<PAGE>
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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 September 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 Identification Number)
incorporation or organization)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 434-3354
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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 November 13, 1998, Registrant had outstanding 19,419,778 shares of
Common Stock, par value $.01 per share.
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<PAGE>
Bank Plus Corporation
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September
30, 1998 and December 31, 1997................................ 1
Consolidated Statements of Operations for the quarters and nine
months ended September 30, 1998 and 1997...................... 2
Consolidated Statements of Comprehensive Income for the quarters
and nine months ended September 30, 1998 and 1997............. 3
Consolidated Statements of Cash Flows for the quarters and nine
months ended September 30, 1998 and 1997...................... 4
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 28
Item 2. Changes in Securities........................................... 31
Item 3. Defaults Upon Senior Securities................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............. 31
Item 5. Other Information............................................... 31
Item 6. Exhibits and Reports on Form 8-K................................ 31
a. Exhibits.................................................. 31
b. Reports on Form 8-K....................................... 33
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents...................................................... $ 290,228 $ 165,945
Investment securities available for sale, at fair value ....................... -- 100,837
Investment securities held to maturity at amortized cost (market value of
$3,361 and $3,208 at September 30, 1998 and December 31, 1997, respectively). 3,336 3,189
Mortgage-backed securities ("MBS") held for trading, at fair value............. -- 41,050
MBS available for sale, at fair value ......................................... 498,241 852,604
Loans receivable, net of allowances of $99,022 and $50,538 at September 30,
1998 and December 31, 1997, respectively..................................... 2,759,398 2,823,577
Investment in Federal Home Loan Bank ("FHLB") stock ........................... 64,410 60,498
Other assets................................................................... 209,597 120,106
-------------- --------------
Total Assets.............................................................. $ 3,825,210 $ 4,167,806
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits..................................................................... $ 3,031,595 $ 2,891,801
FHLB advances................................................................ 585,000 1,009,960
Senior notes................................................................. 51,478 51,478
Other liabilities............................................................ 29,136 32,950
-------------- --------------
Total Liabilities......................................................... 3,697,209 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;
19,449,643 and 19,367,215 shares outstanding
at September 30, 1998 and December 31, 1997, respectively................ 195 194
Paid-in capital ............................................................. 275,130 274,432
Accumulated other comprehensive loss ........................................ (1,356) (4,467)
Accumulated deficit ......................................................... (146,240) (88,814)
-------------- --------------
Total Stockholders' Equity................................................ 127,729 181,345
-------------- --------------
Total Liabilities and Stockholders' Equity.................................. $ 3,825,210 $ 4,167,806
============== ==============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME.............................................. $ 77,547 $ 65,531 $ 227,306 $ 182,693
INTEREST EXPENSE............................................. 54,834 45,098 163,613 121,577
------------ ------------ ------------ ------------
NET INTEREST INCOME.......................................... 22,713 20,433 63,693 61,116
PROVISION FOR ESTIMATED LOAN LOSSES.......................... 51,782 4,251 58,032 12,753
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES (29,069) 16,182 5,661 48,363
------------ ------------ ------------ ------------
NONINTEREST INCOME (EXPENSE):
Loan fee income........................................... 924 563 2,358 1,583
Credit card fees.......................................... 1,056 -- 7,644 --
Fee income from deposits and the sale of uninsured
investment products..................................... 2,659 2,366 7,655 6,975
Gains on sales of loans and securities and trading
activities, net......................................... 1,917 364 320 2,608
Fee income on ATM cash services........................... 453 149 2,260 149
Other income (expense).................................... (1,331) -- (1,331) --
Real estate operations, net............................... (561) (1,093) (2,159) (5,219)
------------ ------------ ------------ ------------
Total noninterest income................................ 5,117 2,349 16,747 6,096
------------ ------------ ------------ ------------
OPERATING EXPENSE:
Personnel and benefits.................................... 13,080 7,631 33,273 21,418
Occupancy................................................. 3,457 3,080 10,506 8,368
FDIC insurance............................................ 672 755 1,972 1,836
Professional services..................................... 5,087 3,097 12,655 7,855
Credit card servicing..................................... 3,497 -- 6,774 --
Office-related expenses................................... 2,029 1,025 4,744 2,705
Other..................................................... 4,140 893 6,019 3,676
------------ ------------ ------------ ------------
Total operating expense................................. 31,962 16,481 75,943 45,858
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE INCOME TAXES AND MINORITY
INTEREST IN SUBSIDIARY.................................... (55,914) 2,050 (53,535) 8,601
Income tax expense (benefit)................................. 3,870 (1,700) 3,870 (6,500)
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE MINORITY INTEREST IN SUBSIDIARY....... (59,784) 3,750 (57,405) 15,101
Minority interest in subsidiary ............................. 7 342 21 4,228
------------ ------------ ------------ ------------
(LOSS) EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS............ $ (59,791) $ 3,408 $ (57,426) $ 10,873
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE:
Basic..................................................... $ (3.08) $ 0.18 $ (2.96) $ 0.58
============ ============ ============ ============
Diluted................................................... $ (3.08) $ 0.17 $ (2.96) $ 0.57
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic..................................................... 19,395,952 19,310,813 19,383,839 18,605,514
============ ============ ============ ============
Diluted................................................... 19,580,968 19,648,242 19,771,875 18,942,276
============ ============ ============ ============
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(LOSS) EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS............. $ (59,791) $ 3,408 $ (57,426) $ 10,873
------------ ------------ ------------ ------------
Other comprehensive earnings (loss):
Unrealized gains (losses) on securities available for sale:
Investment securities available for sale................. 136 709 64 760
MBS available for sale................................... (3,057) (4,673) (2,651) (6,733)
Derivative financial instruments......................... 4,755 (1,575) 5,698 (1,670)
------------ ------------ ------------ ------------
Other comprehensive earnings (loss)........................ 1,834 (5,539) 3,111 (7,643)
------------ ------------ ------------ ------------
COMPREHENSIVE (LOSS) EARNINGS................................. $ (57,957) $ (2,131) $ (54,315) $ 3,230
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings................................. $ (59,791) $ 3,408 $ (57,426) $ 10,873
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Provisions for estimated loan and real estate
losses 51,810 3,918 58,132 13,782
Gains on securities and loan sales.............. (1,917) (364) (320) (2,608)
FHLB stock dividend............................. (942) (822) (2,719) (2,481)
Depreciation and amortization................... 1,940 1,431 5,287 3,194
Amortization of premiums, accretion of discounts
and deferred loan items, net................. 1,739 (3,071) 6,376 (5,159)
Deferred income tax expense (benefit)........... 3,353 (2,012) 3,261 (7,013)
Issuance of stock and stock options............. 460 -- 460 --
Purchases of MBS held for trading................. (10,169) (50,738) (48,978) (60,717)
Principal repayments of MBS held for trading...... 226 661 2,829 1,013
Proceeds from sales of MBS held for trading....... 48,532 18,841 86,808 31,915
Interest receivable decrease (increase)........... 2,587 (1,988) 3,370 (1,478)
Other assets (increase) decrease.................. (91,519) 2,496 (92,843) 33,916
Interest payable (decrease) increase.............. (4,441) 2,189 (5,627) (2,910)
Other liabilities increase (decrease)............. 1,117 (4,581) 4,651 (2,847)
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (57,015) (30,632) (36,739) 9,480
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hancock acquisition................................. -- -- -- 52,908
Westwood branch acquisition......................... -- 47,489 -- 47,489
Maturities of investment securities available for sale -- -- 10,000 --
Proceeds from sales of investment securities available
for sale.......................................... 33,000 32,575 90,805 32,575
Purchases of MBS available for sale................. -- (382,605) (60,052) (598,551)
Principal repayments of MBS available for sale...... 96,091 13,197 244,507 29,187
Proceeds from sales of MBS available for sale....... 146,657 48,798 167,545 234,747
Principal repayments of MBS held to maturity........ -- 977 -- 3,037
Purchases of derivative securities.................. (1,210) -- (5,322) --
Purchases of FHLB stock............................. (1,250) -- (1,250) --
Maturities of certificate of deposits............... -- 493 -- 493
Loans receivable decrease (increase)................ 36,335 (66,195) (14,768) (46,585)
Net proceeds from sales of real estate owned........ 4,357 24,572 23,301 42,318
Premises and equipment additions, net............... (2,730) (1,849) (8,817) (3,051)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 311,250 (282,548) 445,949 (205,433)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings, net (decrease)
increase.......................................... (4,048) (1,686) 52,650 (9,295)
Certificate accounts, net (decrease) increase....... (19,528) 53,234 87,144 63,016
Proceeds from FHLB advances......................... 100,000 410,000 705,000 895,941
Repayments of FHLB advances......................... (475,000) (120,000) (1,129,960) (485,946)
Repayment of short-term borrowings.................. -- -- -- (40,000)
Repayments of long-term borrowings.................. -- -- -- (100,000)
Proceeds from exercise of stock options............. 30 271 239 309
------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities (398,546) 341,819 (284,927) 324,025
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (144,311) 28,639 124,283 128,072
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 434,539 169,559 165,945 70,126
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 290,228 $ 198,198 $ 290,228 $ 198,198
============ ============ ============ ============
(Continued on following page)
</TABLE>
4
<PAGE>
<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
(Dollars in thousands)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other
borrowings........................................ $ 58,976 $ 42,801 $ 168,241 $ 123,622
Income tax payments................................. 156 150 510 393
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Additions to real estate acquired through foreclosure 5,169 20,935 21,458 41,712
Loans originated to finance sale of real estate owned 189 1,867 189 7,955
Transfer between available for sale and held to
maturity MBS portfolios........................... -- 26,998 -- 26,998
Exchange of preferred stock for senior notes........ -- 51,478 -- 51,478
Details of Hancock Acquisition:
Fair value of assets and intangible acquired........ -- -- -- 212,693
Goodwill............................................ -- -- -- 6,589
Liabilities assumed................................. -- -- -- 207,270
Common stock issued................................. -- -- -- 12,012
Cash acquired....................................... -- -- -- 52,908
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Nine Months Ended September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Bank Plus Corporation ("Bank Plus") is the holding company for Fidelity
Federal Bank, a Federal Savings Bank, and its subsidiaries (the "Bank" or
"Fidelity"), Gateway Investment Services, Inc. ("Gateway") and Bank Plus Credit
Services Corporation ("BPCS") (collectively, the "Company"), and 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.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements, prepared from the Company's books and records, contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of September 30, 1998 and
December 31, 1997, and the results of operations and statements of cash flows
for the quarter and nine months ended September 30, 1998 and 1997. 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.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has employed various derivative financial instruments to hedge
valuation fluctuations in its trading and available for sale securities
portfolios. Financial instruments entered into for trading purposes are carried
at fair value, with realized and unrealized changes in fair values recognized in
earnings in the period in which the changes occur. Financial instruments used to
hedge the fluctuations in fair values of available for sale securities are
carried at fair value, with realized and unrealized changes in fair value
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.
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. As of September 30, 1998, the Company had no derivative financial
instruments outstanding.
