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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to_______________
Commission file number 0-28292
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BANK PLUS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4571410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4565 Colorado Boulevard 90039
Los Angeles, California (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (818) 241-6215
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 6, 1998, Registrant had outstanding 19,390,180 shares of Common
Stock, par value $.01 per share.
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BANK PLUS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Financial Condition as of June 30, 1998 and 1
December 31, 1997.....................................................................
Consolidated Statements of Operations for the quarters and six months ended June 30, 2
1998 and 1997.........................................................................
Consolidated Statements of Comprehensive Income for the quarters and six months ended 3
June 30, 1998 and 1997................................................................
Consolidated Statements of Cash Flows for the quarters and six months ended June 30, 4
1998 and 1997.........................................................................
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations............................................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 32
Item 2. Changes in Securities.................................................................. 33
Item 3. Defaults Upon Senior Securities........................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders.................................... 33
Item 5. Other Information...................................................................... 33
Item 6. Exhibits and Reports on Form 8-K....................................................... 33
a. Exhibits........................................................................... 33
b. Reports on Form 8-K................................................................ 36
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
Assets:
<S> <C> <C>
Cash and cash equivalents................................................................. $ 434,539 $ 165,945
Investment securities available for sale, at fair value................................... 32,867 100,837
Investment securities held to maturity at amortized cost (market value of
$3,303 and $3,208 at June 30, 1998 and December 31, 1997, respectively)................. 3,287 3,189
Mortgage-backed securities ("MBSs") held for trading, at fair value....................... 38,805 41,050
MBSs available for sale, at fair value.................................................... 739,700 852,604
Loans receivable, net of allowances of $51,888 and $50,538 at June 30, 1998 and
December 31, 1997, respectively......................................................... 2,851,675 2,823,577
Interest receivable....................................................................... 23,331 24,114
Investment in Federal Home Loan Bank ("FHLB") stock....................................... 62,250 60,498
Real estate owned, net.................................................................... 9,566 12,293
Premises and equipment, net............................................................... 36,405 32,707
Other assets.............................................................................. 53,812 50,992
---------- ----------
$4,286,237 $4,167,806
========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits................................................................................. $3,055,171 $2,891,801
FHLB advances............................................................................ 960,000 1,009,960
Senior notes............................................................................. 51,478 51,478
Other liabilities........................................................................ 34,120 32,950
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4,100,769 3,986,189
---------- ----------
Minority Interest: Preferred stock issued by consolidated subsidiary..................... 272 272
Stockholders' equity:
Common Stock:
Common stock, par value $.01 per share; 78,500,000 shares
authorized; 19,386,715 and 19,367,215 shares outstanding
at June 30, 1998 and December 31, 1997, respectively.................................... 194 194
Paid-in capital.......................................................................... 274,641 274,432
Accumulated other comprehensive loss..................................................... (3,190) (4,467)
Accumulated deficit...................................................................... (86,449) (88,814)
---------- ----------
185,196 181,345
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$4,286,237 $4,167,806
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
=============================== =============================
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income:
Loans......................................................... $ 54,223 $ 49,384 $ 108,228 $ 99,224
MBSs.......................................................... 11,558 4,673 25,123 8,977
Investment securities and other............................... 9,415 4,398 16,408 8,961
---------- ---------- ---------- ----------
Total interest income........................................ 75,196 58,455 149,759 117,162
---------- ---------- ---------- ----------
Interest Expense:
Deposits...................................................... 36,624 29,572 72,095 58,712
FHLB advances................................................. 16,947 8,034 33,573 13,977
Other borrowings.............................................. 1,542 523 3,111 3,790
---------- ---------- ---------- ----------
Total interest expense....................................... 55,113 38,129 108,779 76,479
---------- ---------- ---------- ----------
Net Interest Income............................................ 20,083 20,326 40,980 40,683
Provision for estimated loan losses........................... 4,250 4,251 6,250 8,502
---------- ---------- ---------- ----------
Net Interest Income after Provision for Estimated
Loan Losses................................................... 15,833 16,075 34,730 32,181
---------- ---------- ---------- ----------
Noninterest Income (Expense):
Loan fee income............................................... 5,382 512 8,022 1,020
Gains on loan sales, net...................................... -- 21 18 28
Fee income from sale of uninsured investment products......... 1,956 1,550 3,409 3,063
Fee income on deposits and other income....................... 793 796 1,587 1,546
(Losses) gains on securities and trading activities, net...... (1,893) 995 (1,615) 2,216
Fee income on ATM cash services............................... 713 -- 1,807 --
---------- ---------- ---------- ----------
6,951 3,874 13,228 7,873
---------- ---------- ---------- ----------
Provision for estimated real estate losses.................... (9) (620) (72) (1,362)
Direct costs of real estate operations, net................... (755) (1,205) (1,526) (2,764)
---------- ---------- ---------- ----------
(764) (1,825) (1,598) (4,126)
---------- ---------- ---------- ----------
Total noninterest income...................................... 6,187 2,049 11,630 3,747
---------- ---------- ---------- ----------
Operating Expense:
Personnel and benefits........................................ 10,937 7,086 20,193 13,787
Occupancy..................................................... 3,662 2,788 7,049 5,288
FDIC insurance................................................ 658 587 1,300 1,081
Professional services......................................... 3,963 2,138 7,568 4,758
Office-related expenses....................................... 1,445 832 2,715 1,680
Other......................................................... 3,154 1,610 5,156 2,783
---------- ---------- ---------- ----------
Total operating expense...................................... 23,819 15,041 43,981 29,377
---------- ---------- ---------- ----------
(Loss) Earnings Before Income Taxes and Minority
Interest in Subsidiary........................................ (1,799) 3,083 2,379 6,551
Income tax benefit............................................ (630) (2,500) -- (4,800)
---------- ---------- ---------- ----------
(Loss) Earnings before Minority Interest in Subsidiary......... (1,169) 5,583 2,379 11,351
Minority interest in subsidiary (dividends on subsidiary
preferred stock)............................................. 7 2,333 14 3,886
---------- ---------- ---------- ----------
(Loss) Earnings Available for Common Stockholders.............. $ (1,176) $ 3,250 $ 2,365 $ 7,465
========== ========== ========== ==========
Basic (Loss) Earnings Per Common Share......................... $ (0.06) $ 0.18 $ 0.12 $ 0.41
========== ========== ========== ==========
Basic Weighted Average Common Shares Outstanding............... 19,385,946 18,248,754 19,377,681 18,247,019
========== ========== ========== ==========
Diluted (Loss) Earnings Per Common Share....................... $ (0.06) $ 0.18 $ 0.12 $ 0.40
========== ========== ========== ==========
Diluted Weighted Average Common Shares Outstanding............. 19,887,703 18,496,194 19,859,896 18,583,278
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
=============================== =============================
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(Loss) Earnings Available for Common Stockholders............. $ (1,176) $ 3,250 $ 2,365 $ 7,465
--------- -------- -------- --------
Other comprehensive earnings (loss), net of income taxes:
Unrealized gains (losses) on securities available for sale:
Investment securities available for sale.................... 48 1,563 (72) 51
MBSs available for sale..................................... (1,495) 262 406 (2,060)
Derivative financial instruments............................ 2,258 (50) 943 (95)
--------- -------- -------- --------
Other comprehensive earnings (loss).......................... 811 1,775 1,277 (2,104)
--------- -------- -------- --------
Comprehensive (Loss) Earnings................................. $ (365) $ 5,025 $ 3,642 $ 5,361
========= ======== ======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
=============================== =============================
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) earnings................................................. $ (1,176) $ 3,250 $ 2,365 $ 7,465
Adjustments to reconcile net (losses) earnings to net cash
provided by (used in) operating activities:
Provisions for estimated loan and real estate losses.............. 4,259 4,871 6,322 9,864
Losses (gains) on securities and loan sales....................... 1,893 (1,016) 1,597 (2,244)
FHLB stock dividend............................................... (902) (768) (1,777) (1,659)
Depreciation and amortization..................................... 1,762 893 3,347 1,763
Amortization of premiums and accretion of discounts
and deferred loan items, net................................... 2,726 (1,597) 4,636 (2,088)
Deferred income tax benefit....................................... (612) (2,597) (92) (5,001)
Purchases of MBSs held for trading................................. (18,967) -- (38,809) (9,979)
Principal repayments of MBSs held for trading....................... 676 195 2,603 352
Proceeds from sales of MBSs held for trading........................ 9,659 -- 38,276 13,074
Interest receivable decrease (increase)............................. 49 (121) 783 510
Other assets (increase) decrease.................................... (4,431) 120 (1,323) 31,420
Interest payable increase (decrease)................................ 2,911 (9,720) (1,186) (5,099)
Other liabilities increase.......................................... 3,659 442 3,534 1,734
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities................ 1,506 (6,048) 20,276 40,112
---------- ---------- ---------- ----------
Cash Flows from Investing Activities:
Hancock acquisition................................................. -- 52,908 -- 52,908
Maturities of investment securities available for sale.............. -- -- 10,000 --
Proceeds from sales of investment securities available for sale..... -- -- 57,805 --
Purchases of MBSs available for sale................................ (60,052) (149,399) (60,052) (215,946)
Principal repayments of MBSs available for sale..................... 96,505 10,368 148,416 15,990
Proceeds from sales of MBSs available for sale...................... -- 142,254 20,888 185,949
Principal repayments of MBSs held to maturity....................... -- 1,290 -- 2,060
Realized loss on hedging of MBSs available for sale................. (408) -- (4,112) --
Loans receivable (increase) decrease................................ (18,225) (15,117) (51,103) 19,610
Net proceeds from sales of real estate owned........................ 8,767 6,415 18,944 17,746
Premises and equipment additions, net............................... (4,044) (831) (6,087) (1,202)
---------- ---------- ---------- ----------
Net cash provided by investing activities.......................... 22,543 47,888 134,699 77,115
---------- ---------- ---------- ----------
Cash Flows from Financing Activities:
Demand deposits and passbook savings, net (decrease) increase....... (10,467) (13,945) 56,698 (7,609)
Certificate accounts, net increase (decrease)....................... 69,684 (4,940) 106,672 9,782
Proceeds from FHLB advances......................................... 425,000 435,941 605,000 485,941
Repayments of FHLB advances......................................... (424,960) (253,246) (654,960) (365,946)
Short-term borrowings decrease...................................... -- (40,000) -- (40,000)
Repayments of long-term borrowings.................................. -- (100,000) -- (100,000)
Proceeds from exercise of stock options............................. 29 38 209 38
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities................ 59,286 23,848 113,619 (17,794)
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents......................... 83,335 65,688 268,594 99,433
Cash and cash equivalents at the beginning of the period........... 351,204 103,871 165,945 70,126
---------- ---------- ---------- ----------
Cash and Cash Equivalents at End of Period........................... $ 434,539 $ 169,559 $ 434,539 $ 169,559
========== ========== ========== ==========
</TABLE>
(Continued on following page)
See notes to consolidated financial statements
4
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
=============================== =============================
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Supplemental Cash Flow Information:
Cash (paid) received during the period for:
Interest on deposits, advances and other borrowings............... $ (51,870) $ (47,674) $ (109,265) $ (80,821)
Income tax (payment) refund....................................... (344) (243) (354) (243)
Supplemental Schedule of Noncash Investing and
Financing Activities:
Additions to real estate acquired through foreclosure.............. 7,861 8,111 16,289 20,777
Loans originated to finance sale of real estate owned.............. -- 4,472 -- 6,088
Details of Hancock Acquisition:
Fair value of assets and intangible acquired....................... -- 212,693 -- 212,693
Goodwill........................................................... -- 6,589 -- 6,589
Liabilities assumed................................................ -- 207,270 -- 207,270
Common stock issued................................................ -- 12,012 -- 12,012
Cash acquired...................................................... -- 52,908 -- 52,908
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Six Months Ended June 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In the opinion of Bank Plus Corporation ("Bank Plus") and Bank Plus together
with its subsidiaries (the "Company"), the accompanying unaudited consolidated
financial statements, prepared from the Company's books and records, contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of June 30, 1998 and
December 31, 1997, and the results of operations and statements of cash flows
for the quarter and six months ended June 30, 1998 and 1997.
