,243) (42) - -
Reclass Class C Stock to Class
A Stock(1)..................... - - 1,907,143 19 - - (1,907,143) (19)
Issuance of Class A Stock (2).... - - 47,000,000 470 - - - -
Unrealized gain on securities
available for sale, net of taxes - - - - - - - -
Minimum pension liability
Adjustment...................... - - - - - - - -
Effect of one-for-four Reverse
Stock Split (3)................. - - (54,727,395) (548) - - - -
Net loss for 1995................ - - - - - - - -
---------- ------ ----------- ------ ---------- ------- ---------- -------
Balance, December 31,1995........ - - 18,242,465 182 - - - -
Unrealized gain on securities
available for sale, net of taxes - - - - - - - -
Cash dividends on preferred stock
issued by consolidated
subsidiary...................... - - - - - - - -
Exercise of stock options........ - - 2,800 - - - - -
Holding company re-organization
and capitalization (4).......... 18,245,265 182 (18,245,265) (182) - - - -
Net loss for 1996................ - - - - - - - -
---------- ------ ----------- ------ ---------- ------- ---------- -------
Balance, December 31,1996........ 18,245,265 182 - - - - - -
Unrealized (loss) on securities
available for sale, net of taxes - - - - - - - -
Minority interest in subsidiary
(accrued dividends on
subsidiary preferred stock).... - - - - - - - -
Acquisition of Hancock Savings
Bank (5)........................ 1,058,575 11 - - - - - -
Exercise of stock options........ 63,375 1 - - - - - -
Net earnings for 1997............ - - - - - - - -
---------- ------ ----------- ------ ---------- ------- ---------- -------
Balance, December 31,1997........ 19,367,215 $ 194 - $ - - $ - - -
========== ====== =========== ====== ========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED MINIMUM RETAINED TOTAL
PREFERRED STOCK GAIN(LOSS) PENSION EARNINGS/ STOCK-
-------------------- PAID-IN ON LIABILITY (ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL SECURITIES ADJUSTMENT DEFICIT) EQUITY
--------- ------ -------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.......... - $ - $179,431 (3,482) (2,813) (16,849) $ 156,547
Reclass Class B Stock to Class
A Stock(1)..................... - - - - - - -
Reclass Class C Stock to Class
A Stock(1)..................... - - - - - - -
Issuance of Class A Stock (2).... 2,070,000 51,750 82,172 - - - 134,392
Unrealized gain on securities
available for sale, net of taxes - - - 4,270 - - 4,270
Minimum pension liability
Adjustment...................... - - - - 2,813 - 2,813
Effect of one-for-four Reverse
Stock Split (3)................. - - 548 - - - -
Net loss for 1995................ - - - - - (68,979) (68,979)
--------- ------ -------- ---------- ---------- ----------- ---------
Balance, December 31,1995........ 2,070,000 51,750 262,151 788 - (85,828) 229,043
Unrealized (loss) on securities
available for sale, net of taxes - - - 255 - - 255
Cash dividends on preferred
stock issued by consolidated
subsidiary...................... - - - - - (1,553) (1,553)
Exercise of stock options........ - - 23 - - 23
Holding company re-organization
and capitalization (4).......... (2,070,000) (51,750) (272) - - (52,022)
Net loss for 1996................ - - - - - (14,089) (14,089)
--------- ------ -------- ---------- ---------- ----------- ---------
Balance, December 31,1996........ - - 261,902 1,043 - (101,470) 161,657
Unrealized gain on securities
available for sale, net of taxes - - - (5,510) - - (5,510)
Minority interest in subsidiary
(accrued dividends on
subsidiary preferred stock).... - - - - - 3 3
Acquisition of Hancock Savings
Bank (5)........................ - - 12,001 - - - 12,012
Exercise of stock options........ - - 529 - - 530
Net earnings for 1997............ - - - - - 12,653 12,653
--------- ------ -------- ---------- ---------- ----------- ---------
Balance, December 31,1997........ - $ - $274,432 $ (4,467) $ - $ (88,814) $ 181,345
========= ====== ======== ========== ========== =========== =========
</TABLE>
(1) In connection with the 1995 Recapitalization the Company converted 4,202,243
shares of Class B Common Stock and 1,907,143 shares of Class C Common Stock
to Class A Common Stock.
(2) During 1995, Fidelity issued and sold to investors in a public offering
47,000,000 shares of Class A Common Stock for $82.6 million and 2,070,000
shares of preferred stock for $51.8 million.
(3) Common Stock share data has been retroactively adjusted for the one-for-four
reverse stock split approved by stockholders on February 9, 1996.
(4) In May 1996, Fidelity completed a holding company reorganization pursuant to
which all of the outstanding Common Stock of Fidelity was converted on a
one-for-one basis into all the outstanding Common Stock of Bank Plus, the
holding company. In addition, the Preferred Stock of the Bank was reclassed
from stockholders equity to minority interests.
(5) In July 1997, the Company completed the acquisition of all of the
outstanding common stock of Hancock Savings Bank, F.S.B., a Los Angeles
based federal savings bank with five branches.
See notes to consolidated financial statements.
F-5
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................................................ $ 12,653 $ (14,089) $(68,979)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provisions for estimated loan and real estate losses...................... 14,064 18,829 73,090
Provisions for capitalized software charge................................ -- -- 4,297
Capitalized loan origination costs........................................ (32) (103) (58)
Gains on sale of loans and securities..................................... (2,707) (1,358) (4,620)
Federal Home Loan Bank stock dividends.................................... (3,473) (3,072) (2,438)
Depreciation and amortization............................................. 4,764 3,834 5,587
Amortization of discounts and accretion of premiums
and deferred loan items, net............................................. 295 (2,049) (2,790)
Writedown on mortgage-backed securities available for sale................ 4,838 -- --
Purchases of mortgage-backed securities held for trading................... (60,717) (38,972) --
Principal repayments of mortgage-backed securities held for trading........ 2,405 62 --
Proceeds from sales of mortgage-backed securities held for trading......... 31,915 24,971 --
Purchases of Federal Home Loan Bank stock.................................. (3,506) -- --
Proceeds from sales of loans held for sale................................. -- -- 1,290
Interest receivable (increase) decrease.................................... (2,795) (39) 94
Other assets decrease (increase)........................................... 31,317 (34,383) (1,092)
Deferred income tax benefit................................................ (8,353) -- --
Interest payable increase.................................................. 989 1,280 8,017
Other liabilities and deferred income (decrease) increase.................. (5,681) 2,554 (400)
--------- --------- --------
Net cash provided by (used in) operating activities....................... 15,976 (42,535) 11,998
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hancock Saving Bank, F.S.B. acquisition.................................... 52,908 -- --
Coast Federal Bank, FSB branch acquisition................................. 47,489 -- --
Purchases of investment securities available for sale...................... -- (201,313) (45,569)
Maturities of investment securities available for sale..................... 15,000 42,950 22,286
Proceeds from sales of investment securities available for sale............ 42,850 89,479 102,061
Purchase of investment securities held to maturity......................... -- -- (25,001)
Maturities of investment securities held to maturity....................... 2,286 2,286 10,000
Purchases of mortgage-backed securities available for sale................. (945,191) (206,089) (27,858)
Principal repayments of mortgage-backed securities available for sale...... 62,798 4,655 7,952
Proceeds from sales of mortgage-backed securities available for sale....... 234,747 40,490 162,365
Purchase of mortgage-backed securities held to maturity.................... -- (15,869) (16,234)
Principal repayments of mortgage-backed securities held to maturity........ 3,037 1,397 3,408
Realized loss on hedging of mortgage-backed securities available
for sale.................................................................. (3,541) -- --
Loans receivable, net (increase) decrease.................................. (52,292) 184,768 131,608
Proceeds from sales of real estate, net.................................... 59,542 35,544 34,063
Premises and equipment (additions) dispositions, net....................... (3,768) (844) 1,661
--------- --------- --------
Net cash (used in) provided by investing activities.................... (484,135) (22,546) 360,742
--------- --------- --------
(Continued on following page)
</TABLE>
F-6
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net decrease........................... $ (3,179) $(125,589) $ (66,670)
Certificate accounts, net increase (decrease)................................ 146,518 20,653 (29,733)
Payment of preferred stock dividend.......................................... -- (1,553) --
Proceeds from Federal Home Loan Bank advances................................ 1,320,941 349,008 80,000
Repayments of Federal Home Loan Bank advances................................ (760,832) (191,857) (120,000)
Short-term borrowing decrease................................................ (40,000) (10,000) (350,000)
Repayments of long-term borrowings, net...................................... (100,000) -- --
Proceeds from issuance of capital stock, net................................. -- -- 134,392
Bank Plus capitalization costs............................................... -- (272) --
Stock options exercised...................................................... 530 23 --
---------- --------- ---------
Net cash provided by (used in) financing activities......................... 563,978 40,413 (352,011)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................... 95,819 (24,668) 20,729
Cash and cash equivalents at beginning of period............................ 70,126 94,794 74,065
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD................................ $ 165,945 $ 70,126 $ 94,794
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash (paid) received during the period for:
Interest on deposits, advances and other borrowings......................... $ (171,811) $(149,067) $(166,239)
Income tax refund........................................................... 493 257 5,837
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Additions to real estate acquired through foreclosure........................ 53,214 48,663 51,872
Loans originated to finance sale of real estate owned........................ 8,378 4,758 9,037
Loans originated to finance bulk sale of real estate
owned to Citadel Holding Corporation........................................ -- -- 5,339
Transfers from held to maturity portfolio to available for sale
portfolio:
Loans receivable............................................................ -- -- 68,995
Investment securities....................................................... -- -- 141,678
Mortgage-backed securities.................................................. 26,998 -- 16,404
Transfers from available for sale portfolio to held to maturity
portfolio:
Investment securities....................................................... -- 7,378 --
Mortgage-backed securities.................................................. -- 15,552 3,603
Mortgage loans exchanged for mortgage-backed securities...................... -- -- 112,840
Exchange of preferred stock for senior notes:
Senior notes................................................................ 51,478 -- --
Minority Interest: Preferred stock of consolidated subsidiary.............. (51,478) -- --
DETAILS OF HANCOCK SAVING BANK, F.S.B. 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.
F-7
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS Three Years Ended December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Bank Plus
Corporation ("Bank Plus") and subsidiaries. Bank Plus is the holding company of
Fidelity Federal Bank, a Federal Savings Bank and its subsidiaries (the "Bank"
or "Fidelity") and Gateway Investment Services, Inc. ("Gateway"). Unless
otherwise indicated, references to the "Company" include Bank Plus, Fidelity,
Gateway, and all subsidiaries of Bank Plus and Fidelity. Bank Plus' headquarters
are in Los Angeles, California. The Company offers a broad range of consumer
financial services, including demand and term deposits, uninsured investment
products, and loans to consumers, through 38 full-service branches, 37 of which
are located in southern California, principally in Los Angeles and Orange
counties and one is located in Bloomington, Minnesota. 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.
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
"Note 2--Acquisitions"). The Board of Directors of Bank Plus (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.
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 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.
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 December 31, 1997.
In May 1996, the Bank completed a reorganization pursuant to which all of the
outstanding Class A Common Stock of Fidelity was converted on a one-for-one
basis into all of the outstanding common stock of Bank Plus and Bank Plus became
the holding company for Fidelity (the "Reorganization"). Bank Plus currently has
no significant business or operations other than serving as the holding company
for Fidelity and Gateway, which prior to the Reorganization was a subsidiary of
the Bank. All references to "Fidelity" prior to the Reorganization include
Gateway.
F-8
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 9, 1996, the Bank's stockholders approved a one-for-four reverse
stock split (the "Reverse Stock Split") of the issued and outstanding shares of
the Bank's Common Stock. Upon effectiveness of the Reverse Stock Split, each
stockholder became the owner of one share of Common Stock for each four shares
of Common Stock held at the time of the Reverse Stock Split and became entitled
to receive cash in lieu of any fractional shares. All per share data and
weighted average common shares outstanding have been retroactively adjusted to
reflect the Reverse Stock Split.
In the fourth quarter of 1995, Fidelity completed a plan of recapitalization
(the "1995 Recapitalization"), pursuant to which Fidelity raised approximately
$134.4 million in net new equity through the sale of 2,070,000 shares of Series
A Preferred Stock, and 47,000,000 shares of Fidelity Class A Common Stock. As of
December 31, 1996, the Series A Preferred Stock of the Bank is presented on the
Company's Consolidated Statements of Financial Condition as "Preferred stock
issued by consolidated subsidiary" and the dividends on such preferred stock
subsequent to the date of the Reorganization are reflected in the Company's
Consolidated Statement of Operations as "Minority interest in subsidiary."