6
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Nine Months Ended September 30, 1998
During 1998, the Company used futures on Treasury Notes to hedge the
valuation fluctuations of its fixed rate MBS portfolio. Based on historical
performance, futures on Treasury Notes provided an expectation of high
correlation with the MBS. 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 MBS 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 MBS. The remaining losses on the hedge program
which totaled approximately $5.0 million, are recorded as adjustments to the
cost basis of the securities being hedged and are being amortized over the life
of the MBS as a yield adjustment. Due to the volatility of the correlation
between futures on Treasury Notes and the cost of a hedging program in relation
to its benefits, the Company terminated this hedging program in July 1998.
3. 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 nine months
ended September 30, 1998 and 1997 were 185,016, 337,429, 388,036 and 336,762,
respectively. Potentially dilutive securities relate to incremental shares from
assumed conversions of stock options and deferred stock grants. As a result of
losses incurred by the Company for the quarter and nine months ended September
30, 1998, the potentially diluted securities become anti-dilutive and are not
considered for reporting purposes.
4. LOAN FEE INCOME
The Company charges application fees and annual fees related to the
issuance of its credit card products. Credit card application fees, annual fees
and direct origination costs are deferred and amortized into income over twelve
months.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income"in June 1997.
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.
The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in September 1997. SFAS 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. SFAS
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. To date, the Company is still
examining the impact of SFAS 131 and has not determined what operating segments
will be reported.
7
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Nine Months Ended September 30, 1998
The FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" 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.
The FASB issued SFAS 134, "Accounting for Mortgage-backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" in October 1998. SFAS 134 changes the way mortgage banking
firms account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. SFAS 134 becomes effective
for the first fiscal quarter beginning after December 15, 1998. The Company does
not anticipate that this statement will have a material impact on its
operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included in this Form 10-Q, including without limitation
statements containing the words "believes", "anticipates", "intends", "expects"
and words of similar import, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of Bank Plus
Corporation and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors are referred to in Bank Plus's most
recent Annual Report on Form 10-K as of December 31, 1997. A number of other
factors may have a material adverse effect on the Company's financial
performance. These factors include a national or regional economic slowdown or
recession which increases the risk of defaults and credit losses; restrictions
imposed on the Bank's operations by regulators such as a prohibition on the
payment of dividends to Bank Plus; an increase in the number of customers
seeking protection under the bankruptcy laws which increases the amount of
charge-offs; the effects of fraud by third parties or customers; and the outcome
of pending and future litigation. Given these uncertainties, undue reliance
should not be placed on such forward-looking statements. Bank Plus disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements included herein to reflect
future events or developments.
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
REGULATORY CAPITAL AND SUPERVISION
As a result of the net loss recorded for the third quarter of 1998, the
Bank was categorized as "adequately capitalized" as of September 30, 1998, for
regulatory capital purposes as compared to "well capitalized" as of June 30,
1998. The Bank's core and risk-based capital ratios as of September 30, 1998
were 4.22% and 8.66%, respectively. The core capital to adjusted total assets
ratio, which had the smallest excess of all the capital ratio measurements at
September 30, 1998, had an excess of $8.4 million above the minimum level
required to be considered "adequately capitalized".
The Office of Thrift Supervision ("OTS") completed its safety and soundness
examination during the third quarter of 1998. As a result of the OTS's findings,
the Bank is subject to certain regulatory restrictions including, but not
limited to: (i) a prohibition, absent OTS prior approval, on increases in total
assets during any quarter in excess of an amount equal to net interest credited
on deposit liabilities during the quarter, (ii) a requirement that the Bank
submit to the OTS for prior review and approval the names of proposed new
directors and executive officers and proposed employment contracts with any
director or executive officer, (iii) a requirement that the Bank submit to the
OTS for prior review and approval any third party contracts outside the normal
course of business, and (iv) the ability of the OTS, in its discretion, to
require 30 days prior notice of all transactions between the Bank and its
affiliates. In addition, the Bank is required to respond to criticisms from the
OTS, including providing the OTS with a business plan that demonstrates the
Bank's ability to provide future earnings and return to the status of a well
capitalized institution for regulatory capital purposes.
9
<PAGE>
As a result of the changes in the Bank's regulatory capital levels and
status, the Bank's Federal Deposit Insurance Corporation ("FDIC") insurance
premium will increase to annual rate of 0.30% of deposits beginning in the first
quarter of 1999 from its current level of 0.09% and its supervisory audit costs
will increase by approximately $200,000 in 1999.
Currently, Bank Plus funds the interest payments on its 12% Senior Notes
(the "Senior Notes") through preferred stock and common stock dividends from
Fidelity. The preferred stock carries a 10% rate and is not subject to OTS
approval unless, among other things, the Bank's regulatory capital falls below
adequately capitalized. The common stock dividends, which are used to fund the
difference between the rate on the Senior Notes and the rate on the preferred
stock dividends, are currently subject to OTS approval. No assurance can be
given that the OTS will approve the common stock dividends in the future, or
that the OTS will approve the preferred stock dividends in the future if the
Bank's regulatory capital falls below adequately capitalized. Currently, Bank
Plus has available liquidity to supplement the preferred stock dividend from the
Bank to fund the February 1999 interest payment on the Senior Notes. In future
periods, Bank Plus may be able to increase its liquidity through dividends from
Gateway or BPCS. No assurance can be given that funds will continue to be
available at Bank Plus to pay the February 1999 interest payment or future
interest payments, or that dividends will be able to be made by Gateway or BPCS
to provide additional liquidity.
CREDIT CARD OPERATIONS
At September 30, 1998, the outstanding balance and accounts in the Bank's
credit card portfolio were $311.3 million and 340,000, respectively. The credit
card program with MMG Direct, Inc. ("MMG") represented $165 million of the
outstanding balances and over 260,000 accounts, and the program with American
Direct Credit LLC ("ADC") represented $123.7 million of the outstanding balances
and over 70,000 accounts. At the quarter end, the MMG and ADC programs together
accounted for 93% of the total outstanding credit card balances, and
delinquencies under the MMG and ADC programs were 19.5% and 13.4%, respectively.
As of October 31, 1998, outstanding balances and delinquencies under the MMG and
ADC programs were $168 million and 25.7%, and $133 million and 12.4%,
respectively.
In October 1998, the Bank terminated its agreement with MMG and no new
accounts have been originated under the MMG program since August 1998.
Additionally, ADC and the Bank have entered into a settlement agreement pursuant
to which they agreed to wind down originations under the Bank's card program
with ADC and terminate the related agreement. Initial balances of new accounts
originated under the ADC program for the period from November 1, 1998 to
December 31, 1998 will be limited to accounts with total initial balances of not
more than $18 million. The Bank will cease originating new accounts under the
ADC program at the end of 1998 and ADC will be relieved of its obligations to
pay for further credit losses.
Under the Bank's agreement with ADC, ADC or its nominee will have the right
to purchase all outstanding balances and accounts originated under the ADC
program at a formula price. This right extends until March 31, 1999 and
restricts the Bank from selling the accounts to a third party prior to December
31, 1998. ADC will continue to provide collection services on the accounts until
March 31, 1999. No assurances can be given that a sale of accounts will take
place under this arrangement with ADC.
As a result of the significant growth in this primarily sub-prime credit
card portfolio and increases in delinquencies and charge-offs in excess of prior
expectations, the Bank increased its allowances for loan and lease losses
("ALLL") by $52.4 million for the quarter ended September 30, 1998. Loan loss
reserves were provided for outstanding balances under the ADC program due to the
uncertainties regarding ADC's ability to pay for future charge-offs. In
addition, due to uncertainties regarding MMG's ability to pay its contractual
share of losses under the MMG programs, the Bank has provided reserves exclusive
of any potential benefits from future contributions by MMG. The Bank's ALLL
increased to $88.5 million at September 30, 1998 from $36.1 million at June 30,
1998.
10
<PAGE>
While the Bank believes that these actions taken will reduce future credit
losses in the credit card portfolio, no assurances can be given that these
actions will have that result. In addition, a number of other factors may have a
material adverse effect on the financial results of the credit card programs and
the Company's overall financial performance. These factors include a national or
regional economic slowdown or recession which increases the risk of defaults and
credit losses; an increase in the number of customers seeking protection under
the bankruptcy laws which increases the amount of charge-offs; the effects of
fraud by third parties or customers; and the financial performance of the Bank's
remaining credit card marketers which may impact their ability to fulfill their
contractual financial obligations which may result in increased losses to the
Bank.
During the second and third quarter of 1998, the Bank's new credit
processing center located in Beaverton, Oregon began providing customer service
and collection services for portions of the Bank's credit card programs,
services that would otherwise be provided by third parties. This new processing
center is operated by Bank Plus' subsidiary, BPCS. Through September 30, 1998,
Bank Plus had contributed $5 million to BPCS to support start-up costs and the
acquisition of fixtures and equipment.
CHANGES IN THE COMPANY'S STRATEGY
During the third quarter of 1998, the Company announced the engagement of a
financial advisor to assist in the pursuit of strategic objectives. As part of
its strategic objectives, the Company has had discussions with its advisor and a
number of potential acquirers regarding the possible sale of the Company. Some
of the interested parties completed preliminary due diligence. As of this date,
no definitive offers to acquire the Company have been made, and there can be no
assurance given that any offers will be made in the future or that the terms of
any offers received by the Company will be considered acceptable. The Company
intends to solicit offers to purchase the Company or deposits from interested
parties during the fourth quarter of 1998. Due to various factors including,
among other things, the valuation of the Bank's multifamily and credit card
portfolios and recent volatility in the market value of potential acquirers'
common stock, a sale of the Company or its deposits at an acceptable price may
not be possible at this time.
As a result of changes in management, and in response to the changes in the
Bank's capital levels and regulatory status, the Company has revised its
strategic plan. As previously discussed, the Company has taken actions to reduce
the emphasis on credit card activities. In addition, the Company has
discontinued or deferred the implementation of initiatives related to auto
loans, the transactional Internet bank project and the proposed name change for
the Bank. To reduce the level of start-up expenses required in the California
Public Employee's Retirement System ("CalPERS") financial education program, the
Company is in discussions with a financial partner who would provide all future
funding for the program in return for a majority share of profits. In November
1998, Americash L.L.C. ("Americash") completed the sale of its operations to a
third party, through which all amounts owed by Americash to the Bank were
repaid. As a result of this sale, the Bank's ATM cash services revenue may
decrease or be eliminated.
The Company also plans to reduce total assets in the near future to improve
its regulatory capital ratios. This reduction in assets is expected to be
accomplished through reductions in cash equivalents and mortgage-backed
securities ("MBS"). The cash generated by these asset sales will be used to
reduce liabilities of the Bank, which may include sales of deposits or
reductions of deposits through repricing. Because the Company earns a spread on
its interest-earning assets over its interest-bearing liabilities, a reduction
in the level of assets will reduce the Company's net interest income.
As a result of the changes in business strategy, the Company intends to
reduce the level of its operating expenses in future periods. The Company will
also explore a variety of options to reducing its servicing costs for its credit
card portfolios. The Company anticipates that these reductions will be offset in
part or in whole by increases in FDIC insurance, litigation costs and
supervisory audit costs. Notwithstanding the above, the Company will continue to
provide all necessary resources to the Year 2000 project.
No assurance can be given that these changes in the Company's strategic
plan will result in improved operating results or that the Company will meet the
regulatory requirements to be categorized as well capitalized.
