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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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: (818) 549-3116
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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 9, 1999, Registrant had outstanding 19,441,865 shares of
Common Stock, par value $.01 per share.
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BANK PLUS CORPORATION
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1999 and
December 31, 1998..................................................................... 1
Consolidated Statements of Operations for the quarters and nine months ended
September 30, 1999 and 1998........................................................... 2
Consolidated Statements of Comprehensive Income for the quarters and
nine months ended September 30, 1999 and 1998......................................... 3
Consolidated Statements of Cash Flows for the quarters and nine months ended
September 30, 1999 and 1998........................................................... 4
Notes to Consolidated Financial Statements............................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 31
Item 6. Exhibits and Reports on Form 8-K......................................................... 34
a. Exhibits........................................................................... 34
b. Reports on Form 8-K................................................................ 34
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i
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents...................................................... $ 208,496 $ 380,507
Investment securities available for sale ("AFS"), at fair value................ -- 28,797
Investment securities held to maturity, at amortized cost (market value of
$1,136 and $1,099 at September 30, 1999 and December 31, 1998, respectively). 1,134 1,084
Mortgage-backed securities ("MBS") available for sale, at fair value........... 364,918 465,010
Loans receivable, net of allowances for estimated loan losses of $70,590
and $106,171 at September 30, 1999 and December 31, 1998, respectively....... 2,270,696 2,665,576
Investment in Federal Home Loan Bank ("FHLB") stock............................ 30,706 65,358
Premises and equipment......................................................... 35,213 39,042
Other assets................................................................... 47,134 66,685
-------------- --------------
Total Assets................................................................. $ 2,958,297 $ 3,712,059
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits..................................................................... $ 2,480,446 $ 2,922,531
FHLB advances................................................................ 295,000 585,000
Senior notes................................................................. 51,478 51,478
Other liabilities............................................................ 23,687 25,390
-------------- --------------
Total Liabilities......................................................... 2,850,611 3,584,399
-------------- --------------
Minority interest.............................................................. 272 272
Stockholders' equity:
Common stock:
Common stock, par value $.01 per share; 78,500,000 shares
authorized; 19,463,343 and 19,434,043 shares outstanding
at September 30, 1999 and December 31, 1998, respectively............... 195 194
Paid-in capital.............................................................. 275,285 275,131
Accumulated other comprehensive loss......................................... (6,887) (2,795)
Accumulated deficit.......................................................... (161,179) (145,142)
-------------- --------------
Total Stockholders' Equity................................................ 107,414 127,388
-------------- --------------
Total Liabilities and Stockholders' Equity........................................ $ 2,958,297 $ 3,712,059
============== ==============
</TABLE>
See notes to consolidated financial statements.
1
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<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,
-----------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans................................................. $ 51,762 $ 56,368 $ 165,531 $ 164,596
MBS................................................... 6,101 11,584 17,012 36,858
Investment securities and other....................... 3,267 10,324 13,650 26,732
-------------- -------------- -------------- --------------
Total interest income............................... 61,130 78,276 196,193 228,186
-------------- -------------- -------------- --------------
INTEREST EXPENSE:
Deposits.............................................. 26,735 37,336 86,623 109,431
FHLB advances......................................... 6,267 15,990 22,411 49,563
Other borrowings...................................... 1,572 1,508 4,721 4,619
-------------- -------------- -------------- --------------
Total interest expense.............................. 34,574 54,834 113,755 163,613
-------------- -------------- -------------- --------------
Net interest income...................................... 26,556 23,442 82,438 64,573
Provision for estimated loan losses...................... 17,500 51,782 62,300 58,032
-------------- -------------- -------------- --------------
Net interest income after provision for estimated loan
losses................................................. 9,056 (28,340) 20,138 6,541
-------------- -------------- -------------- --------------
NONINTEREST INCOME (EXPENSE):
Loan fee income....................................... 1,006 924 2,580 2,358
Credit card fees...................................... 5,161 1,056 25,263 7,644
Fee income from the sale of uninsured investment
products............................................ 1,571 1,709 4,792 5,118
Fee income from deposits and other fee income......... 1,051 950 2,958 2,537
Losses on securities and trading activities........... -- 364 -- (1,402)
(Loss) gain on sales of loans, net.................... (594) 824 (540) 842
Gain on sale of branches, net......................... 5,914 -- 5,914 --
Fee income from automated teller machine ("ATM") cash
services............................................ -- 453 1,314 2,260
Other income (expense)................................ 558 (1,331) 310 (1,331)
Real estate operations, net........................... (284) (561) (1,054) (2,159)
-------------- -------------- -------------- --------------
Total noninterest income............................ 14,383 4,388 41,537 15,867
-------------- -------------- -------------- --------------
OPERATING EXPENSE:
Personnel and benefits................................ 10,730 13,080 32,640 33,273
Occupancy............................................. 3,990 3,457 11,443 10,506
Federal Deposit Insurance Corporation ("FDIC")
insurance........................................... 1,975 672 5,356 1,972
Professional services................................. 2,988 5,087 11,030 12,655
Credit card data processing and servicing............. 2,789 3,497 9,278 6,775
Office-related expenses............................... 1,587 2,029 4,206 4,744
Other................................................. 1,773 4,140 3,738 6,018
-------------- -------------- -------------- --------------
Total operating expense............................. 25,832 31,962 77,691 75,943
-------------- -------------- -------------- --------------
Loss before income taxes and minority
interest in subsidiary................................ (2,393) (55,914) (16,016) (53,535)
Income taxes............................................. -- 3,870 -- 3,870
-------------- -------------- -------------- --------------
Loss before minority interest in subsidiary.............. (2,393) (59,784) (16,016) (57,405)
Minority interest in subsidiary.......................... 7 7 21 21
-------------- -------------- -------------- --------------
Loss to common stockholders.............................. $ (2,400) $ (59,791) $ (16,037) $ (57,426)
============== ============== ============== ==============
LOSS PER SHARE ("EPS"):
Basic................................................. $ (0.12) $ (3.08) $ (0.82) $ (2.96)
============== ============== ============== ==============
Diluted............................................... $ (0.12) $ (3.08) $ (0.82) $ (2.96)
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................. 19,463,343 19,395,952 19,460,132 19,383,839
============== ============== ============== ==============
Diluted............................................... 19,463,343 19,395,952 19,460,132 19,383,839
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
2
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<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Loss to common stockholders............................... $ (2,400) $ (59,791) $ (16,037) $ (57,426)
-------------- -------------- -------------- --------------
Other comprehensive loss:
Investment securities and MBS AFS:
Unrealized holding losses arising during
the period, net.................................... (1,080) (2,214) (4,092) (1,804)
Reclassification adjustment for gains included
in loss, net....................................... -- (707) -- (783)
-------------- -------------- -------------- --------------
Total............................................ (1,080) (2,921) (4,092) (2,587)
-------------- -------------- -------------- --------------
Derivative financial instruments:
Unrealized holding gains arising during
the period, net.................................... -- 4,715 -- 1,376
Reclassification adjustment for losses
included in loss, net.............................. -- 40 -- 4,322
-------------- -------------- -------------- --------------
Total............................................ -- 4,755 -- 5,698
-------------- -------------- -------------- --------------
Other comprehensive (loss) earnings.................... (1,080) 1,834 (4,092) 3,111
-------------- -------------- -------------- --------------
Comprehensive loss........................................ $ (3,480) $ (57,957) $ (20,129) $ (54,315)
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (2,400) $ (59,791) $ (16,037) $ (57,426)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provisions for estimated loan and real estate losses 17,500 51,810 62,439 58,132
Losses (gains) on sale of loans and securities..... 594 (1,917) 540 (320)
FHLB stock dividends............................... (414) (942) (1,765) (2,719)
Depreciation and amortization...................... 1,997 1,940 6,056 5,287
Accretion of premiums and net deferred loan and
credit card fees and amortization of discounts... (2,625) 1,739 (15,959) 6,376
Deferred income tax expense (benefit).............. -- 3,353 (56) 3,261
Issuance of stock and stock options................ -- 460 -- 460
Purchases of MBS held for trading....................... -- (10,169) -- (48,978)
Proceeds from sales and principal repayments of
MBS held for trading.................................. -- 48,758 -- 89,637
Proceeds from redemption (purchases) of FHLB stock...... 4,378 (1,250) 36,992 (1,250)
Interest receivable decrease............................ 504 2,587 3,326 3,370
Other assets decrease (increase)........................ 5,209 (91,519) 11,557 (92,843)
Interest payable decrease............................... (1,414) (4,441) (4,018) (5,627)
Other liabilities increase.............................. 3,718 1,117 3,073 4,651
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities... 27,047 (58,265) 86,148 (37,989)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities AFS................. -- -- 28,831 10,000
Proceeds from sales of investment securities AFS ....... -- 33,000 -- 90,805
Purchases of MBS AFS.................................... (24,901) -- (135,478) (60,052)
Proceeds from sales and principal repayments of MBS AFS. 50,562 242,748 228,219 412,052
Purchases of derivative securities...................... -- (1,210) -- (5,322)
Loans receivable, net decrease (increase)............... 169,497 36,335 340,525 (14,768)
Proceeds from sales of real estate...................... 2,707 4,357 12,606 23,301
Dispositions (purchases) of premises and equipment, net. 218 (2,730) (790) (8,817)
-------------- -------------- -------------- --------------
Net cash provided by investing activities............. 198,083 312,500 473,913 447,199
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings,
net (decrease) increase............................... (22,656) (4,048) (32,473) 52,650
Certificate accounts, net (decrease) increase........... (115,159) (19,528) (409,612) 87,144
Proceeds from FHLB advances............................. -- 100,000 -- 705,000
Repayments of FHLB advances............................. (200,000) (475,000) (290,000) (1,129,960)
Proceeds from exercise of stock options................. -- 30 13 239
-------------- -------------- -------------- --------------
Net cash used in financing activities................. (337,815) (398,546) (732,072) (284,927)
-------------- -------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents....... (112,685) (144,311) (172,011) 124,283
Cash and cash equivalents at beginning of period........... 321,181 434,539 380,507 165,945
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period................. $ 208,496 $ 290,228 $ 208,496 $ 290,228
============== ============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other borrowings $ (35,606) $ (58,976) $ (116,654) $ (168,241)
Income tax refunds (payments)........................... 17 (156) 1,519 (510)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure................ 2,851 5,169 12,149 21,458
Loan originated to finance sale of real estate owned.... 1,320 189 2,116 189
</TABLE>
See notes to consolidated financial statements.