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods. There were no federal funds outstanding at
December 31, 1997 and $29.0 million of federal funds outstanding at December 31,
1996. There were $28.0 million in whole loan investment repurchase agreements at
December 31, 1997 and none at December 31, 1996. Fidelity is required by the
Federal Reserve System to maintain noninterest-earnings cash funds reserves
based upon the outstanding balances in certain of its transaction accounts. At
December 31, 1997, the required reserves, including vault cash, totaled $8.8
million.
Investment Securities and Mortgage-backed Securities
The Company's investment in securities principally consists of U.S. treasury
and agency securities and mortgage-backed securities ("MBSs"). The Bank
classifies its investment in securities as held to maturity securities, trading
securities and available for sale securities as applicable. Held to maturity
securities are carried at amortized cost, while trading and available for sale
securities are carried at fair value. Unrealized gains or losses on trading
securities are reflected currently in earnings, and on available for sale
securities are reflected as a separate component in stockholder's equity, net of
any tax effect. Income on securities is recognized using the level yield method
and gains or losses on sales are recorded on a specific identification basis.
Loans
Loans are considered impaired when it is deemed probable by management the
Company will be unable to collect all principal and interest amounts due
according to the contracted terms of the loan agreement. The Company may measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
the fair value of the collateral for a collateral dependent asset. Regardless of
the measurement method, the Company will measure impairment based on the fair
value of the collateral when it is determined that foreclosure is probable.
Interest on loans, including impaired loans, is credited to income as earned
and is accrued only if deemed collectible, using the interest method. Unpaid
interest income is reversed when a loan becomes over 90 days contractually
delinquent and on other loans, if management determines it is warranted, prior
to being
F-9
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
90 days delinquent. While a loan is on nonaccrual status, interest is recognized
only as cash is received. Discounts and premiums on purchased loans are
classified with loans receivable on the statement of financial condition and are
credited or charged to operations over the estimated life of the related loans
using the interest method. The Company charges fees for originating loans. Loan
origination fees, net of certain direct costs of originating the loan, are
recognized as an adjustment of the loan yield over the estimated life of the
loan by the interest method. When a loan is sold, unamortized net loan
origination fees and direct costs are recognized in earnings with the related
gain or loss on sale. Other loan fees and charges representing service costs for
the prepayment of loans, for delinquent payments or for miscellaneous loan
services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
The Bank has securitized and sold certain loans and provided investors with
credit enhancements to absorb losses through either subordination of the Bank's
retained percentage or the pledging of cash and securities. The Bank estimates
losses to be incurred from the credit enhancements by considering all the
underlying loans in the securitizations in determining its allowance for loan
losses or through the establishment of a contingent liability based on the
historical loss experience of the loan pools. Any estimated losses are reflected
in current operations in the form of provisions for loan losses.
As of January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS') No. 122, "Accounting for Mortgage Servicing Rights." SFAS No.
122 amends certain provisions of SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," to require recognition of the rights to service mortgage
loans for others as separate assets, however those rights are acquired,
eliminating the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. SFAS No. 122 also requires that
capitalized mortgage servicing assets be assessed for impairment based on the
fair value of those rights. As a consequence of the adoption of SFAS No. 122,
gains on sales of loans for the year ended December 31, 1995 increased by $0.7
million and the Company's loss per share decreased by $0.08. SFAS No. 122 was
superseded for transactions recorded after December 31, 1996, by SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Debt". There were no transactions recorded after December 31, 1996.
Real Estate Owned
Real estate held for sale is acquired when property collateralizing a loan is
foreclosed upon or otherwise acquired by the Company in satisfaction of the
loan. Real estate acquired through foreclosure is recorded at the lower of fair
value or the recorded investment in the loan satisfied at the date of
foreclosure. Fair value is based on the net amount that the Company could
reasonably expect to receive for the asset in a current sale between a willing
buyer and a willing seller, that is, other than in a forced or liquidation sale.
Inherent in the computation of estimated fair value are assumptions about the
length of time the Company may have to hold the property before disposition. The
holding costs through the expected date of sale and estimated disposition costs
are included in the valuations. Adjustments to the carrying value of the assets
are made through valuation allowances and charge-offs, recognized through a
charge to operations.
Allowances for Estimated Losses on Loans and Real Estate Owned
The Company estimates allowances for estimated losses on loans and real estate
owned ("REO") which represents the Company's estimate of identified and
unidentified losses in the Company's portfolios. These estimates, while based
upon historical loss experience and other relevant data, are ultimately
subjective and inherently uncertain. The Company has established valuation
allowances for estimated losses on specific loans
F-10
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and REO ("specific valuation allowances" or "SVA") and for the inherent risk in
the loan and REO portfolios which has yet to be specifically identified
("general valuation allowances" or "GVA"). Specific valuation allowances are
allocated from the GVA when, in the Company's judgment, a loan is impaired or
the REO has declined in value and the loss is probable and estimable. When these
estimated losses are determined to be permanent, such as when a loan is
foreclosed and the related property is transferred to REO, specific valuation
allowances are charged off.
The Company establishes the level of GVA utilizing several models and
methodologies which are based upon a number of factors, including historical
loss experience, the level of nonperforming and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and management's judgment. Additions to GVA, in the form of
provisions, are reflected in current operations.
Loan Servicing
Fidelity services mortgage loans for investors. Fees earned for servicing
loans owned by investors are reported as income when the related loan payments
are collected. Loan servicing costs are charged to expense as incurred.
Stock-based Compensation
SFAS No. 123 "Accounting for Stock-based Compensation," became effective in
1996. The statement encourages, but does not require companies to record
compensation cost for stock based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. As required by SFAS
No. 123, the Company has disclosed the pro forma effects of the fair value
method in Note 16.
Depreciation and Amortization
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the lives of the respective leases or the useful
lives of the improvements, whichever is shorter.
Earnings per Share
SFAS No. 128 "Earnings Per Share" became effective in 1997. This statement
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 No. 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. The dilutive potential common share
as of December 31, 1997, 1996 and 1995 are 348,346,
F-11
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
195,567 and 8,359, respectively, relating to incremental shares from assumed
conversions of stock options and deferred stock grants.
Intangible Assets
The excess of cost over the fair value of net assets acquired in connection
with the acquisition of Hancock in 1997, which is included in other assets on
the Company's Consolidated Statements of Financial Condition, and is being
amortized to operations over fifteen years. The cost of core deposits purchased
is being amortized over the average life of the deposits acquired, generally
five to ten years. At December 31, 1997, goodwill and the cost of deposits
purchased totaled $6.4 million and $9.4 million, respectively, and had a
remaining life of 15 years and 7 years, respectively.
Income Taxes
Income taxes are provided to reflect deferred tax assets or liabilities on the
balance sheet based upon the tax effects of differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Through August 4, 1994, the 1994 restructuring and recapitalization date, the
Bank filed a consolidated federal income tax return and a combined California
franchise tax return with its former parent company, Citadel. Pursuant to the
1994 restructuring and recapitalization Fidelity raised approximately $109
million in net new equity, and Citadel's ownership interest in Fidelity was
reduced to 16.2% of the then outstanding common stock. As a result of this 1994
restructuring and recapitalization, the Bank was no longer eligible to file a
tax return on a consolidated or combined basis with Citadel. Accordingly,
Fidelity and its subsidiaries filed a consolidated federal income tax return and
a combined California franchise tax return with the Bank as the common parent
corporation for the period of August 5, 1994 through December 31, 1994 and the
1995 calendar year. Fidelity and its subsidiaries have filed a consolidated
federal income tax return and a combined California franchise tax return with
its new parent company, Bank Plus for the 1996 calendar year, and will continue
to file as such for subsequent years.
Derivative Financial Instruments
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 is required to pledge
collateral or other security to other parties to these instruments. The Company
controls its credit exposure to counterparties through credit approvals, credit
limits and other monitoring procedures. The amount of credit exposure for such
instruments at any given time is represented by the fair value of instruments
having a positive value.
The Company has employed interest rate swaps, caps and floors in the
management of interest rate risk. Interest rate swaps generally involve the
exchange of fixed or floating interest payments without the exchange of the
underlying principal amounts. Interest rate caps and floors generally involve
the payment of a one time premium to a counterparty who, if interest rates rise
or fall above or below a predetermined level, will make payments to the Company
at an agreed upon rate for the term of the agreement until such time as interest
rates fall below or rise above the cap or floor level. Settlement accounting is
utilized for interest rate swaps, caps or floors entered into for purposes of
modifying the interest rate characteristic of interest-earning assets
F-12
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or interest-bearing liabilities. Under settlement accounting, amounts receivable
or payable related to such contracts are recognized as interest income or
expense, depending upon the assets or liabilities to which they are matched.
Gains or losses on early terminations of swaps, caps or floors are included in
the carrying amount of the related asset or liability and amortized as yield
adjustments over the remaining terms of the terminated instruments. The premiums
paid for interest rate caps and floors are capitalized and amortized over the
life of the contracts using the straight line method. To qualify for settlement
accounting, the instruments must have notional amounts equal to or less than the
matched asset or liability and the term must be equal to or a shorter period
than the matched asset or liability. If the criteria for settlement accounting
is not met, the derivative instruments utilized are fair valued with such
amounts reported in current earnings.
Options on treasury futures, interest rate caps and swaps and forward
commitments to purchase or sell MBSs entered into for trading purposes are
carried at fair value. Realized and unrealized changes in fair values are
recognized in earnings in the period in which the changes occur. Treasury
futures used to hedge the fluctuations in fair values of available for sale
securities are carried at fair value, with realized and unrealized changes in
fair value recognized in a separate component of stockholders' equity. Realized
gains and losses on termination of such hedge instruments are amortized into
interest income or expense over the expected remaining life of the hedged asset
or liability. Management monitors the correlation of the changes in fair values
between the hedge instruments and the securities being hedged to ensure high
correlation. Prior to the inception of a new hedge program the Company reviews
historical relationships of the potential hedge instrument and the securities to
be hedge to determine that correlation is expected. The correlation of new hedge
programs is reviewed after the first six months and at the end of every quarter
thereafter. If the criteria for hedge accounting is not met, the fair value
adjustments of the derivative instruments are reported in current earnings.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" in June 1997.
SFAS No. 130--Reporting Comprehensive Income
SFAS No. 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 No. 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 No. 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.
F-13
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 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 No. 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 No. 131 -- Disclosures about Segments of an Enterprise and Related
Information
SFAS No. 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 No. 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 No. 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 No. 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 reconciliation's 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 No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 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 No. 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 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.
F-14
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACQUISITIONS
On July 29, 1997, the Company completed the acquisition of all of the
outstanding common stock of Hancock, a Los Angeles-based institution with five
branches. The total consideration paid to the Hancock stockholders was 1,058,575
shares of Bank Plus Common Stock valued at $11.3469 per share.
The acquisition of Hancock was accounted for as a purchase and was reflected
in the consolidated statements of financial condition of the Company as of June
30, 1997. The Company's consolidated statement of operations includes the
revenues and expenses of the acquired business beginning July 1, 1997. 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.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the years ended December 31, 1997 and
1996 of the Company and Hancock assuming the acquisition had occurred on January
1, 1997 and 1996, with pro forma adjustments to give effect to the amortization
of goodwill and the core deposit intangible.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
------- --------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net interest income.................... $83,386 $ 90,161
Provisions for estimated loan losses... 13,514 22,585
Other income........................... 4,057 2,726
Operating expenses..................... 66,390 89,370
Net earnings (loss) available for common stockholders. 11,402 (24,187)
Basic earnings (loss) per common share. 0.59 (1.25)
Diluted earnings (loss) per common share........ 0.58 (1.24)
</TABLE>
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations which actually
would have resulted had the transaction been consummated on the above dates, nor
are they indicative of future results of operations of the consolidated
entities.
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.
F-15
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The following table summarizes investment securities and MBSs available for
sale portfolio.