11
<PAGE>
CHANGES IN EXECUTIVE MANAGEMENT
On October 28, 1998, Mark K. Mason was appointed President and Chief
Executive Officer of the Company, replacing Richard M. Greenwood, who had
resigned on September 22, 1998. Additionally, senior management of BPCS was
changed in September 1998, with the resignations of W. C. Taylor III, Chief
Lending Officer of the Bank and President of BPCS and Jeff Hug, Senior Vice
President of credit card operations. Under new management, which includes an
individual with extensive experience in servicing prime and sub-prime credit
card portfolios, the credit-processing center is implementing plans to improve
its customer service and collection processing activities.
YEAR 2000
The Company utilizes computer software programs, systems and devices
("systems") throughout the organization to support its operations. If corrective
action is not taken, many of these systems may not be able to correctly
interpret and process dates into the Year 2000. The Company has inventoried and
analyzed its systems to determine which will require modification, upgrade, or
replacement.
The Company has established a Year 2000 project team to provide the
business units with the support, guidance, and project management expertise to
ensure that the Company meets its Year 2000 compliance requirements. The Year
2000 project office is responsible for ensuring that the Company complies with
the guidelines established by the Federal Financial Institutions Examinations
Council ("FFIEC"). The FFIEC issues guidelines to provide further clarification
on the federal regulatory requirements mandating how financial institutions
prepare for the Year 2000. In addition, the Company has engaged an independent
third party to provide project oversight and Year 2000 subject matter expertise.
PROJECT'S STATE OF READINESS
The Year 2000 project is comprised of two major phases. Phase I involves
the installation of upgraded mission critical systems that are reported to be
Year 2000 complaint. Phase II involves the testing of mission critical systems
using future dates to certify the system as Year 2000 compliant.
Phase I of the project was substantially completed in October 1998 with the
upgrade of deposit servicing systems to current release levels which are
reported by the software vendor to be Year 2000 compliant. This milestone also
included the conversion of the Company's accounts payable and general ledger
applications to new systems that the software vendor states are Year 2000
compliant. The Company will test these applications using future dates during
Phase II of this Project.
A number of mission-critical distributed and embedded systems have already
been renovated and tested internally for Year 2000 compliance. Year 2000
upgrades to other mission-critical internally operated systems are scheduled to
occur by December 31, 1998.
The Year 2000 project office plans to complete Year 2000 future date
testing (Phase II) of the internally operated mission-critical systems by the
end of the first quarter of 1999. The Company's testing strategy includes the
thirteen future dates recommended by the FFIEC.
The Company has completed the preparation of a Year 2000 customer awareness
plan to address Year 2000 issues raised by customers. A risk management plan was
developed to address risks posed by the Company's material customers. Both of
these plans were developed in accordance with the FFIEC guidelines.
ESTIMATED YEAR 2000 PROJECT COSTS
The expense estimate for anticipated Year 2000 project activities is $6.0
million for 1998 and 1999. This forecast is based on information currently known
about the Company's systems and servicers as well as management's interpretation
of the FFIEC guidelines released to date. A significant portion of this budget
is allocated to the staffing of technology and support personnel to implement
the required modifications and upgrades. Additional personnel are also required
to perform the system testing and produce the testing documentation required by
the FFIEC. As of September 30, 1998, the Company has incurred Year 2000 related
expenses of approximately $2.7 million of the $6.0 million cost estimate.
12
<PAGE>
CONTINGENCY PLANS
The FFIEC requires the development of remediation and business resumption
contingency plans. Remediation contingency plans are initiated if the Company
fails to successfully complete renovation, validation, or implementation of a
mission-critical system. Business resumption plans are initiated if one of the
systems that the Company believed to be Year 2000 compliant unexpectedly fails
during the Year 2000 event.
An overall Year 2000 contingency plan strategy document has been developed
and distributed to Company business units. The contingency plan was developed
based on guidelines issued by the FFIEC, the United States General Accounting
Office and other sources. Company business units are in the process of creating
detailed contingency plans. The identification of critical business functions
and the associated risks has been completed. This information is used to
estimate the probability and impact of a system failure and to develop
work-arounds in the event of such a failure.
The contingency plans are expected to be substantially complete by the end
of June 1999. The plans are "living documents" and will be reviewed and updated
quarterly or as required by changes in the Company's operations.
RISK FACTORS
The Company has recently started the future date testing of its newly
renovated internal mission-critical systems. There can be no assurances that
these systems are or will be Year 2000 compliant. Additional expenses and delays
may be incurred if the test results reveal the need for additional system
renovation or replacement.
The Company utilizes the systems and services of a number of third parties.
Some of the third-party vendors provide services through an outside service
bureau. The failure of a key third-party service provider could result in a
material business interruption.
The Company is closely monitoring the Year 2000 progress of its third-party
vendors. A third-party vendor test plan has been developed to test
mission-critical services provided by third parties, where appropriate, for Year
2000 compliance by the end of the first half of 1999. Additional expenses and
delays may be incurred in the event that internal future date testing or further
analysis reveals test exceptions that require additional renovation or the
ultimate replacement of vendors.
Unknown expenses and consequences could result if it becomes necessary to
execute elements of the Company's Year 2000 contingency plans. Although the
Company has given the Year 2000 project a high priority and believes that Year
2000 compliance will be achieved, there can be no assurances that the Company
will be successful in addressing Year 2000 issues within this estimated
timeframe or budget.
RESULTS OF OPERATIONS
SUMMARY
The Company reported net losses of $59.8 million and $57.4 million for the
quarter and nine months ended September 30, 1998, respectively, as compared to
net earnings of $3.4 million and $10.9 million for the corresponding periods in
1997. During the quarter ended September 30, 1998, the Company recorded a
provision for estimated loan losses of $51.8 million and incurred operating
expenses of $32.0 million. Increasing delinquencies and charge-offs in the
credit card loan portfolio and uncertainty regarding the ability of the MMG and
ADC to fulfill their contractual obligations to support charge-offs in the
related credit card programs were the primary causes for the significant
increase in the provision for estimated loan losses. Operating expenses, which
increased $15.5 million and $30.1 million for the quarter and nine months as
compared to the corresponding 1997 periods, respectively, were higher primarily
due to costs associated with the Bank's credit card programs and other business
initiatives.
13
<PAGE>
NET INTEREST INCOME
The following tables present the primary determinants of net interest
income for the periods indicated. For the purpose of this analysis, nonaccrual
mortgage loans are included in the average balances, and delinquent interest on
such loans has been deducted from interest income.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 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:
Mortgage and other loans .......... $2,616,843 $ 48,758 7.45% $2,861,202 $ 52,593 7.35%
Credit card loans.................. 257,368 7,610 11.83 12,471 224 7.13
MBS................................ 721,024 10,855 6.02 452,608 7,784 6.88
Investment securities ............. 620,141 9,382 6.00 258,542 4,108 6.32
Investment in Federal Home Loan
Bank ("FHLB") stock .............. 64,113 942 5.83 55,841 822 5.86
----------- ---------- ------------ ----------
Total interest-earning assets .... 4,279,489 77,547 7.24 3,640,664 65,531 7.20
---------- -----------
Noninterest-earning assets .......... 141,174 115,916
----------- -----------
Total assets ..................... $4,420,663 $3,756,580
=========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits .................. $ 351,606 1,043 1.18 $ 318,536 865 1.08
Savings deposits ................. 120,592 916 3.01 133,144 882 2.63
Time deposits .................... 2,573,452 35,377 5.40 2,278,428 31,419 5.42
----------- ---------- ------------ ----------
Total deposits ................ 3,045,650 37,336 4.86 2,730,108 33,166 4.82
Borrowings ........................ 1,158,546 17,498 5.99 799,766 11,932 5.92
----------- ---------- ------------ ----------
Total interest-bearing liabilities 4,204,196 54,834 5.17 3,529,874 45,098 5.07
----------- ---------- ------------ ----------
Noninterest-bearing liabilities...... 40,005 38,535
Preferred stock issued by
consolidated subsidiary............. 272 10,789
Stockholders' equity................. 176,190 177,382
----------- -----------
Total liabilities and equity......... $4,420,663 $3,756,580
=========== ===========
Net interest income; interest rate
spread.............................. $ 22,713 2.07% $ 20,433 2.13%
========== ========== ========== ==========
Net yield on interest-earning assets
("net interest margin")............. 2.16% 2.28%
========== ==========
Average nonaccruing mortgage loan
Balance included in average loan
balance ......................... $ 22,834 $ 36,470
=========== ===========
Net delinquent interest removed
from interest income ............... $ 183 $ 449
========== ==========
Reduction in net yield on
interest-earning assets due to
delinquent interest................. 0.02% 0.05%
========== ==========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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:
Mortgage and other loans .......... $2,733,666 $ 151,735 7.40% $2,768,617 $ 151,764 7.31%
Credit card loans.................. 157,824 12,861 10.87 5,287 277 6.99
MBS................................ 775,992 35,978 6.18 315,178 16,761 7.09
Investment securities ............. 529,409 24,013 6.06 236,452 11,410 6.45
Investment in FHLB stock .......... 62,300 2,719 5.84 54,124 2,481 6.13
----------- ---------- ----------- ----------
Total interest-earning assets .... 4,259,191 227,306 7.12 3,379,658 182,693 7.21
---------- ----------
Noninterest-earning assets .......... 153,593 83,872
----------- -----------
Total assets ..................... $4,412,784 $3,463,530
=========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits .................. $ 346,529 3,059 1.18 $ 301,937 2,470 1.09
Savings deposits ................. 122,426 2,752 3.01 122,540 2,713 2.96
Time deposits .................... 2,525,280 103,620 5.43 2,150,624 86,695 5.37
----------- ---------- ----------- ----------
Total deposits ................ 2,994,235 109,431 4.89 2,575,101 91,878 4.77
Borrowings ........................ 1,196,995 54,182 6.05 639,477 29,699 6.21
----------- ---------- ----------- ----------
Total interest-bearing liabilities 4,191,230 163,613 5.22 3,214,578 121,577 5.06
----------- ---------- ----------- ----------
Noninterest-bearing liabilities...... 40,686 40,014
Preferred stock issued by
consolidated subsidiary............. 272 40,956
Stockholders' equity................. 180,596 167,982
----------- -----------
Total liabilities and equity......... $4,412,784 $3,463,530
=========== ===========
Net interest income; interest rate
spread.............................. $ 63,693 1.90% $ 61,116 2.15%
========== ========== ========== ==========
Net yield on interest-earning assets
("net interest margin")............. 1.98% 2.40%
========== ==========
Average nonaccruing loan balance
Included in average loan balance.... $ 22,343 $ 47,841
=========== ===========
Net delinquent interest removed
From interest income ............... $ 1,528 $ 3,298
=========== ===========
Reduction in net yield on
interest-earning assets due to
delinquent interest................. 0.05% 0.13%
========== ==========
</TABLE>
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.
The $2.3 million increase in net interest income between the third quarter
1998 and the third quarter 1997 reflects the 17.5% increase in the average
balance of the interest-earning assets offset by a decrease in the net yield to
2.16% from 2.28%. The $2.6 million increase in net interest income between the
nine months ended September 30, 1998 and the comparable period in 1997 reflects
the 26.0% increase in the average balance of interest-earning assets, offset by
a decrease in the net yield to 1.90% from 2.15%. The increases in the average
balances of interest-earning assets are due to increases in credit card loans
and increases in MBS and the short-term investment portfolios, which is in line
with the Company's prior plans to leverage excess capital. The net yield
decreased due to the use of higher costing certificates of deposit and FHLB
advances to fund the increase in interest-earning assets, higher prepayments on
the MBS portfolio causing increased amortization of the purchase premiums and
the amortization of losses incurred in the second quarter of 1998 on the hedging
program for fixed rate MBS. These were partially offset by a lower average
balance of nonaccruing loans, an increase in the average balance of higher
yielding credit card loans and an increase in the average Eleventh District Cost
of Funds ("COFI") Index, which is the primary index used to adjust the interest
rates on the mortgage loan portfolio.