Bank Plus is the holding company for Fidelity Federal Bank, a Federal Savings
Bank, and its subsidiaries (the "Bank" or "Fidelity"), Gateway Investment
Services, Inc. ("Gateway") and Bank Plus Credit Services Corporation ("BPCS").
The Company's headquarters are in Los Angeles, California. The Company offers a
broad range of consumer financial services, including demand and term deposits,
uninsured investment products, 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 of which 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 1998 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
The financial information provided herein, including the information under the
heading Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" ("MD&A"), is written with the presumption that the users
of the interim financial statements have read, or have access to, the most
recent Annual Report on Form 10-K which contains the latest available audited
consolidated financial statements and notes thereto, as of December 31, 1997,
together with the MD&A as of such date.
2. REPORTING COMPREHENSIVE INCOME
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 which establishes standards for
reporting and the displaying of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-stockholder sources." It includes all changes in equity
during a period except those resulting from investments by stockholders and
distribution to stockholders.
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.
3. 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.
The Company has employed interest rate swaps, caps and floors, options on
treasury futures and forward commitments to purchase or sell securities in the
management of interest rate risk. 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
6
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BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Six Months Ended June 30, 1998
method. 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 the
hedge remains highly effective. If the criteria for hedge accounting is not met,
the fair value adjustments of the derivative instruments are reported in current
earnings.
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 adjustable rate MBSs totaled $50.0 million at June 30, 1998. Also
outstanding in relation to this managed portfolio at June 30, 1998, were $71.0
million notional amount of interest rate caps which will mature in 2003, $5.0
million notional amount interest rate swaps which will mature in 2002 and $32.3
million notional amount of call options on treasury futures with an exercise
date in 1998.
The Company has used futures on Treasury Notes to hedge the valuation
fluctuations of it's fixed rate MBSs portfolio. Based on historical performance,
futures on Treasury Notes provided an expectation of high correlation with the
MBSs. Based on the correlation analysis completed for the period ended June 30,
1998, it was determined that high correlation in the fluctuations of the fair
values of the MBSs and the hedge instruments had not occurred. As a result, the
Company recorded a loss of $4.0 million, which represented the extent to which
the futures results had not been offset by the effects of price changes on the
MBSs. The remaining losses on the hedge program which totaled approximately $5.0
million, are recorded as an adjustment to the cost basis of the securities being
hedged and are being amortized over the life of the MBSs as a yield adjustment.
Because of the ineffectiveness of this hedge program, the Company terminated the
hedge in July 1998. Management is investigating other strategies which may
provide a more effective hedge against valuation fluctuations in the MBSs
portfolio. There can be no assurance that any strategy, if implemented, would
effectively hedge valuation fluctuations.
4. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated on both a basic and diluted basis.
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 shares for the quarter and six months
ended June 30, 1998 and 1997 were 501,757, 482,215, 247,440 and 336,259,
respectively. Potentially dilutive securities relate to incremental shares from
assumed conversions of stock options and deferred stock grants.
5. LOAN FEE INCOME
The Company charges application and annual fees related to the issuance of its
credit card products. Credit card application and annual fees and direct
origination costs are deferred and amortized into income over twelve months.
6. RECENT ACCOUNTING PRONOUNCEMENTS
7
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Six Months Ended June 30, 1998
The Financial Accounting Standards Board ("FASB") issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires the Company to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 allows
derivatives to be designated as hedges only if certain criteria are met, with
the resulting gain or loss on the derivative either charged to income or
reported as a part of other comprehensive income if criteria are met. SFAS 133
is effective for all fiscal quarters beginning after June 15, 1999. At this
time, the Company is unable to determine whether the adoption of SFAS 133 will
have a material impact on its operations and financial position.
8
<PAGE>
ITEM 2. 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-Q,
including without limitation statements containing the words "believes,"
"anticipates," "intends," "expects" and similar words, 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-Q. Given these uncertainties, undue reliance should not be placed
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements included herein to reflect future events
or developments.
OVERVIEW
Bank Plus Corporation ("Bank Plus"), through its wholly-owned subsidiaries,
Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries ("Fidelity"
or the "Bank"), Gateway Investment Services, Inc., ("Gateway") and Bank Plus
Credit Services Corporation ("BPCS") (collectively, the "Company"), offers a
broad range of consumer financial services, including demand and term deposits,
loans to consumers, uninsured investment products and credit processing
services. Fidelity operates through 38 full-service branches, 37 of which are
located in southern California, principally in Los Angeles and Orange counties,
and one of which is located in Bloomington, Minnesota. In 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.
RECENT DEVELOPMENTS
The Company has previously disclosed that it was contemplating a
significant acquisition. It is uncertain at this time when, or if, this
transaction will take place.
FINANCIAL PERFORMANCE
The Company reported a net loss of $1.2 million for the quarter ended June
30, 1998 as compared to net earnings of $3.3 million for the corresponding
period in 1997. This unfavorable change is due to a $8.8 million increase in
operating expenses and a $1.9 million decrease in income tax benefits offset by
a $4.1 million increase in noninterest income and a $2.3 million decrease in
minority interest in subsidiary results. For the six months ended June 30, 1998
net earnings decreased to $2.4 million from $7.5 million for the same period in
1997 due to a $14.6 million increase in operating expenses and a $4.8 million
decrease in income tax benefits offset by a $7.9 million increase in noninterest
income, a $2.3 million decrease in provisions for loan losses and a $3.9 million
decrease in minority interest in subsidiary results.
The increase in operating expenses is primarily due to expenses associated
with additional retail branches obtained in the Company's acquisition of Hancock
Savings Bank, FSB ("Hancock"), Year 2000 software compliance costs and increased
activity in the Company's credit card and financial planning operations. The
increase in noninterest income is due primarily to increased fee revenues from
the Company's credit card operations and automated teller machine ("ATM") cash
services and decreased real estate operations expense offset by a decrease in
investment earnings associated with hedging losses.
9
<PAGE>
CREDIT CARDS
Fidelity has implemented 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 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. Generally, there are three
types of affinity programs: credit enhancement programs, shared risk programs
and programs where the Bank undertakes all of the credit risk. In each of these
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 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. The Bank offers cards with limits
ranging from $300 to $5,000 to the full credit spectrum of borrowers.
Under the credit enhancement programs, the affinity partners receive
substantially all of the revenues and 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
June 30, 1998, outstanding credit cards and balances associated with the credit
enhancement programs were approximately 60,000 and $108.5 million, respectively.
Credit enhancements provided by the affinity partners in form of cash reserves
totaled $8.4 million or 7.74% of the related outstanding credit card balances at
June 30, 1998.
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. At June 30,
1998, outstanding credit cards and balances associated with the shared risk
programs were approximately 180,000 and $85.8 million, respectively. Loan loss
allowances provided by the Bank related to the shared risk program totaled $6.6
million or 7.69% of the outstanding credit card balance at June 30, 1998.
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 4% 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%.
The costs of an increase in delinquencies and credit losses could have a
material adverse effect on the financial results of the credit card programs and
the Company's overall financial performance. Delinquencies and credit losses are
influenced by a number of external and internal factors. A national or regional
economic slowdown or recession increases the risk of defaults and credit losses.
Costs associated with an increase in the number of customers seeking protection
under the bankruptcy laws, resulting in accounts being charged-off as
uncollectible, and the effects of fraud by third parties or customers are
additional factors. "Seasoning" of accounts (increases in the average age of a
credit card issuer's portfolio) affects the Company's level of delinquencies and
losses which may require higher loan loss provisions (and reserves). A decrease
in account originations or balances and the attrition of such accounts or
balances could significantly impact the seasoning of the overall portfolio,
resulting in increases in the overall percentage of delinquencies and losses.
The Company markets many of its credit card products to consumers with
limited or lower grade credit histories. As a result, in some cases, in addition
to the higher delinquency and credit loss rates associated with this
10
<PAGE>
market, there is little historical experience with respect to credit risk and
performance of these underserved markets. Accordingly, although the Company
believes that it can effectively price these products in relation to their
relative risk, there can be no assurance that the Company's risk-based pricing
system will offset the negative impact of the expected higher delinquency and
loss rates.
In the event significant delinquencies and credit losses are incurred
beyond managements current estimates, no assurances can be given that the
respective affinity partners will have the ability to provide the financial
support contractually required per the affinity agreements.
Fidelity is evaluating other affinity credit card arrangements with several
potential strategic allies. These arrangements, if consummated, would involve
the issuance of substantial numbers of credit cards, and in most instances 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.