4
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BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bank Plus
Corporation ("Bank Plus") and its subsidiaries. Bank Plus is the holding company
for Fidelity Federal Bank, A Federal Savings Bank, and its subsidiaries (the
"Bank" or "Fidelity") and Gateway Investment Services, Inc. ("Gateway")
(collectively, the "Company"). The Company offers a broad range of consumer
financial services, including demand and term deposits and loans to consumers.
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. Fidelity operates
through 36 full-service branches, 35 of which are located in southern
California, principally in Los Angeles and Orange counties, and one of which is
located in Bloomington, Minnesota, which is subject to a contract of sale.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements, prepared from the Company's books and records, contain all
adjustments necessary for a fair presentation of the Company's financial
condition as of September 30, 1999 and December 31, 1998, and the results of
operations, statements of comprehensive income and statements of cash flows for
the three and nine months ended September 30, 1999 and 1998. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1999 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, 1998,
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.
5
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BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
2. EARNINGS PER SHARE
The reconciliation of the numerators and denominators used in basic and
diluted EPS follows for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Loss to common stockholders............................... $ (2,400) $ (59,791) $ (16,037) $ (57,426)
============== ============== ============== ==============
Weighted average common shares outstanding:
Basic................................................. 19,463,343 19,395,952 19,460,132 19,383,839
Effect of dilutive securities-- stock options......... -- -- -- --
Effect of dilutive securities-- deferred stock awards. -- -- -- --
-------------- -------------- -------------- --------------
Diluted............................................... 19,463,343 19,395,952 19,460,132 19,383,839
============== ============== ============== ==============
EPS:
Basic................................................. $ (0.12)$ (3.08) $ (0.82) $ (2.96)
Effect of dilutive securities-- stock options......... -- -- -- --
Effect of dilutive securities-- deferred stock awards. -- -- -- --
-------------- -------------- -------------- --------------
Diluted............................................... $ (0.12) $ (3.08) $ (0.82) $ (2.96)
============== ============== ============== ==============
</TABLE>
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," effective for financial statements for periods
beginning after June 15, 2000. This statement 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. This statement 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. At
this time, the Company has not determined whether the adoption of SFAS No. 133
will have a material impact on its operations and financial position.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q,
including without limitation statements containing the words "believes",
"anticipates", "intends", "expects", "plans" 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 and its subsidiaries to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. 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; movements in
market interest rates that may reduce our margins or the fair value of the
financial instruments we hold; restrictions imposed on the Bank's operations by
regulators such as a prohibition on the payment of dividends to Bank Plus;
failure of regulatory authorities to issue approvals or non-objection to
material transactions involving the Bank; actions by the Bank's regulators that
could adversely affect the Bank's capital levels; failure of the Bank to
maintain its well capitalized status for regulatory purposes; the inability to
achieve the financial goals in Bank Plus' strategic plan; an increase in the
number of borrowers seeking protection under the bankruptcy laws which increases
the amount of charge-offs; the effects of fraud by third parties or customers;
the effectiveness of the Company's collection efforts; changes in the ownership
of the Company or in tax regulations which would limit the Company's ability to
utilize its net operating loss carryforwards; 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.
RECENT DEVELOPMENTS
As a result of continued high level of provisions for estimated credit card
loan losses, the Company incurred a net loss of $2.4 million, or $0.12 per
diluted share, for the third quarter of 1999 and $16.0 million, or $0.82 per
diluted share, for the nine months ended September 30, 1999. These operating
losses were offset by a gain of $5.9 million from the sale in August, 1999 of
two of the Bank's branches which held total deposits of $124 million.
The Bank's core and risk-based capital ratios as of September 30, 1999
exceeded the minimum regulatory capital requirements for classification as a
"well-capitalized" institution. The Bank's core and risk-based capital ratios as
of September 30, 1999, were 5.14% and 10.30%, respectively, compared to 4.51%
and 9.05%, respectively, as of June 30, 1999 and 4.36% and 8.95%, respectively,
as of December 31, 1998. During the third quarter, as part of its program to
regain well-capitalized status, the Bank prepaid $200 million in FHLB advances
and sold $120 million in single family loans at a net cost of $0.9 million.
Additionally, Bank Plus' wholly-owned subsidiary, Bank Plus Credit Services
Corporation ("BPCS"), was dissolved and substantially all of the assets of BPCS
were contributed to Fidelity and Fidelity now services the credit card
portfolios. No changes in credit card servicing operations occurred as a
consequence of this contribution. No assurances can be given that the Bank's
capital status in future periods will not be adversely impacted by losses from
the credit card operations or other events or that the Bank will be able to
maintain its well-capitalized status for regulatory purposes. The Bank may
consider other transactions, including additional sales of deposits, sales of
assets or additional prepayments of FHLB advances, to reduce the overall size of
the balance sheet in order to maintain its well-capitalized status.
7
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The quality of the mortgage loan portfolio continued to improve during 1999
as evidenced by historically low levels of delinquencies and real estate owned
("REO"). As of September 30, 1999 delinquencies and REO balances in the mortgage
loan portfolio were 0.74% and $5.7 million, respectively.
In September, the Bank established a new division to originate multifamily
and commercial real estate loans. The management team for this division recently
joined Fidelity from IMPAC Commercial Capital Corporation, a subsidiary of IMPAC
Commercial Holdings, Inc., where over an eighteen month period they originated
over $700 million in multifamily and commercial mortgage loans which were
securitized or sold into the secondary market. It is anticipated that the loans
originated by this division will either be held in the Bank's portfolio to
replace the ongoing runoff of its existing mortgage portfolio or sold into the
secondary market.
During 1999, as part of its plan to regain its well-capitalized status and
augment its net interest margin, the Bank continued its deposit repricing and
conversion program. Through September 30, 1999, the Bank reduced its total
deposits, primarily through the reduction of higher cost certificates of
deposit, by $318 million, excluding the effect of the sale of deposits, and
reduced its cost of deposits from 4.53% at December 31, 1998 to 4.12% at
September 30, 1999. The Company's total cost of funds for the 1999 third quarter
of 4.50% was, for the first time since the index was created, below the Eleventh
District Cost of Funds Index, which stood at 4.61% at September 30, 1999.
At April 1, 1999 collection services for the American Direct Credit ("ADC")
credit card portfolio were transferred from ADC to BPCS in accordance with the
settlement agreement between the Bank and ADC. As a result of a number of
factors, including conforming the contractual charge-off policy for the ADC
portfolio to the Bank's charge-off policy, which increased the charge-off period
from 150 to 180 days, the rise in delinquencies expected upon the cessation of
origination's under the program in February 1999 and transitional difficulties
associated with the transfer of the servicing of accounts from ADC to the
Company, delinquencies in the ADC credit card portfolio increased from the 12.3%
level at March 31, 1999 to 23.7% at June 30, 1999. During the 1999 third
quarter, delinquencies in the ADC credit card portfolio remained stable as the
expected increase in amounts delinquent greater than 90 days was offset by a 31%
decrease in amounts delinquent less than 90 days. Overall delinquencies in the
credit card portfolio were 20.5% at September 30, 1999 as compared to 20.4% at
June 30, 1999, 16.8% at March 31, 1999 and 21.4% at December 31, 1998.
During the second quarter of 1999, the Company completed its Year 2000
("Y2K") testing of all internal mission critical systems. The Company will
continue refining its vendor coordination and contingency planning through the
remainder of the year.