15
<PAGE>
PROVISION FOR ESTIMATED LOAN LOSSES
The increase in provisions for estimated loan losses of $47.5 million and
$45.3 million for the quarter and nine months ended September 30, 1998,
respectively, as compared to the corresponding periods in 1997, was primarily
due to increasing delinquencies and charge-offs in a rapidly growing credit card
portfolio and uncertainty regarding the ability of the Bank's credit card
marketers to fulfill their contractual obligations to support charge-offs in the
related credit card programs. Credit card balances were $311.3 million as
compared to $21.0 million, delinquencies were 16.05% as compared to 5.40% at
September 30, 1998 and September 30, 1997, respectively. Charge-offs and
buybacks were $9.5 million during the quarter ended September 30, 1998 with no
comparable amount for the same period in 1997.
NONINTEREST INCOME (EXPENSE)
The following table presents noninterest income (expense) for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan fee income........................................... $ 924 $ 563 $ 2,358 $ 1,583
Credit card fees.......................................... 1,056 -- 7,644 --
Fee income from deposits and the sale of uninsured
investment products..................................... 2,659 2,366 7,655 6,975
Gains on sales of loans and securities and trading
activities, net......................................... 1,917 364 320 2,608
Fee income on ATM cash services........................... 453 149 2,260 149
Other income (expense).................................... (1,331) -- (1,331) --
Real estate operations, net............................... (561) (1,093) (2,159) (5,219)
------------ ------------ ------------ ------------
Total noninterest income.................................. $ 5,117 $ 2,349 $ 16,747 $ 6,096
============ ============ ============ ============
</TABLE>
Noninterest income increased by $2.8 million from $2.3 million in the
quarter ended September 30, 1997 to $5.1 million in the quarter ended September
30, 1998. The major components of this increase are (a) credit card fee income
increased by $9.3 million, (b) an increase in fee income on ATM cash services of
$0.3 million, due to a higher average balance of cash outstanding, (c) decreased
cost of real estate operations of $0.5 million primarily due to improved
execution on sales and a lower volume of foreclosed properties, (d) an increase
in gains on loans and securities activities of $1.5 million primarily due to
increased sale activity stemming from the reduction in the size of the balance
sheet for regulatory capital purposes. These positive variances were offset by
an $8.2 million write-off of credit card marketing fees owed to the Bank by MMG.
As a result of the cancellation of previously opened credit card accounts, the
Bank was entitled to a reimbursement from MMG of $8.2 million in marketing fees.
This amount was written off due to the uncertainty regarding the collectibility
of these amounts. Also, a decrease in other income (expense) of $1.3 million was
due to the prepayment fees on the early repayment of certain FHLB advances
related to the reduction in the size of the balance sheet.
Noninterest income increased by $10.7 million from $6.1 million in the nine
months ended September 30, 1997 to $16.7 million in the nine months ended
September 30, 1998. The major components of this increase are (a) credit card
fee income increased by $15.8 million, due to an increase in the volume of
credit cards issued in the period, (b) an increase in fee income on ATM cash
services of $2.1 million, due to higher cash balances outstanding for the
period, and (c) decreased costs of real estate operations of $3.1 million
primarily due to improved execution on sales and a lower volume of foreclosed
properties. These favorable variances were partially offset by the $8.2 million
write-off of credit card marketing fees owed to the Bank by MMG, the $4.0
million loss on the hedging program of fixed rate MBS in 1998 and a decrease in
other income (expense) of $1.3 million due to the prepayment fees on the early
repayment of some FHLB advances.
16
<PAGE>
OPERATING EXPENSES
The following table presents operating expenses for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Personnel and benefits.................................... $ 13,080 $ 7,631 $ 33,273 $ 21,418
Occupancy................................................. 3,457 3,080 10,506 8,368
FDIC insurance............................................ 672 755 1,972 1,836
Professional services..................................... 5,087 3,097 12,655 7,855
Credit card servicing..................................... 3,497 -- 6,774 --
Office-related expenses................................... 2,029 1,025 4,744 2,705
Other..................................................... 4,140 893 6,019 3,676
------------ ------------ ------------ ------------
Total operating expense................................. $ 31,962 $ 16,481 $ 75,943 $ 45,858
============ ============ ============ ============
</TABLE>
Operating expenses increased by $15.5 million to $32.0 million for the
quarter ended September 30, 1998 compared to $16.5 million for the quarter ended
September 30, 1997. The change was primarily due to (a) a $5.4 million increase
in personnel and benefits expense due to an increase of 262 in full-time
equivalent employees ("FTEs") related to the staffing of BPCS, the CalPERS
financial educational and planning program and increased personnel working on
the Year 2000 compliance project; (b) an increase of $0.4 million in occupancy
costs primarily due to the BPCS facilities in Beaverton, Oregon; (c) an increase
of $2.0 million of professional services primarily resulting from costs
associated with Year 2000 compliance, (d) an increase in credit card servicing
expense of $3.5 million related to third party processing services; (e) an
increase of $1.0 million in office related expenses primarily due to the
additional FTEs, and (f) an increase in other expenses of $3.2 million primarily
related to the write off of assets associated with the closure of certain
strategic initiatives, such as the Internet bank project and the proposed name
change for the Bank, and the write off of certain other long-term assets for
which the Company has changed its estimate of recovery.
Operating expenses increased by $30.1 million to $75.9 million for the nine
months ended September 30, 1998 compared to $45.9 million for the nine months
ended September 30, 1997. In addition to the changes described above regarding
the increases in expenses in the third quarter of 1998 as compared to the third
quarter of 1997, a portion of the increases in personnel and benefits, occupancy
and office related expenses for the nine months ended September 30, 1998 were
related to the acquisitions, in the third quarter of 1997, of Hancock Savings
Bank, a five-branch savings association, and one branch from Coast Federal
Savings.
Although the Company is currently taking steps to reduce operating
expenses, most of these reductions will not be fully effective until sometime in
1999 and these reductions may be more than offset by higher FDIC insurance
rates, potential litigation on costs relating to the termination of the major
credit card programs as well as shareholder suits and increased regulatory
costs.
INCOME TAXES
The Company's combined federal and state statutory tax rate is
approximately 42.0%. The increase in income tax expense of $5.6 million for the
three months ended September 30, 1998 as compared to the same period in 1997 is
due to the reversal of deferred tax benefits the Company had previously
recognized based upon a reassessment of its ability to utilize the tax benefits.
As of September 30, 1998, the Company reflected a net deferred tax asset of
$5.0 million. Under SFAS 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 109 could
require the partial or complete recapture of the $5.0 million deferred tax
benefit into expense in future periods.
17
<PAGE>
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 September 30, 1998, 21% of
Fidelity's real estate loan portfolio consisted of California single family
residences, while another 12% and 59% consisted of California multifamily
dwellings of 2 to 4 units and 5 or more units, respectively.
The performance of the Company's loans secured by multifamily and
commercial properties has been affected by southern California economic
conditions. These portfolios are particularly susceptible to the potential for
declines in the southern California economy, such as increasing vacancy rates,
declining rents, increasing interest rates, declining debt coverage ratios, and
declining market values for multifamily and commercial properties. In addition,
the possibility that 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.
During 1998, the Company significantly increased its primarily sub-prime
credit card portfolio. During the third quarter of 1998, the Bank experienced
increases in delinquencies and charge-offs in excess of prior expectations. The
performance of the Bank's credit card portfolio may be adversely affected by a
number of factors, including a national or regional economic slowdown or
recession, an increase in the number of customers seeking protection under the
bankruptcy laws, and fraud by third parties or customers. In addition, because
the portfolio is primarily sub-prime, the Bank may experience significantly
higher delinquencies and charge-offs than those experienced by other credit card
issuers.
Delinquent Loans
The following tables present net loan delinquencies as of the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loan delinquencies by number of days:
Amounts:
30 to 59 days....................... $ 8,706 $ 6,401 $ 11,664 $ 9,433 $ 12,059
60 to 89 days....................... 4,776 4,647 3,079 4,094 3,309
90 days and over.................... 15,551 18,338 16,420 13,075 21,691
------------- ------------- ------------- ------------- -------------
Total.................................... $ 29,033 $ 29,386 $ 31,163 $ 26,602 $ 37,059
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 0.35% 0.24% 0.42% 0.34% 0.42%
60 to 89 days....................... 0.19 0.17 0.11 0.14 0.12
90 days and over.................... 0.61 0.69 0.60 0.47 0.76
------------- ------------- ------------- ------------- -------------
Total.................................... 1.15% 1.10% 1.13% 0.95% 1.30%
============= ============= ============= ============= =============
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Credit card loan delinquencies by number of days:
Amounts:
30 to 59 days....................... $ 26,892 $ 9,187 $ 4,097 $ 2,472 $ 559
60 to 89 days....................... 10,606 5,419 2,814 1,432 352
90 days to 119 days................. 5,983 3,691 2,190 705 143
120 to 149 days..................... 5,031 2,278 1,553 376 76
150 days and over................... 1,420 1,206 1,003 428 4
------------- ------------- ------------- ------------- -------------
Total.................................... $ 49,932 $ 21,781 $ 11,657 $ 5,413 $ 1,134
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 8.64% 4.73% 3.63% 4.86% 2.66%
60 to 89 days....................... 3.41 2.79 2.50 2.82 1.68
90 days 119 days.................... 1.92 1.90 1.94 1.39 0.68
120 to 149 days..................... 1.62 1.17 1.38 0.74 0.36
150 days and over................... 0.46 0.62 0.89 0.84 0.02
------------- ------------- ------------- ------------- -------------
Total.................................... 16.05% 11.21% 10.34% 10.65% 5.40%
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Auto and other loan delinquencies by number of days:
Amounts:
30 to 59 days....................... $ 786 $ 210 $ 129 $ -- $ --
60 to 89 days....................... 109 43 -- 14 --
90 days and over.................... 112 264 124 70 --
------------- ------------- ------------- ------------- -------------
Total.................................... $ 1,007 $ 517 $ 253 $ 84 $ --
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 4.32% 1.89% 2.05% --% --%
60 to 89 days....................... 0.60 0.39 -- 0.54 --
90 days and over.................... 0.62 2.38 1.97 2.71 --
------------- ------------- ------------- ------------- -------------
Total.................................... 5.54% 4.66% 4.02% 3.25% --%
============= ============= ============= ============= =============
</TABLE>
Credit card delinquencies increased $28.1 million as of September 30, 1998
as compared to June 30, 1998. The increase in delinquencies in the credit card
portfolio is due to a significant increase in first payment defaults on new
cards originated during the third quarter and the continued seasoning of the
portfolio originated in prior periods. As a result of the Bank significantly
curbing new card originations and the attrition of accounts previously
outstanding, it is expected that the overall percentage of delinquencies related
to the seasoning of the portfolio may increase in future periods.