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED ---------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
--------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
Investment securities:
U.S. Treasury and agency securities (1)........................ $100,032 $ 880 $ (75) $ 805 $100,837
-------- ------ -------- -------- --------
MBSs:
FHLMC.......................................................... 10,384 11 (120) (109) 10,275
FNMA........................................................... 228,893 2,095 (479) 1,616 230,509
GNMA........................................................... 221,716 1,092 -- 1,092 222,808
Participation certificates..................................... 24,860 -- -- -- 24,860
Collateralized mortgage obligations............................ 344,513 194 (1,495) (1,301) 343,212
LIBOR Asset Trust.............................................. 20,940 -- -- -- 20,940
-------- ------ -------- -------- --------
851,306 3,392 (2,094) 1,298 852,604
-------- ------ -------- -------- --------
Total available for sale...................................... $951,338 $4,272 $ (2,169) 2,103 $953,441
======== ====== ======== ========
Net unrealized losses on investment securities
included in amortized cost (1)................................. (872)
Net unrealized and realized losses, hedging
activities (1)(2).............................................. (5,898)
Deferred tax benefit associated with total mark
to market loss................................................. 200
--------
Net amount included in stockholders' equity..................... $ (4,467)
========
DECEMBER 31, 1996
Investment securities:
U.S. Treasury and agency securities (1)........................ $155,353 $1,298 $ (400) $ 898 $156,251
-------- ------ -------- -------- --------
MBSs:
FHLMC.......................................................... 61,469 903 (10) 893 62,362
FNMA........................................................... 54,624 946 (22) 924 55,548
GNMA........................................................... 35,703 110 (133) (23) 35,680
Participation certificates..................................... 25,813 -- -- -- 25,813
-------- ------ -------- -------- --------
177,609 1,959 (165) 1,794 179,403
-------- ------ -------- -------- --------
Total available for sale...................................... $332,962 $3,257 $ (565) 2,692 $335,654
======== ====== ======== ========
Net unrealized losses on investment securities
included in amortized cost (1)............................... (2,009)
Net unrealized and realized gains, hedging...................... 360
activities (1)(2).............................................. --------
Net amount included in stockholders'............................ $ 1,043
equity................................. ========
</TABLE>
- ---------------
(1) Amortized cost of certain securities that were previously transferred
between portfolios includes unamortized market value adjustments recorded at
the time of transfer to the held to maturity portfolio.
(2) Includes net realized gains (losses) of $(3.4) million and $0.3 million in
1997 and 1996, respectively, from hedging activities which are amortized
over the lives of the hedged securities as required by SFAS No. 115.
F-16
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the investment securities and MBSs held to
maturity portfolios.
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED --------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
--------- ----- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Investment securities(1) (2)...... $ 3,189 $19 $ -- $ 19 $ 3,208
======= === ======== ======== =======
DECEMBER 31, 1996
Investment securities(1) (2)...... $ 5,178 $20 $ -- 20 $ 5,198
MBSs non-agency................... 30,024 -- (2,855) (2,855) 27,169
------- --- -------- -------- -------
Total held to maturity........... $35,202 $20 $ (2,855) $ (2,835) $32,367
======= === ======== ======== =======
</TABLE>
- --------------
(1) Amortized cost of certain securities that were previously transferred
between portfolios includes unamortized market value adjustments recorded at
the time of transfer to the held to maturity portfolio.
(2) Represents U.S. Treasury securities which have been pledged as credit
support to a securitization of loans by the Company.
The following table summarizes the weighted average yield of debt securities
as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
---- ----
<S> <C> <C>
Investment securities:
Available for sale............ 5.53% 6.20%
Held to maturity.............. 6.00 5.77
MBSs:
Available for sale............ 7.05 7.51
Held to maturity.............. -- 7.52
Held for trading.............. 6.66 6.54
</TABLE>
The following table presents the available for sale and held to maturity
portfolios at December 31, 1997 by contractual maturity. Actual maturities on
MBSs may differ from contractual maturities due to scheduled periodic payments
and prepayments.
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED -------------------- AGGREGATE
COST GAINS LOSSES FAIR VALUE
--------- ------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment Securities:
Over 1 year to 5 years.............................. $ 90,032 $ 880 $ (75) $ 90,837
Over 10 years....................................... 10,000 -- -- 10,000
-------- ------ -------- --------
100,032 880 (75) 100,837
-------- ------ -------- --------
MBSs:
Over 1 year to 5 years.............................. 124,320 11 (599) 123,732
Over 10 years....................................... 726,986 3,381 (1,495) 728,872
-------- ------ -------- --------
851,306 3,392 (2,094) 852,604
-------- ------ -------- --------
Total Available for Sale........................... $951,338 $4,272 $ (2,169) $953,441
======== ====== ======== ========
HELD TO MATURITY:
Investment Securities over 1 year to 5 years......... $ 3,189 $ 19 $ -- $ 3,208
======== ====== ======== ========
</TABLE>
F-17
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following gains and losses were realized from the sale of investment
securities and MBSs, the costs of which were computed on a specific
identification method, during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SALES OF INVESTMENT SECURITIES AND MBSS:
Available for sale....................................... $277,597 $129,969 $264,426
Held for trading......................................... 31,915 24,971 --
-------- -------- --------
$309,512 $154,940 $264,426
======== ======== ========
GAINS (LOSSES) ON SECURITIES AND TRADING ACTIVITIES, NET:
Gains (losses)on sales of securities available for sale:
Gains................................................... $ 2,483 $ 1,215 $ 3,903
Losses.................................................. -- (59) (566)
-------- -------- --------
2,483 1,156 3,337
-------- -------- --------
Gains (losses) on trading activities:
Realized gains, net..................................... 187 187 761
Unrealized losses, net.................................. -- (7) --
-------- -------- --------
187 180 761
-------- -------- --------
Gains on securities and trading $ 2,670 $ 1,336 $ 4,098
activities, net....................................... ======== ======== ========
</TABLE>
At December 31, 1997 and 1996, interest receivable in the accompanying
statements of financial condition include accrued interest receivable on debt
securities of $6.7 million and $3.2 million, respectively.
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 unrealized holding loss of $4.5 million at September 30, 1997
was reported in a separate component of shareholders' equity as the decline in
fair value was not believed to be other than temporary. The continued poor
performance of the securities underlying collateral in the three months
subsequent to September 30, 1997 motivated management to seek a buyer for the
securities rather than risk possible continued decline in fair value. The
securities were sold in January 1998 at a loss of $4.8 million, which was
recorded through earnings in 1997 as the loss was now considered to be other
than temporary.
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
Trading
During the third quarter of 1996, the Company entered into a one-year 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 activities in accordance with the Company's investment
strategy. Under this agreement, the investment advisor utilizes financial
instruments to manage the risks and returns of the program, including options,
caps and forward commitments of MBSs. All investment and other financial
instrument activity relating to the investment advisor's account are treated as
trading activities. During both 1997 and 1996, the Company recognized net losses
from trading activities of $0.1 million compared to net gains in 1995 of $0.8
million.
F-18
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available for Sale
During 1997, the Company entered into a program to hedge the fluctuations in
fair value of fixed rate MBSs in the available for sale portfolio. Realized
losses on closed hedging positions under this program totaled $3.5 million and
have been recorded in a separate component of stockholders equity, consistent
with reporting for those securities, in accordance with SFAS No. 115. The loss
is being amortized as a yield adjustment to the MBSs over the life of the
securities.
The following trading and available for sale instruments were outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
MATURITY/ AVERAGE FAIR VALUE AT
NOTIONAL EXERCISE FAIR DECEMBER 31, UNREALIZED
INSTRUMENT AMOUNT DATE VALUE 1997 GAIN (LOSS)
---------------------------------- ----------- ---------- ----------- ------------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Trading:
Interest rate cap................ $ 71,000 2007 $ 1,050 $ 818 $ (956)
Put option on treasury futures... 6,500 1998 66 104 21
Commitments to purchase MBSs
TBA.............................. 30,000 1998 58 58 58
Commitments to sell MBSs TBA..... 15,000 1998 1 1 1
Interest rate swap............... 5,000 2002 16 (46) (46)
Available for sale:
Treasury futures................. 205,900 1998 (2,615) (2,496) (2,496)
</TABLE>
The following instruments were outstanding at December 31, 1996:
<TABLE>
<CAPTION>
MATURITY/ AVERAGE FAIR VALUE AT
NOTIONAL EXERCISE FAIR DECEMBER 31, UNREALIZED
INSTRUMENT AMOUNT DATE VALUE 1997 (LOSS)
---------------------------------- ----------- ---------- ----------- ------------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Trading:
Interest rate cap................ $21,000 2003 $ 790 $ 718 $ (171)
Put option on treasury futures... 8,000 1997 15 33 (18)
Commitments to purchase MBSs
TBA............... ............. 12,500 1997 (2) (4) (4)
</TABLE>
Also included as a hedge to the available for sale investment portfolio is a
commitment to sell MBS TBA adjustable rate mortgages ("ARMs") of $20.4 million,
with an average fair value of $20.5 million and an unrealized gain of $0.03
million at December 31, 1996.
F-19
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Single family........................ $ 638,539 $ 517,288
Multifamily:
2 to 4 units....................... 322,309 319,281
5 to 36 units...................... 1,343,597 1,408,317
37 units and over.................. 308,473 307,741
---------- ----------
Total multifamily................. 1,974,379 2,035,339
Commercial and industrial............ 204,656 203,510
Land................................. 1,656 1,670
---------- ----------
Total real estate loans........... 2,819,230 2,757,807
Other (1)............................. 62,912 6,373
---------- ----------
2,882,142 2,764,180
---------- ----------
Less:
Undisbursed loan funds............... 1,710 --
Unearned (premiums) discounts........ (2,722) 1,974
Deferred loan fees................... 9,039 12,767
Allowance for estimated losses (2)... 50,538 57,508
---------- ----------
58,565 72,249
---------- ----------
$2,823,577 $2,691,931
========== ==========
</TABLE>
- --------------------
(1) At December 31, 1997, the other category included $50.7 million of credit
card loans.
(2) At December 31, 1997 and 1996, the allowance for estimated loan losses
includes $14.4 million and $16.7 million, respectively, of remaining loan
GVA and SVA for the Accelerated Asset Resolution Plan.
Fidelity's portfolio of mortgage loans serviced for others amounted to $308.8
million at December 31, 1997 and $433.8 million at December 31, 1996. The Bank
sold the servicing rights to substantially all of the single family and 2-4 unit
loans in the Bank's loan portfolio during the second quarter of 1996. The
servicing rights to $938.5 million in loans were transferred for a total sale
price of $10.0 million. Such sales proceeds have been accounted for as a
reduction in the carrying value of the loans based on the relative fair values
of the servicing sold and loans retained and is to be accreted over the
estimated life of the loans. Accretion of this amount of the deferred revenue
totaled $2.2 million and $1.5 million during 1997 and 1996, respectively.
Fidelity's mortgage loan portfolio includes multifamily, commercial and
industrial loans of $2.2 billion at both December 31, 1997 and 1996, which
depend primarily on operating income to provide debt service coverage. These
loans generally have a greater risk of default than single family residential
loans and, accordingly, earn a higher rate of interest to compensate in part for
the risk. Approximately 99% of these loans are secured by property within the
state of California.
The Company has modified the terms of a number of its mortgage loans that it
would not otherwise consider to protect its investment by granting concessions
to borrowers because of borrowers' financial difficulties. These modifications
take several forms, including interest only payments for a limited time at
current rates, a reduced loan balance in exchange for a payment of the loan or
other terms that the Bank
F-20
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
deems appropriate in the circumstances. Modifications are granted when the
collateral is inadequate or the borrower does not have the ability or
willingness to continue making scheduled payments and management determines that
the modification is the best alternative for the collection of its investment.
Modifications are reported as Troubled Debt Restructurings ("TDRs") as defined
by SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings," and accounted for in accordance with SFAS No. 15 and SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1997
and 1996, outstanding TDRs totaled $44.0 million and $45.2 million,
respectively.
For the years ended December 31, 1997, 1996 and 1995, interest income of $3.4
million, $3.6 million and $3.2 million, respectively, was recorded on TDRs.
During 1997, 1996 and 1995 the reduction in interest income had the loans
performed according to their original terms was immaterial.
The total of mortgage loans on nonaccrual status was $13.1 million, $36.1
million and $51.9 million at December 31, 1997, 1996 and 1995, respectively. The
reduction in income related to nonaccrual loans upon which interest was not paid
was $3.9 million, $6.0 million and $5.8 million for the corresponding years.
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, Hancock
recorded $5.8 million as an addition to the allowance for estimated loan losses
representing the estimated reduced recoveries in executing the Plan.
Through December 31, 1997, (i) $40.5 million in gross book balances of AARP
Pool loans had been resolved through either a negotiated sale or discounted
payoff, (ii) $8.5 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
F-21
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
profile for inclusion in the AARP Pool or that accelerated resolution of such
assets was no longer appropriate and (v) $126.6 million in gross book balances
of REO were sold ($52.6 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 December 31, 1997, the AARP Pool consisted of 55 assets with an aggregate
gross book balance of $29.0 million, comprised primarily of accruing and
nonaccruing multifamily real estate loans totaling approximately $21.4 million
and REO properties totaling approximately $7.6 million, which are reported as
real estate owned on the statement of financial condition. Through December 31,
1997, of the $50.8 million of reserves established in connection with the Plan,
including the $5.8 million established for the Hancock assets, $8.8 million had
been charged off and $31.6 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 in 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.
NOTE 6--REAL ESTATE OWNED
REO consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure. $ 13,416 $ 26,744
Allowance for estimated losses........... (1,123) (2,081)
-------- --------
$ 12,293 $ 24,663
======== ========
</TABLE>
The following summarizes the results of REO operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Losses from:
Real estate acquired through $(5,413) $(5,688) $(5,779)
foreclosure...........................