Through June 30, 1998, the Bank outsourced card processing and customer
service to third party providers. However, the Company has established a credit-
processing center to handle card-related services internally. This center began
handling collections and fraud investigation for some of the card programs in
the second quarter of 1998, and, after July 1, 1998, began providing customer
service. 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 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 credit-processing center operates as a subsidiary of Bank Plus under
the name of Bank Plus Credit Services Corporation (BPCS). In April 1998 Fidelity
made a cash dividend of $3.0 million to Bank Plus which was used by Bank Plus to
support the start-up cost of BPCS. In an effort to support BPCS near-term
liquidity needs, the Company has decided to contribute BPCS to the Bank to be
run as an operating subsidiary. While management anticipates regulatory approval
of this contribution, no assurances can be given that such approval will be
obtained.
AMERICASH
In June 1997, Fidelity entered into an arrangement with Americash L.L.C.
("Americash") in which Fidelity provides cash services for Americash's newly
established network of cash-dispensing ATMs. 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 first six months of 1998 was $45.4 million, and the program generated
fees, which are reported as noninterest income, of $1.8 million during the same
period.
During 1997 and the first six months of 1998, the average transaction
volume for the Americash ATM network was insufficient to generate transaction
fees above the minimum threshold provided for in the agreement between Americash
and Fidelity. Therefore, Fidelity's fees during those periods 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, accounts receivable from Americash
of $2.3 million and $1.0 million were outstanding at June 30, 1998 and December
31, 1997, respectively. This fee-deferral arrangement is temporary, and Fidelity
and Americash have agreed that the outstanding receivable balance will not be
permitted to exceed $2.5 million. Management anticipates that Americash will
secure other sources of financing for its future capital requirements. Until
such alternative financing is obtained, management believes the Bank has
adequate remedies under its agreements with Americash regarding collection of
the receivable.
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans,
mortgage-backed securities ("MBSs") and investment securities ("interest-earning
assets") and interest paid on deposits and borrowings ("interest-bearing
liabilities"). For the quarter ended June 30, 1998, net interest income totaled
$20.1 million, decreasing by $0.2 million from $20.3 million for the comparable
period in 1997. Although average interest-earning assets increased by $1.1
billion in the quarter ended June 30, 1998 as compared to the same period last
year, the favorable income from the increase in volume was offset by a decline
in the interest margin of 0.59% due to lower yields on MBSs and investment
securities and an increase in funding costs, as the growth in earning assets was
primarily funded with higher cost certificate of deposits and borrowings. For
the six months ended June 30, 1998, net interest income totaled $41.0 million,
increasing by $0.3 million from $40.7 million for the comparable period in 1997.
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.
12
<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>
QUARTER ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ------------------------------
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.......................................... $2,918,402 $54,223 7.43% $2,716,010 $49,384 7.27%
MBS............................................ 758,732 11,558 6.09 254,851 4,673 7.33
Investment securities.......................... 560,689 8,513 6.09 222,986 3,630 6.62
Investment in Federal Home Loan
Bank ("FHLB") stock.......................... 61,964 902 5.84 53,602 768 5.83
---------- ------- ---------- -------
Total interest-earning assets................ 4,299,787 75,196 7.00 3,247,449 58,455 7.21
------- -------
Noninterest-earning assets...................... 149,383 110,228
---------- ----------
Total assets................................. $4,449,170 $3,357,677
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits............................... $ 347,472 1,029 1.19 $ 294,489 817 1.13
Savings deposits.............................. 122,811 920 3.00 115,318 903 3.18
Time deposits................................. 2,529,510 34,675 5.44 2,085,341 27,852 5.42
---------- ------- ---------- -------
Total deposits............................... 2,999,793 36,624 4.90 2,495,148 29,572 4.81
---------- -------
Borrowings..................................... 1,225,025 18,489 6.05 609,357 8,557 5.70
---------- ------- ---------- -------
Total interest-bearing liabilities........... 4,224,818 55,113 5.23 3,104,505 38,129 4.98
---------- ------- ---------- -------
Noninterest-bearing liabilities................. 40,771 36,976
Preferred stock issued by consolidated
subsidiary...................................... 272 51,750
Stockholders' equity............................ 183,309 164,446
---------- ----------
Total liabilities and equity.................... $4,449,170 $3,357,677
========== ==========
Net interest income; interest rate spread....... $20,083(1) 1.77% $20,326 2.23%
======= ==== ======= ====
Net yield on interest-earning assets ("net
interest margin")............................. 1.86%(1) 2.45%
==== ====
Average nonaccruing loan balance
included in average loan balance.............. $ 23,022 $ 45,344
========== ==========
Net delinquent interest reserve removed
from interest income......................... $ 626 $ 994
======= =======
Reduction in net yield on interest-earning
assets due to delinquent interest............ 0.06% 0.12%
==== ====
</TABLE>
- -------------------
(1) For the quarter ended June 30, 1998, the impact of the Americash ATM cash
services program on net interest income and margin would be increases of
$0.7 million and 5 basis points, respectively, if the revenue from the
Americash ATM cash services program had been included in net interest
income.
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997
---------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVEREAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans......................................... $2,900,130 $108,228 7.46% $2,732,790 $ 99,224 7.26%
MBS........................................... 803,476 25,123 6.25 246,462 8,977 7.28
Investment securities......................... 484,044 14,631 6.10 225,407 7,302 6.53
Investment in FHLB stock..................... 61,393 1,777 5.84 53,266 1,659 6.28
---------- -------- ---------- --------
Total interest-earning assets............... 4,249,043 149,759 7.05 3,257,925 117,162 7.19
-------- -------
Noninterest-earning assets..................... 159,802 68,490
---------- ----------
Total assets................................ $4,408,845 $3,326,415
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits............................. $ 343,990 2,016 1.18 $ 293,637 1,605 1.10
Savings deposits............................ 123,343 1,836 3.00 117,238 1,831 3.15
Time deposits............................... 2,501,194 68,243 5.44 2,086,722 55,276 5.34
---------- -------- ---------- --------
Total deposits............................ 2,968,527 72,095 4.90 2,497,597 58,712 4.74
---------- --------
Borrowings.................................... 1,216,219 36,684 6.08 573,032 17,767 6.25
---------- -------- ---------- --------
Total interest-bearing liabilities.......... 4,184,746 108,779 5.24 3,070,629 76,479 5.02
---------- -------- ---------- --------
Noninterest-bearing liabilities................ 41,026 40,754
Preferred stock issued by consolidated
subsidiary..................................... 272 51,750
Stockholders' equity........................... 182,801 163,282
---------- ----------
Total liabilities and equity................... $4,408,845 $3,326,415
========== ==========
Net interest income; interest rate spread...... $ 40,980(1) 1.81% $ 40,683 2.17%
======== ==== ======== ====
Net yield on interest-earning assets ("net
interest margin")............................ 1.89%(1) 2.46%
==== ====
Average nonaccruing loan balance
included in average loan balance............. $ 22,097 $ 53,526
=========== ==========
Net delinquent interest reserve removed
from interest income......................... $ 1,345 $ 2,575
======== ========
Reduction in net yield on interest-earning
assets due to delinquent interest............ 0.06% 0.16%
==== ====
</TABLE>
- ------------------
(1) For the six months ended June 30, 1998, the impact of the Americash ATM
cash services program on net interest income and margin would be increases
of $1.8 million and 6 basis points, respectively, if the revenue from the
Americash ATM cash services program had been included in net interest
income.
14
<PAGE>
The following tables present the dollar amount of changes in interest income
and expense for each major component of interest-earning assets and interest-
bearing liabilities and the amount of change attributable to changes in average
balances and average rates for the periods indicated. Because of numerous
changes in both balances and rates, it is difficult to allocate precisely the
effects thereof. For purposes of these tables, the change due to volume is
initially calculated as the change in average balance multiplied by the average
rate during the prior period and the change due to rate is calculated as the
change in average rate multiplied by the average volume during the current
period. Any change that remains unallocated after such calculations is allocated
proportionately to changes in volume and changes in rates.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO JUNE 30, 1997 COMPARED TO JUNE 30, 1997
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
====================================== =========================================
VOLUME RATE NET VOLUME RATE NET
--------- ---- ------- --------- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans.................................... $ 3,736 $ 1,103 $ 4,839 $ 6,094 $ 2,910 $ 9,004
MBSs..................................... 9,236 (2,351) 6,885 20,282 (4,136) 16,146
Investment securities.................... 5,595 (712) 4,883 8,378 (1,049) 7,329
Investment in FHLB stock................. 130 4 134 254 (136) 118
--------- -------- --------- --------- -------- --------
Total interest income............... 18,697 (1,956) 16,741 35,008 (2,411) 32,597
--------- -------- --------- --------- -------- --------
Interest expense:
Deposits:
Demand deposits........................ (164) (48) (212) (275) (136) (411)
Savings deposits....................... (65) 48 (17) (96) 91 (5)
Time deposits.......................... (6,353) (470) (6,823) (11,003) (1,964) (12,967)
--------- -------- --------- --------- -------- --------
Total deposits...................... (6,582) (470) (7,052) (11,374) (2,009) (13,383)
Borrowings............................... (8,804) (1,128) (9,932) (19,251) 334 (18,917)
--------- -------- --------- --------- -------- --------
Total interest expense................. (15,386) (1,598) (16,984) (30,625) (1,675) (32,300)
--------- -------- --------- --------- -------- --------
Increase (decrease) in net interest
income................................... $ 3,311 $ (3,554) $ (243) $ 4,383 $($4,086) $ 297
========= ======== ========= ========= ======== ========
</TABLE>
The $0.2 million decrease in net interest income between the second quarter
1998 and the second quarter 1997 was primarily due to decreased rates on
interest-earning assets and increases in rates of interest-bearing liabilities.
The decrease in rates on earning assets were primarily due to higher prepayments
on the MBSs portfolio causing higher amortization of purchase premium and an
increase in lower yielding short-term investments securities. The $0.3 million
increase in net interest income between the six months ended June 30, 1998 and
the comparable period in 1997 was primarily due to an increase in the average
level of interest-earning assets. This was partially offset by decreased rates
on interest-earning assets and increases in rates and the average level of
interest-bearing liabilities. The net interest income for the quarter and the
six months ended June 30, 1998 decreased as a result of the exchange, in the
third quarter of 1997, of preferred stock of the Bank for 12% Senior Notes
("Senior Notes") of the Company. The increased interest expense related to
Senior Notes, for the quarter and six months ended June 30, 1998, of $1.5
million and $3.1 million, respectively, was offset by reductions in minority
interest in subsidiary of $2.3 million and $3.9 million for the quarter and six
months ended June 30, 1998, respectively.