19
<PAGE>
NONPERFORMING ASSETS
All assets and ratios are reported net of specific reserves unless
otherwise stated. The following table presents asset quality details at the
dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NPAs by Type:
NPLs $ 29,318 $ 27,526 $ 21,166 $ 14,583 $ 22,027
REO, net of REO GVA............. 10,161 9,566 10,481 12,293 18,469
Other repossessed assets........ 183 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total NPAs.................... $ 39,662 $ 37,092 $ 31,647 $ 26,876 $ 40,496
============= ============= ============= ============= =============
Number of REO properties........... 72 64 78 88 110
============= ============= ============= ============= =============
NPAs by Composition:
Single family residences........ $ 8,594 $ 8,408 $ 7,708 $ 6,833 $ 7,493
Multifamily 2 to 4 units........ 4,192 4,295 3,357 2,039 3,047
Multifamily 5 units and over.... 11,917 14,800 13,305 15,309 29,161
Commercial and other............ 3,025 2,914 3,031 1,686 1,072
Credit cards.................... 12,434 7,175 4,746 1,509 223
REO GVA......................... (500) (500) (500) (500) (500)
------------- ------------- ------------- ------------- -------------
Total NPAs.................... 39,662 37,092 31,647 26,876 40,496
Total troubled debt restructurings
("TDRs")...................... 47,222 44,990 42,195 43,993 46,447
------------- ------------- ------------- ------------- -------------
Total TDRs and NPAs........... $ 86,884 $ 82,082 $ 73,842 $ 70,869 $ 86,943
============= ============= ============= ============= =============
Classified Assets:
NPAs $ 39,662 $ 37,092 $ 31,647 $ 26,876 $ 40,496
Performing classified loans .... 74,963 86,916 85,884 103,176 102,371
Other classified assets......... 3,999 1,706 2,065 23,450 14,027
------------- ------------- ------------- ------------- -------------
Total classified assets....... $ 118,624 $ 125,714 $ 119,596 $ 153,502 $ 156,894
============= ============= ============= ============= =============
Classified Asset Ratios:
NPLs to total assets............ 0.77% 0.64% 0.50% 0.35% 0.56%
NPLs to total loans............. 1.06% 0.97% 0.74% 0.52% 0.78%
NPAs to total assets............ 1.04% 0.87% 0.75% 0.64% 1.03%
TDRs to total assets............ 1.23% 1.05% 1.00% 1.06% 1.18%
NPAs and TDRs to total assets... 2.27% 1.92% 1.75% 1.70% 2.22%
Classified assets to total assets 3.10% 2.93% 2.83% 3.68% 4.00%
REO to NPAs..................... 25.62% 25.79% 33.12% 45.74% 45.61%
NPLs to NPAs.................... 73.92% 74.21% 66.88% 54.26% 54.39%
</TABLE>
NPAs of $39.7 million at September 30, 1998 increased $2.6 million over
June 30, 1998 as the decrease in the multifamily 5 units and over portfolio of
$2.9 million was offset by an increase in the credit card portfolio of $5.3
million.
20
<PAGE>
ALLOWANCE FOR ESTIMATED LOAN AND REO LOSSES
The following table summarizes the Bank's reserves and certain coverage
ratios at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
ALLL ........................... $ 88,500 $ 36,088 $ 32,192 $ 32,426 $ 34,664
Cash reserves................... 7,656 8,334 6,488 4,332 1,796
SVA............................. 10,522 15,800 15,843 18,112 23,744
------------- ------------- ------------- ------------- -------------
Total......................... 106,678 60,222 54,523 54,870 60,204
REO:
GVA............................. 500 500 500 500 500
SVA............................. 532 541 568 623 951
------------- ------------- ------------- ------------- -------------
Total allowances for estimated
losses....................... $ 107,710 $ 61,263 $ 55,591 $ 55,993 $ 61,655
============= ============= ============= ============= =============
Selected ratios:
Loan allowances to loans........ 3.42% 1.84% 1.86% 1.90% 2.07%
Total allowances to loans and REO
(1)............................. 3.77% 2.12% 1.91% 1.95% 2.14%
Total ALLL and cash reserves to:
Net loans (1)................. 3.38% 1.31% 1.33% 1.29% 1.27%
Net NPLs...................... 327.98% 137.40% 180.38% 252.06% 165.52%
Net loans and REO (1)......... 3.38% 1.55% 1.34% 1.30% 1.28%
Net NPAs...................... 243.70% 121.11% 122.22% 138.63% 91.27%
Total assets.................. 2.53% 1.05% 0.92% 0.89% 0.94%
</TABLE>
- ----------
(1) 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.
Total loan reserves, including cash reserves provided by the Bank's credit
card marketers, increased $46.5 million to $106.7 million at September 30, 1998
from $60.2 million at June 30, 1998 primarily due to a $51.8 million provision
for estimated loan losses and additional cash reserves provided by the Bank's
credit card marketers offset by charge-offs and buybacks totaling $13.6 million.
Charge-offs and buybacks of credit card accounts during the quarter were $9.5
million.
The Company establishes allowances for estimated losses on loans which
represent the Company's estimate of identified and unidentified losses in the
Company's portfolios. These estimates, while based upon historical loss
experience and other relevant data, are ultimately subjective and inherently
uncertain. The Company has established valuation allowances for estimated losses
on specific mortgage loans ("specific valuation allowances" or "SVA") and for
the inherent risk in the loan portfolios which has yet to be specifically
identified (ALLL). SVAs are allocated from the GVA when, in the Company's
judgment, a mortgage loan is impaired and the loss is probable and estimable.
When these estimated losses are determined to be permanent, such as when a
mortgage loan is foreclosed and the related property is transferred to REO,
specific valuation allowances are charged off.
In addition to reserves established by the Bank, cash reserves have been
provided by credit card affinity marketers under the credit enhancement programs
which are utilized to purchase accounts from the Bank after the accounts reach a
certain delinquent status. As previously discussed, due to uncertainties
regarding the ability of ADC, the Company's largest credit enhancement affinity
marketer, to purchase future charge-offs, the Bank provided additional reserves
during the third quarter.
The amount of the Bank's allowance for loan losses represents management's
estimate of the amount of loan losses likely to be incurred by the Bank, based
upon various assumptions as to economic and other conditions. As such, the
allowance for loan losses does not represent the amount of such losses that
could be incurred under adverse conditions that management does not consider to
be the most likely to arise. In addition, management's classification of assets
and evaluation of the adequacy of the allowance for loan losses is an ongoing
process. Consequently, there can be no assurance that material additions to the
Bank's allowance for loan losses will not be required in the future, thereby
adversely affecting earnings and the Bank's ability to maintain or build
21
<PAGE>
capital. While management believes that the current allowance is adequate to
absorb the known and inherent risks in the loan portfolio, no assurances can be
given that the allowance is adequate or that economic conditions which may
adversely affect the Bank's market area or other circumstances will not result
in future loan losses, which may not be covered completely by the current
allowance or may require an increased provision which could have a significant
adverse effect on the Bank's financial condition, results of operations and
levels of regulatory capital.
The following schedule summarizes the activity in the Bank's allowances for
estimated loan and real estate losses:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
------------ ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on July 1,................... $ 60,222 $ 1,041 $ 61,263 $ 59,964 $ 2,599 $ 62,563
Provision for losses .............. 51,782 27 51,809 4,251 (333) 3,918
Net funding (utilization) of
cash reserves.................... (678) -- (678) -- -- --
Charge-offs ....................... (5,312) (36) (5,348) (8,184) (1,094) (9,278)
Recoveries and other .............. 664 -- 664 2,377 279 2,656
------------ ----------- ----------- ----------- ----------- -----------
Balance on September 30, ............ $ 106,678 $ 1,032 $ 107,710 $ 58,408 $ 1,451 $ 59,859
============ =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
------------ ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1, ............... $ 54,870 $ 1,123 $ 55,993 $ 57,508 $ 2,081 $ 59,589
Provision for losses .............. 58,032 100 58,132 12,753 1,029 13,782
Net funding (utilization) of
cash reserves.................... 3,324 -- 3,324 -- -- --
Allowances related to acquisition.. -- -- -- 12,770 120 12,890
Charge-offs ....................... (14,086) (214) (14,300) (30,688) (2,369) (33,057)
Recoveries and other .............. 4,538 23 4,561 6,065 590 6,655
------------ ----------- ----------- ----------- ----------- -----------
Balance on September 30, ............ $ 106,678 $ 1,032 $ 107,710 $ 58,408 $ 1,451 $ 59,859
============ =========== =========== =========== =========== ===========
</TABLE>
The following table details the activity affecting specific loss reserves
for the period indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 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........ $ 15,800 $ 541 $ 16,341 $ 18,112 $ 623 $ 18,735
Allocations (to) from loan ALLL or
REO GVA.......................... (1,146) 27 (1,119) 5,316 123 5,439
Charge-offs........................ (4,132) (36) (4,168) (12,906) (214) (13,120)
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period indicated.... $ 10,522 $ 532 $ 11,054 $ 10,522 $ 532 $ 11,054
============ =========== =========== =========== =========== ===========
</TABLE>
22
<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.
The Bank's actual and required capital as of September 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS ADEQUATELY TO BE CATEGORIZED
ACTUAL CAPITALIZED AS WELL CAPITALIZED
----------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ---------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total capital (to risk-weighted
assets)..........................$ 188,700 8.66% $ 174,300 8.00% $ 217,800 10.00%
Core capital (to adjusted tangible
assets).......................... 160,800 4.22 152,400 4.00 190,500 5.00
Tangible capital (to tangible
assets).......................... 160,800 4.22 57,200 1.50 N/A
Core capital (to risk-weighted
assets).......................... 160,800 7.38 N/A 130,700 6.00
As of September 30, 1997:
Total capital (to risk-weighted
assets).......................... 243,100 11.22 173,300 8.00 216,600 10.00
Core capital (to adjusted tangible
assets).......................... 216,000 5.53 156,300 4.00 195,300 5.00
Tangible capital (to tangible
assets).......................... 216,000 5.53 58,600 1.50 N/A
Core capital (to risk-weighted
assets).......................... 216,000 9.97 N/A 129,900 6.00
</TABLE>
As of September 30, 1998, the Bank was "adequately capitalized" under the
Prompt Corrective Action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). As of
September 30, 1998, the most constraining of the capital ratio measurements was
core capital to adjusted tangible assets which had an excess of $8.4 million
above the minimum level required to be considered adequately capitalized. The
Bank's capital amounts and classification are subject to review by federal
regulators about components, risk-weightings and other factors. There are no
conditions or events since September 30, 1998 that management believes have
changed the institution's category.
An institution whose capital does not meet the amounts required in order to
be adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0% total capital
to risk-weighted assets, 3.0% core capital to risk-weighted assets, or 3.0% core
capital to adjusted total assets, it will be treated as significantly
undercapitalized. Finally, an institution will be treated as critically
undercapitalized if its ratio of "tangible equity" (core capital plus cumulative
preferred stock minus intangible assets other than supervisory goodwill and
purchased mortgage servicing rights) to adjusted total assets is equal to or
less than 2.0%.
An institution's capital category is based on its capital levels as of the
most recent of the following dates (1) the date the institution's most recent
quarterly Thrift Financial Report ("TFR") was required to be filed with the OTS,
(2) the date the institution received from the OTS its most recent final report
of examination or (3) the date the institution received written notice from the
OTS of the institution's capital category. If subsequent to the most recent TFR
or report of examination a material event has occurred that would cause the
institution to be placed in a lower capital category, the institution must
provide written notice to the OTS within 15 days, and the OTS shall determine
whether to change the association's capital category.