During the third quarter, the arbitrator for the Bank's arbitration claim
against MMG Direct, Inc. ("MMG") confirmed the Bank's position that Fidelity's
credit card marketing agreement with MMG and all existing and future obligations
thereunder had been terminated. The arbitrator denied all claims for damages by
each party, except for requiring Fidelity to pay MMG $0.7 million in fees the
Bank had withheld from MMG during the course of the dispute and $1.0 million for
legal fees and expenses. The award terminated MMG's rights and interest in the
Bank's credit card portfolio and settled all claims by either party under the
contract.
8
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OTHER TRANSACTIONS
In August 1999, the Bank signed a definitive agreement to sell certain
intellectual property assets and its branch at the Mall of America ("MOA"),
which had deposits of $12.6 million at September 30, 1999. In the first part of
the transaction, which was completed at the date of the definitive agreement,
the Bank sold its rights to the intellectual property developed in connection
with its partially completed transactional web site, including the registered
service mark "iBank" and the web site domain name "iBank.com." In the second
part of the transaction, which is anticipated to be completed by the end of the
second quarter of 2000, the Bank will sell the MOA branch to a bank to be
acquired or formed by the buyer. Upon completion of these transactions, the Bank
anticipates recording an aggregate gain of approximately $0.9 million. However,
no assurances can be given that the second part of the sale will be completed or
if, completed, will be completed as contemplated.
In August 1999, Fidelity repurchased the servicing rights to $488 million
of mortgages on 1 to 4 unit properties currently in its mortgage portfolio. This
repurchase is expected to immediately contribute to the profitability and
efficiency of the Bank's mortgage servicing operations and provide added control
over the Bank's existing mortgage portfolio.
In March 1999, Fidelity sold $10.5 million of its auto loan portfolio with
no gain or loss recognized on the transaction.
STATUS OF EXPLORATION OF STRATEGIC ALTERNATIVES
Approximately one year ago the Company initiated a process to explore the
potential sale of the Company and, as part of that process, also explored the
possibility of the concurrent sale of the core bank and the credit card
operations to separate buyers. A broad range of potential acquirers were
solicited, a number of which undertook due diligence, and the Company has
vigorously pursued negotiations with these parties. Uncertainties regarding
credit risk in the credit card portfolio and consumer and other litigation have
caused interested buyers to defer consideration of an acquisition at this time.
While there has been no change in the Company's interest in exploring a
potential sale, the Company and its advisors believe that, until these
uncertainties are satisfactorily resolved, a sale of the Company is unlikely.
The Company continues to evaluate its strategic options, including sales of
deposits, sale of all or portions of the credit card portfolio and other
transactions intended to increase earnings, augment capital and increase
shareholder value.
RESULTS OF OPERATIONS
SUMMARY
The Company reported net losses of $2.4 million and $16.0 million for the
quarter and nine months ended September 30, 1999, respectively, as compared to
net losses of $59.8 million and $57.4 million for the corresponding periods in
1998. Net income from core bank operations was $13.6 million and $29.7 million
for the quarter and nine months ended September 30, 1999, respectively as
compared to $8.8 million and $15.3 million for the corresponding periods in
1998. Net losses from the credit card operations were $16.0 million and $45.7
million for the quarter and nine months ended September 30, 1999, respectively,
as compared to $64.7 million and $68.8 million for the corresponding periods in
1998.
In 1999, Bank Plus began viewing its business as consisting of two
reportable business segments; core bank operations and credit card operations.
The financial performance of these business segments is measured by the
Company's profitability reporting processes. The following describes these two
business segments:
9
<PAGE>
Core Bank Operations -- The principal business activities of this segment
are attracting funds from the general public and other institutions, originating
and investing in real estate related assets, including mortgage loans and
mortgage-backed securities, and investment securities and selling uninsured
investment products. This segment's primary sources of revenue are interest
income earned on real estate related assets, investment securities and funding
provided to the credit card operations, fees earned in connection with loans and
deposits and fees earned from the sale of uninsured investment products. This
segment's principal expenses are interest incurred on interest-bearing
liabilities, including deposits and borrowings, provisions for estimated loan
losses, retail branch system costs, mortgage servicing and origination costs and
executive and administrative expenses.
Credit Card Operations -- The principal business activities of this segment
are servicing the outstanding credit card accounts and managing the credit risk
associated with the credit card portfolio. Since the first quarter of 1999,
there have been no material new originations of credit card accounts. This
segment's primary sources of revenue are interest income earned on the credit
card balances and fees earned on credit card accounts, including acceptance and
annual fees, late fees and interchange fees. This segment's principal expenses
are interest expense from funding provided by the core bank operations,
provisions for estimated loan losses and costs of servicing the portfolio,
including third party processing charges.
The following table shows the net income or loss for core bank operations
and credit card operations for the periods indicated. In computing net interest
income, funding costs are charged to the credit card operations based on a
rolling twelve-month average of one-year fixed rate FHLB advances. All indirect
general and administrative expense not specifically identifiable with either of
the two business segments are allocated on the basis of direct operating
expenses.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CORE BANK OPERATIONS:
Net interest income................................... $ 17,548 $ 18,549 $ 53,406 $ 57,190
Provision for estimated loan losses................... (3,452) (9,736) (11,476) (10,086)
Noninterest income.................................... 9,222 3,332 16,274 8,222
Operating expense..................................... 16,617 22,834 51,466 60,230
Income tax expense.................................... -- 3,870 -- 3,870
------------- ------------- ------------- -------------
Net earnings........................................ $ 13,605 $ 4,913 $ 29,690 $ 11,398
============= ============= ============= =============
Operating Ratios:
Net interest margin................................. 2.35% 1.80% 2.18% 1.77%
Efficiency ratio.................................... 76.68% 74.21% 78.38% 77.57%
Return on average assets............................ 1.83% 0.47% 1.24% 0.36%
Return on average equity............................ 63.73% 16.77% 41.62% 9.94%
CREDIT CARD OPERATIONS:
Net interest income................................... $ 9,008 $ 4,893 $ 29,032 $ 7,383
Provision for estimated loan losses................... 20,952 61,518 73,776 68,118
Noninterest income.................................... 5,161 1,056 25,263 7,645
Operating expense..................................... 9,215 9,128 26,225 15,713
------------- ------------- ------------- -------------
Net loss............................................ $ (15,998) $ (64,697) $ (45,706) $ (68,803)
============= ============= ============= =============
Operating Ratios:
Net interest margin................................. 13.70% 8.37% 12.94% 6.57%
Efficiency ratio.................................... 65.04% 153.44% 48.30% 104.56%
</TABLE>
10
<PAGE>
CORE BANK OPERATIONS
The $8.7 million increase in net income from core bank operations in the
1999 third quarter as compared to the 1998 third quarter was due to a $5.9
million gain on the sale in August 1999 of $124 million in deposits, reductions
in operating expense and the absence of income tax expense, which were offset by
decreased net interest income and lower recoveries of provisions for estimated
loan losses. The $18.3 million increase in net income for the nine months ended
September 30, 1999 as compared to the corresponding period in 1998 was primarily
due to the gain on sale of deposits, reductions in operating expense and the
absence of income tax expense offset by decreased net interest income.
For the 1999 third quarter, net yield on interest earning assets increased
to 2.35% while average interest earning assets decreased to $3.0 billion as
compared to a net yield of 1.80% and average interest earning assets of $4.2
billion in the 1998 third quarter. For the nine months ended September 30, 1999,
net yield on interest earning assets increased to 2.18% while average interest
earning assets decreased to $3.3 billion as compared to a net yield of 1.77% and
average interest earning assets of $4.2 billion in the corresponding period in
1998. The increase in net yield for the quarter and nine-month periods was
primarily the result of decreased costs of deposits. As a result of decreases in
the levels of general interest rates and the deposit repricing and conversion
program initiated in October, 1999, the average costs of deposits decreased to
4.17% and 4.30% for the quarter and nine months ended September 30, 1999 as
compared to 4.86% and 4.89% for the corresponding periods in 1998. The decrease
in average assets for the quarter and nine-month periods was due to the Bank's
efforts to reduce assets as part of its plan to augment its regulatory capital
ratios and regain its well-capitalized status.
The recoveries of provisions for estimated loan losses, which represent net
recoveries of loan loss reserves and reduced estimates of future loan losses,
reflect the continuing improvement in the asset quality of the Bank's mortgage
loan portfolio.
Noninterest income increased $5.9 million and $8.1 million for the quarter
and nine months ended September 30, 1999, respectively, as compared to the
corresponding periods in 1998 primarily as a result of a $5.9 million gain on
sale of deposits. In addition, for the nine months ended September 30, 1999,
losses from treasury activities decreased from $2.7 million to $0.7 million and
costs of real estate operations decreased by $1.1 million when compared to the
nine months ended September 30, 1998. The losses from treasury activities for
the nine months ended September 30,1998 were primarily due to losses from
hedging activities and fees for the prepayment of FHLB advances. The decrease in
the costs of real estate operations reflect the continued improvement in the
performance of the core bank operations mortgage loan portfolio. These increases
in noninterest income were offset by lower fee income from ATM cash services as
a result of the termination of the related program in the first quarter of 1999.