The Company's net interest income, interest rate margin and operating
results have been negatively affected by the level of mortgage loans on
nonaccrual status. Gross balances of NPLs averaged $22.1 million and $53.5
million during the six months ended June 30, 1998 and 1997, respectively. As a
result, the Company's net interest rate margin was decreased by 0.06% and 0.16%
in those periods, 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 investment
securities
15
<PAGE>
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.
Noninterest income increased by $4.1 million from $2.0 million in the
quarter ended June 30, 1997 to $6.2 million in the quarter ended June 30, 1998.
The major components of this increase are (a) loan fee income increased by $4.9
million due to an increase in the volume of credit cards issued in the period
with no comparable activity in the prior period, (b) fee income on ATM cash
services of $0.7 million in the form of fees accrued in 1998, with no comparable
amounts in 1997 and (c) decreased real estate operations of $1.1 million
primarily due to improved execution on sales and a lower volume of foreclosed
properties. These favorable variances were partially offset by a decrease in
gains on securities activities of $2.9 million resulting from the $4.0 million
loss on the hedging program of fixed rate MBSs.
Noninterest income increased by $7.9 million from $3.7 million in the six
months ended June 30, 1997 to $11.6 million in the six months ended June 30,
1998. The major components of this increase are (a) loan fee income increased by
$7.0 million due to an increase in the volume of credit cards issued in the
period with no comparable activity in the prior period, (b) fee income on ATM
cash services of $1.8 million in the form of fees accrued in 1998, with no
comparable amounts in 1997 and (c) decreased real estate operations of $2.5
million primarily due to improved execution on sales and a lower volume of
foreclosed properties. These favorable variances were partially offset by the
$4.0 million loss on the hedging program of fixed rate MBSs with no comparable
amounts in 1997.
OPERATING EXPENSES
Operating expenses increased by $8.8 million to $23.8 million for the
quarter ended June 30, 1998 compared to $15.0 million for the quarter ended June
30, 1997. The change was primarily due to (a) a $3.9 million increase in
personnel and benefits expense due to an increase of 219 or 46% in full-time
equivalent employees ("FTEs") primarily due to the addition of Hancock
operations, staffing of BPCS, the California Public Employee's Retirement System
("CalPERS") financial educational and planning program and increased personnel
working on the Year 2000 compliance project; (b) an increase of $0.9 million in
occupancy costs primarily due to Hancock and Coast Federal Bank, FSB ("Coast")
branch acquisitions completed after June, 1997; (c) an increase of $1.8 million
of professional services primarily resulting from costs associated with the Year
2000 compliance project, (d) an increase of $0.6 million in office related
expenses primarily due to the Hancock and Coast acquisitions and the start-up of
BPCS, and (e) an increase in other expenses of $1.5 million primarily related to
the servicing of the credit card portfolio by a third party.
Operating expenses increased by $14.6 million to $44.0 million for the six
months ended June 30, 1998 compared to $29.4 million for the six months ended
June 30, 1997. The change was primarily due to (a) a $6.4 million increase in
personnel and benefit expense due to an increase of 176 or 37% in FTEs primarily
due to the inclusion of Hancock operations, staffing of BPCS, the CalPERS
program and increased personnel working on the Year 2000 compliance project; (b)
an increase of $1.8 million in occupancy costs primarily due to Hancock and
Coast branch acquisitions completed after June, 1997; (c) an increase of $2.8
million of professional services primarily resulting from costs associated with
the Year 2000 compliance project, (d) an increase of $1.0 million in office
related expenses primarily due to the Hancock and Coast acquisitions and the
start-up of BPCS, and (e) an increase in other expenses of $2.4 million
primarily related to the servicing of the credit card portfolio by a third
party.
While the Company intends to continue to control operating expenses, the
level of expenses are expected to increase related to the continued
implementation of BPCS and the Year 2000 compliance project. The Company also
intends to expend resources as it evaluates and pursues earning asset
acquisition opportunities.
Increased operating expenses resulted in an increase in the annualized
operating expense ratio to 2.00% for the six months ended June 30, 1998 from
1.77% for the same period in 1997, based on the total average asset size of the
Company (from $3.3 billion for the six months ended June 30, 1997 to $4.4
billion for the six months ended June 30, 1998).
16
<PAGE>
Due to the sensitivity of the operating expense ratio to changes in the
size of the balance sheet, management also looks at trends in the efficiency
ratio to assess the changing relationship between operating expenses and income.
The efficiency ratio measures the amount of cost expended by the Company to
generate a given level of revenues in the normal course of business. It is
computed by dividing total operating expense by net interest income and
noninterest income, excluding infrequent items. A decrease in the efficiency
ratio is favorable in that it indicates that less expenses were incurred to
generate a given level of revenue.
The efficiency ratio increased to 82.34% for the second quarter 1998 from
64.82% for the second quarter 1997. The efficiency ratio also increased between
the six months ended June 30, 1998 and 1997 from 63.39% to 78.79%, respectively.
These increases were primarily due to the increases in operating expense
relating to the start up of BPCS and the Year 2000 project, activities for which
no revenues were generated.
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. The Federal Financial Institutions Examinations Council
(the "FFIEC") has issued guidelines that clarify federal regulatory requirements
with respect to the Year 2000. Recently published guidelines that require
additional date testing of systems, among other items, will require the Company
to perform additional work and to incur additional Year 2000 related expense
beyond those originally contemplated. Given information currently known about
the Company's systems and servicers and management's interpretation of the FFIEC
guidelines released to date, the current expense estimate for Year 2000
corrective activities is $5.5 million to $6.0 million, of which a significant
portion will be related to increased staffing of technology and support
personnel to implement the required modifications, upgrades, and testing.
While the Company has given Year 2000 a high priority and believes it will
achieve Year 2000 compliance, it is to a large 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 the estimated cost.
INCOME TAXES
The Company's combined federal and state statutory tax rate is
approximately 42.0% of earnings before income taxes. The effective tax benefit
rate of 35.0% on losses before income taxes for the quarter ended June 30, 1998
reflects an adjustment to the Company's previously accrued liability for income
taxes. No income tax provision was reflected on earnings before income taxes for
the six months ended June 30, 1998, due to the utilization of federal and state
net operating loss carryforwards and the partial recognition of the deferred tax
asset. The effective tax benefit rates of 81.1% and 73.3% on earnings before
income taxes for the quarter and six months ended June 30, 1997, respectively,
reflect the federal and state tax benefit attributable to the utilization of net
operating loss carryforwards and the partial recognition of the deferred tax
asset.
As of December 31, 1996, a valuation allowance was provided for the total
net deferred tax asset. As of June 30, 1998, the Company reflected a net
deferred tax asset of $8.7 million. Under Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes, the reduction in
valuation allowance is dependent upon a "more likely than not" expectation of
realization of the deferred tax asset, based upon the weight of available
evidence. The analysis of available evidence is performed each quarter utilizing
the "more likely than not" criteria required by SFAS 109 to determine the
amount, if any, of the deferred tax asset to be realized. Accordingly, there can
be no assurance that the Company will recognize additional portions of its
deferred tax asset in future periods. Moreover, the criteria of SFAS No. 109
could require the partial or complete recapture of the $8.7 million deferred tax
benefit into expense in future periods.
17
<PAGE>
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 Holding Corporation. Fidelity has recorded $1.1 million of tax
benefit in 1996 with respect to these amended tax returns. IRC Section 172(f) is
an area of the tax law without significant legal precedent. The Internal Revenue
Service, as part of their current examination, has disallowed the Section 172(f)
claim in its entirety. Although management intends to appeal this disallowance,
no assurances can be given that this claim will be allowed even in part.
However, management believes that the portion of the claim attributable to the
$1.1 million in benefit previously recorded will be allowed on a "more likely
than not" basis. As a result, management has determined that the continued
recording of this receivable without a valuation allowance is warranted.
FINANCIAL CONDITION
ASSET QUALITY
General
The Company's mortgage loan portfolio is primarily secured by assets
located in southern California and is comprised principally of single family and
multifamily (2 units or more) residential loans. At June 30, 1998, 23% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 12% and 58% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively. At June 30, 1997,
20% of Fidelity's real estate loan portfolio (including loans held for sale)
consisted of California single family residences while another 11% and 61%
consisted of California multifamily dwellings of 2 to 4 units and 5 or more
units, respectively.
The performance of the Company's loans secured by multifamily and
commercial properties has been adversely affected by southern California
economic conditions. These portfolios are particularly susceptible to the
potential for further declines in the southern California economy, such as
increasing vacancy rates, declining rents, increasing interest rates, declining
debt coverage ratios, and declining market values for multifamily and commercial
properties. In addition, the possibility that investors may abandon properties
or seek bankruptcy protection with respect to properties experiencing negative
cash flow, particularly where such properties are not cross-collateralized by
other performing assets, can also adversely affect the multifamily loan
portfolio. There can be no assurances that current improved economic indicators
will have a material impact on the Bank's portfolio in the near future as many
factors key to recovery may be impacted adversely by the Federal Reserve Board's
interest rate policy as well as other factors.
The Bank's internal asset review process reviews the quality and
recoverability of each of those assets which exhibit credit risk to the Bank
based on delinquency and other criteria in order to establish adequate general
valuation allowances ("GVA") and specific valuation allowance ("SVA").
Accelerated Asset Resolution Plan
An important component of the Company's business strategy is the reduction
of risk in the Bank's loan and real estate owned ("REO") portfolios. 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.
18
<PAGE>
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 June 30, 1998, (i) $51.4 million in gross book balances of AARP
Pool loans had been resolved through either a negotiated sale or discounted
payoff, (ii) $8.9 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) $130.5 million in
gross book balances of REO were sold ($55.5 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 June 30, 1998, the remaining AARP Pool consisted of 30 assets with a
book balance, net of SVA and writedowns, of $9.4 million, comprised of accruing
and nonaccruing multifamily real estate loans totaling approximately $4.8
million and REO properties totaling approximately $4.6 million, which are
reported as real estate owned on the statement of financial condition. Through
June 30, 1998, of the $50.8 million of reserves established in connection with
the Plan, including the $5.8 million established by Hancock, $33.9 million had
been charged-off, $7.3 million had been allocated to SVAs or REO writedowns in
connection with the Bank's estimate of recovery for AARP Pool assets and $8.0
million has been returned to the regular GVA along with the associated loans
that were returned to the Bank's mortgage portfolio based on management's
determination that such assets no longer met the risk profile for inclusion in
the AARP Pool.