23
<PAGE>
MANDATORY SANCTIONS IF THE BANK WERE CATEGORIZED AS UNDERCAPITALIED
CAPITAL RESTORATION PLAN. An institution that is undercapitalized must
submit a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels of
activities the institution will conduct, and such other information as the OTS
may require. The OTS must act on the capital restoration plan expeditiously and
generally not later than 60 days after the plan is submitted.
The OTS may approve a capital restoration plan only if the OTS determines
that the plan is likely to succeed in restoring the institution's capital and
will not appreciably increase the risks to which the institution is exposed. In
addition, the OTS may approve a capital restoration plan only if the
institution's performance under the plan is guaranteed by every company that
controls the institution, up to the lesser of (a) 5% of the institution's total
assets at the time the institution became undercapitalized or (b) the amount
necessary to bring the institution into compliance with all capital standards as
of the time the institution fails to comply with its capital restoration plan.
Such guarantee must remain in effect until the institution has been adequately
capitalized for four consecutive quarters and the controlling company or
companies must provide the OTS with appropriate assurances of their ability to
perform the guarantee. If the controlling company guarantee is not acceptable,
the OTS may treat the undercapitalized institution as significantly
undercapitalized. There are additional restrictions which are applicable to
significantly undercapitalized institutions which are described below.
LIMITS ON EXPANSION. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
CAPITAL DISTRIBUTIONS. With one exception, an undercapitalized savings
institution generally may not pay any dividends or make other capital
distributions. Under the exception, the OTS may permit, after consultation with
the FDIC, repurchases or redemptions of the institution's shares that are made
in connection with the issuance of additional shares to improve the
institution's financial condition. Undercapitalized institutions also may not
pay management fees to any company or individual that controls the institution.
Similarly, an adequately capitalized institution may not make a capital
distribution or pay a management fee to a controlling person if such payment
would cause the institution to become undercapitalized.
BROKERED DEPOSITS AND BENEFIT PLAN DEPOSITS. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
24
<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 September 30, 1998 and 1997.
<TABLE>
<CAPTION>
TANGIBLE CORE CAPITAL RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
As of September 30, 1998:
Stockholders' equity................................ $ 174,100 $ 174,100 $ 174,100
Accumulated other comprehensive loss................ 1,400 1,400 1,400
Adjustments:
Goodwill.......................................... (6,100) (6,100) (6,100)
Intangible assets................................. (8,600) (8,600) (8,600)
ALLL.............................................. -- -- 27,900
------------ ------------ ------------
Regulatory capital................................ $ 160,800 $ 160,800 $ 188,700
------------ ------------ ------------
As of September 30, 1997:
Stockholders' equity................................ $ 226,000 $ 226,000 $ 226,000
Accumulated other comprehensive loss................ 6,600 6,600 6,600
Adjustments:
Goodwill.......................................... (6,500) (6,500) (6,500)
Intangible assets................................. (10,100) (10,100) (10,100)
ALLL.............................................. -- -- 27,100
------------ ------------ ------------
Regulatory capital.................................. $ 216,000 $ 216,000 $ 243,100
============ ============ ============
</TABLE>
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.
DEPOSITS
At September 30, 1998, the Company had deposits of $3.0 billion. The
following table presents the distribution of deposit accounts at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Money market savings accounts............................. $ 62,501 2.1% $ 55,885 1.9%
Checking accounts......................................... 341,586 11.2 336,036 11.7
Passbook accounts......................................... 55,544 1.8 67,502 2.3
------------- ----------- ------------- -----------
Total transaction accounts........................... 459,631 15.1 459,423 15.9
------------- ----------- ------------- -----------
Certificates of deposit $100,000 and over................. 853,681 28.2 721,206 24.9
Certificates of deposit less than $100,000................ 1,718,283 56.7 1,711,172 59.2
------------- ----------- ------------- -----------
Total certificates of deposit........................ 2,571,964 84.9 2,432,378 84.1
------------- ----------- ------------- -----------
Total deposits....................................... $ 3,031,595 100.0% $ 2,891,801 100.0%
============= =========== ============= ===========
</TABLE>
There were no brokered deposits outstanding at September 30, 1998 and 1997.
25
<PAGE>
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
September 30, 1998 include (a) a line of credit with the FHLB with $178.6
million available, (b) $130.0 million in unpledged securities available to be
placed in reverse repurchase agreements or sold and (c) $524.6 million of
unpledged loans, some of which would be available to collateralize additional
FHLB or private borrowings, or be securitized.
CONTINGENT OR POTENTIAL USES OF FUNDS
The Bank had unfunded loans totaling $0.3 million at September 30, 1998.
The Bank had unfunded loans totaling $2.3 million at September 30, 1997.
Additionally, unused lines of credit related to credit card loans and other
credit lines totaled $188.6 million as of September 30, 1998.
LIQUIDITY
The regulatory required average daily balance of liquid assets is 4% of the
liquidity base, which is based on a quarterly average. The Bank's quarterly
average regulatory liquidity ratio was 28.5% at September 30, 1998. The Bank's
monthly average regulatory liquidity ratio, under the liquidity regulations in
force at the time was 8.26% for the nine months ended September 30, 1997.
HOLDING COMPANY LIQUIDITY
At September 30, 1998 and 1997, Bank Plus had cash and cash equivalents of
$1.0 million and $0.7 million, respectively. Bank Plus has no material potential
cash producing operations or assets other than its investments in Fidelity,
Gateway and BPCS. Accordingly, Bank Plus is substantially dependent on dividends
from Fidelity, Gateway and BPCS in order to fund its cash needs, including its
payment obligations on the $51.5 million principal amount of Senior Notes issued
in exchange for Fidelity's Preferred Stock. See "--Recent Developments--
Regulatory Capital and Supervision."
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.
26
<PAGE>
The following table sets out the maturity and rate sensitivity of the
interest-earning assets and interest-bearing liabilities as of September 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.
<TABLE>
MATURITY AND RATE SENSITIVITY ANALYSIS
<CAPTION>
AS OF SEPTEMBER 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..................................... $ 208,822 $ -- $ -- $ -- $ -- $ 208,822
Investment securities (1) (2)............ 66,679 -- 1,067 -- -- 67,746
MBS (1).................................. 64,172 -- -- -- 434,069 498,241
Loans receivable:
ARMs and other adjustables (3)......... 2,192,921 504,372 43,070 11,401 359 2,752,123
Fixed rate loans....................... 5,495 222 4,107 13,479 119,972 143,275
------------ ------------ ------------ ------------ ------------ ------------
Total gross loans receivable......... 2,198,416 504,594 47,177 24,880 120,331 2,895,398
------------ ------------ ------------ ------------ ------------ ------------
Total.............................. 2,538,089 504,594 48,244 24,880 554,400 $ 3,670,207
------------ ------------ ------------ ------------ ------------ ============
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts (4).... 397,130 -- -- -- -- $ 397,130
Money market accounts (4)............ 62,501 -- -- -- -- 62,501
Fixed maturity deposits:
Retail customers................... 602,836 1,512,001 447,239 724 941 2,563,741
Wholesale customers................ 10 8,113 100 -- -- 8,223
------------ ------------ ------------ ------------ ------------ ------------
Total deposits.................. 1,062,477 1,520,114 447,339 724 941 3,031,595
------------ ------------ ------------ ------------ ------------ ------------
Borrowings:
FHLB advances (3).................... -- -- 485,000 100,000 -- 585,000
Other................................ -- -- -- 51,478 -- 51,478
------------ ------------ ------------ ------------ ------------ ------------
Total borrowings................... -- -- 485,000 151,478 -- 636,478
------------ ------------ ------------ ------------ ------------ ------------
Total........................... 1,062,477 1,520,114 932,339 152,202 941 $ 3,668,073
------------ ------------ ------------ ------------ ------------ ============
REPRICING GAP.............................. $ 1,475,612 $(1,015,520) $ (884,095) $ (127,322) $ 553,459
============ ============ ============ ============ ============
GAP TO TOTAL ASSETS........................ 38.56% (26.53)% (23.10)% (3.33)% 14.46%
CUMULATIVE GAP TO TOTAL ASSETS............. 38.56% 12.03% (11.07)% (14.40)% 0.06%
</TABLE>
- ----------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $64.4 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.
The Company manages interest rate risk by, among other things, maintaining
a portfolio consisting primarily of adjustable rate mortgage ("ARM") loans. ARM
loans comprised 83%, of the total mortgage loan portfolio at September 30, 1998
and 95% at September 30, 1997. The percentage of monthly adjustable ARMs to
total mortgage loans was approximately 62% and 73% at September 30, 1998 and
1997, respectively. Interest sensitive assets provide the Company with a degree
of long-term protection from rising interest rates. At September 30, 1998,
approximately 92% of Fidelity's total mortgage loan portfolio consisted of loans
which mature or reprice within one year, compared to approximately 93% at
September 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
September 30, 1998, 87% of the Bank's loans, which are indexed to COFI, as with
all COFI portfolios in the industry, do not reprice until some time after the
27
<PAGE>
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 has utilized various financial instruments in the normal course
of its business. By their nature all such instruments involve risk, and the
maximum potential loss may exceed the value at which such instruments are
carried. As is customary for these types of instruments, the Company usually
does not require collateral or other security from other parties to these
instruments. The Company manages its credit exposure to counterparties through
credit approvals, credit limits and other monitoring procedures. The Company's
Credit Policy Committee makes recommendations regarding counterparties and
credit limits which are subject to approval by the Board of Directors.
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. With the exception of the significant reduction in
stockholders' equity resulting from the losses incurred in the third quarter
ended September 30, 1998, there has been no significant change in interest rate
risk since December 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1997, the Bank entered into an agreement for credit card marketing
and servicing with ADC. Under the agreement, ADC was to be responsible for all
credit card losses. ADC was required to post cash reserves equal to expected
credit losses and was to purchase all credit card accounts that were more than
152 days delinquent. In September 1998, the Bank notified ADC that (i) the
credit reserves posted by ADC were inadequate and would need to be substantially
increased and (ii) ADC would be required to accelerate its purchase of
delinquent accounts to meet its contractual commitments. ADC objected to the
Bank's assertions and declined to meet these demands. Instead, ADC filed suit
seeking a temporary restraining order and preliminary injunction enjoining the
Bank's attempts to implement contract compliance, asserting that such actions
would put ADC out of business within a matter of days. The suit is entitled
AMERICAN DIRECT CREDIT, LLC, A NEVADA LIMITED LIABILITY COMPANY, PLAINTIFF V.
FIDELITY FEDERAL BANK, A FEDERAL SAVINGS BANK, DEFENDANT, in the United States
District Court, for the District of Idaho, Civil Case No. 98-0391-BLW. In this
suit ADC purported to state claims for breach of contract, unfair competition
and unfair trade practices as grounds for injunctive relief. On October 6, 1998,
the Court issued a temporary restraining order, conditioned upon a $300,000
bond, and set a hearing date on ADC's application for a preliminary injunction
for October 20, 1998. Prior to the issuance of this temporary restraining order,
the Bank gave ADC notice of contract termination on the asserted ground of ADC's
insolvency. The temporary restraining order issued by the Court also enjoined
implementation of this contract termination for insolvency.