For the quarter and nine months ended September 30, 1999, operating expense
decreased to $16.6 million and $51.5 million from $22.8 million and $60.2
million in the corresponding periods in 1998 primarily due to decreases in
personnel and benefits and professional services offset by increases in FDIC
insurance. The decreases in personnel and benefits and professional services are
the result of changes in the Company's business plan which included the
discontinuance of a number of initiatives undertaken by previous management, the
restructuring of executive management and other reductions in staffing and
discretionary expenses.
CREDIT CARD OPERATIONS
For the 1999 third quarter, net losses from credit card operations
decreased to $16.0 million from $64.7 million in the 1998 third quarter as a
result of increases in net interest income and noninterest income and lower
provisions for estimated loan losses. For the nine months ended September 30,
1999, net losses from credit card operations decreased to $45.7 million from the
$68.8 million in the corresponding period in 1998 as a result of increases in
net interest income and noninterest income and lower provisions for estimated
loan losses offset by higher servicing expenses.
11
<PAGE>
The net yield on credit card receivables increased to 13.70% and 12.94% and
average interest earning balances outstanding increased to $263.1 million and
$299.1 million for the quarter and nine months ended September 30, 1999,
respectively, as compared to net yields of 8.37% and 6.57% and average interest
earning assets of $233.9 million and $149.8 million for the corresponding
periods in 1998. The increases in net yield are primarily a result of the
termination of the program agreement with ADC in November 1998, whereby the Bank
became entitled to all of the interest earned from the related portfolio. The
increase in average assets reflects the significant growth in the Bank's credit
card programs during 1998.
The provision for estimated loan losses decreased from $61.5 million in the
1998 third quarter to $21.0 million in the 1999 third quarter. During the third
quarter of 1998, the Bank's credit card portfolio increased by $116.9 million
while delinquencies increased by $28.2 million. The increase in balances and
delinquencies caused the estimate of future loan losses to increase
significantly resulting in the $61.5 million provision for estimated loan
losses. During the third quarter of 1999, the Bank's credit card portfolio and
delinquencies decreased by $29.1 million and $5.6 million respectively. For the
nine months ended September 30, 1999, the provision for loan losses increased to
$73.8 million from $68.1 million for the corresponding period in 1998 primarily
as a result of higher charge-offs in 1999 and lower amounts of cash reserves
provided by marketing agents in 1999 as a result of the termination of the ADC
program in 1998, offset by a decrease in credit card balances during 1999.
Noninterest income represents credit card fees which include origination
fees net of origination costs, annual fees and other recurring fees including
interchange fees, late payment fees and other ancillary fees. Origination fees
net of origination costs and annual fees are deferred and amortized into income
over a twelve month period.
Noninterest income increased $4.1 million for the 1999 third quarter as
compared to the 1998 third quarter. During the 1998 third quarter, the Company
wrote off $8.2 million of marketing fees receivable from MMG due to the
uncertainty regarding the collectibility of these amounts. There was no
corresponding charge in 1999. Decreases in recurring fees and net deferred
origination fees from the MMG credit card portfolio were partially offset by
increases in recurring fees from the ADC credit card portfolio. For the 1999
third quarter, $0.9 million of net deferred origination fees were recognized in
income as compared to $5.1 million in the third quarter of 1998. This decrease
is the result of the wind down of the MMG credit card program and as of
September 30, 1999, there were no unamortized net deferred origination fees and
no additional origination fees or costs are expected to be created. In addition,
recurring fees, from the MMG portfolio decreased $1.3 million due to the
decrease in the number of accounts in this portfolio. As a result of the
termination of the program agreement with ADC in November 1998, the Bank became
entitled to all fees earned from the related portfolio and recognized fees of
$1.5 million for the quarter ended September 30, 1999.
Noninterest income increased by $17.6 million for the nine months ended
September 30, 1999 as compared to the corresponding period in 1998 primarily due
to increases in recurring fees received from the MMG and ADC credit card
portfolios and the write off in 1998 of the marketing fees receivable from MMG.
Recurring fees on the MMG portfolio increased by $4.8 million during the nine
months ending September 30, 1999 as compared to the same period in 1998
primarily due to an increase in the average number of accounts outstanding. Fees
on the ADC portfolio were $3.8 million for the nine months ending September 30,
1999.
For the 1999 third quarter, operating expense was equal to the
corresponding period in 1998 because increases in litigation costs and the costs
of servicing the ADC portfolio were offset by decreases in costs of servicing
the MMG portfolio. Litigation costs of $1.8 million in the 1999 third quarter
were related to the recently concluded arbitration with MMG. As a result of the
termination of the program agreement with ADC in November 1998, the Bank assumed
responsibility for the costs of servicing the portfolio at that time. The costs
of servicing the MMG portfolio and other credit card related expenses decreased
in the 1999 third quarter as a result of the decrease in the number of accounts
outstanding and the termination of originations under the MMG program in the
third quarter of 1998. For the nine months ended September 30, 1999, operating
expense increased $10.5 million compared to the corresponding period in 1998 as
12
<PAGE>
a result of the costs of servicing the ADC portfolio, increased litigation costs
and an increase in the cost of servicing the MMG portfolio. Litigation costs
incurred in 1999 related to the MMG arbitration were $3.3 million, which
includes $1.0 million paid to MMG as a result of the arbitration. The increase
in the cost of servicing the MMG portfolio was due to increases in the average
balance and number of delinquent accounts in the MMG program during 1999.
NET INTEREST INCOME
The following tables present the primary determinants of net interest
income for the periods indicated. For the purpose of this analysis, nonaccruing
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,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -------------------------------------------
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 .............. $ 2,232,168 $ 40,279 7.22% $ 2,616,843 $ 48,758 7.45%
Credit card loans...................... 267,050 11,483 17.20 257,368 7,610 11.83
MBS.................................... 386,234 6,101 6.32 721,024 11,584 6.43
Investment securities ................. 190,991 2,853 5.93 620,141 9,382 6.00
Investment in FHLB stock .............. 31,930 414 5.14 64,113 942 5.83
------------- ------------- ------------- -------------
Total interest-earning assets ........... 3,108,373 61,130 7.86 4,279,489 78,276 7.31
------------- -------------
Noninterest-earning assets .............. 76,474 141,174
------------- -------------
Total assets ............................ $ 3,184,847 $ 4,420,663
============= =============
Interest-bearing liabilities:
Deposits:
Checking.............................. $ 374,691 1,187 1.26 $ 351,606 1,043 1.18
Savings............................... 112,629 810 2.85 120,592 916 3.01
Certificates of deposits ("CDs")...... 2,055,501 24,738 4.71 2,573,452 35,377 5.40
------------- ------------- ------------- -------------
Total deposits .......................... 2,542,821 26,735 4.17 3,045,650 37,336 4.86
Borrowings .............................. 504,172 7,839 6.17 1,158,546 17,498 5.99
------------- ------------- ------------- -------------
Total interest-bearing liabilities....... 3,046,993 34,574 4.50 4,204,196 54,834 5.17
------------- -------------
Noninterest-bearing liabilities.......... 27,713 40,005
Minority Interest........................ 272 272
Stockholders' equity..................... 109,869 176,190
------------- -------------
Total liabilities and equity............. $ 3,184,847 $ 4,420,663
============= =============
Net interest income; interest rate
spread................................ $ 26,556 3.36% $ 23,442 2.14%
============= ============= ============= =============
Net yield on interest-earning assets
("net interest margin") .............. 3.45% 2.23%
============= =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -------------------------------------------
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 .............. $ 2,305,716 $ 128,035 7.40% $ 2,733,666 $ 151,735 7.40%
Credit card loans...................... 300,442 37,496 16.64 157,824 12,861 10.87
MBS.................................... 381,693 17,012 5.94 775,992 36,858 6.33
Investment securities ................. 299,396 11,885 5.29 529,409 24,013 6.06
Investment in FHLB stock .............. 47,672 1,765 4.94 62,300 2,719 5.84
------------- ------------- ------------- -------------
Total interest-earning assets ........... 3,334,919 196,193 7.84 4,259,191 228,186 7.14
------------- -------------
Noninterest-earning assets .............. 91,392 153,593
------------- -------------
Total assets ............................ $ 3,426,311 $ 4,412,784
============= =============
Interest-bearing liabilities:
Deposits:
Checking.............................. $ 375,455 3,485 1.24 $ 346,529 3,059 1.18
Savings............................... 116,901 2,493 2.84 122,426 2,752 3.01
CDs................................... 2,193,472 80,645 4.83 2,525,280 103,620 5.43
------------- ------------- ------------- -------------
Total deposits .......................... 2,685,828 86,623 4.30 2,994,235 109,431 4.89
Borrowings .............................. 583,043 27,132 6.20 1,196,995 54,182 6.05
------------- ------------- ------------- -------------
Total interest-bearing liabilities....... 3,268,871 113,755 4.64 4,191,230 163,613 5.22
------------- -------------
Noninterest-bearing liabilities.......... 34,951 40,686
Minority interest........................ 272 272
Stockholders' equity..................... 122,217 180,596
------------- -------------
Total liabilities and equity............. $ 3,426,311 $ 4,412,784
============= =============
Net interest income; interest rate
spread................................. $ 82,438 3.20% $ 64,573 1.92%
============= ============= ============= =============
Net yield on interest-earning assets
("net interest margin") .............. 3.29% 2.00%
============= =============
</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 nonperforming loans ("NPLs") and (d) the interest rate
spread between the yields earned and the rates paid.