Provision for estimated real estate (1,060) (3,219) (3,366)
losses................................ ------- ------- -------
Net loss from real estate operations.. $(6,473) $(8,907) $(9,145)
======= ======= =======
</TABLE>
F-22
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--ALLOWANCE FOR ESTIMATED LOAN AND REAL ESTATE OWNED LOSSES
The following summarizes the activity in the allowances for estimated loan and
real estate losses:
<TABLE>
<CAPTION>
REAL ESTATE
LOANS OWNED TOTAL
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1995............ $ 67,202 $ 2,318 $ 69,520
Provision for losses................. 69,724 (1) 3,366 73,090
Charge-offs.......................... (44,278) (8,358) (52,636)
Allocations from GVA to REO.......... (6,166) 6,166 --
Recoveries and other................. 2,953 -- 2,953
-------- ------- --------
Balance at December 31, 1995.......... 89,435 3,492 92,927
Provision for losses................. 15,610 3,219 18,829
Charge-offs.......................... (50,841) (4,630) (55,471)
Recoveries and other................. 3,304 -- 3,304
-------- ------- --------
Balance at December 31, 1996.......... 57,508 2,081 59,589
Provision for losses................. 13,004 1,060 14,064
Charge-offs.......................... (41,190) (2,810) (44,000)
Allocations related to acquisition... 12,770 (2) 120 12,890
Recoveries and other................. 8,446 672 9,118
-------- ------- --------
Balance at December 31, 1997.......... $ 50,538 $ 1,123 $ 51,661
======== ======= ========
</TABLE>
(1) Included in the provision for estimated loan losses for 1995 is the $45.0
million loan portfolio charge associated with the Plan.
(2) Included is the $5.8 million loan portfolio charge taken by Hancock
associated with the Plan.
At December 31, 1997 and December 31, 1996, the gross recorded investment in
mortgage loans that are considered to be impaired was $40.8 million, and $153.5
million, respectively. Included in these amounts are $30.1 million and $105.1
million of impaired loans for which allowance for credit losses have been
established totaling $10.5 million and $30.3 million. The average recorded
investment and the amount of interest income recognized on impaired loans during
1997 and 1996 was $97.2 million and $151.4 million and $2.1 million and $9.4
million, respectively.
The performance of the Company's mortgage loan portfolio has been adversely
affected by southern California economic conditions. The performance of the
Company's multifamily loan portfolio is particularly susceptible to further
declines in the southern California economy, increasing vacancy rates, declining
rents, increasing interest rates, declining debt coverage ratios, declining
market values for multifamily residential properties, and the possibility that
investors may abandon properties or seek bankruptcy protection with respect to
properties experiencing negative cash flow, particularly where such properties
are not cross-collateralized by other performing assets. There can be no
assurances that these economic conditions will improve in the near future as
many factors key to recovery may be impacted adversely by the Federal Reserve
Bank's interest rate policy as well as other factors. Consequently, rents and
real estate values may not stabilize which may affect future delinquency and
foreclosure levels and may adversely impact the Company's asset quality,
earnings performance and capital levels.
F-23
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--DEPOSITS
Deposits consist of the following balances at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
AMOUNT % AMOUNT %
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF ACCOUNT, WEIGHTED AVERAGE
INTEREST RATE:
Passbook, 2.00% at December 31, 1997
and 1996.............................. $ 67,502 2.3% $ 53,665 2.2%
Checking and money market checking,
1.17% at December 31, 1997 and 1.10%
at December 31, 1996.................. 336,036 11.7 287,711 11.5
Money market savings, 4.17% at
December 31, 1997 and 4.14% at
December 31, 1996..................... 55,885 1.9 65,605 2.6
---------- ------ ---------- ------
459,423 15.9 406,981 16.3
---------- ------ ---------- ------
Certificates with rates of:
Under 3.00%.......................... 5,359 0.2 4,640 0.2
3.01 - 4.00%......................... 11,952 0.4 19,601 0.8
4.01 - 5.00%......................... 836,262 28.9 1,166,347 46.7
5.01 - 6.00%......................... 1,288,463 44.6 669,603 26.8
6.01 - 7.00%......................... 280,002 9.7 199,747 8.0
7.01 - 8.00%......................... 9,935 0.3 17,321 0.7
Over 8.00%........................... 405 -- 11,693 0.5
---------- ------ ---------- ------
2,432,378 84.1 2,088,952 83.7
---------- ------ ---------- ------
Total deposits..................... $2,891,801 100.0% $2,495,933 100.0%
- ---------------------------------------- ========== ====== ========== ======
Weighted average interest rate......... 4.82% 4.69%
========== ==========
</TABLE>
Fidelity had noninterest-bearing checking accounts of $99.6 million and $70.4
million at December 31, 1997 and 1996, respectively. At December 31, 1997,
certificate accounts were scheduled to mature as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------------------
YEAR OF MATURITY (DOLLARS IN THOUSANDS)
- -------------------
<S> <C>
1998...................... $2,111,274
1999...................... 272,690
2000...................... 15,359
2001...................... 11,900
After 2002................ 21,155
----------
$2,432,378
==========
</TABLE>
At December 31, 1997, securities totaling $0.6 million were pledged as
collateral for $0.2 million of public funds on deposit with the Company and
potential future deposits.
Certificates of deposits of $100,000 or more accounted for $721.2 million and
represented 24.9% of all deposits at December 31, 1997 and $543.3 million or
21.8% of all deposits at December 31, 1996.
The Company, from time to time, has also utilized brokered deposits as a
short-term means of funding. These deposits are obtained or placed by or through
a deposit broker and are subject to certain regulatory
F-24
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
limitations. Should the Bank become undercapitalized, it would be prohibited
from accepting, renewing or rolling over deposits obtained through a deposit
broker. The Company is currently eligible to accept brokered deposits. The
Company had no brokered deposits outstanding at December 31, 1997 and 1996.
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at year-end................................. $1,009,960 $ 449,851
Average amount outstanding during the year.......... $ 698,261 $ 296,596
Maximum amount outstanding at any month-end......... $1,209,960 $ 449,851
Weighted average interest rate during the year...... 5.84% 5.43%
Weighted average interest rate at year-end.......... 5.82% 5.53%
Secured by:
FHLB Stock......................................... $ 60,498 $ 52,330
Loans receivable................................... 1,315,389 989,138(1)
Investment securities and MBSs, at cost............ 581,445 117,786
---------- ----------
$1,957,332 $1,159,254
========== ==========
</TABLE>
(1) Includes pledged loans available for use under the letter of credit securing
commercial paper. See Note 10.
The maturities and weighted average interest rates on FHLB advances are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR OF MATURITY
- ----------------
1997............. $ -- --% $329,851 5.05%
1998............. 374,960 5.81 -- --
1999............. 200,000 5.74 -- --
2000............. 245,000 5.48 20,000 8.61
2003............. 190,000 6.43 100,000 6.49
---------- --------
$1,009,960 5.83 $449,851 5.53
========== ========
</TABLE>
F-25
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR OF --------------------
MATURITY 1997 1996
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings:
Commercial paper....................... 1997 $ -- $ 40,000
8 1/2% Mortgage-backed medium-term
notes................................. 1997 -- 100,000
------- --------
-- 140,000
------- --------
Long-term borrowings:
Senior notes........................... 2007 51,478 --
------- --------
$51,478 $140,000
======= ========
</TABLE>
The 8 1/2% mortgage-backed medium-term notes matured on April 15, 1997 and
the funds were replaced by FHLB advances. At December 31, 1996, the 8 1/2%
mortgage-backed medium-term notes were secured by a joint pool of mortgage loans
and U.S. Treasury notes, at cost, totaling $226.2 million.
Borrowings other than the 8 1/2% mortgage-backed medium-term notes are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial paper:
Balance at year-end................................. $ -- $ 40,000
Average amount outstanding during the year.......... $11,417 $ 93,457
Maximum amount outstanding at any month-end......... $40,000 $140,000
Weighted average interest rate during the year...... 6.26% 5.72%
Weighted average interest rate at year end.......... --% 5.36%
Secured by Letter of Credit from FHLB............... $ -- $150,000
Securities sold under agreement to repurchase:
Balance at year-end................................. $ -- $ --
Average amount outstanding during the year.......... $ 2,260 $ 25,382
Maximum amount outstanding at any month-end......... $25,500 $ 73,007
Weighted average interest rate during the year...... 5.35% 5.17%
Federal funds purchased:
Balance at year-end................................. $ -- $ --
Average amount outstanding during the year.......... $ 135 $ --
Maximum amount outstanding at any month-end......... $ -- $ --
Weighted average interest rate during the year...... 5.93% --%
Senior notes:
Balance at year-end................................. $51,478 $ --
Average amount outstanding during the year.......... $23,110 $ --
Maximum amount outstanding at any month-end......... $51,478 $ --
Weighted average interest rate during the year...... 12.04% --%
</TABLE>
The weighted average interest rate on other borrowings was 6.10% and 7.60% at
December 31, 1997 and 1996, respectively. The commercial paper program expired
on August 5, 1997 and was not renewed by decision of the Bank.
F-26
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--BENEFIT PLANS
Retirement Income Plan
The Company has a retirement income plan covering substantially all employees.
The defined benefit plan provides for payment of retirement benefits commencing
normally at age 65 in a monthly annuity; however, the option of a lump sum
payment is available upon retirement or in the event of early termination. An
employee becomes vested upon five years of service. Benefits payable under the
plan are generally determined on the basis of the employee's length of service
and average earnings over the previous five years. Annual contributions to the
plan are sufficient to satisfy legal funding requirements.
In February 1994, the Board of Directors passed a resolution to amend the plan
by discontinuing participation in the plan by newly hired employees and freezing
the level of service and salaries used to compute the plan benefit to February
28, 1994 levels. The Bank has funded the retirement income plan such that the
fair value of plan assets exceed the projected benefit obligation.
The components of net pension costs are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest cost................... $ 158 $ 202 $ 218
Actual return on plan assets.... (207) (426) (371)
Net amortization and deferral... (51) 149 92
Effect of partial settlements... 55 189 252
----- ----- -----
$ (45) $ 114 $ 191
===== ===== =====
</TABLE>
The funded status of this plan, as of the dates indicated, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation:
Vested................................................ $ 2,461 $ 2,360
Nonvested............................................. -- 62
------- -------
$ 2,461 $ 2,422
======= =======
Projected benefit obligation.......................... $(2,461) $(2,422)
Fair value of plan assets............................. 2,839 2,546
------- -------
Net plan assets under projected benefit obligation.. 378 124
Minimum liability adjustment.......................... 474 753
------- -------
Prepaid pension cost................................ $ 852 $ 877
======= =======
Actuarial assumptions:
Discount rate....................................... 7.25% 7.25%
Expected long-term rate of return on plan assets.... 9.00% 9.00%
</TABLE>
F-27
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
401(k) Plan
The Company has a 401(k) defined contribution plan available to all employees
who have been with the Company for one year and have reached the age of 21.
Employees may generally contribute up to 15% of their salary each year, and the
Company matches 12.5% up to the first 6% contributed by the employee. In
addition, the Company may elect, at its discretion, to match an amount based on
the Company's profitability as determined on an annual basis by the Board of
Directors. The Company's contribution expense was $0.1 million, $0.1 million and
$0.3 million in the years ended December 31, 1997, 1996 and 1995, respectively.
Director Retirement Plan
The Directors Retirement Plan provides for non-employee directors who have at
least three years of Board service, including service on the Board prior to the
1994 restructuring and recapitalization.
An eligible director shall, after termination from Board service for any
reason other than cause, be entitled to receive a quarterly payment equal to one
quarter of his/her average annual compensation (including compensation for
service on the Board of any of the Company's subsidiaries), including all
retainers and meeting fees, received during his/her last three years of Board
service. Such payments shall commence at the beginning of the first fiscal
quarter subsequent to termination and continue for a 3-year period. If a
director's Board membership is terminated for cause, no benefits are payable
under this plan.
If a director's Board membership is terminated within two years following the
effective date of a change in control, then he/she also shall be eligible for a
lump sum payment in an amount that is the greater of: (1) 150% times average
annual compensation during the preceding 3-year period, (2) the sum of all
retirement benefits payable under normal retirement provisions described in the
preceding paragraph or (3) $78,000. The Company's accumulated benefit obligation
was $0.9 million and $0.5 million at December 31, 1997 and 1996, and net pension
costs were $0.3 million and $0.3 million for the years ended December 31, 1997
and 1996, respectively.