As of June 30, 1998, the AARP Pool was terminated based on the minimal
remaining assets in the AARP Pool and the determination that the resolution of
these assets would be conducted in a similar manner as the Bank's regular
portfolio. The $1.6 million of unallocated GVA remaining from the original $50.8
million reserves established for the AARP Pool, including the $5.8 million
established by Hancock, is included in the Bank's GVA.
Classified Assets
Total classified assets decreased $27.8 million or 18.1% from December 31,
1997, to $125.7 million at June 30, 1998. This decrease was due primarily to a
decrease in other classified assets of $21.7 million related to the sale of the
LIBOR Asset Trust securities in January 1998. The decrease in classified assets
was also affected by lower levels of performing classified loans and the large
volume of REO sales during the first six months of 1998. The ratio of
nonperforming assets ("NPAs") to total assets increased from 0.61% at December
31, 1997, to 0.70% at June 30, 1998. This increase is primarily due to an
increased level of NPLs at June 30, 1998, compared to December 31, 1997.
19
<PAGE>
The following table presents net classified assets by property type at the
dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
-------- --------- ------------ ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Performing classified loans:
Single family................................ $ 2,863 $ 2,330 $ 3,551 $ 3,521 $ 3,331
Multifamily:
2 to 4 units................................. 3,939 3,769 4,241 4,455 4,856
5 to 36 units................................ 47,722 53,649 63,777 58,694 62,509
37 units and over............................ 29,960 21,661 22,704 24,551 20,761
-------- -------- --------- -------- --------
Total multifamily properties............... 81,621 79,079 90,722 87,700 88,126
Commercial and other......................... 8,296 9,221 10,412 11,373 9,788
Credit card loans............................ 654 -- -- -- --
Other consumer loans......................... 307 -- -- -- --
-------- -------- --------- -------- --------
Total performing classified loans.......... 93,741 90,630 104,685 102,594 101,245
-------- -------- --------- -------- --------
Nonperforming classified loans:
Single family................................ 6,288 5,306 4,222 4,501 5,980
Multifamily:
2 to 4 units................................. 3,264 2,023 948 1,721 2,677
5 to 36 units................................ 8,823 3,970 4,752 10,006 15,745
37 units and over............................ 525 3,545 2,090 5,139 4,929
-------- -------- -------- -------- --------
Total multifamily properties............. 12,612 9,538 7,790 16,866 23,351
Commercial and other......................... 1,451 1,576 1,062 437 3,845
-------- -------- -------- -------- --------
Total nonperforming classified loans....... 20,351 16,420 13,074 21,804 33,176
-------- -------- -------- -------- --------
Total classified loans................... 114,092 107,050 117,759 124,398 134,421
-------- -------- -------- -------- --------
REO:
Single family................................ 2,120 2,402 2,611 2,992 4,095
Multifamily
2 to 4 units................................. 1,031 1,334 1,091 1,326 2,215
5 to 36 units................................ 1,055 3,550 5,318 10,911 12,992
37 units and over............................ 4,397 2,240 3,149 3,105 3,106
-------- -------- -------- -------- --------
Total multifamily properties............. 6,483 7,124 9,558 15,342 18,313
Commercial and other......................... 1,463 1,455 624 635 2,432
-------- -------- -------- -------- --------
Net REO before REO GVA..................... 10,066 10,981 12,793 18,969 24,840
REO GVA....................................... (500) (500) (500) (500) (1,200)
-------- -------- -------- -------- --------
Total REO.................................. 9,566 10,481 12,293 18,469 23,640
-------- -------- -------- -------- --------
Other classified assets........................ 2,056 2,065 23,450(1) 14,027(1) 1,404
-------- -------- -------- -------- --------
Total classified assets.................... $125,714 $119,596 $153,502 $156,894 $159,465
======== ======== ======== ======== ========
</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.
20
<PAGE>
Delinquent Loans
During the second quarter of 1998, total delinquent mortgage loans
decreased $1.8 million from March 31, 1998. The following table presents loan
delinquencies by number of days delinquent and by property type as of the dates
indicated. All assets are reported net of specific reserves and writedowns.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1997
--------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquencies by number of days:
30 to 59 days....................................................... 0.24% 0.42% 0.34%
60 to 89 days....................................................... 0.17 0.11 0.14
90 days and over.................................................... 0.69 0.60 0.47
------- ------- -------
Mortgage loan delinquencies to net mortgage loan portfolio............... 1.10% 1.13% 0.95%
======= ======= =======
Delinquencies by property type:
Single family:
30 to 59 days....................................................... $ 3,612 $ 3,376 $ 4,153
60 to 89 days....................................................... 1,773 954 1,354
90 days and over.................................................... 6,288 5,306 4,222
------- ------- -------
11,673 9,636 9,729
------- ------- -------
Percent to applicable mortgage loan portfolio..................... 1.86% 1.49% 1.53%
Multifamily (2 to 4 units):
30 to 59 days....................................................... 1,140 693 1,111
60 to 89 days....................................................... 1,060 529 257
90 days and over.................................................... 3,264 2,023 948
------- ------- -------
5,464 3,245 2,316
------- ------- -------
Percent to applicable mortgage loan portfolio..................... 1.75% 1.02% 0.72%
Multifamily (5 to 36 units):
30 to 59 days....................................................... 1,061 4,452 3,638
60 to 89 days....................................................... 1,814 1,596 2,329
90 days and over.................................................... 6,810 3,970 4,753
------- ------- -------
9,685 10,018 10,720
------- ------- -------
Percent to applicable mortgage loan portfolio..................... 0.76% 0.77% 0.80%
Multifamily (37 units and over):
30 to 59 days....................................................... -- 2,509 531
60 to 89 days....................................................... -- -- --
90 days and over.................................................... 525 3,545 2,090
------- ------- -------
525 6,054 2,621
------- ------- -------
Percent to applicable mortgage loan portfolio..................... 0.19% 2.07% 0.86%
Commercial and Industrial:
30 to 59 days....................................................... 588 634 --
60 to 89 days....................................................... -- -- 154
90 days and over.................................................... 1,451 1,576 1,062
------- ------- -------
2,039 2,210 1,216
------- ------- -------
Percent to applicable mortgage loan portfolio..................... 1.05% 1.11% 0.59%
Total mortgage loan delinquencies, net................................... $29,386 $31,163 $26,602
======= ======= =======
Mortgage loan delinquencies to net mortgage loan portfolio............... 1.10% 1.13% 0.95%
======= ======= =======
</TABLE>
21
<PAGE>
The following table presents delinquent credit card loans at the dates
indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1997
-------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquencies by number of days:
30 to 59 days....................................................... $ 9,187 $ 4,097 $ 2,472
60 to 89 days....................................................... 5,419 2,814 1,432
90 to 119 days...................................................... 3,691 2,190 1,509
120 to 149 days...................................................... 2,278 1,553 --
150 days and over.................................................... 1,206 1,003 --
------- ------- -------
Total delinquent credit card loans (1)................................... $21,781 $11,657 $ 5,413
======= ======= =======
Credit card loan delinquencies to gross credit
card loan portfolio................................................... 11.21% 10.34% 10.65%
======= ======= =======
</TABLE>
- --------------------
(1) Included in the above delinquent credit card loan balances are $14.4
million, $10.7 million and $5.4 million, respectively, 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 and, accordingly, loans in the 90 days and over category
are not reported as NPLs.
The following table presents net delinquent loans, including credit card
loans, at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
--------- --------- ------------ ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of days delinquent:
30 to 59 days................................. $15,588 $15,761 $11,905 $12,618 $11,638
60 to 89 days................................. 10,066 5,893 5,527 3,661 7,370
90 days and over.............................. 25,513 21,166 14,583 21,914 28,449
------- ------- ------- ------- -------
Total delinquencies....................... $51,167(1) $42,820(1) $32,015(1) $38,193(1) $47,457
======= ======= ======= ======= =======
</TABLE>
- ----------------
(1) Included in the net delinquent loan balances at June 30, 1998, March 31,
1998, December 31, 1997 and September 31, 1997, are $14.4 million, $10.7
million, $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 and, accordingly, loans in the 90 days and
over category are not reported as NPLs.
22
<PAGE>
Nonperforming Assets
All assets and ratios are reported net of specific reserves and writedowns
unless otherwise stated. The following table presents asset quality details at
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
---------- ---------- ------------ ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NPAs by Type:
NPLs...................................... $ 20,351 $ 16,420 $ 13,074 $ 21,804 $ 33,176
REO, net of REO GVA....................... 9,566 10,481 12,293 18,469 23,640
-------- -------- -------- -------- --------
Total NPAs.............................. $ 29,917 $ 26,901 $ 25,367 $ 40,273 $ 56,816
======== ======== ======== ======== ========
NPAs by Composition:
Single family residences.................. $ 8,408 $ 7,708 $ 6,833 $ 7,493 $ 10,075
Multifamily 2 to 4 units.................. 4,295 3,357 2,039 3,047 4,892
Multifamily 5 units and over.............. 14,800 13,305 15,309 29,161 36,772
Commercial and other...................... 2,914 3,031 1,686 1,072 6,277
REO GVA................................... (500) (500) (500) (500) (1,200)
-------- -------- -------- -------- --------
Total NPAs.............................. 29,917 26,901 25,367 40,273 56,816
Total troubled debt restructuring
("TDR")................................. 44,990 42,195 43,993 46,447 44,828
-------- -------- -------- -------- --------
Total TDRs and NPAs..................... $ 74,907 $ 69,096 $ 69,360 $ 86,720 $101,644
======== ======== ======== ======== ========
Classified Assets:
NPAs..................................... $ 29,917 $ 26,901 $ 25,367 $ 40,273 $ 56,816
Performing classified loans.............. 94,091 90,630 104,685 102,594 101,245
Other classified assets.................. 1,706 2,065 23,450(1) 14,027(1) 1,404
-------- -------- -------- -------- --------
Total classified assets................. $125,714 $119,596 $153,502 $156,894 $159,465
======== ======== ======== ======== ========
Classified Asset Ratios:
NPLs to total assets..................... 0.47% 0.39% 0.31% 0.56% 0.94%
NPAs to total assets..................... 0.70% 0.64% 0.61% 1.03% 1.61%
TDRs to total assets..................... 1.05% 1.00% 1.06% 1.18% 1.27%
NPAs and TDRs to total assets............ 1.75% 1.64% 1.66% 2.21% 2.88%
Classified assets to total assets........ 2.93% 2.83% 3.68% 4.00% 4.51%
REO to NPAs.............................. 31.98% 38.96% 48.46% 45.86% 41.61%
NPLs to NPAs............................. 68.02% 61.04% 51.54% 54.14% 58.39%
</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.