14
<PAGE>
The following tables present the dollar amount of changes in interest
income and expense for each major component of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average balances and average rates for the periods indicated. Because of
numerous changes in both balances and rates, it is difficult to allocate
precisely the effects thereof. For purposes of these tables, the change due to
volume is initially calculated as the change in average balance multiplied by
the average rate during the prior period and the change due to rate is
calculated as the change in average rate multiplied by the average volume during
the current period. Any change that remains unallocated after such calculations
is allocated proportionately to changes in volume and changes in rates.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1998
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
------------------------------------------- -------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage and other loans........ $ (7,007) $ (1,472) $ (8,479) $ (23,700) $ -- $ (23,700)
Credit card loans............... 296 3,577 3,873 17,703 6,932 24,635
MBS............................. (5,289) (194) (5,483) (18,362) (1,484) (19,846)
Investment securities .......... (6,420) (109) (6,529) (9,384) (2,744) (12,128)
Investment in FHLB stock ....... (427) (101) (528) (576) (378) (954)
------------- ------------- ------------- ------------- ------------- -------------
Total interest income ............. (18,847) 1,701 (17,146) (34,319) 2,326 (31,993)
------------- ------------- ------------- ------------- ------------- -------------
Interest expense:
Deposits:
Demand deposits .............. (71) (73) (144) (265) (161) (426)
Savings deposits ............. 58 48 106 115 144 259
Time deposits ................ 6,507 4,132 10,639 12,480 10,495 22,975
------------- ------------- ------------- ------------- ------------- -------------
Total deposits .................... 6,494 4,107 10,601 12,330 10,478 22,808
Borrowings ..................... 10,161 (502) 9,659 27,946 (896) 27,050
------------- ------------- ------------- ------------- ------------- -------------
Total interest expense ............ 16,655 3,605 20,260 40,276 9,582 49,858
------------- ------------- ------------- ------------- ------------- -------------
Increase in net interest income ... $ (2,192) $ 5,306 $ 3,114 $ 5,957 $ 11.908 $ 17,865
============= ============= ============= ============= ============= =============
</TABLE>
INCOME TAXES
The Company's expected combined federal and state statutory tax rate is
approximately 42.0% of earnings before income taxes. The Company expects to
generate additional deferred tax assets in 1999, primarily related to operating
loss carryforwards and bad debt timing differences. As these deferred tax assets
are anticipated to be fully offset by valuation allowances no tax expense or
benefit has been recorded in 1999.
FINANCIAL CONDITION
ASSET QUALITY
Because over 89% of the Company's mortgage loan portfolio is secured by
properties located in southern California, the performance of the Company's
loans 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 single family, multifamily and commercial properties. In addition,
the possibility that borrowers may abandon properties or seek bankruptcy
protection with respect to income properties experiencing negative cash flow,
particularly where such properties are not cross-collateralized by other
performing assets, can also adversely affect portfolio performance.
15
<PAGE>
During 1998, the Company significantly increased its primarily sub-prime
credit card portfolio. 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, the effectiveness of the Company's
collection efforts, and fraud or breaches of contracts by third parties or
customers. In addition, because the portfolio is primarily sub-prime, the Bank
will experience significantly higher delinquencies and charge-offs than those
experienced by other credit card issuers whose portfolio's are not sub-prime.
DELINQUENT LOANS
The following tables present net delinquent loans at the dates indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loan delinquencies by number of days:
30 to 59 days......................... $ 6,641 $ 6,087 $ 5,026 $ 6,556 $ 8,706
60 to 89 days......................... 2,633 2,264 4,001 4,936 4,776
90 days and over...................... 6,128 5,905 12,962 13,841 15,551
------------- ------------- ------------- ------------- -------------
Total............................... $ 15,402 $ 14,256 $ 21,989 $ 25,333 $ 29,033
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 0.31% 0.27% 0.21% 0.27% 0.35%
60 to 89 days....................... 0.13 0.10 0.17 0.21 0.19
90 days and over.................... 0.30 0.26 0.55 0.57 0.61
------------- ------------- ------------- ------------- -------------
Total............................ 0.74% 0.63% 0.93% 1.05% 1.15%
============= ============= ============= ============= =============
Credit card loan delinquencies by number of days:
30 to 59 days......................... $ 13,397 $ 15,666 $ 12,801 $ 19,609 $ 26,892
60 to 89 days......................... 10,040 13,940 10,485 15,391 10,606
90 to 119 days........................ 9,877 12,075 11,101 17,969 5,983
120 to 149 days....................... 9,443 8,460 11,148 17,363 5,031
150 days and over..................... 8,734 6,963 6,670 4,460 1,420
------------- ------------- ------------- ------------- -------------
Total............................... $ 51,491 $ 57,104 $ 52,205 $ 74,792 $ 49,932
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days....................... 5.34% 5.60% 4.12% 5.60% 8.64%
60 to 89 days....................... 4.00 4.98 3.38 4.40 3.41
90 to 119 days...................... 3.94 4.31 3.57 5.13 1.92
120 to 149 days..................... 3.76 3.02 3.59 4.96 1.62
150 days and over................... 3.48 2.49 2.15 1.27 0.46
------------- ------------- ------------- ------------- -------------
Total............................ 20.52% 20.40% 16.81% 21.36% 16.05%
============= ============= ============= ============= =============
Other loan delinquencies by number of days:
30 to 59 days......................... $ 745 $ 742 $ 1,002 $ 2,079 $ 965
60 to 89 days......................... 379 364 182 533 227
90 days and over...................... 123 160 175 414 294
------------- ------------- ------------- ------------- -------------
Total............................... $ 1,247 $ 1,266 $ 1,359 $ 3,026 $ 1,486
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days....................... 6.99% 6.07% 9.39% 8.48% 3.69%
60 to 89 days....................... 3.56 2.98 1.71 2.18 0.87
90 days and over.................... 1.16 1.31 1.64 1.69 1.13
------------- ------------- ------------- ------------- -------------
Total............................ 11.71% 10.36% 12.74% 12.35% 5.69%
============= ============= ============= ============= =============
</TABLE>
16
<PAGE>
Mortgage loan delinquencies continued to be at historically low levels at
September 30, 1999. Of the $15.4 million in mortgage loan delinquencies at
September 30, 1999, $1.5 million, or 0.26% of the related loans, are loans on
single family or 2 to 4 unit residences which have Veterans Administration
("VA") or Federal Housing Administration ("FHA") guarantees. As a result of the
VA or FHA, guarantees no losses are expected from these loans.
Credit card delinquencies decreased $5.6 million at September 30, 1999 as
compared to June 30, 1999, due to decreased delinquencies in the MMG credit card
portfolio and as a result of the migration of the second quarter increase in
delinquencies in the ADC credit card portfolio migrating through the later
stages of delinquency.