NOTE 12--INCOME TAXES
Income tax expense/(benefit) comprised the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal................................ $ 199 $(1,100) $ --
State.................................. 54 7 4
------- ------- -------
253 (1,093) 4
------- ------- -------
Deferred income tax (benefit) expense:
Federal................................ (7,425) -- --
State.................................. (928) -- --
------- ------- -------
(8,353) -- --
------- ------- -------
$(8,100) $(1,093) $ 4
======= ======= =======
</TABLE>
F-28
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax liability/(asset) comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current income tax asset:
Federal.............................. $ (626) $ (286)
State................................ (186) (73)
-------- -------
(812) (359)
-------- -------
Deferred income tax (asset) liability:
Federal.............................. (39,225) (32,632)
Valuation allowance--Federal......... 31,808 32,632
State................................ (7,593) (6,633)
Valuation allowance--State........... 6,749 6,633
-------- -------
(8,261) --
-------- -------
$ (9,073) $ (359)
======== =======
</TABLE>
F-29
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax liability/(asset) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FEDERAL:
Deferred tax liabilities:
Loan fees and interest............... $ 6,714 $ 7,202
FHLB stock dividends................. 15,556 13,620
Accrual to cash adjustment on
pre-1986 loans...................... 2,508 1,907
Mark to market adjustment............ 1,633 --
Unrealized gain on securities
available for sale.................. -- 365
Sale of servicing income............. -- 505
Other................................ 1,919 1,301
-------- --------
Gross deferred tax liabilities......... 28,330 24,900
-------- --------
Deferred tax assets:
Bad debt and loan loss deduction..... 12,218 6,997
Net operating loss carryover......... 38,186 40,190
Alternative minimum tax and other
credits carryover................... 2,839 2,839
Deposit base intangibles............. 5,504 2,392
Contingent liabilities............... 1,970 2,752
Debt modification gain............... 1,189 --
Sale of servicing income............. 1,184 --
Depreciation......................... 577 694
Mark to market adjustment............ -- 365
Unrealized loss on securities
available for sale.................. 1,633 --
Other................................ 2,255 1,303
-------- --------
Gross deferred tax assets.............. 67,555 57,532
Valuation allowance.................... (31,808) (32,632)
-------- --------
Deferred tax assets, net of allowance.. 35,747 24,900
-------- --------
Net deferred tax asset............... $ (7,417) $ --
======== ========
STATE:
Deferred tax liabilities:
Loan fees and interest............... $ 2,061 $ 2,325
FHLB stock dividends................. 4,818 4,397
Mark to market adjustment............ 619 --
Accrual to cash adjustment on
pre-1986 loans...................... 777 616
Unrealized gain on securities
available for sale.................. -- 118
Other................................ 592 446
-------- --------
Gross deferred tax liabilities......... 8,867 7,902
-------- --------
Deferred tax assets:
Bad debt and loan loss deduction..... 7,867 8,729
Net operating loss carryover......... 4,765 4,126
Deposit base intangibles............. 966 38
Depreciation......................... 448 498
Sale of servicing income............. 486 --
Mark to market adjustment............ -- 118
Contingent liabilities............... 610 889
Unrealized loss on securities
available for sale.................. 506 --
Other................................ 812 137
-------- --------
Gross deferred tax assets.............. 16,460 14,535
Valuation allowance.................... (6,749) (6,633)
-------- --------
Deferred tax assets, net of allowance.. 9,711 7,902
-------- --------
Net deferred tax asset............... $ (844) $ --
======== ========
</TABLE>
F-30
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1996 a valuation allowance was provided for the total net
deferred tax asset. Under 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. 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 allow a $8.3 million net
deferred tax asset for the year ended December 31, 1997.
The analysis of available evidence is performed each quarter utilizing the
"more likely than not" criteria required by SFAS No. 109 to determine the
amount, if any, of the deferred tax asset to be realized. Accordingly, there can
be no assurance that the Company will recognize additional portions of the
deferred tax asset in future periods. The criteria of SFAS No. 109 could require
the recording of valuation allowances against this $8.3 million net deferred tax
asset through the recording of tax expense in future periods.
In conjunction with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", certain securities were classified as available for sale
during the year. Under SFAS No. 115, adjustments to the fair market value of
securities held as available for sale are reflected through an adjustment to
stockholders' equity. The related current tax benefit has been reflected in
stockholders' equity.
A reconciliation from the consolidated statutory federal income tax expense
(benefit) to the consolidated effective income tax expense (benefit) follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Expected federal income tax expense (benefit)....................... $ 3,075 $ (3,684) $ (24,141)
Increases (reductions) in taxes resulting from:
Franchise tax expense (benefit), net of federal income
tax and valuation allowance....................................... (568) 4 4
(Reduction) addition to valuation allowance........................ (10,408) 91 23,779
Specified liability loss carryback under IRC
Section 172(f).................................................... -- (1,100) --
Bad debt recapture................................................. -- 3,227 --
Other, net......................................................... (199) 369 362
-------- -------- ---------
Income tax (benefit) expense........................................ $ (8,100) $ (1,093) $ 4
======== ======== =========
</TABLE>
The Internal Revenue Service (the "Service") has completed its examination of
the Bank's federal income tax returns through 1991. The Service is currently
conducting an examination of the federal income tax returns for 1992, 1993 and
tax year ended August 4, 1994. The California Franchise Tax Board (the "FTB")
has completed its examination of the California franchise tax returns through
1988 and has completed the field examination of the California franchise tax
returns for years 1989 through 1991. However, this examination is currently in
the appeals process with the FTB.
Internal Revenue Code ("IRC") Sections 382 and 383 and the Treasury
Regulations thereunder generally provide that, following an ownership change of
a corporation with a net operating loss ("NOL"), a net unrealized built-in loss,
or tax credit carryovers, the amount of annual post-ownership change taxable
income that can be offset by pre-ownership change NOLs, or recognized built-in
losses, and the amount of post-ownership change tax liability that can be offset
by pre-ownership change tax credits, generally cannot exceed a limitation
prescribed by Section 382. The Section 382 annual limitation generally equals
the product of the
F-31
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair market value of the equity of the corporation immediately before the
ownership change (subject to various adjustments) and the federal long-term tax-
exempt rate prescribed monthly by the Service.
As a result of the 1994 restructuring and recapitalization, the Bank underwent
an ownership change, ceased to be a member of the Citadel consolidated group,
and became subject to the annual limitations under Section 382. As a result of
the 1995 Recapitalization, the Bank again underwent an ownership change and
became subject to the annual limitations under Section 382. The limitations
imposed by the 1995 change of ownership are inclusive of the limitations imposed
by the 1994 change of ownership.
Hancock was merged with and into Fidelity as of June 30, 1997 in a tax-free
reorganization within the meaning of IRC Section 368(a)(1)(A), by reason of the
application of IRC Section 368(a)(2)(D). The cumulative total of net deferred
tax assets of Hancock and the related valuation allowance are included in the
balances of net deferred taxes as of December 31, 1997. In accordance with the
provisions of SFAS No. 109, any subsequent reductions in the valuation allowance
associated with the deferred tax assets of Hancock will be reflected as an
adjustment to any goodwill with respect to the acquisition that remains
unamortized.
As of December 31, 1997, the Bank had an estimated NOL carryover for federal
income tax purposes of $109.1 million expiring in years 2008 through 2011. Of
this amount, $70.1 million is subject to annual utilization limitations as a
result of the 1994 and 1995 changes of ownership. Of the estimated federal NOL
carryover, $3.2 million represents Hancock NOLs which are subject to an annual
utilization limitation as a result of the 1997 change of ownership occurring as
part of its acquisition by the Bank. For California franchise tax purposes, the
Bank had an estimated NOL carryover of $43.9 million. Of the estimated
California NOL carryover, $40.3 million relates to the Bank's operations and
expire in years 1998 through 2002, with $24.9 million of this amount subject to
annual utilization limitations as a result of the 1994 and 1995 changes of
ownership. The remaining $3.6 million in estimated California NOLs represent
Hancock NOLs expiring in years 2000 through 2009 with an annual utilization
limitation as a result of the 1997 change of ownership occurring as part of its
acquisition by the Bank.
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 with the Bank's former parent
company, Citadel. The amended returns, if accepted in total, would result in a
net refund of $19.0 million to Fidelity. IRC Section 172(f) is an area of the
tax law without significant legal precedent. The Internal Revenue Service (the
"Service") is currently examining this issue with respect to Fidelity's ability
to carryback such losses. Therefore, no assurances can be given as to
Fidelity's entitlement to such claim. Fidelity has recorded $1.1 million of tax
benefit in 1996 with respect to these amended tax returns.
Effective for taxable years beginning after 1995, legislation enacted in 1996
has repealed for federal purposes the reserve method of accounting for bad debts
for thrift institutions. While thrifts qualifying as "small banks" may continue
to use the experience method, Fidelity is deemed a "large bank" and is required
to use the specific charge off method. In addition, this enacted legislation
contains certain income recapture provisions which are discussed below.
A thrift institution deemed a "large bank" is required to include into income
ratably over 6 years, beginning with the first taxable year beginning after
1995, the institution's "applicable excess reserves." The applicable excess
reserves are the excess of (1) the balance of the institution's reserves for
losses on loans other than supplemental reserves at the close of its last
taxable year beginning before January 1, 1996, over (2) the adjusted balance of
such reserves as of the close of its last taxable year beginning before January
1, 1988. Fidelity's applicable excess reserves at December 31, 1995 were $14.6
million. This amount is being recognized into taxable income over six years at
the rate of $2.4 million per year starting with the taxable year ended December
31, 1996. The remaining applicable excess reserves at December 31, 1997 were
$9.8 million.
The remaining adjusted pre-1988 total loan loss reserve balance of $26.0
million at December 31, 1997, will be recaptured into taxable income in the
event Fidelity (1) ceases to be a "bank" or "thrift," or (2) makes distributions
to shareholders in excess of post-1951 earnings and profits, redemptions, or
liquidations. Based on current estimates, Fidelity had post-1951 earnings and
profits at December 31, 1997 sufficient to cover 1997 distributions to
shareholders for federal income tax purposes. As a result, Fidelity did not
trigger any reserve recapture into taxable income for 1997.
F-32
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the provisions of SFAS No. 109, a deferred tax liability of $9.1 million
has not been provided for the remaining adjusted pre-1988 total loan loss
reserve balance of $26.0 million at December 31, 1997. The use of these reserves
in a manner that results in a recapture into taxable income as previously
discussed will require federal taxes to be provided at the then current income
tax rate. The use of these reserves in such a manner is not anticipated.
NOTE 13--COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company and certain of its subsidiaries
had a number of lawsuits and claims pending at December 31, 1997. The Company's
management and its counsel believe that the lawsuits and claims are without
merit. There is a risk that the final outcome of one or more of these claims
could result in the payment of monetary damages which could be material in
relation to the financial condition or results of operations of the Company. The
Company does not believe that the likelihood of such a result is probable and
has not established any specific litigation reserves with respect to such
lawsuits.
Fidelity enters into agreements to extend credit to customers on an ongoing
basis. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Most commitments are expected to be
drawn upon and, therefore, the total commitment amounts generally represent
future cash requirements. At December 31, 1997, the Company had $1.7 million in
commitment to fund loans.
As of December 31, 1997, the Company had certain mortgage loans with a gross
principal balance of $85.0 million, of which $71.0 million had been sold in the
form of mortgage pass-through certificates, over various periods of time, to
four investor financial institutions leaving a balance of $14.0 million in loans
retained by the Company. These mortgage pass-through certificates provide a
credit enhancement to the investors in the form of the Company's subordination
of its retained percentage interest to that of the investors. In this regard,
the aggregate of $71.0 million held by investors are deemed Senior Mortgage
Pass-Through Certificates and the $14.0 million in loans held by the Company are
subordinated to the Senior Mortgage Pass-Through Certificates in the event of
borrower default. Full recovery of the $14.0 million is subject to this
contingent liability due to its subordination. In 1993, the Bank repurchased as
an investment a portion of the mortgage pass-through certificates, and at
December 31, 1997, the balance of the repurchased certificate was $24.9 million
and was included in the MBSs available for sale portfolio and accounted for in
accordance with SFAS No. 115. The other Senior Mortgage Pass-Through
Certificates totaling $46.1 million at December 31, 1997 are owned by other
investor institutions. Due to the subordination of its retained percentage
interest, the Company considers all the loans underlying the Senior Mortgage
Pass-Through Certificates in determining its allowance for loan losses and any
estimated losses are reflected in the provision for loan losses.
During 1992, the Company also effected the securitization by FNMA of $114.3
million of multifamily mortgages wherein $114.3 million in whole loans were
swapped for Triple A rated MBSs through FNMA's Alternative Credit Enhancement
Structure ("ACES") program. These MBSs were sold in December 1993 and the
current outstanding balance as of December 31, 1997 of $70.9 million is serviced
by the Company.
As part of a credit enhancement to absorb losses relating to the ACES
transaction, the Company has pledged and placed in a trust account, as of
December 31, 1997, $13. 1 million, comprised of $9.9 million in cash and $3.2
million in U.S. Treasury securities at book value. The Company shall absorb
losses, if any, which may be incurred on the securitized multifamily loans to
the extent of $13.1 million. FNMA is responsible for any losses in excess of the
$13.1 million. The corresponding contingent liability for credit losses secured
by the trust assets was $2.9 million and $6.6 million at December 31, 1997 and
1996, respectively, and is included in other liabilities.