23
<PAGE>
Real Estate Owned
Direct costs of foreclosed real estate operations totaled $0.8 million and
$1.2 million for the quarter ended June 30, 1998 and 1997, and $1.5 million and
$2.8 million for the six months ended June 30, 1998 and 1997, respectively. The
following table provides information about the change in the book value and the
number of properties owned and obtained through foreclosure for the periods
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER AT OR FOR THE SIX
ENDED JUNE 30, MONTHS ENDED JUNE 30,
--------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REO net book value............................................ $9,566 $23,640 $ 9,566 $23,640
Net (decrease) increase in REO for the period................. (915) $ -- $(2,727) $(1,023)
Number of real properties owned............................... 64 142 64 142
Increase (decrease) increase in number of properties
owned for the period....................................... (14) 7 (24) 11
Number of properties foreclosed for the period................ 27 76 66 149
Gross book value of properties foreclosed..................... $7,748 $20,665 $18,640 $41,795
Average gross book value of properties foreclosed............. $ 287 $ 272 282 $ 281
</TABLE>
24
<PAGE>
Allowance for Estimated Loan and REO Losses
The following table summarizes the Bank's reserves, writedowns and certain
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
-------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
GVA.............................................................. $29,488 $32,426 $33,490
SVA.............................................................. 15,800 18,112 26,474
------- ------- -------
Total allowance for estimated losses (1)........................ $45,288 $50,538(2) $59,964(2)
======= ======= =======
Writedowns (3)................................................... $ 76 $ 183 $ 183
======= ======= =======
Total allowance and loan writedowns to gross
mortgage loans................................................. 1.68% 1.76% 2.10%
Total mortgage loan allowance to gross mortgage loans............ 1.68% 1.75% 2.09%
Mortgage loan GVA to mortgage loans (4).......................... 1.10% 1.14% 1.19%
Mortgage loan GVA to NPLs (4).................................... 144.90% 248.02% 100.95%
NPLs to total mortgage loans (4)................................. 0.76% 0.46% 1.19%
REO:
GVA.............................................................. $ 500 $ 500 $ 1,200
SVA.............................................................. 541 623 1,399
------- ------- -------
Total allowance for estimated losses............................ $ 1,041 $ 1,123 $ 2,599
======= ======= =======
Writedowns (3)................................................... $ 3,604 $ 7,227 $10,736
======= ======= =======
Total REO allowance and REO writedowns to
gross REO...................................................... 32.68% 40.45% 36.06%
Total REO allowance to gross REO (5)............................. 9.81% 8.37% 9.91%
REO GVA to REO (4)............................................... 4.97% 3.91% 4.83%
Total Loans and REO (excluding credit cards):
GVA.............................................................. $29,988 $32,926 $34,690
SVA.............................................................. 16,341 18,735 27,873
------- ------- -------
Total allowance for estimated losses............................ $46,329 $51,661 $62,563
======= ======= =======
Writedowns (3)................................................... $ 3,680 $ 7,410 $10,919
======= ======= =======
Total allowance and writedowns to gross loans and
REO (6)........................................................ 1.83% 2.03% 2.53%
Total allowance to gross loans and REO (5)(6).................... 1.69% 1.78% 2.17%
Total GVA to loans and REO (4)(6)................................ 1.10% 1.15% 1.22%
Total GVA to NPAs (4)............................................ 100.24% 127.29% 59.79%
Credit card loans:
GVA -- shared risk programs...................................... $ 6,600 $ -- $ --
======= ======= =======
GVA to shared risk credit card loans............................. 7.69% --% --%
Cash reserves -- credit enhancement programs $ 8,401 $ -- $ --
======= ======= =======
Cash reserves to credit enhancement loans 7.74% --% --%
</TABLE>
- ----------------
(1) All allowances for loan losses are for the Bank's portfolio of mortgage
loans.
(2) At December 31, 1997 and June 30, 1997, the allowance for estimated loan
losses includes, $14.4 million and $18.1 million, respectively, of remaining
loan GVA and SVA for the Plan. See "--Asset Quality--Accelerated Asset
Resolution Plan."
(3) Writedowns include cumulative charge-offs on outstanding mortgage 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.
(6) Gross loans net of credit card programs.
25
<PAGE>
The following schedule summarizes the activity in the Bank's allowances for
estimated loan and real estate losses:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
===========================================================================
1998 1997
----------------------------------- ----------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL (1)
--------- ----- ----- ----- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on April 1,................................ $48,035 $1,068 $ 49,103 $52,882 $2,186 $55,068
Provision for losses............................. 4,250 9 4,259 4,251 620 4,871
Charge-offs...................................... (2,305) (36) (2,341) (12,441) (478) (12,919)
Allowances related to acquisition................ -- -- -- 12,770 120 12,890
Recoveries and other............................. 1,908 -- 1,908 2,502 151 2,653
------- ------ ------- ------- ------ -------
Balance on June 30,................................ $51,888 $1,041 $52,929 $59,964 $2,599 $62,563
======= ====== ======= ======= ====== =======
</TABLE>
- -----------------
(1) 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."
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
===========================================================================
1998 1997
---------------------------------- --------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL (1)
--------- ----- ----- ----- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1,.......................... $50,538 $1,123 $51,661 $57,508 $2,081 $59,589
Provision for losses......................... 6,250 72 6,322 8,502 1,362 9,864
Charge-offs.................................. (8,774) (177) (8,951) (22,504) (1,275) (23,779)
Allowances related to acquisition............ -- -- -- 12,770 120 12,890
Recoveries and other......................... 3,874 23 3,897 3,688 311 3,999
------- ------ ------- ------- ------ -------
Balance on June 30,............................ $51,888 $1,041 $52,929 $59,964 $2,599 $62,563
======== ====== ======= ======= ====== =======
</TABLE>
- ------------------
(1) Included in the estimated loan losses related to the Hancock acquisition is
$5.8 million associated with the Plan. See "--Asset Quality-- Accelerated
Asset Resolution Plan."
The following table details the activity affecting specific loss reserves
for the period indicated:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
================================== ================================
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
--------- ----- ----- ----- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................ $15,843 $568 $16,411 $18,112 $623 $18,735
Allocations from GVA to specific
reserves.................................. 2,262 10 2,272 6,462 96 6,558
Charge-offs................................. (2,305) (37) (2,342) (8,774) (178) (8,952)
------- ---- ------- ------- ---- -------
Balance at end of period indicated............ $15,800 $541 $16,341 $15,800 $541 $16,341
======= ==== ======= ======= ==== =======
</TABLE>
26
<PAGE>
REGULATORY CAPITAL COMPLIANCE
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 June 30, 1998 and 1997, 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 June 30, 1998 that management believes have
changed the institution's category.
The Bank's actual and required capital as of June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
=================== =====================
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
As of June 30, 1998:
Total capital (to risk-weighted
assets).............................. $248,700 10.78% greater than $184,600 greater than 8.00%
Core capital (to adjusted tangible
assets)................................ 219,800 5.15 greater than 170,800 greater than 4.00
Tangible capital (to tangible assets).. 219,800 5.15 greater than 64,100 greater than 1.50
Core capital (to risk-weighted
assets)................................ 219,800 9.52 N/A
As of June 30, 1997:
Total capital (to risk-weighted
assets)................................ 238,800 11.57 greater than 165,100 greater than 8.00
Core capital (to adjusted tangible
assets)................................ 213,000 6.06 greater than 140,600 greater than 4.00
Tangible capital (to tangible assets).. 213,000 6.06 greater than 52,700 greater than 1.50
Core capital (to risk-weighted
assets)................................ 213,000 10.32 N/A
</TABLE>
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
CORRECTIVE ACTION
PROVISIONS
=====================
AMOUNT RATIO
------ -----
<S> <C> <C>
As of June 30, 1998:
Total capital (to risk-weighted
assets).............................. greater than $230,800 greater than 10.00%
Core capital (to adjusted tangible
assets)................................ greater than 213,500 greater than 5.00
Tangible capital (to tangible assets).. N/A
Core capital (to risk-weighted
assets)................................ greater than 138,500 greater than 6.00
As of June 30, 1997:
Total capital (to risk-weighted
assets)................................ greater than 206,300 greater than 10.00
Core capital (to adjusted tangible
assets)................................ greater than 175,800 greater than 5.00
Tangible capital (to tangible assets).. N/A
Core capital (to risk-weighted
assets)................................ greater than 123,800 greater than 6.00
</TABLE>
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 March 31, 1998 and 1997 had the
rule been in effect at these times.
27
<PAGE>
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principals ("GAAP") to the Bank's tangible, core
and risk-based capital as of June 30, 1998 and 1997.
<TABLE>
<CAPTION>
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
-------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
As of June 30, 1998:
Stockholders' equity (1)........................................ $231,800 $231,800 $231,800
Accumulated other comprehensive loss............................ 3,200 3,200 3,200
Adjustments:
Goodwill....................................................... ( 6,200) ( 6,200) ( 6,200)
Intangible assets.............................................. ( 9,000) ( 9,000) ( 9,000)
GVA............................................................ -- -- 28,900
Equity investments............................................. -- -- --
-------- -------- --------
Regulatory capital (2).......................................... $219,800 $219,800 $248,700
======== ======== ========
As of June 30, 1997:
Stockholders' equity (1)........................................ $227,500 $227,500 $227,500
Accumulated other comprehensive loss............................ 1,100 1,100 1,100
Adjustments:
Goodwill....................................................... ( 6,600) ( 6,600) ( 6,600)
Intangible assets.............................................. ( 9,000) ( 9,000) ( 9,000)
GVA............................................................ -- -- 25,900
Equity investments............................................. -- -- ( 100)
-------- -------- --------
Regulatory capital (2).......................................... $213,000 $213,000 $238,800
======== ======== ========
</TABLE>
- ---------------
(1) Fidelity's total stockholders' equity, in accordance with GAAP, was 5.42%
and 6.44% of its total assets at June 30, 1998 and June 30, 1997,
respectively.
(2) Both the OTS and the Federal Deposit Insurance Corporation (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.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
LIQUIDITY
The Bank derives funds from deposits, FHLB advances, securities sold under
agreements to repurchase, and other short-term and long-term borrowings. In
addition, funds are generated from loan payments and payoffs as well as from the
sale of loans and investments.
FHLB Advances
The Bank had net repayments of FHLB advances of $50.0 million for the six
months ended June 30, 1998. This compares to net increases of $120.0 million for
the six months ended June 30, 1997.