The following table presents the credit card loan portfolio by program at
the dates indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MMG outstanding balances:
Current.............................. $ 87,141 $ 95,145 $ 105,133 $ 116,431 $ 132,855
Delinquencies:
30 to 59 days...................... 5,344 6,291 6,064 11,810 19,486
60 to 89 days...................... 4,107 5,260 5,765 10,089 6,257
90 to 119 days..................... 4,234 4,796 6,390 13,472 2,944
120 to 149 days.................... 4,163 3,942 7,689 14,660 2,304
150 days and over.................. 3,534 3,837 6,670 4,460 1,175
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 21,382 24,126 32,578 54,491 32,166
------------- ------------- ------------- ------------- -------------
Total................................ $ 108,523 $ 119,271 $ 137,711 $ 170,922 $ 165,021
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 4.92% 5.27% 4.40% 6.91% 11.81%
60 to 89 days...................... 3.78 4.41 4.19 5.90 3.79
90 to 119 days..................... 3.90 4.02 4.64 7.88 1.78
120 to 149 days.................... 3.84 3.30 5.58 8.58 1.40
150 days and over.................. 3.25 3.22 4.84 2.61 0.71
------------- ------------- ------------- ------------- -------------
Total........................... 19.69% 20.22% 23.65% 31.88% 19.49%
============= ============= ============= ============= =============
ADC outstanding balances:
Current.............................. $ 85,914 $ 98,701 $ 122,989 $ 129,450 $ 107,099
Delinquencies:
30 to 59 days...................... 6,219 8,212 5,529 6,603 6,755
60 to 89 days...................... 5,073 8,113 4,012 4,633 3,973
90 to 119 days..................... 5,075 6,764 4,245 3,959 2,864
120 to 149 days.................... 5,281 4,487 3,431 2,699 2,727
150 days and over.................. 5,198 3,121 -- -- 245
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 26,846 30,697 17,217 17,894 16,564
------------- ------------- ------------- ------------- -------------
Total................................ $ 112,760 $ 129,398 $ 140,206 $ 147,344 $ 123,663
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 5.52% 6.35% 3.94% 4.48% 5.46%
60 to 89 days...................... 4.50 6.27 2.86 3.14 3.21
90 to 119 days..................... 4.50 5.23 3.03 2.69 2.32
120 to 149 days.................... 4.68 3.47 2.45 1.83 2.21
150 days and over.................. 4.61 2.41 -- -- 0.20
------------- ------------- ------------- ------------- -------------
Total........................... 23.81% 23.73% 12.28% 12.14% 13.40%
============= ============= ============= ============= =============
(CONTINUED)
</TABLE>
17
<PAGE>
(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other credit card loans outstanding balances:
Current.............................. $ 26,276 $ 28,959 $ 30,273 $ 29,405 $ 21,365
Delinquencies:
30 to 59 days...................... 1,834 1,163 1,208 1,196 651
60 to 89 days...................... 860 567 708 669 376
90 to 119 days..................... 568 515 466 538 175
120 to 149 days.................... -- 31 28 4 --
150 days and over.................. 2 5 -- -- --
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 3,264 2,281 2,410 2,407 1,202
------------- ------------- ------------- ------------- -------------
Total................................ $ 29,540 $ 31,240 $ 32,683 $ 31,812 $ 22,567
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 6.21% 3.72% 3.70% 3.76% 2.88%
60 to 89 days...................... 2.91 1.81 2.17 2.10 1.67
90 to 119 days..................... 1.92 1.65 1.43 1.69 0.77
120 to 149 days.................... -- 0.10 0.08 0.01 --
150 days and over.................. 0.01 0.01 -- -- --
------------- ------------- ------------- ------------- -------------
Total........................... 11.05% 7.29% 7.38% 7.56% 5.32%
============= ============= ============= ============= =============
</TABLE>
The available credit on credit cards outstanding at September 30, 1999
was $18.2 million, $26.7 million and $6.4 million for the MMG, ADC and other
card programs, respectively.
18
<PAGE>
NONPERFORMING AND CLASSIFIED 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>
QUARTERS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets ("NPAs") by Type:
NPLs................................... $ 7,108 $ 6,412 $ 13,137 $ 14,372 $ 16,884
REO.................................... 5,685 6,861 8,431 8,397 10,161
Other repossessed assets............... 72 139 320 535 183
------------- ------------- ------------- ------------- -------------
Total NPAs........................... $ 12,865 $ 13,412 $ 21,888 $ 23,304 $ 27,228
============= ============= ============= ============= =============
Number of REO properties.................. 41 42 57 62 72
============= ============= ============= ============= =============
NPAs by Composition (1):
Single family residences............... $ 6,080 $ 6,656 $ 9,761 $ 8,985 $ 8,613
Multifamily 2 to 4 units............... 394 444 2,423 3,917 4,207
Multifamily 5 units and over........... 3,893 4,504 7,061 7,761 11,917
Commercial and other................... 2,965 2,449 3,203 3,088 3,228
Consumer............................... 153 427 438 692 295
REO valuation allowances............... (620) (1,068) (998) (1,139) (1,032)
------------- ------------- ------------- ------------- -------------
Total NPAs........................... 12,865 13,412 21,888 23,304 27,228
Total troubled debt restructurings
("TDRs")............................. 25,022 31,255 48,020 48,018 47,222
------------- ------------- ------------- ------------- -------------
Total TDRs and NPAs.................. $ 37,887 $ 44,667 $ 69,908 $ 71,322 $ 74,450
============= ============= ============= ============= =============
Classified Assets:
NPAs $ 12,865 $ 13,412 $ 21,888 $ 23,304 $ 27,228
Performing classified loans ........... 78,685 83,423 88,623 108,355 87,401
Other classified assets................ 781 889 1,242 1,426 3,999
------------- ------------- ------------- ------------- -------------
Total classified assets.............. $ 92,331 $ 97,724 $ 111,753 $ 133,085 $ 118,628
============= ============= ============= ============= =============
Classified Asset Ratios:
NPLs to total assets................... 0.24% 0.19% 0.37% 0.39% 0.44%
NPLs to total loans.................... 0.31% 0.26% 0.51% 0.54% 0.61%
NPAs to total assets................... 0.43% 0.41% 0.62% 0.63% 0.71%
TDRs to total assets................... 0.85% 0.95% 1.35% 1.29% 1.23%
NPAs and TDRs to total assets.......... 1.28% 1.35% 1.97% 1.92% 1.95%
Classified assets to total assets...... 3.12% 2.96% 3.15% 3.59% 3.10%
REO to NPAs............................ 44.19% 51.16% 38.52% 36.03% 37.32%
NPLs to NPAs........................... 55.25% 47.81% 60.02% 61.67% 62.01%
</TABLE>
- ---------------------
(1) REO balances included in this table are not presented net of specific
reserves.
Total classified assets decreased $5.4 million from June 30, 1999, to $92.3
million at September 30, 1999 primarily due to a $4.7 million decrease in
classified mortgage loans. This decrease primarily reflects the continuing
improvement in the underlying income properties of the Bank's multifamily
portfolio. Credit card accounts over 90 days past due are included as performing
classified loans in the above table.
19
<PAGE>
ALLOWANCE FOR ESTIMATED LOAN AND REO LOSSES
The following table summarizes the activity in the Bank's allowances and
cash reserves for estimated loan and REO losses:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period........................... $ 84,630 $ 61,263 $ 109,198 $ 55,993
------------- ------------- ------------- -------------
Charge-offs........................................... (29,533) (5,348) (103,234) (14,300)
Recoveries............................................ 1,080 664 3,582 4,561
------------- ------------- ------------- -------------
Net charge-offs..................................... (28,453) (4,684) (99,652) (9,739)
Provision:
Estimated loan losses............................... 17,500 51,782 62,300 58,032
REO................................................. -- 27 139 100
Net change in cash reserves (1)....................... 890 (678) 2,582 3,324
------------- ------------- ------------- -------------
Balance at end of period................................. $ 74,567 $ 107,710 $ 74,567 $ 107,710
============= ============= ============= =============
Ratio of net charge-offs during the period to average
loans outstanding..................................... 1.14% 0.16% 3.82% 0.34%
</TABLE>
- -------------------
(1) Net change in cash reserves includes fundings, repurchases and transfers
from credit card marketers.
The following table presents loan and REO charge-offs and recoveries for
the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Charge-offs:
1 - 4 units.......................................... $ 256 $ 436 $ 1,091 $ 2,123
Multifamily loans:
5 to 36 units...................................... 277 1,796 1,385 7,109
37 units and over.................................. (10) 1,602 275 3,150
Commercial and industrial............................ 209 59 1,395 444
Credit card loans.................................... 28,222 1,180 95,997 1,180
Other loans.......................................... 579 275 3,091 294
------------- ------------- ------------- -------------
Total charge-offs....................................... $ 29,533 $ 5,348 $ 103,234 $ 14,300
============= ============= ============= =============
Recoveries:
1 - 4 units.......................................... $ 144 $ 366 $ 834 $ 1,912
Multifamily loans:
5 to 36 units...................................... 58 49 324 2,087
37 units and over.................................. 197 164 365 427
Commercial and industrial............................ -- -- 398 50
Credit card loans.................................... 481 -- 1,461 --
Other loans.......................................... 200 85 200 85
------------- ------------- ------------- -------------
Total recoveries........................................ $ 1,080 $ 664 $ 3,582 $ 4,561
============= ============= ============= =============
</TABLE>
20
<PAGE>
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. At September 30, 1999 and 1998, cash reserves were
$3.4 million and $7.7 million, respectively, and were recorded as deposits on
the Company's statements of financial condition. Accounts purchased from cash
reserves during the nine months of 1999 and 1998 totaled $2.4 million and $16.8
million, respectively and are not included in the above table.
The following table sets forth the allowance for estimated loan and REO
losses at the dates indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
Allowance for Loan and Lease
Losses ("ALLL") ..................... $ 65,550 $ 75,414 $ 70,606 $ 98,229 $ 88,500
SVA.................................... 5,040 5,681 7,292 7,942 10,522
------------- ------------- ------------- ------------- -------------
Total ALLL and SVA................... 70,590 81,095 77,898 106,171 99,022
Cash reserves.......................... 3,357 2,467 1,915 1,888 7,656
------------- ------------- ------------- ------------- -------------
Total loan allowances and cash
reserves........................... 73,947 83,562 79,813 108,059 106,678
REO valuation allowances.................. 620 1,068 998 1,139 1,032
------------- ------------- ------------- ------------- -------------
Total allowances and cash reserves........ $ 74,567 $ 84,630 $ 80,811 $ 109,198 $ 107,710
============= ============= ============= ============= =============
Selected ratios:
Total allowances to net loans and REO.. 3.18% 3.33% 3.03% 3.94% 3.77%
Total ALLL and cash reserves to:
Net loans............................ 2.95% 3.08% 2.73% 3.62% 3.38%
Net NPLs............................. 969.43% 1214.61% 552.04% 696.61% 573.28%
Net loans and REO.................... 2.95% 3.09% 2.74% 3.63% 3.38%
Net NPAs............................. 536.39% 584.41% 333.61% 431.75% 356.44%
Total assets......................... 2.33% 2.38% 2.06% 2.71% 2.53%
</TABLE>
Credit losses are inherent in the business of originating and retaining
loans. The Company maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. These allowances consist of SVAs and an ALLL
which are based on ongoing, quarterly assessments of the probable estimated
losses inherent in the loan portfolio.