F-33
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the Hancock acquisition, the Company has assumed the commitment
to absorb losses from Hancock's loan sale and securitization to FNMA under the
ACES program. Loans sold subject to recourse provisions had remaining unpaid
principal balances at December 31, 1997 of $28.0 million. At December 31, 1997,
the Company has pledged U.S. Treasury securities and MBSs of $4.7 million as
security for the recourse contingencies associated with the loans. The
corresponding contingent liability for credit losses secured by the pledged
assets was $1.1 million at December 31, 1997 and is included in other
liabilities.
On September 30, 1996 legislation was enacted that required member
institutions to recapitalize the Savings Association Insurance Fund ("SAIF") by
paying a one-time special assessment of approximately 65.7 basis points on all
assessable deposits as of March 31, 1995. The one-time special assessment
resulted in the Bank recording an $18.0 million charge in additional SAIF
premiums at September 30, 1996.
The Company conducts portions of its operations from leased facilities. All of
the Company's leases are operating leases. At December 31, 1997, aggregate
minimum rental commitments on operating leases with noncancelable terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
(DOLLARS IN
YEAR OF COMMITMENT THOUSANDS)
---------------------
<S> <C>
1998............................. $ 4,352
1999............................. 4,054
2000............................. 3,372
2001............................. 3,091
2002............................. 2,535
Thereafter....................... 8,345
-------
$25,749
=======
</TABLE>
Operating expense includes rent expense of $2.9 million in 1997, $3.3 million
in 1996 and $3.1 million in 1995.
NOTE 14--RECAPITALIZATION
1995 Recapitalization
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity through the sale of 2,070,000 of Series A Preferred Stock and
47,000,000 of Class A Common Stock. As part of the 1995 Recapitalization,
Fidelity adopted the Plan (see Note 5--Loans Receivable) which is designed to
aggressively dispose of, resolve or otherwise manage a pool of multifamily
loans. As a result, the Bank recorded a $45.0 million loan portfolio charge
which represents the estimated additional losses expected to be incurred.
The 1995 Recapitalization expenses of $2.6 million were charged directly
against equity while the $45.0 million loan portfolio restructuring charge is
reflected in the statement of operations.
F-34
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--REGULATORY MATTERS
The Office of Thrift Supervision (the "OTS") capital regulations, as required
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") include three separate minimum capital requirements for the savings
institution industry--a "tangible capital requirement," a "leverage limit" and a
"risk-based capital requirement." These capital standards must be no less
stringent than the capital standards applicable to national banks.
As of December 31, 1997 and 1996, the Bank was "well capitalized" under the
Prompt Corrective Action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Bank must maintain minimum core capital,
core risk-based capital and risk-based capital ratios as set forth in the table
below. The Bank's capital amounts and classification are subject to review by
federal regulators about components, risk-weightings and other factors. There
are no conditions or events since December 31, 1997 that management believes
have changed the institution's category.
The Bank's actual and required capital as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
TO BE CATEGORIZED AS WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
===================== ============================== ===============================
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- -------- ------------ --------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to
risk-weighted assets)...... $254,200 11.99% * $169,700 * 8.00% * $212,100 * 10.00%
Core capital (to adjusted
tangible assets)........... 227,700 5.48 * 124,600 * 3.00 * 207,700 * 5.00
Tangible capital (to
tangible assets)........... 218,300 5.27 * 62,200 * 1.50 N/A
Core capital (to
risk-weighted assets)...... 227,700 10.74 N/A * 127,200 * 6.00
As of December 31, 1996:
Total capital (to
risk-weighted assets)...... 233,600 11.85 * 157,700 * 8.00 * 197,100 * 10.00
Core capital (to adjusted
tangible assets)........... 209,200 6.29 * 99,800 * 3.00 * 166,300 * 5.00
Tangible capital (to
tangible assets)........... 208,900 6.28 * 49,900 * 1.50 N/A
Core capital (to
risk-weighted assets)...... 209,200 10.61 N/A * 118,300 * 6.00
</TABLE>
- --------------------
* Represents "greater than or equal to."
Under FDICIA, the OTS was required to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities. The OTS
added an interest rate risk capital component to its risk-based capital
requirement originally effective September 30, 1994. However, the OTS has
temporarily postponed the implementation of the rule implementing the interest
rate risk capital component until the OTS has collected sufficient data to
determine
F-35
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
whether the rule is effective in monitoring and managing interest rate risk.
This capital component will require institutions deemed to have above normal
interest rate risk to hold additional capital equal to 50% of the excess risk.
No interest rate risk component would have been required to be added to the
Bank's risk-based capital requirement at December 31, 1997 and 1996 had the rule
been in effect at these times.
The following table reconciles the Bank's capital in accordance with GAAP to
the Bank's tangible, core and risk-based capital as of December 31, 1997 and
1996.
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
=================== ============= =====================
BALANCE BALANCE BALANCE
------------------- ------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
As of December 31, 1997:
Stockholders' equity (1)......... $230,000 $230,000 $230,000
Unrealized loss on securities.... 4,500 4,500 4,500
Adjustments:
Goodwill........................ (6,500) (6,500) (6,500)
Intangible assets (2)........... (9,700) (300) (300)
GVA............................. -- -- 26,600
Equity investments.............. -- -- (100)
-------- -------- --------
Regulatory capital (3)........... $218,300 $227,700 $254,200
======== ======== ========
As of December 31, 1996:
Stockholders' equity (1)......... $210,300 $210,300 $210,300
Unrealized gains on securities... (1,000) (1,000) (1,000)
Adjustments:
Goodwill........................ (300) -- --
Intangible assets............... (100) (100) (100)
GVA............................. -- -- 24,600
Equity investments.............. -- -- (200)
-------- -------- --------
Regulatory capital (3)........... $208,900 $209,200 $233,600
======== ======== ========
</TABLE>
- --------------
(1) Fidelity's total stockholder's equity, calculated in accordance with GAAP,
was 5.52% and 6.32% of its total assets at December 31, 1997 and 1996,
respectively.
(2) Includes core deposit intangibles associated with the acquisition of
Hancock and the Coast branch acquisition at December 31, 1997.
(3) At periodic intervals, both the OTS and the FDIC routinely examine the Bank
as part of their legally prescribed oversight of the industry. Based on
their examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
Capitalized Software Costs
The Bank was notified by the OTS West Regional Office in April 1995 by a
written directive that certain computer software implementation or enhancement
related costs capitalized in accordance with GAAP are required to be immediately
expensed in the Bank's Thrift Financial Report (the "TFR") and deducted from
regulatory capital as required in the instructions to the TFR and by OTS policy.
As of December 31, 1995, the full amount in question, approximately $4.3
million, was reserved and subsequently written-off in the first quarter of 1996.
F-36
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--STOCK OPTION PLANS
Stock Option Plans
On February 26, 1997, the Board of Directors of the Company adopted, subject
to stockholder approval, a Stock Option and Equity Incentive Plan (the "Stock
Option Plan"). The Stock Option Plan consists of certain amendments to, and a
restatement of, the Bank's 1996 Stock Option Plan. On April 30, 1997, the
Company's stockholders approved the Stock Option Plan which provides (1) the
granting of stock options, restricted stock and deferred stock units (2)
deferred stock awards in lieu of cash compensation otherwise payable to
directors and (3) stock options, restricted stock or deferred stock units in
lieu of cash awards for senior officers. The number of shares of the Bank's
Common Stock available for grants has increased 750,000 to 2,125,000 under the
Stock Option Plan. A provision has been added limiting to 100,000 the number of
shares of Common Stock that can be subject to stock option grants in any year to
any participant. The Stock Option Plan also provides for 2,500 annual grants of
stock options to non-employee directors. The Stock Option Plan is administered
by the Compensation/Stock Options Committee of the Board of Directors, which is
authorized to select award recipients, establish award terms and conditions, and
make other related administrative determinations in accordance with the
provisions of the Stock Option Plan. Unexercised options granted under the Stock
Option Plan expire on the earlier of the tenth anniversary of the Stock Option
Plan effective date (February 9, 1996) or 90 days following the effective date
of the recipients termination for cause, all outstanding options are canceled as
of the effective date of such termination. Bank Plus assumed the 1996 Stock
Option Plan in connection with the Reorganization.
On December 11, 1995, the Board approved the grant of options to certain
executives and key employees of the Bank at an exercise price of $2.10 ($8.35
after giving effect to the Reverse Stock Split), at which time the market value
of the underlying Class A Common Stock was $2.06 per share ($8.25 after giving
effect to the Reverse Stock Split). The options vest at a rate of 10% on
February 13, 1996 and, thereafter, 30 % per year over the next three years at
the anniversary of the Stock Option Plan effective date. Of the total options
granted, 1,025,000 were granted to six executives of the Bank, 87,500 were
granted to other key employees of the Bank and 184,000 were granted to the seven
non-employee directors of the Bank. In 1997, the Board approved the grant of
100,000 to a new executive at $11.125. The options vest at 10% at date of grant
and, thereafter, 30% per year over the next three years. In addition, nine non-
employee directors were automatically granted options to purchase 22,500 shares
at $10.25 which all vest immediately.
The following is a summary of the Stock Option Plan:
<TABLE>
<CAPTION>
Average
Number Option
of Options Price
---------- -------
<S> <C> <C>
Granted, December 11, 1995... 1,296,500 $ 8.35
---------
Balance, December 31, 1995... 1,296,500 8.35
Expired..................... (14,500) 8.35
Exercised................... (2,800) 8.35
---------
Balance, December 31, 1996... 1,279,200 8.35
Granted..................... 122,500 10.96
Expired..................... (114,450) 8.35
Exercised................... (63,375) 8.35
---------
Balance, December 31, 1997... 1,223,875 8.61
=========
</TABLE>
F-37
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted under the 1996 Stock Option Plan for 1997,
1996 and 1995 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for 1997 and 1996 and
1995, respectively: no dividend yield, expected stock price volatility of 60%
for 1997 and 77% for both 1996 and 1995 based on daily market prices for the
preceding five year period, risk free interest rate equivalent to the 10-year
Treasury rate on the date of the grant of 5.74% for 1997 and 5.70% for both 1996
and 1995, and an option contract life of 10 years. The Company applied
Accounting Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. Accordingly, no compensation cost has been
recognized for its Stock Option Plan. Had compensation cost for the Company's
Stock Option Plan been determined based on the fair value at the grant dates for
awards under the Stock Option Plan consistent with the method of SFAS No. 123,
the Company's net earnings and earnings per share for the years ended December
31, 1997, 1996 and 1995 would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings (loss):
As reported............................ $12,653 $(14,089) $(68,979)
Pro forma.............................. $ 9,182 $(14,968) $(68,979)
Net earnings (loss) to common
stockholders:
As reported............................ $12,653 $(15,642) $(68,979)
Pro forma.............................. $ 9,182 $(16,521) $(68,979)
Basic net earnings (loss) per common
share:
As reported............................ $ 0.67 $ (0.86) $ (8.84)
Pro forma.............................. $ 0.49 $ (0.91) $ (8.84)
Diluted net earnings (loss) per common
share:
As reported............................ $ 0.66 $ (0.85) $ (8.83)
Pro forma.............................. $ 0.48 $ (0.90) $ (8.83)
Weighted-average fair value per share
of options granted..................... $ 9.57 $ 6.87 $ 6.87
</TABLE>
Two non-employee directors participated in receiving deferred stock awards in
lieu of cash compensation. As of December 31, 1997, there were 6,982 deferred
stock grants with an average grant price of $11.61. Included in deferred
compensation is approximately $0.1 million as of December 31, 1997.
NOTE 17--RELATED PARTY TRANSACTIONS
Administrative and Operational Services
Pursuant to the terms of a Expense Sharing Agreement between Bank Plus and
Fidelity, Fidelity provides Bank Plus with all payroll, marketing, legal,
management information services, accounts payable, human resources and general
administrative services for a fee equal to 2.5% of the cost of certain shared
expenses plus a pro rata share of the overhead costs and expenses associated
with Bank employees who render such services to Bank Plus. Bank Plus paid
Fidelity $0.3 million and $0.1 million under this agreement in 1997 and 1996,
respectively. No such costs were paid to Fidelity prior to the formation of the
holding company in May 1996.
F-38
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax Sharing
The tax sharing agreement between Citadel and Fidelity was terminated prior to
the closing of the 1994 restructuring and recapitalization on August 4, 1994.
Citadel and Fidelity entered into a tax disaffiliation agreement which sets
forth each party's rights and obligations with respect to deficiencies and
refunds, if any, of federal, state, local or foreign taxes for periods before
and after the closing and related matters such as the filing of tax returns and
the conduct of examinations by the Service and other taxing authorities.