28
<PAGE>
On October 23, 1998 the Court issued a preliminary injunction, but
conditioned its effectiveness upon ADC's placing up a further $2 million bond.
Even if effective, the preliminary injunction would have permitted the Bank to
assert its claims for immediate payment by ADC for delinquent accounts, which at
October 15, 1998 amounted to approximately $2.7 million, after a one month grace
period. ADC did not provide the $2 million bond necessary to make the
preliminary injunction effective.
ADC initiated settlement discussions that resulted in a written settlement
agreement as of October 30, 1998 providing for an orderly termination of the
contract between the Bank and ADC. Under this arrangement, ADC is permitted to
originate further credit card accounts of up to $18 million in initial balances,
subject to more stringent credit underwriting standards, during the remainder of
1998, after which no further credit cards will be issued. The settlement
agreement further provides that ADC may market the existing credit card
portfolio through March 31, 1999 based upon a specified formula price. From
January 1 through March 31, 1999, ADC will have a right of first refusal in
connection with any offer the Bank may receive for the portfolio. Until December
31, 1998, ADC will continue to service the credit card operations for a fixed
fee, and thereafter through March 31, 1999, ADC will provide certain collection
services only. Each of such relationships will terminate earlier if the existing
credit card portfolio is sold. Accordingly, by or before March 31, 1999 all
continuing relationships with ADC will be terminated, except for certain defined
obligations to indemnify against third-party claims. Documents to implement the
settlement, including releases and a dismissal with prejudice, are in the
process of review and finalization.
In November 1997, the Bank entered into a credit card marketing
relationship with MMG. MMG was to solicit members of certain agreed-upon
affinity groups to become credit card holders. The Bank was to provide servicing
and other related functions. MMG and the Bank were to share equally in credit
losses. In late summer of 1998, disputes arose between the parties. The Bank
asserted that MMG had improperly induced it to enter into the contract by
misrepresenting the nature and extent of an affinity group and MMG's intention
to market to that group. The Bank further asserted that MMG had breached their
contract by engaging in regulatory violations, by engaging in conduct which
violated certain rules pertaining to MasterCard issuance and by improperly
soliciting accounts on a widespread basis from individuals outside the
agreed-upon affinity groups.
In September 1998 the Bank instituted an arbitration proceeding in Los
Angeles based upon such claims, entitled IN THE MATTER OF ARBITRATION BETWEEN
FIDELITY FEDERAL BANK AND MMG DIRECT, INC., American Arbitration Association No.
72 147 01072 98, and in October 1998 the Bank reasserted MMG's defaults and
terminated the MMG contract. Thereafter, MMG filed an Original Petition and
Request for Injunctive Relief in the County Court at Law No. 6, Dallas County,
Texas entitled MMG DIRECT, INC., PLAINTIFF V. FIDELITY FEDERAL BANK, FSB,
DEFENDANT, Case No. 98-10086-E. This lawsuit purports to state a number of
claims, including fraud in the inducement, breach of contract, common law fraud,
negligent misrepresentation, accounting and constructive trust and seeks
injunctive relief and damages based upon various asserted misrepresentations and
omissions and failures to perform and breaches of contract attributed to the
Bank. The Company believes that the claims asserted by MMG in such suit are
improperly brought in such suit and are subject to arbitration. Further, the
Company believes that MMG's claims are without merit, that the contract between
MMG and the Bank properly has been terminated and that MMG is responsible to the
Bank for unpaid credit losses and other damages in substantial amount. The Bank
intends to promptly pursue the above positions and claims against MMG.
On October 19, 1998 a purported class action was filed against the Company
and its current and immediately preceding chief executive officers. The case is
entitled HOWARD GUNTY PROFIT SHARING PLAN, BOTH INDIVIDUALLY AND ON BEHALF OF
ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS V. RICHARD M. GREENWOOD, MARK K.
MASON, BANK PLUS CORPORATION, AND DOES 1 THROUGH 50, INCLUSIVE, DEFENDANTS, Los
Angeles Superior Court, Central Judicial District, Case No. BC199336. This
action alleges that the Company failed to make adequate public disclosure
concerning losses in the Bank's credit card operations during the period from
August 14, 1998 (when the Company filed its quarterly report on Form 10-Q for
the second quarter) through September 22, 1998 (when the Company issued a press
release concerning its credit card losses). The complaint includes claims for
negligent misrepresentation, common law fraud, statutory fraud and violations of
the California Corporations Code. The complaint has not yet been served on the
29
<PAGE>
Company. It is the Company's view that certain of the claims asserted in the
complaint are legally deficient and that none of the claims asserted by the
plaintiff are well grounded factually. The Company intends to defend vigorously
the asserted claims.
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. The other two cases have been dismissed.
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 the remaining suit. The legal
responsibility and financial exposure of this claims presently cannot be
reasonably ascertained and, accordingly, there is a risk that the outcome of the
remaining claim 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 parties are in settlement negotiations but no assurances can be given
regarding the outcome of such negotiations.
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.
30
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
- ------------- -----------------------------------------------------------------
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).*
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 Promissory Note, dated August 3, 1994, by Citadel Realty, Inc. in
favor of Fidelity and related loan documents (1661 Camelback
Road) (incorporated by reference to Exhibit 10.14 to the Form
8-B).*
10.2 Guaranty Agreement, dated August 3, 1994, by Citadel Holding
Corporation ("Citadel") in favor of Fidelity (incorporated by
reference to Exhibit 10.15 to the Form 8-B).*
10.3 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).*
10.4 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).*
10.5 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 10-Q
for the quarter ended June 30, 1997).*
10.6 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 10-Q
for the quarter ended June 30, 1997).*
10.7 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).*
31
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------- -----------------------------------------------------------------
10.8 Stock Option and Equity Incentive Plan (incorporated by reference
to Exhibit 10.24 to the quarterly report on Form 10-Q for the
quarterly period ended March 31, 1997).*
10.9 Retirement Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.25 to the Form 8-B).*
10.10 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 10-Q for the quarter ended June 30,
1997).*
10.11 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 10-Q
for the quarter ended June 30, 1997).*
10.12 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 10-Q
for the quarter ended June 30, 1997).*
10.13 Form of Incentive Stock Option Agreement between the Bank and
certain officers (incorporated by reference to Exhibit 10.30 to
the Form 8-B).*
10.14 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).*
10.15 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).*
10.16 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).*
10.17 Standard Office Lease--Net, dated July 15, 1994, between the Bank
and 14455 Ventura Blvd., Inc. (incorporated by reference to
Exhibit 10.35 to the Form 8-B).*
10.18 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).*
10.19 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).*
10.20 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).*
10.21 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).*
10.22 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).*
10.23 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).*
10.24 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).*
10.25 Bank Plus Corporation Deferred Compensation Plan (incorporated by
reference to Exhibit 10.56 to the quarterly report on Form 10-Q
for the quarter ended June 30, 1997).*
10.26 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).*
10.27 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 10-Q for the
quarter ended March 31, 1998).*
32
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------- -----------------------------------------------------------------
10.28 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
10-Q for the quarter ended March 31, 1998).*
10.29 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 10-Q for the quarter ended
March 31, 1998).*
10.30 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 10-Q for the quarter ended
March 31, 1998).*
10.31 Settlement Term Sheet dated as of October 30, 1998 between
Fidelity and American Direct Credit LLC
27. Financial Data Schedule.
- ----------
* Indicates previously filed documents.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the SEC on August 25, 1998
reporting on Item 5. "Other Events" regarding the retention of Keefe, Bruyett &
Woods, Inc. as financial advisor to assist the Company in the pursuit of its
strategic objectives.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK PLUS CORPORATION
Registrant
Date: November 19, 1998 /s/ Mark K. Mason
-------------------------------------------
Mark K. Mason
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER)
EXHIBIT 10.31
SETTLEMENT TERM SHEET
The parties will stipulate to the entry of a modified order, subject to court
approval, for a modified preliminary injunction consistent with the following
terms and conditions, which the parties undertake to cooperatively prepare
forthwith. Capitalized terms used herein and not otherwise defined are given the
same meaning as used in the American Direct Credit Bankcard Program Agreement
(the "Agreement") between Fidelity Federal Bank, A Federal Savings Bank (the
"Bank") and American Direct Credit LLC ("ADC") dated March 5, 1997. The
Agreement, as modified by the modified preliminary injunction and by the
definitive amendment reflecting the terms hereof, will remain in effect.
1. Certain ADC Members will market the Fidelity/ADC credit card receivable
portfolio and Accounts (the "Portfolio") through the end of March 1999.
Representatives of ADC or American Direct Capital ("Capital") are not
authorized to bind or obligate the Bank in any way. No agency,
partnership, joint venture or other legal relationship exists or will be
created hereby.
2. ADC shall have the exclusive right to market and purchase, or cause a
third party to purchase, the Portfolio from the date hereof through
December 31, 1998. The Bank will cooperate in the efforts to sell the
Portfolio as reasonably requested by ADC at ADC's expense and at no
expense to the Bank, but the Bank will only be obligated to sell the
Portfolio to ADC or its bona fide nominee that (i) pays a cash price
equal to at least the gross balance of the receivables (before reserves
and excluding receivable balances of Default Accounts) on the date of
sale discounted by 11% and (ii) consummates such purchase on or before
December 31, 1998. In addition to the cash price to be received by the
Bank from the purchaser, the Bank shall also retain the balances in the
/>Reserve Account and the Settlement Account (i.e., the Bank shall
receive such retention in addition to the purchase price paid by the
purchaser). The Bank shall have unfettered discretion to reject any
proposal to acquire the Portfolio for any price less than that specified
in this paragraph.
3. If the Portfolio is not sold by December 31, 1998, ADC shall have the
right to market and purchase, or cause a third party to purchase, the
Portfolio from January 1, 1999 through March 31, 1999. If the Bank
receives a bona fide offer to acquire the Portfolio (the "Offer") between
January 1, 1999 and March 31, 1999 that the Bank desires to accept, the
Bank shall so notify ADC in a writing setting forth the terms of such
Offer. ADC shall have right (the "Right of First Refusal") to acquire the
Portfolio for a cash price equal to the purchase price set forth in the
Offer, but such right must be exercised in good faith by ADC, and such
purchase by ADC must be consummated, within ten business days of ADC's
receipt from the Bank of the written notice of the Offer. If ADC shall
fail to so exercise the Right of First Refusal and to so consummate such
purchase, the Bank shall be free to sell the Portfolio pursuant to the
Offer. Prior to the earlier of the date on which the Bank notifies ADC of
an Offer or March 31, 1999, the Bank will cooperate in the efforts to
sell the Portfolio as reasonably requested by ADC at ADC's expense and at
no expense to the Bank, but the Bank will only be obligated to sell the
Portfolio to ADC or its bona fide nominee that (i) pays a cash price
equal to at least the gross balance of the receivables (before reserves
and excluding receivable balances of Default Accounts) on the date of
sale discounted by 11% and (ii) consummates such purchase on or before
March 31, 1999. If the Portfolio is sold to ADC or its bona fide nominee
under the terms of this paragraph, the Bank will pay ADC $300,000.