The allowance for credit losses does not represent the amount of 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
credit losses is an ongoing process. Consequently, there can be no assurance
that material additions to the Bank's allowance for credit losses will not be
required in the future, thereby adversely affecting earnings and the Bank's
ability to maintain or build capital.
21
<PAGE>
REGULATORY CAPITAL COMPLIANCE
The Office of Thrift Supervision ("OTS") capital regulations, as required
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
include three separate minimum capital requirements for the savings institution
industry--a "tangible capital requirement," a "leverage limit" and a "risk-based
capital requirement." The Bank's actual and required capital are as follows at
the dates indicated:
<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, 1999:
Total capital (to risk-weighted
assets)............................... $ 173,040 10.30% $ 134,346 8.00% $ 167,933 10.00%
Core capital (to adjusted tangible
assets)............................... 151,498 5.14 88,490 3.00 147,484 5.00
Tangible capital (to tangible assets.... 151,498 5.14 44,245 1.50 N/A
Core capital (to risk-weighted
assets)............................... 151,498 9.02 N/A 100,760 6.00
AS OF SEPTEMBER 30, 1998:
Total capital (to risk-weighted
assets)............................... 188,699 8.66 174,271 8.00 217,839 10.00
Core capital (to adjusted tangible
assets)............................... 160,713 4.22 114,299 3.00 190,498 5.00
Tangible capital (to tangible assets.... 160,713 4.22 57,149 1.50 N/A
Core capital (to risk-weighted
assets)............................... 160,713 7.38 N/A 130,704 6.00
</TABLE>
22
<PAGE>
The following table reconciles the Company's stockholders' equity to the
Bank's tangible, core and risk-based capital at the dates indicated:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AS OF SEPTEMBER 30, 1999:
Consolidated stockholders' equity................. $ 107,414 $ 107,414 $ 107,414
Adjustments:
Fidelity's preferred stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (1,719) (1,719) (1,719)
------------- ------------- -------------
Fidelity's stockholders' equity................... 157,445 157,445 157,445
Accumulated other comprehensive loss.............. 6,887 6,887 6,887
Adjustments:
Intangible assets............................... (12,832) (12,832) (12,832)
Excess ALLL..................................... -- -- 21,542
Nonincludable subsidiaries...................... (2) (2) (2)
------------- ------------- -------------
Regulatory capital.................................. $ 151,498 $ 151,498 $ 173,040
============= ============= =============
AS OF SEPTEMBER 30, 1998:
Consolidated stockholders' equity................. $ 127,729 $ 185,196 $ 185,196
Adjustments:
Fidelity's preferred stock...................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............. (5,364) (5,364) (5,364)
------------- ------------- -------------
Fidelity's stockholders' equity................... 174,115 231,582 231,582
Accumulated other comprehensive loss.............. 1,356 1,356 1,356
Adjustments:
Intangible assets............................... (14,748) (14,748) (14,748)
Excess ALLL..................................... -- -- 27,986
Nonincludable subsidiaries...................... (10) (10) (10)
------------- ------------- -------------
Regulatory capital.................................. $ 160,713 $ 218,180 $ 246,166
============= ============= =============
</TABLE>
As of September 30, 1999, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991. As of September 30, 1999,
the most constraining of the capital ratio measurements under the PCA
requirements was core capital to adjusted tangible assets which had an excess of
$4.0 million above the minimum level required to be considered well capitalized.
The Bank's capital levels and classification are subject to periodic review by
federal banking regulators as to components, risk-weightings and other factors.
There are no conditions or events since September 30, 1999 that management
believes will change the Bank's category.
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.
23
<PAGE>
DEPOSITS
The largest source of funds for the Bank is deposits. Customer deposits are
insured by the FDIC to the maximum amount permitted by law. At September 30,
1999, the Bank had deposits of $2.5 billion. The following table presents the
distribution of deposit accounts at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts..................................... $ 355,533 $ 380,292 $ 341,586
Passbook accounts..................................... 53,395 56,836 55,544
Money market savings accounts......................... 52,178 56,451 62,501
------------- ------------- -------------
Total transaction accounts......................... 461,106 493,579 459,631
------------- ------------- -------------
CDs:
Less than $100,000................................. 1,427,112 1,795,000 1,718,283
Greater than $100,000.............................. 592,228 633,952 853,681
------------- ------------- -------------
Total CDs........................................ 2,019,340 2,428,952 2,571,964
------------- ------------- -------------
Total deposits........................................ $ 2,480,446 $ 2,922,531 $ 3,031,595
============= ============= =============
Weighted average interest rate on deposits............ 4.12% 4.53% 4.78%
============= ============= =============
</TABLE>
There were no brokered deposits outstanding at the dates indicated above.
The following table provides information with regards to the Bank's most
recent quarterly experience in the levels of and pricing of CDs for the period
indicated:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
----------------------------
NET NEW OR NET NEW OR
WITHDRAWALS RENEWED NET CHANGE WITHDRAWALS RENEWED
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CDs maturing in quarter ended:
September 30, 1998................... $ 611,217 $ 591,719 $ (19,498) 5.41% 5.06%
December 31, 1998.................... 579,887 436,875 (143,012) 5.43 4.30
March 31, 1999....................... 695,261 532,999 (162,262) 5.15 4.18
June 30, 1999........................ 584,454 452,263 (132,191) 5.08 4.33
September 30, 1999(1)................ 577,716 561,375 (16,341) 4.90 4.79
</TABLE>
- -----------------
(1) The amount and weighted average rate of net withdrawals exclude the affect
of the two branches sold in August 1999.
24
<PAGE>
The distribution of certificate accounts by date of maturity is an
important indicator of the relative stability of a major source of funds. Longer
term certificate accounts generally provide greater stability as a source of
funds, but currently entail greater interest costs than passbook accounts. The
following tables summarize certificate accounts by maturity and weighted average
rate at September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Matures in quarter ended:
December 31, 1999..................................... $ 370,756 4.66%
March 31, 2000........................................ 593,830 4.69
June 30, 2000......................................... 346,956 4.53
September 30, 2000.................................... 395,689 4.90
December 31, 2000..................................... 113,365 4.35
March 31, 2001........................................ 133,471 4.37
June 30, 2001......................................... 9,470 4.98
September 30, 2001 and after.......................... 55,803 5.64
-------------
Total CDs........................................... $ 2,019,340 4.69%
=============
</TABLE>
BORROWINGS
The following table sets forth certain information as to the Company's FHLB
advances and other borrowings at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Fixed rate advances................................... $ 295,000 $ 585,000 $ 585,000
Floating rate advances................................ -- -- --
------------- ------------- -------------
Total FHLB advances.................................. 295,000 585,000 585,000
Other borrowings:
Senior notes.......................................... 51,478 51,478 51,478
------------- ------------- -------------
Total borrowings......................................... $ 346,478 $ 636,478 $ 636,478
============= ============= =============
Weighted average interest rate on all borrowings......... 6.40% 6.20% 6.20%
============= ============= =============
Percent of total borrowings to total liabilities and
stockholders' equity.................................. 11.71% 17.15% 23.60%
============= ============= =============
</TABLE>
On November 8, 1999 the FHLB exercised its option to call a $200 million
advance with a rate of 5.16%. The Bank funded the repayment of the called
advance through available cash and cash equivalents and short-term borrowings
from the FHLB.
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
September 30, 1999 include (a) a line of credit with the FHLB with $151.7
million available, (b) $47 million in unpledged securities available to be
placed in reverse repurchase agreements or sold and (c) $1.7 billion of
unpledged loans, some of which would be available to collateralize additional
FHLB or private borrowings, or to be securitized.
25
<PAGE>
CONTINGENT OR POTENTIAL USES OF FUNDS
The Bank had commitments to fund $5.3 million of loans at September 30,
1999 and unused lines of credit related to credit card loans and other credit
lines totaled $97.0 million at September 30, 1999.
LIQUIDITY
The regulatory required average daily balance of liquid assets is 4.0% of
the liquidity base, which is based on a quarterly average. The Bank's quarterly
average regulatory liquidity ratio was 11.95% and 28.5% for the six months ended
September 30, 1999 and 1998, respectively.