Fidelity entered into a new tax sharing agreement with its new parent company,
Bank Plus, which sets forth each party's rights and obligations with respect to
deficiencies and refunds, if any, of federal or state income or franchise taxes
effective on May 16, 1996 and related matters such as the filing of tax returns
and the conduct of examinations by the Service and other taxing authorities.
Contribution of Gateway Capital Stock
In May 1996, Fidelity contributed all the outstanding capital stock of Gateway
to Bank Plus as a capital contribution. The net book value of such stock at
December 31, 1995 was $0.8 million. As a result, Gateway became a wholly owned
subsidiary of Bank Plus.
Other Equity Transactions
Fidelity paid a cash dividend of $2.0 million in May 1996 to capitalize Bank
Plus, which had an immaterial effect on the Bank's tangible, core and risk-based
capital. In addition, in April 1997 and November 1996, Gateway paid cash
dividends of $0.3 million to Bank Plus.
At December 31, 1997 and 1996, Bank Plus had cash and cash equivalents of $1.0
million and $0.8 million, respectively, 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
Series A Preferred Stock. See Note 1--Summary of significant Accounting
Policies. Both Gateway's and Fidelity's ability to pay dividends or otherwise
provide funds to Bank Plus are subject to significant regulatory restrictions.
F-39
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is the Company's disclosure of the estimated fair value of
financial instruments. The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgement is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
========================= ===========================
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Investment securities available for
sale.................................. $ 100,837 $ 100,837 $ 156,251 $ 156,251
Investment securities held to maturity. 3,189 3,208 5,178 5,198
MBSs available for sale................ 852,604 852,604 179,403 179,403
MBSs held to maturity.................. -- -- 30,024 27,169
MBSs held for trading.................. 41,050 41,050 14,121 14,121
Loans receivable....................... 2,823,577 2,818,236 2,691,931 2,630,100
Mortgage servicing rights.............. 2,056 5,346 2,141 11,000
Other assets........................... 922 922 751 751
FINANCIAL LIABILITIES:
Deposits............................... 2,891,801 2,899,964 2,495,933 2,425,284
FHLB advances.......................... 1,009,960 1,012,640 449,851 450,284
Senior notes........................... 51,478 61,522 -- --
Commercial paper....................... -- -- 40,000 40,016
Mortgage-backed notes.................. -- -- 100,000 100,000
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitment to sell MBSs................ -- 1 -- 25
Commitment to purchase MBSs............ -- 58 -- (4)
Interest rate swap..................... -- (46) -- --
</TABLE>
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Investment Securities and Mortgage-backed Securities
Estimated fair values for investment and MBSs are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Loans
The estimated fair values of loans receivable are based on an option adjusted
cash flow valuation ("OACFV"). The OACFV includes forward interest rate
simulations and takes into account the credit quality of performing and
nonperforming loans. Such valuations may not be indicative of the value derived
upon a sale of all or part of the portfolio.
F-40
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Servicing Rights
The estimated fair values of mortgage servicing rights are based on an OACFV
analysis.
Other Assets
Fair value of trading derivative instruments are based on quoted market
prices.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand. The fair value of fixed rate
certificates of deposits is estimated by using an OACFV analysis.
Borrowings (Including Federal Home Loan Bank Advances and Other Borrowings)
The estimated fair value is based on an OACFV model.
Off-balance sheet instruments, which include interest rate swaps, floors and
options
The estimated fair value for the Company's off-balance sheet instruments are
based on quoted market prices, when available, or an OACFV analysis.
Other Financial Instruments
Financial instruments of the Bank, as included in the Consolidated Statements
of Financial Condition, for which fair value approximates the carrying amount at
December 31, 1997 and 1996 include "Cash and cash equivalents", "Interest
receivable", "Investment in FHLB stock" and interest payable.
F-41
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER
----------- ------------ -------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997:
Interest income........................ $ 58,707 $ 58,455 $ 65,531 $ 72,314 $ 255,007
Interest expense....................... 38,350 38,129 45,098 52,432 174,009
Provision for estimated loan losses.... 4,251 4,251 4,251 251 13,004
Provision for estimated real estate
losses................................ 742 620 (333) 31 1,060
Gains on loan sales, net............... 7 21 2 7 37
Gains on sales of securities and
trading activities, net............... 1,221 995 362 92 2,670
Writedown of MBSs, available for sale.. -- -- -- (4,838) (4,838)
Operating expense...................... 14,336 15,041 16,481 17,238 63,096
Earnings before minority interest in
subsidiary............................ 5,768 5,583 3,750 1,787 16,888
Minority interest in subsidiary
(dividends on subsidiary
preferred stock).................... 1,553 2,333 342 7 4,235
Net earning............................ 4,215 3,250 3,408 1,780 12,653
Earnings available for common
stockholders.......................... 4,215 3,250 3,408 1,780 12,653
Basic earnings per common share........ 0.23 0.18 0.18 0.08 0.67
Basic weighted average common shares
outstanding........................... 18,245,265 18,248,754 19,310,813 19,356,825 18,794,887
Diluted earnings per common share...... 0.23 0.18 0.17 0.08 0.66
Diluted weighted average common shares
outstanding........................... 18,656,085 18,496,194 19,648,242 19,732,348 19,143,233
Market prices of common stock:
High................................... 13.75 11.50 13.25 13.69 13.75
Low.................................... 10.38 9.63 10.75 11.06 9.63
1996:
Interest income........................ $ 60,052 $ 59,556 $ 59,020 $ 59,285 $ 237,913
Interest expense....................... 38,216 37,790 37,775 38,842 152,623
Provision for estimated loan losses.... 3,905 3,905 3,900 3,900 15,610
Provision for estimated real estate
losses................................ 668 578 731 1,242 3,219
Gains on loan sales, net............... -- 6 3 13 22
Gains (losses) on sales of securities
and trading activities, net........... (83) 235 610 574 1,336
Operating expense...................... 16,627 16,538 17,433 13,853 64,451
SAIF special assessment................ -- -- 18,000 -- 18,000
Earnings (loss) before minority
interest in subsidiary................ 1,531 2,222 (16,371) 3,186 (9,432)
Minority interest in subsidiary
(dividends on subsidiary
preferred stock)...................... -- 1,552 1,553 1,552 4,657
Net earning (loss)..................... 1,531 670 (17,924) 1,634 (14,089)
Preferred stock dividends.............. 1,553 -- -- -- 1,553
(Loss) earnings available for common
stockholders.......................... (22) 670 (17,924) 1,634 (15,642)
Basic (loss) earnings per common share. -- 0.04 (0.98) 0.08 (0.86)
Basic weighted average common shares
outstanding........................... 18,242,465 18,242,465 18,242,715 18,243,890 18,242,887
Diluted (loss) earnings per common
share................................. -- 0.04 (0.97) 0.08 (0.85)
Diluted weighted average common shares
outstanding........................... 18,349,019 18,348,901 18,438,661 18,580,957 18,438,454
Market prices of common stock:
High................................... 9.75 9.50 10.63 11.75 11.75
Low.................................... 8.50 8.63 8.75 10.63 8.50
(continued)
</TABLE>
F-42
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(continued)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1995:
Interest income................................ $ 60,570 $ 62,521 $ 61,700 $ 61,686 $ 246,477
Interest expense............................... 42,641 45,625 43,618 42,952 174,836
Provision for estimated loan losses............ 4,020 11,131 8,773 45,800 69,724
Provision for estimated real estate losses..... 391 1,153 1,229 593 3,366
(Losses) gains on loan sales, net.............. (292) 938 15 (139) 522
Gains on sales of securities and
trading activities, net....................... 939 3,159 -- -- 4,098
Operating expense.............................. 19,151 19,035 20,466 23,302 81,954
Net earnings (loss)............................ 1,049 (9,027) (10,579) (50,422) (68,979)
Basic (loss) earnings per share................ 0.16 (1.39) (1.63) (4.31) (8.84)
Basic weighted average common shares
outstanding................................... 6,492,465 6,492,465 6,492,465 11,708,539 7,807,201
Diluted (loss) earnings per common share....... 0.16 (1.39) (1.63) (4.29) (8.83)
Diluted weighted average common shares
outstanding................................... 6,492,465 6,492,465 6,492,465 11,739,718 7,815,560
Market prices of common stock:
High........................................... 20.00 18.00 11.50 9.25 20.00
Low............................................ 16.00 11.00 6.00 5.50 5.50
</TABLE>
F-43
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20--PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements.
BANK PLUS CORPORATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................... $ 974 $ 792
Loans receivable........................................................ 565 709
Investment in preferred stock of subsidiary............................. 51,478 --
Investment in subsidiaries.............................................. 184,079 158,513
Other assets............................................................ 1,126 731
-------- --------
$238,222 $160,745
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Senior notes........................................................... $ 51,478 $ --
Other liabilities...................................................... 932 131
-------- --------
52,410 131
Stockholder's equity.................................................... 185,812 160,614
-------- --------
$238,222 $160,745
======== ========
</TABLE>
F-44
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BANK PLUS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(Dollars in thousands)
<S> <C> <C>
INCOME:
Interest income............................................................................ $ 49 $ 29
Interest expense........................................................................... 2,782 --
-------- --------
NET INTEREST (EXPENSE) INCOME.............................................................. (2,733) 29
-------- --------
EXPENSES:
Occupancy.................................................................................. 257 --
Professional services...................................................................... 219 208
Intercompany expense allocation............................................................ 271 143
Other...................................................................................... 93 42
-------- --------
840 393
-------- --------
LOSS BEFORE INCOME TAX BENEFIT.............................................................. (3,573) (364)
Income tax benefit......................................................................... 384 149
-------- --------
LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) AND MINORITY
INTEREST OF SUBSIDIARIES................................................................... (3,189) (215)
Equity in undistributed net earnings (loss) of subsidiaries............................... 20,077 (9,217)
Minority interest in subsidiary (dividend on subsidiary
preferred stock)......................................................................... (4,235) (4,657)
-------- --------
NET EARNINGS (LOSS)......................................................................... $ 12,653 $(14,089)
======== ========
</TABLE>
F-45
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BANK PLUS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- -------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).......................................................... $ 12,653 $ (14,089)
Equity in undistributed net (earnings) loss of subsidiaries.................. (20,077) 9,217
Minority interest in subsidiary (dividend on subsidiary preferred stock)..... 4,235 4,657
Other assets increase........................................................ (395) (707)
Senior notes interest payable, increase...................................... 2,782 --
Other liabilities increase................................................... 12 119
Other........................................................................ -- (19)
--------- ---------
Net cash used in operating activities....................................... (790) (822)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans receivable decrease (increase)......................................... 144 (709)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends from subsidiaries.................................................. 2,290 2,300
Stock options exercised...................................................... 530 23
Senior notes interest........................................................ (1,992) --
--------- ---------
Net cash provided by financing activities................................... 828 2,323
--------- ---------
Net increase in cash and cash equivalents................................. 182 792
Cash and cash equivalents at beginning of period............................ 792 --
--------- ---------
Cash and cash equivalents at the end of period.............................. $ 974 $ 792
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Exchange of preferred stock for senior notes:
Investment in preferred stock of subsidiary............................... $ 51,478 $ --
Senior notes.............................................................. 51,478 --
</TABLE>
F-46
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
sections entitled "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "DIRECTORS AND
EXECUTIVE OFFICERS" contained in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information set forth in the
section entitled "EXECUTIVE COMPENSATION" contained in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by this reference is the information set forth in the
section entitled "BENEFICIAL OWNERSHIP OF COMMON STOCK" contained in the 1998
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by this reference is the information set forth in the
section entitled "RELATED PARTY TRANSACTIONS" contained in the 1998 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- -----------
<S> <C>
Independent Auditor's Report....................................................................... F-2
Consolidated Statements of Financial Condition at December 31, 1997 and 1996....................... F-3
Consolidated Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1997................................................................................ F-4
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended
December 31, 1997................................................................................ F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December
31, 1997......................................................................................... F-6
Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended
December 31, 1997................................................................................. F-8
</TABLE>
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
II-1
<PAGE>
(b) Reports on Form 8-K
None
(c) 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).*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------- -------------------------------------------------------------------------------------------------
<S> <C>
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).*
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).*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------- -------------------------------------------------------------------------------------------------
<S> <C>
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).*
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).*.
10.57 Form of 1997 Non-Employee Director Stock Option Agreement between the Company and certain
directors.
11. Statement re Computation of Per Share Earnings.
12. Computation of Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock
Dividends.