Loan payments and payoffs
Loan principal payments, including prepayments and payoffs, provided $200.8
million for the six months ended June 30, 1998 compared to $114.2 million for
the same period in 1997. The Bank expects that loan payments and prepayments
will remain a significant funding source.
Securities
The sale and maturity of investment securities and MBSs provided $117.0
million and $199.0 million for the six months ended June 30, 1998 and 1997,
respectively, with repayments of MBSs providing $151.0 million and $18.4 million
for the six months ended June 30, 1998 and 1997, respectively. The Bank held
$772.6 million and
28
<PAGE>
$354.3 million of investment securities and MBS in its available for sale
portfolio as of June 30, 1998 and 1997, respectively.
Undrawn sources
The Company maintains other sources of liquidity to draw upon, which at June
30, 1998 include (a) a line of credit with the FHLB with $205.5 million
available, (b) $237.7 million in unpledged securities available to be placed in
reverse repurchase agreements or sold and (c) $677.6 million of unpledged loans,
some of which would be available to collateralize additional FHLB or private
borrowings, or be securitized.
Deposits
At June 30, 1998, the Company had deposits of $3.1 billion. The following
table presents the distribution of deposit accounts at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------------------ ------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Money market savings accounts............................. $ 64,163 2.1% $ 55,885 1.9%
Checking accounts......................................... 341,607 11.2 336,036 11.7
Passbook accounts......................................... 57,909 1.9 67,502 2.3
---------- ------ ---------- ------
Total transaction accounts.............................. 463,679 15.2 459,423 15.9
---------- ------ ---------- ------
Certificates of deposit $100,000 and over................. 845,566 27.7 721,206 24.9
Certificates of deposit less than $100,000................ 1,745,926 57.1 1,711,172 59.2
---------- ------ ---------- ------
Total certificates of deposit........................... 2,591,492 84.8 2,432,378 84.1
---------- ------ ---------- ------
Total deposits.......................................... $3,055,171 100.0% $2,891,801 100.0%
========== ====== ========== ======
</TABLE>
The Company is currently eligible to accept brokered deposits; however, there
were no brokered deposits outstanding at June 30, 1998 and 1997.
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 June 30, 1998 and 1997. In
the six months ended June 30, 1998, there were no borrowed and repaid funds from
reverse repurchase agreements compared to $25.5 million of funds borrowed and
repaid during the six months ended June 30, 1997.
Loan Fundings
Fidelity originated and purchased $89.3 million of gross loans (excluding
Fidelity's refinancings) in the six months ended June 30, 1998 compared to $79.3
million in the same period of 1997.
Contingent or potential uses of funds
The Bank had unfunded loans totaling $0.6 million at June 30, 1998. The Bank
had unfunded loans totaling $3.3 million at June 30, 1997. Additionally, unused
lines of credit related to credit card loans and other credit lines totaled
$192.4 million as of June 30, 1998.
29
<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 26.00% at June 30, 1998. The Bank's monthly
average regulatory liquidity ratio, under the liquidity regulations in force at
the time was 6.98% for the six months ended June 30, 1997.
Holding Company Liquidity
At June 30, 1998 and 1997, Bank Plus had cash and cash equivalents of $2.4
million and $0.9 million, respectively, and no material potential cash producing
operations or assets other than its investments in Fidelity, Gateway and BPCS.
Accordingly, Bank Plus is substantially dependent on dividends from Fidelity,
Gateway and BPCS in order to fund its cash needs, including its payment
obligations on the $51.5 million principal amount of Senior Notes issued in
exchange for Fidelity's Preferred Stock. In connection therewith, on April 2,
1998 Fidelity made a cash dividend to Bank Plus in the amount of $1.5 million to
assist in funding Bank Plus' future payment obligations with respect to the
Senior Notes. Both Gateway's and Fidelity's ability to pay dividends or
otherwise provide funds to Bank Plus are subject to significant regulatory
restrictions.
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to maximize the net income of
the Company while controlling interest rate risk exposure. Banks and savings
institutions are subject to interest rate risk when assets and liabilities
mature or reprice at different times (duration risk), against different indices
(basis risk) or for different terms (yield curve risk). The decision to control
or accept interest rate risk can only be made with an understanding of the
probability of various scenarios occurring. Having liabilities that reprice more
quickly than assets is beneficial when interest rates fall, but may be
detrimental when interest rates rise.
The Company manages interest rate risk by, among other things, maintaining a
portfolio consisting primarily of adjustable rate mortgage ("ARM") loans. ARM
loans comprised 91%, of the total loan portfolio at June 30, 1998 and 96% at
June 30, 1997. The percentage of monthly adjustable ARMs to total loans was
approximately 70% and 74% at June 30, 1998 and 1997, respectively. Interest
sensitive assets provide the Company with a degree of long-term protection from
rising interest rates. At June 30, 1998, approximately 91% of Fidelity's total
loan portfolio consisted of loans which mature or reprice within one year,
compared to approximately 94% at June 30, 1997. 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 June 30, 1998, 85% of the Bank's loans, which
are indexed to Eleventh District Cost of Funds ("COFI") as with all COFI
portfolios in the industry, do not reprice until some time after the industry
liabilities composing COFI reprice. The Company's liabilities reprice generally
in line with the cost of funds of institutions which comprise the FHLB Eleventh
District. In the Company's case, the lag between the repricing of its
liabilities and its ARM loans indexed to COFI is approximately four months.
Thus, in a rising rate environment there will be upward pressure on rates paid
on deposit accounts and wholesale borrowings, and the Company's net interest
income will be adversely affected until the majority of its interest-earning
assets fully reprice. Conversely, in a falling interest rate environment, net
interest income will be positively affected.
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
30
<PAGE>
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.
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of June 30, 1998.
"Gap," as reflected in the table, represents the estimated difference between
the amount of interest-earning assets and interest-bearing liabilities repricing
during future periods as adjusted for interest-rate swaps and other financial
instruments as applicable, and based on certain assumptions, including those
stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
MATURITY OR REPRICING
------------------------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
----------- -------------- ------------ ------------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash.................................. $ 342,824 $ -- $ -- $ -- $ -- $ 342,824
Investment securities (1) (2)......... 70,242 2,236 25,926 -- -- 98,404
MBS (1)............................... 71,824 1,091 -- -- 705,590 778,505
Loans receivable:
ARMs and other adjustables (3)....... 2,272,581 372,648 14,168 11,051 127 2,670,575
Fixed rate loans..................... 6,947 451 15,788 14,240 211,035 248,461
---------- ------------ ---------- ---------- -------- ----------
Total gross loans receivable....... 2,279,528 373,099 29,956 25,291 211,162 2,919,036
---------- ------------ ---------- ---------- -------- ----------
Total............................. 2,764,418 376,426 55,882 25,291 916,752 $4,138,769
---------- ------------ ---------- ---------- -------- ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts (4).. 399,516 -- -- -- -- $ 399,516
Money market accounts (4).......... 64,163 -- -- -- -- 64,163
Fixed maturity deposits:
Retail customers.................. 617,885 1,583,123 379,883 776 1,231 2,582,898
Wholesale customers.............. 381 8,113 100 -- -- 8,594
---------- ------------ ---------- ---------- -------- ----------
Total deposits.................. 1,081,945 1,591,236 379,983 776 1,231 3,055,171
---------- ------------ ---------- ---------- -------- ----------
Borrowings:
FHLB advances (3).................. 100,000 175,000 585,000 100,000 -- 960,000
Other.............................. -- -- -- 51,478 -- 51,478
---------- ------------ ---------- ---------- -------- ----------
Total borrowings.................. 100,000 175,000 585,000 151,478 -- 1,011,478
---------- ------------ ---------- ---------- -------- ----------
Total........................... 1,181,945 1,766,236 964,983 152,254 1,231 $4,066,649
---------- ------------ ---------- ---------- -------- ==========
REPRICING GAP......................... $1,582,473 $ (1,389,810) $ (909,101) $ (126,963) $915,521
========== ============ ========== ========== ========
GAP TO TOTAL ASSETS................... 36.92% (32.42)% (21.21)% (2.96)% 21.36%
CUMULATIVE GAP TO TOTAL ASSETS........ 36.92% 4.50 % (16.71)% (19.67)% 1.69%
</TABLE>
- -------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $62. 3 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.
31
<PAGE>
Analysis of the Gap provides only a static view of the Company's interest rate
sensitivity at a specific point in time. The actual impact of interest rate
movements on the Company's net interest income may differ from that implied by
any Gap measurement. The actual impact on net interest income may depend on the
direction and magnitude of the interest rate movement, as well as competitive
and market pressures.
MARKET RISK
The Company's Asset/Liability Committee ("ALCO"), which includes senior
management representatives, monitors and considers methods of managing the rate
and sensitivity repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of changes in net portfolio value
("NPV") and net interest income. A primary purpose of the Company's
asset/liability management is to manage interest rate risk to effectively invest
the Company's capital and to preserve the value created by its core business
operations. As such, certain management monitoring processes are designed to
minimize the impact of sudden and sustained changes in interest rates on NPV and
net interest income. There has been no significant change in interest rate risk
since December 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 1992 and February
1995, one in Federal District Court and five in California Superior Court. In
the federal case the Bank won a summary judgment in the District Court. This
judgment was appealed and the Ninth Circuit Court of Appeals affirmed in part,
reversed in part and remanded back to the District Court for further
proceedings. The District Court has ruled in favor of certifying a class in that
action. Three of the California Superior Court cases resulted in final judgments
in favor of the Bank, after the plaintiffs unsuccessfully appealed the trial
court judgments in favor of the Bank. Two other cases are pending in the
California Superior Court. In both 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 reserves with respect to such
lawsuits.
In the normal course of business, the Company and certain of its subsidiaries
have a number of other lawsuits and claims pending. Although there can be no
assurance, the Company's management and its counsel believe that none of the
foregoing lawsuits or claims will have a material adverse effect on the
financial condition or business of the Company.
32
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held on April 29, 1998, the shareholders
elected Norman Barker, Jr., Robert P. Condon and Gordon V. Smith to the Board of
Directors of Bank Plus to serve for three year terms, approved an amendment to
the Company's Certificate of Incorporation to change the name of the Company to
iBank Corporation (subject to the right of the Board of Directors, in its
discretion, to abandon the proposed amendment), and ratified the appointment of
Deloitte & Touche LLP as the Company's independent public accountants for 1998.