1
<PAGE>
4. If ADC purchases or obtains a purchaser for the Portfolio, the Bank
agrees, at ADC's expense, to (i) transfer the Bank's Mastercard bank
identification number ("BIN") associated with the Portfolio to the
purchaser or other person as requested by ADC, provided such transfer
complies with all Mastercard regulations, (ii) take any action the Bank
determines is reasonable to attempt to cause Card Management Corporation
to agree to terminate its servicing of the Portfolio without payment by
ADC of an early termination fee, (iii) permit the purchaser of the
Portfolio to use the BIN until such time as a deconversion may be
completed (at ADC's cost), and (iv) take such further actions, at ADC's
expense, as ADC may reasonably request to effect the transfer of the
Portfolio to the purchaser.
5. In any sale of the Portfolio, the Bank's representations and warranties
will be limited to its ownership of the receivables and its corporate
authority to enter into such sales transaction. Specifically, the
Portfolio will be sold without recourse and the Bank will not be required
to make representations and warranties as to the credit quality of the
Portfolio and will not undertake to repurchase any receivables sold. Upon
consummation of such sale or as otherwise provided herein, the Dismissal
(as defined below) shall be filed in the litigation and the Releases (as
defined below) shall become effective.
6. Originations by ADC for the months of November and December shall not
exceed $10 million in November and $8 million in December. ADC shall
immediately cease the origination of any Accounts in the State of Alabama
other than Accounts marketed through Brainstorm U.S.A. Such originations
through Brainstorm U.S.A. shall be limited to $50,000 per month. Each
origination shall be subject to audit by the Bank or its designee (i.e.,
a 100% audit of new Accounts), provided that the Bank shall continue to
use its reasonable efforts to process and approve new Accounts. The Bank
may have an independent auditor monitor the flow of funds into and out of
ADC bank accounts. The Bank, at its sole cost and expense, may maintain
representatives on site at ADC to insure the integrity of ADC's records,
systems, documents and operations.
7. For all new originations, the Bank shall withhold from sales advances all
funds other than those to be remitted to dealers and shall deposit such
withheld amounts into the Reserve Account and such funds shall become
part of the Reserve Fund. Funds to be remitted to dealers will be
transferred to ADC on a daily basis consistent with past practice and
without offset of any kind.
8. With respect to new account applications received by ADC from and after
November 1, 1998, the Bank will not be required to advance funds for any
accounts with a FICO credit score less than 585; and ADC shall not submit
applications to the Bank with FICO credit scores less than 585.
9. Computations of required Reserves and distributions to ADC or
replenishment by ADC of the Reserve Account or Settlement Account,
including existing unsatisfied demands by the Bank for the September 15th
and October 15th settlements and all payments which otherwise would have
been required under the Agreement on November 15th and December 15th,
shall be suspended until December 31, 1998, provided, however, that the
foregoing shall not prohibit the Bank from transferring funds between the
Settlement Account and the Reserve Account pursuant to the terms of the
Agreement. Any Accounts charged off after November 1, 1998 shall be
retained by the Bank. The Bank shall continue to provide ADC with
information concerning all Bank activity related to the Operating
Account, Settlement Account and Reserve Account through December 31,
1998, and shall provide ADC with CMC's monthly NOAH reports through March
31, 1999.
2
<PAGE>
10. The Bank will allow ADC to withdraw from the Settlement Account or the
Reserve Account up to $800,000 in November 1998 and up to an additional
$800,000 in December 1998 as reimbursement for actual expenses incurred
to originate or service accounts, including without limitation, payroll,
rent and other occupancy costs, and similar operating expenses, provided,
however, that no payment will be made for expenses incurred payable to
affiliated third parties other than reasonable salaries payable in the
ordinary course of business to ADC members who were employees of ADC on
September 30, 1998. Specifically excluded from reimbursement are legal
expenses related to disputes between parties to the Agreement. Bank shall
permit such withdrawals on the third business day following the day on
which ADC provides the Bank with a reasonable description and appropriate
supporting documentation of the expense to be paid with the withdrawn
funds. Bank may monitor the use of such funds as set forth in paragraph
6.
11. If the Bank does not sell the Portfolio on or before December 31, 1998,
the Bank shall retain ADC to provide collection services for the
Portfolio for a servicing fee of $400,000 per month. Upon the earliest to
occur of March 31, 1999, the date the Portfolio is sold or the date as of
which the Bank determines, in its sole and unfettered discretion, that
ADC's servicing performance does not meet performance standards to be set
forth in a definitive document, the Bank's retention of ADC to provide
such servicing shall terminate.
12. ADC shall grant the Bank a first lien on and security interest in any
interest ADC has in the Settlement Account and will create, document and
perfect the same to the Bank's satisfaction. Upon the earlier of the
termination of the Agreement or the sale of the Portfolio, the Bank
agrees to terminate the security interest it has in the System pursuant
to Section 9 of the Agreement and if requested by ADC, shall execute a
UCC termination statement to that effect.
13. Capital and ADC shall be responsible for damages and shall indemnify and
hold harmless the Bank from and against any and all claims, damages and
losses caused by ADC or its members or for which ADC is responsible under
the Agreement and relating to (i) the efforts to market and sell the
Portfolio, (ii) loans generated in violation of FICO minimums, (iii)
fraudulent marketing of cards, (iv) any allegations of lender liability
or successor liability, (v) any allegations of regulatory violations and
(vi) any other wrongful conduct of ADC, Capital and/or their respective
members. Bank may conduct reasonable on-going compliance audits to
monitor ADC's performance.
14. ADC shall immediately execute and deliver to the Bank a dismissal with
prejudice of the pending litigation (the "Dismissal"). ADC and the Bank
each shall execute and deliver mutual general releases (the "Releases").
The form of Releases shall exclude from their effect ADC's and the Bank's
obligations (except to the extent modified hereby) to indemnify each
other pursuant to the Agreement (including, without limitation, ADC's
existing and continuing obligation to indemnify the Bank from any and all
claims flowing from the litigation now pending in the State of Alabama
with respect to irregularities in credit card issuance and from any
further such litigation that has been or may be instituted), which
obligations shall survive any termination of the Agreement. The Dismissal
and Releases shall become effective pursuant to paragraphs 5 and 15. The
Releases shall be held, until effective, by counsel for the parties and
the Dismissal shall be held by counsel for the Bank until filing is
appropriate.
3
<PAGE>
15. If the sale of the Portfolio is not consummated by December 31, 1998,
then (i) the Bank will be entitled to acquire all of ADC's interest in
the Portfolio including any interest ADC may have in the Reserve Account
and the Settlement Account in exchange for a release by the Bank of ADC
from all claims under the Agreement, (ii) the Agreement will terminate at
11:59 p.m. (Los Angeles time) on such date (except that ADC's and the
Bank's obligations to indemnify each other pursuant to the Agreement
(including, without limitation, ADC's existing and continuing obligation
to indemnify the Bank from any and all claims flowing from the litigation
now pending in the State of Alabama with respect to irregularities in
credit card issuance and from any further such litigation that has been
or may be instituted) shall survive any termination of the Agreement),
(iii) the Dismissal and the Releases shall become effective and the
Dismissal shall be filed in the pending litigation, and (iv) the $300,000
bond shall be forfeited to the Bank.
16. The existing $300,000 bond will remain in effect. Upon the closing of a
sale of the Portfolio to ADC or its nominee prior to December 31, 1998
pursuant to the terms hereof, the $300,000 shall be returned to ADC.
Otherwise, said bond and funds represented thereby shall be forfeited to
the Bank. ADC will not be required to post a bond in the amount of $2
million.
17. In the absence of a breach of the Agreement, as modified hereby, a
violation of the preliminary injunction, as modified, or further order of
Court, the court-mandated arbitration shall be stayed until January 1,
1999. Upon effectiveness of the Releases and entry of the Dismissal, the
requirement for arbitration shall be terminated. ADC shall not contest
the venue for arbitration under the Agreement, which shall be maintained
in Los Angeles, California.
18. For purposes of performance under the Agreement and this agreement prior
to December 31, 1998, ADC shall waive any argument that prior course of
conduct or dealing has in any way modified the Agreement.
19. If ADC or the Bank materially breaches the provisions of the Agreement or
the provisions hereof on or before December 31, 1998, then the
non-breaching party may, at its option, exercisable only or before
December 31, 1998, terminate the foregoing arrangements, whereupon the
Releases and the Dismissal shall be void and of no effect, the original
terms of the preliminary injunction shall be reinstituted, and ADC shall
be required to post all bonds and make all payments to the Bank or the
Reserve Account required by or consistent with such injunction as if the
preliminary injunction had been continuously in effect.
20. The Bank and ADC shall use their best efforts to complete all definitive
documents necessary to implement this agreement by Tuesday, November 3,
1998 and such definitive documents shall be effective on November 3,
1998. In the interim, ADC and the Bank shall act as though this agreement
were fully documented and in full force and effect.
4
<PAGE>
21. This agreement is subject to OTS approval and/or non-objection and may be
cancelled by the Bank for non- or unsatisfactory performance. When
executed, a copy of this agreement may be delivered to the Court for
purposes of facilitating the entry of the modified preliminary
injunction.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
October 30, 1998.
FIDELITY FEDERAL BANK, A FSB
By: /S/ MARK K. MASON
-----------------------------------------
Mark K. Mason, Chief Executive Officer
AMERICAN DIRECT CREDIT LLC
By: /S/ BRIAN MacINNIS
-----------------------------------------
Brian MacInnis, Manager
5
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 0 89,215
<INT-BEARING-DEPOSITS> 0 201,013
<FED-FUNDS-SOLD> 0 7,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 498,241
<INVESTMENTS-CARRYING> 0 67,746
<INVESTMENTS-MARKET> 0 67,771
<LOANS> 0 2,858,420
<ALLOWANCE> 0 99,022
<TOTAL-ASSETS> 0 3,825,210
<DEPOSITS> 0 3,031,595
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 29,136
<LONG-TERM> 0 636,478
0 0
0 0
<COMMON> 0 195
<OTHER-SE> 0 272<F1>
<TOTAL-LIABILITIES-AND-EQUITY> 0 3,825,210
<INTEREST-LOAN> 56,368 164,596
<INTEREST-INVEST> 21,179 62,710
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 77,547 227,306
<INTEREST-DEPOSIT> 37,336 109,431
<INTEREST-EXPENSE> 54,834 163,613
<INTEREST-INCOME-NET> 22,713 63,693
<LOAN-LOSSES> 51,782 58,032
<SECURITIES-GAINS> 1,093 (522)
<EXPENSE-OTHER> 32,530 78,123
<INCOME-PRETAX> (55,914)<F2> (53,535)<F2>
<INCOME-PRE-EXTRAORDINARY> (55,914) (53,535)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (59,791) (57,426)
<EPS-PRIMARY> (3.08) (2.96)
<EPS-DILUTED> (3.08) (2.96)
<YIELD-ACTUAL> 2.16 1.98
<LOANS-NON> 0 29,318
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 47,222
<LOANS-PROBLEM> 0 74,963
<ALLOWANCE-OPEN> 60,222 58,870
<CHARGE-OFFS> 5,312 14,086
<RECOVERIES> 664 4,538
<ALLOWANCE-CLOSE> 106,678<F3> 106,678<F3>
<ALLOWANCE-DOMESTIC> 106,678<F3> 106,678<F3>
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 88,500 88,500
<FN>
<F1> Minority interest: Preferred stock of consolidated subsidiary
<F2> Earnings before income tax benefit and $7 minority interest for 3 mos.,
$21 for 9 mos., which is included in (Expense-Other)
<F3> Includes cash reserves of $7.7 million.
</FN>
</TABLE>