21.1 List of Subsidiaries.
27. Financial Data Schedule.
</TABLE>
- -----------------
* Indicates previously filed documents.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
By: /S/ GORDON V. SMITH
-----------------------------
GORDON V. SMITH
Chairman of the Board
Date: March 30, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ---------------------------------------- ------------------------------------------------ -----------------
<S> <C> <C>
/S/ GORDON V. SMITH Chairman of the Board of Directors March 30, 1998
- ----------------------------------------
GORDON V. SMITH
/S/ RICHARD M. GREENWOOD President and Chief Executive Officer; Vice March 30, 1998
- ---------------------------------------- Chairman of the Board
RICHARD M. GREENWOOD (Principal Financial Officer)
/S/ NORMAN BARKER, JR. Director March 30, 1998
- ----------------------------------------
NORMAN BARKER, JR.
/S/ WALDO H. BURNSIDE Director March 30, 1998
- ----------------------------------------
WALDO H. BURNSIDE
/S/ GEORGE GIBBS, JR. Director March 30, 1998
- ----------------------------------------
GEORGE GIBBS, JR.
/S/ LILLY V. LEE Director March 30, 1998
- ----------------------------------------
LILLY V. LEE
/S/ MARK SULLIVAN III Director March 30, 1998
- ----------------------------------------
MARK SULLIVAN III
/S/ RICHARD VILLA Senior Vice President, Controller and March 30, 1998
- ---------------------------------------- Chief Accounting Officer
RICHARD VILLA (Principal Accounting Officer)
</TABLE>
II-5
<PAGE>
EXHIBIT 10.57
1997 NONEMPLOYEE DIRECTOR STOCK OPTION AGREEMENT
AGREEMENT made as of the 1/st/ day of May, 1997 between Bank Plus
Corporation, a Delaware corporation (the "Company"), and
[NAME_OF_NONEMPLOYEE_DIRECTOR] (the "Optionee"), a nonemployee director of the
Company or its wholly-owned subsidiary, Fidelity Federal Bank, a Federal Savings
Bank ("Fidelity").
WITNESSETH:
WHEREAS, the Company's stockholders approved certain amendments to the
Bank Plus Corporation Stock Option and Equity Incentive Plan (the "Plan"), a
copy of which is attached hereto as Exhibit A and the terms of which are
---------
incorporated herein by reference, at the annual meeting of stockholders held on
April 30, 1997; and
WHEREAS, the Plan, as so amended, provides for annual awards of stock
options to be made to the nonemployee directors of the Company and Fidelity on
the first business day after the date of the annual meeting of the Company's
stockholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth and other good and valuable consideration, the
Company and the Optionee agree as follows:
1. Subject to the terms and conditions of this Agreement and the
Plan, the Company hereby grants to the Optionee the option (the "Option") to
purchase, from time to time, all or a part of 2,500 shares (the "Option Shares")
of the Company's common stock ($0.01 par value) (the "Common Stock"). The Option
is fully vested, and shall expire at the close of business on April 30, 2007,
unless sooner terminated pursuant to sections 3 or 4 of this Agreement. The
Option is exercisable at a purchase price of $10.25 per Option Share.
2. The Option is not transferable by the Optionee otherwise than by
will or the laws of descent and distribution, and is exercisable, during the
Optionee's lifetime, only by the Optionee.
3. In the event that the Optionee shall cease to serve on the board
of directors of the Company and/or Fidelity for any reason other than removal
for cause, the Optionee may exercise the Option at any time within 90 days
following such cessation, but not later than the date of expiration of the
Option, whichever shall first occur. In the event of the removal of the Optionee
from the board of directors of the Company and/or Fidelity for cause, the Option
shall be cancelled as of the effective date of such removal.
1
<PAGE>
4. In the event the Optionee dies while serving as a nonemployee
director of the Company and/or Fidelity, the person or persons to whom the
Option is transferred by will or the laws of descent and distribution may
exercise the Option at any time within one year from the date of death, but no
later than the date of expiration of the Option, whichever shall first occur.
5. The Option may be exercised only by written notice to the
Secretary of the Company at its office at 4565 Colorado Boulevard, Los Angeles,
California 90039. Such notice shall state the election to exercise the Option
under the 1997 Nonemployee Director Stock Option Agreement and the number of
shares in respect of which it is being exercised and shall be signed by the
Optionee. In no event may the Option be exercised for less than 500 shares
unless there are fewer than 500 shares remaining for exercise under the Option.
The certificate or certificates of the shares as to which the Option shall have
been exercised will be registered only in the Optionee's name. In the event the
Option becomes exercisable by another person or persons upon the death of the
Optionee, the notice of exercise shall be accompanied by appropriate proof of
the right to exercise the Option.
6. At the time of exercise of the Option and prior to the delivery
of such shares, the Optionee shall pay in cash to the Company the sum of the
aggregate option price of all shares purchased pursuant to such exercise of the
Option. All payments shall be made in cash or by check payable to the order of
the Company. The Optionee shall not have any of the rights and privileges of a
stockholder of the Company with respect to the shares deliverable upon any
exercise of the Option unless and until certificates representing such shares
shall have been delivered to the Optionee.
7. The Optionee agrees that any resale of the shares received upon
any exercise of the Option shall be made in compliance with the registration
requirements of the Securities Act of 1933 or an applicable exemption therefrom,
including without limitation the exemption provided by Rule 144 promulgated
thereunder (or any successor rule).
In the event that, prior to the exercise of the Option with respect to all
of the shares of Common Stock in respect of which the Option is granted, the
number of outstanding shares of Common Stock shall be increased or decreased or
changed into or exchanged for a different number or kind of shares of stock or
other securities of the Company, whether through stock dividend, stock split,
reverse stock split, recapitalization or other change affecting the outstanding
Common Stock, the remaining number of shares of Common Stock still subject to
the Option and the purchase price thereof shall be appropriately adjusted by the
committee appointed by the Board of Directors to administer the Plan (the
"Committee") as provided in Section 3 of the Plan.
8. The Committee shall have authority to interpret the Plan and this
Agreement and to make any and all determinations under them, and its decisions
shall be binding and conclusive upon the Optionee and the Optionee's legal
representative in respect of any questions arising under the Plan or this
Agreement.
9. Any notice to be given to the Company shall be addressed to the
Secretary of the Company at 4565 Colorado Boulevard, Los Angeles, California
90039 and any notice to be
2
<PAGE>
given to the Optionee shall be addressed to the Optionee at the Optionee's
residence as it may appear on the records of the Company or at such other
address as either party may hereafter designate in writing to the other.
10. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and any successors to the business of the Company and any
successors to the Optionee by will or the laws of descent and distribution, but
this Agreement shall not otherwise be assignable by the Optionee.
11. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California and applicable federal law.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date and year first above written.
BANK PLUS CORPORATION
By /S/ RICHARD M. GREENWOOD
-------------------------------------
President and Chief Executive Officer
---------------------------------------
[Name_of_Nonemployee_Director]
3
<PAGE>
EXHIBIT 11.
BANK PLUS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Dollars in thousands, except per common share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss)......................................... $ 12,653 $ (14,089) $ (68,979)
Less:
Preferred stock dividends................................ -- 1,553 --
----------- ----------- ----------
Earnings (loss) available for common stockholders...... $ 12,653 $ (15,642) $ (68,979)
=========== =========== ==========
Weighted average common shares outstanding.................. 18,794,887 18,242,887 7,807,201
=========== =========== ==========
Basic earnings (loss) per common share...................... $ 0.67 $ (0.86) $ (8.84)
=========== =========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) available for common stockholders........... $ 12,653 $ (15,642) $ (68,979)
=========== =========== ==========
Weighted average common shares outstanding.................. 18,794,887 18,242,887 7,807,201
Plus incremental shares from assumed conversions:
Stock options............................................ 348,152 195,567 8,359
Deferred stock grants.................................... 194 -- --
----------- ----------- ----------
Dilutive potential common shares....................... 348,346 195,567 8,359
----------- ----------- ----------
Adjusted weighted average common shares outstanding......... 19,143,233 18,438,454 7,815,560
=========== =========== ==========
Diluted earnings (loss) per common share.................... $ 0.66 $ (0.85) $ (8.83)
=========== =========== ==========
</TABLE>
<PAGE>
EXHIBIT 12.
BANK PLUS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS (LOSS) TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations
before income taxes.......................... $ 8,788 $ (10,525) $ (69,975) $ (144,968) $ (101,680)
Add:
Interest on deposits............................ 126,717 120,265 128,242 108,310 131,721
Interest on borrowings.......................... 47,292 32,358 46,594 47,518 56,773
One-third of rents.............................. 870 990 930 870 900
-------- --------- --------- ---------- ----------
Earnings as adjusted (A).................... $183,667 $ 143,088 $ 106,791 $ 11,730 $ 87,714
======== ========= ========= ========== ==========
Earnings as adjusted............................... $183,667 $ 143,088 $ 106,791 $ 11,730 $ 87,714
Less:
Interest on deposits............................ 126,717 120,265 128,242 108,310 131,721
-------- --------- --------- ---------- ----------
Adjusted earnings (loss) excluding
interest on deposits (B)................. $ 56,950 $ 22,823 $ (21,451) $(96,580) $(44,007)
======== ========= ========= ========== ==========
Fixed Charges:
Interest on deposits............................ $126,717 $ 120,265 $ 128,242 $ 108,310 $ 131,721
Interest on borrowings.......................... 47,292 32,358 46,594 47,518 56,773
One-third of rents.............................. 870 990 930 870 900
Dividend on preferred stock of
subsidiary................................... 7,302 10,707 -- -- --
-------- --------- --------- ---------- ----------
Fixed charges (C)............................ $182,181 $ 159,823 $ 175,766 $ 156,698 $ 189,394
======== ========= ========= ========== ==========
Fixed charges excluding interest
on deposits (D)............................ $ 55,464 $ 39,558 $ 47,524 $ 48,388 $ 57,673
======== ========= ========= ========== ==========
Ratio of earnings to fixed charges (A) / (C)....... 1.01 0.90 0.61 0.07 0.46
======== ========= ========= ========== ==========
Ratio of earnings (loss) to fixed charges
excluding interest on deposits (B) / (D)..... 1.03 0.58 (0.45) (2.00) (0.76)
======== ========= ========= ========== ==========
Amount of coverage deficiency...................... $ N/A $ (21,232) $ (68,975) $ (144,968) $ (101,680)
======== ========= ========= ========== ==========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF BANK PLUS CORPORATION
Bank Plus Credit Services Corporation
Fidelity Federal Bank, A Federal Savings Bank
Gateway Investment Services, Inc.
SUBSIDIARIES OF FIDELITY FEDERAL BANK, F.S.B.
Chino Equities, Inc.
Citadel Service Corporation
Gateway Mortgage Corporation
Hancock Service Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> OCT-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 0 155,144
<INT-BEARING-DEPOSITS> 0 11,395
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 41,050
<INVESTMENTS-HELD-FOR-SALE> 0 953,441
<INVESTMENTS-CARRYING> 0 63,687
<INVESTMENTS-MARKET> 0 63,706
<LOANS> 0 2,874,115
<ALLOWANCE> 0 50,538
<TOTAL-ASSETS> 0 4,167,806
<DEPOSITS> 0 2,891,801
<SHORT-TERM> 0 374,960
<LIABILITIES-OTHER> 0 32,950
<LONG-TERM> 0 686,478
0 0
0 0
<COMMON> 0 194
<OTHER-SE> 0 181,617<F1>
<TOTAL-LIABILITIES-AND-EQUITY> 0 4,167,806
<INTEREST-LOAN> 53,234 205,275
<INTEREST-INVEST> 18,086 46,257
<INTEREST-OTHER> 994 3,475
<INTEREST-TOTAL> 72,314 255,007
<INTEREST-DEPOSIT> 34,839 126,717
<INTEREST-EXPENSE> 52,432 174,009
<INTEREST-INCOME-NET> 19,882 80,998
<LOAN-LOSSES> 251 13,004
<SECURITIES-GAINS> 92 2,670
<EXPENSE-OTHER> 18,499<F2> 73,804<F2>
<INCOME-PRETAX> 187 8,788
<INCOME-PRE-EXTRAORDINARY> 187 8,788
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,780 12,653
<EPS-PRIMARY> 0.08 0.67
<EPS-DILUTED> 0.08 0.66
<YIELD-ACTUAL> 1.99 2.27
<LOANS-NON> 13,074 13,074
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 43,993 43,993
<LOANS-PROBLEM> 104,685 104,685
<ALLOWANCE-OPEN> 58,408 57,508
<CHARGE-OFFS> 10,502 41,190
<RECOVERIES> 2,381 8,446
<ALLOWANCE-CLOSE> 50,538 50,538
<ALLOWANCE-DOMESTIC> 50,538 50,538
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 32,426 32,426
<FN>
<F1>Includes $272 minority interest: preferred stock of consolidated subsidiary.
<F2>Includes G & A, provision for estimated real estate losses and direct costs of
real estate, net, plus minority interest in earnings of subsidiary (dividends
on subsidiary preferred stock).
</FN>
</TABLE>