Of the 19,367,203 shares of Common Stock outstanding as of the record date,
March 2, 1998, the following indicates the number of votes cast for and
withheld, with respect to each of the three directors, as well as the number of
votes for, against and abstaining, with respect to the amendment to the
Company's Certificate of Incorporation and the ratification of Deloitte & Touche
LLP:
<TABLE>
<CAPTION>
Number of Votes
--------------------------------------------------
For Withheld
---------------- ---------------
<S> <C> <C>
Proposal 1 -- Election of Directors:
Norman Barker, Jr................................................... 15,790,108 158,368
Robert P. Condon.................................................... 15,791,875 156,601
Gordon V. Smith..................................................... 15,791,862 156,614
---------------- --------------- -------------
For Against Abstain
---------------- --------------- -------------
Proposal 2 - Amendment to the Company's Certificate of
Incorporation to change the name of the Company to
iBank Corporation................................................... 14,554,825 1,389,284 4,367
Proposal 3 - Ratification of Independent Public Accountants........... 15,941,283 5,252 1,938
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
No. Description
- -------------- -------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of March 27, 1996, among Fidelity, Bank Plus
Corporation and Fidelity Interim Bank (incorporated by reference to Exhibit 2.1 to the Form 8-B
of Bank Plus filed with the SEC on April 22, 1996 (the "Form 8-B")).*
2.2 Agreement and Plan of Merger, dated June 25, 1997, among Bank Plus Corporation, Fidelity and
Hancock Savings Bank, F.S.B (incorporated by reference to Exhibit 2.2 to the Form S-4 of Bank
Plus filed with the SEC on June 30, 1997).*
3.2 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).*
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
4.2 Indenture dated as of July 18, 1997 between Bank Plus Corporation and The Bank of New York, as
trustee relating to the 12% Senior Notes due July 18, 2007 of Bank Plus Corporation
(incorporated by reference to Exhibit 4.4 of the Registration Statement on Form S-8 of Bank Plus
filed on September 4, 1997).*
10.1 Settlement Agreement between Fidelity, Citadel and certain lenders, dated as of June 3, 1994
(the "Letter Agreement") (incorporated by reference to Exhibit 10.1 to the Form 8-B).*
10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, 1994 (incorporated by reference to
Exhibit 10.2 to the Form 8-B).*
10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 (incorporated by reference to
Exhibit 10.3 to the Form 8-B).*
10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 (incorporated by reference to
Exhibit 10.4 to the Form 8-B).*
10.5 Mutual Release, dated as of August 4, 1994, between Fidelity, Citadel and certain lenders
(incorporated by reference to Exhibit 10.5 to the Form 8-B).*
10.6 Mutual Release between Fidelity, Citadel and The Chase Manhattan Bank, NA, dated June 17, 1994
(incorporated by reference to Exhibit 10.6 to the Form 8-B).*
10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13, 1994, between Fidelity and
Colony Capital, Inc. (incorporated by reference to Exhibit 10.7 to the Form 8-B).*
10.8 Real Estate Purchase Agreement, dated as of August 3, 1994, between Fidelity and CRI
(incorporated by reference to Exhibit 10.8 to the Form 8-B).*
10.9 Loan and REO Purchase Agreement (Secondary), dated as of July 12, 1994, between Fidelity and EMC
Mortgage Corporation (incorporated by reference to Exhibit 10.9 to the Form 8-B).*
10.10 Loan and REO Purchase Agreement (Secondary), dated as of July 21, 1994, between Fidelity and
International Nederlanden (US) Capital Corporation, Farallon Capital Partners, L.P., Tinicum
Partners, L.P. and Essex Management Corporation (incorporated by reference to Exhibit 10.10 to
the Form 8-B).*
10.11 Purchase of Assets and Liability Assumption Agreement by and between Home Savings of America,
FSB and Fidelity, dated as of July 19, 1994 (incorporated by reference to Exhibit 10.11 to the
Form 8-B).*
10.12 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity and related loan documents
(3943 Veselich Avenue) (incorporated by reference to Exhibit 10.12 to the Form 8-B).*
10.13 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity and related loan documents
(23200 Western Avenue) (incorporated by reference to Exhibit 10.13 to the Form 8-B).*
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).*
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
10.21 Side letter, dated August 3, 1994, between Fidelity and CRI (incorporated by reference to
Exhibit 10.20 to the Form 8-B).*
10.22 Placement Agency Agreement, dated July 12, 1994, between Fidelity, Citadel and J.P. Morgan
Securities Inc. (incorporated by reference to Exhibit 10.21 to the Form 8-B).*
10.23 Stock Purchase Agreement, dated as of August 3, 1994, between Fidelity and Citadel (incorporated
by reference to Exhibit 10.22 to the Form 8-B).*
10.24 Litigation and Judgment Assignment and Assumption Agreement, dated as of August 3, 1994, between
Fidelity and Citadel (incorporated by reference to Exhibit 10.23 to the Form 8-B).*
10.25 Amended and Restated 1996 Stock Option Plan (incorporated by reference to Exhibit 10.24 to the
quarterly report on Form 10Q for the quarterly period ended March 31, 1997).*
10.26 Retirement Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.25 to the
Form 8-B).*
10.27 Form of Severance Agreement between the Bank and Mr. Sanders (incorporated by reference to
Exhibit 10.26 to the Form 8-B).*
10.28 Form of Change in Control Agreement between the Bank and Mr. Greenwood (incorporated by
reference to Exhibit 10.28 to the quarterly report on Form 10Q for the quarter ended June 30,
1997).*
10.29 Form of Severance and Change in Control Agreement between the Bank and each of Messrs. Austin,
Evans & Taylor (incorporated by reference to Exhibit 10.29 to the quarterly report on Form 10Q
for the quarter ended June 30, 1997).*
10.30 Form of Severance and Change in Control Agreement between the Bank and each of Messrs. Condon, &
Stutz (incorporated by reference to Exhibit 10.30 to the quarterly report on Form 10Q for the
quarter ended June 30, 1997).*
10.31 Form of Severance Agreement between the Bank and Mr. Renstrom (incorporated by reference to
Exhibit 10.29 to the Form 8-B).*
10.32 Form of Incentive Stock Option Agreement between the Bank and certain officers (incorporated by
reference to Exhibit 10.30 to the Form 8-B).*
10.33 Form of Amendment to incentive Stock Option Agreement between the Bank and certain officers
(incorporated by reference Exhibit 10.31 to the Form 8-B).*
10.34 Form of Non-Employee Director Stock Option Agreement between the Bank and certain directors
(incorporated by reference to Exhibit 10.32 to the Form 8-B).*
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 LeaseNet, 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).*
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
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 (incorporated by reference to Exhibit 10.57 to the 1997 Form 10-K).*
10.58 Form of 1998 Non-Employee Director Stock Option Agreement between the Company and certain
directors (incorporated by reference to Exhibit 10.58 to the quarterly report on Form 10Q for
the quarter ended March 31, 1998).*
10.59 Form of Stock Option Agreement between the Company and Messrs. Greenwood, Austin, Condon, Evans,
Stutz and Taylor (incorporated by reference to Exhibit 10.58 to the quarterly report on Form 10Q
for the quarter ended March 31, 1998).*
10.60 Form of Incentive Stock Option Agreement between the Company and Messrs. McNamara and Villa
(incorporated by reference to Exhibit 10.58 to the quarterly report on Form 10Q for the quarter
ended March 31, 1998).*
10.61 Form of Change in Control Agreement between the Company and Messrs. McNamara and Villa
(incorporated by reference to Exhibit 10.58 to the quarterly report on Form 10Q for the quarter
ended March 31, 1998).*
27. Financial Data Schedule.
</TABLE>
- ------------------
* Indicates previously filed documents.
(b) Reports on Form 8-K
None
36
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
Registrant
Date: August 14, 1998 /s/ Richard M. Greenwood
---------------------------------
Richard M. Greenwood
President and Chief Executive Officer;
Vice Chairman of the Board
(Principal Executive Officer)
Date: August 14, 1998 /s/ Mark K. Mason
--------------------------------
Mark K. Mason
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 91,715
<INT-BEARING-DEPOSITS> 0 342,824
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 38,805
<INVESTMENTS-HELD-FOR-SALE> 0 772,567
<INVESTMENTS-CARRYING> 0 65,537
<INVESTMENTS-MARKET> 0 65,553
<LOANS> 0 2,903,563
<ALLOWANCE> 0 51,888
<TOTAL-ASSETS> 0 4,286,237
<DEPOSITS> 0 3,055,171
<SHORT-TERM> 0 275,000
<LIABILITIES-OTHER> 0 34,120
<LONG-TERM> 0 736,478
0 0
0 0
<COMMON> 0 194
<OTHER-SE> 0 272<F1>
<TOTAL-LIABILITIES-AND-EQUITY> 0 4,286,237
<INTEREST-LOAN> 54,223 108,228
<INTEREST-INVEST> 20,973 41,531
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 75,196 149,759
<INTEREST-DEPOSIT> 36,624 72,095
<INTEREST-EXPENSE> 55,113 108,779
<INTEREST-INCOME-NET> 20,083 40,980
<LOAN-LOSSES> 4,250 6,250
<SECURITIES-GAINS> (1,893) (1,615)
<EXPENSE-OTHER> 24,581 45,521
<INCOME-PRETAX> (1,799)<F2> 2,365<F3>
<INCOME-PRE-EXTRAORDINARY> (1,799)<F2> 2,365<F3>
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,176) 2,365
<EPS-PRIMARY> (0.06) 0.12
<EPS-DILUTED> (0.06) 0.12
<YIELD-ACTUAL> 1.86 1.89
<LOANS-NON> 0 20,351
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 44,990
<LOANS-PROBLEM> 0 94,091
<ALLOWANCE-OPEN> 48,035 50,538
<CHARGE-OFFS> (2,305) (8,774)
<RECOVERIES> 1,908 3,874
<ALLOWANCE-CLOSE> 51,888 51,888
<ALLOWANCE-DOMESTIC> 51,888 51,888
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 36,088 36,088
<FN>
<F1>MINORITY INTEREST: PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY
<F2>EARNINGS BEFORE INCOME TAX BENEFIT AND $7 MINORITY INTEREST IN SUBSIDIARY
WHICH IS IN EXPENSE-OTHER
<F3>EARNINGS BEFORE $14 MINORITY INTEREST IN SUBSIDIARY, WHICH IS INCLUDED IN
EXPENSE-OTHER
</FN>
</TABLE>