HOLDING COMPANY LIQUIDITY
At September 30, 1999, Bank Plus had cash and cash equivalents of $1.7
million. Bank Plus has no material potential cash producing operations or assets
other than its investments in Fidelity and Gateway. Accordingly, Bank Plus is
substantially dependent on dividends from Fidelity and Gateway in order to fund
its cash needs, including its payment obligations on its $51.5 million senior
notes.
The February, May and August 1999 senior note interest payments were funded
by preferred stock dividends from Fidelity and cash on hand at Bank Plus. The
liquidity for the interest payments for the remainder of 1999 is expected to be
provided by current liquidity at Bank Plus, currently projected dividends from
Gateway and preferred stock dividends from Fidelity.
No assurance can be given that funds will continue to be available at Bank
Plus to pay future interest payments, or that dividends will be able to be made
by Gateway to provide additional liquidity. The Bank has an agreement with the
OTS which permits the payment of dividends on the Bank's preferred stock so long
as the Bank remains adequately capitalized. The agreement with the OTS does not
constrain the OTS from restricting future dividend payments based on safety and
soundness considerations or future examination findings, and no assurance can
therefore be given that the OTS will permit future dividend payments by Fidelity
to Bank Plus. The Bank has received no indication from the OTS that it will
object to the continued payment of preferred stock dividends.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
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,
1999. "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 based on certain assumptions, including those
stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
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 and cash equivalents............... $ 163,976 $ -- $ -- $ -- $ -- $ 163,976
Investment securities (1) (2)........... 31,840 -- -- -- -- 31,840
MBS (1)................................. 112,819 1,816 -- -- 250,283 364,918
Loans receivable:
Adjustable rate mortgages ("ARMs")
and other adjustables (3)........... 1,732,267 269,617 64,072 7,396 493 2,073,845
Fixed rate loans...................... 124,264 310 4,936 14,156 123,287 266,953
------------- ------------- ------------- ------------- ------------- -------------
Total gross loans receivable........ 1,856,531 269,927 69,008 21,552 123,780 2,340,798
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets............. 2,165,166 271,743 69,008 21,552 374,063 $ 2,901,532
------------- ------------- ------------- ------------- ------------- =============
Interest-bearing liabilities:
Deposits:
Checking and savings accounts (4)..... 408,928 -- -- -- -- $ 408,928
Money market accounts (4)............. 52,178 -- -- -- -- 52,178
Fixed maturity deposits:
Retail customers.................... 378,663 1,338,667 301,274 474 249 2,019,327
Wholesale customers................. -- 13 -- -- -- 13
------------- ------------- ------------- ------------- ------------- -------------
Total deposits.................... 839,769 1,338,680 301,274 474 249 2,480,446
------------- ------------- ------------- ------------- ------------- -------------
Borrowings:
FHLB advances......................... -- 20,000 275,000 -- -- 295,000
Other................................. -- -- -- 51,478 -- 51,478
------------- ------------- ------------- ------------- ------------- -------------
Total borrowings.................... -- 20,000 275,000 51,478 -- 346,478
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities........ 839,769 1,358,680 576,274 51,952 249 $ 2,826,924
------------- ------------- ------------- ------------- ------------- =============
Repricing Gap............................. $ 1,325,397 $ (1,086,937) $ (507,266) $ (30,400) $ 373,814
============= ============= ============= ============= =============
Gap to total assets....................... 44.80% (36.74)% (17.15)% (1.03)% 12.64%
Cumulative Gap to Total Assets............ 44.80% 8.06% (9.09)% (10.11)% 2.52%
</TABLE>
- ----------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $30.7 million.
(3) ARMs 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 ARM loans. Interest sensitive assets provide
the Company with a degree of long-term protection from rising interest rates.
ARM loans comprised 93.2% of the total mortgage loan portfolio at September 30,
1999 and 91.8% of ARMs in the mortgage loan portfolio are indexed to the FHLB
Eleventh District Cost of Funds Index ("COFI"). 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
27
<PAGE>
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.
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 Bank's Asset Liability Committee, 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 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 net portfolio value and net interest
income. There has been no significant change in interest rate risk since
December 31, 1998.
YEAR 2000
The Company utilizes computer software programs, systems and devices with
embedded microchips ("Systems") throughout the organization to support its
operations. Corrective action was necessary to insure that these systems would
be able to correctly interpret and process dates into 2000. The Company
inventoried and analyzed its Systems to determine which required modification,
upgrade, or replacement.
The Company established a Y2K project office to provide business units with
the support, guidance, and project management expertise to ensure that the
Company meets its Y2K objectives. The Y2K project office ensures that the
Company complies with the guidelines established by the Federal Financial
Institutions Examinations Council ("FFIEC") regarding regulatory requirements on
how financial institutions prepare for the Y2K. The Company also engaged an
independent third party to provide Y2K subject matter expertise.
PROJECT'S STATE OF READINESS
The Y2K project consisted of two major phases. Phase I was the installation
of upgrades to mission critical Systems to make them Y2K compliant. Phase II was
the testing of mission critical Systems using future dates to certify the
systems as Y2K compliant. Both Phase I and Phase II have been completed. After
the completion of Phase II, the Company entered the quality assurance period
which includes the testing of non-critical future dates, certification of non
mission critical Systems, and the monitoring and maintenance of all Systems to
ensure they remain compliant.
Phase I of the project was completed in October 1998 with the upgrade of
the Company's deposit servicing Systems, as well as the Company's accounts
payable and general ledger applications. All Systems upgraded during Phase I
have been successfully migrated into the Company's production environment.
Additionally, the Company's mission critical embedded Systems and mission
critical applications that run on distributed platforms have been renovated and
validated for Y2K compliance.
Phase II of the project was completed in March 1999. Phase II consisted of
testing and validating the Company's mission critical Systems using future
dates. The Company's internal testing strategy included the thirteen future
dates recommended by the FFIEC plus additional dates that are believed to be
important for certain applications.
28
<PAGE>
The quality assurance period was initiated in April 1999 and will continue
until January 2000. In June 1999, the Company completed the future date testing
of all internal and external mission critical Systems. This milestone included
testing the internal mission critical Systems with all remaining Y2K dates. This
substantiated all of the Company's mission critical Systems as Y2K compliant.
The certification of the Company's non mission critical Systems was
completed at the end of the third quarter. Additionally, policies and procedures
have been implemented to ensure that the Systems that have been certified as Y2K
compliant remain compliant. Throughout the remainder of 1999, the Company will
maintain and test its systems to ensure that they remain Y2K compliant.
CUSTOMER AWARENESS AND RISK MANAGEMENT PLANS
The Company implemented a Y2K customer awareness plan to address Y2K issues
raised by customers. As part of this plan, the Company distributed a project
status update in the June 1999 deposit account statements and an additional
update by direct mail in August 1999. 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 and are being reviewed
and updated each quarter or as required.
CASH MANAGEMENT PLAN
The Company has developed a cash management plan to address customers'
year-end cash requirements. As part of this plan, the Company is tracking and
monitoring the cash outflow and taking steps to ensure that adequate cash is
available should there be increases in the cash outflow. The plan will be
updated as required throughout the remainder of 1999.
ESTIMATED Y2K PROJECT COSTS
The total Y2K project budget is $6.3 million. A significant portion of this
budget was for the staffing of technology and support personnel to implement the
required modifications and upgrades. Additional personnel were also required to
perform the system testing, produce testing documentation, and prepare
contingency plans required by the FFIEC. As of September 30, 1999, the Company
had incurred Y2K related expenses of $5.9 million of which $2.1 million was
incurred in 1999. It is anticipated that total Y2K expenses will be within the
budgeted amount.
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 business
interruptions occur during the Y2K event. The contingency plans are designed to
provide for the continuation of the Company's critical business functions should
such interruptions occur.
The interagency statement established June 30, 1999 as the date by which
the Y2K contingency plans were to be substantially complete. The contingency
plans have been written, independently reviewed, and tested. Senior level
management and the Board of Directors provided final approval on the plans in
July.
RISK FACTORS
The Company utilizes the Systems and services of a number of third parties.
The failure of a key third-party service provider could result in a material
business interruption. The Company is closely monitoring the Y2K progress of the
Company's third-party vendors. Additional expenses and delays may be incurred if
future date testing or further analysis reveals test exceptions that require
additional system renovations, system replacement, or the selection of another
third-party vendor.
29
<PAGE>
Unknown expenses and consequences may result if it becomes necessary to
execute elements of the Company's Y2K contingency plans. Although the Company
has given the Y2K project a high priority and management believes that Y2K
compliance will be achieved with minimal disruption, there are no assurances
that the Company will be successful in addressing Y2K issues within this
estimated timeframe or budget.
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MMG CREDIT CARD LITIGATION
In November 1997, the Bank entered into a credit card marketing relationship
with MMG pursuant to which MMG was to solicit members of certain agreed-upon
affinity groups to become credit card holders. The Bank was to contract for the
provision of or provide credit card servicing and other related functions. MMG
and the Bank were to share equally in program profits and losses. In late summer
and fall of 1998, disputes arose between the parties. The Bank asserted that MMG
had improperly induced it to enter into the contract relationship by material
misrepresentations. The Bank further asserted that MMG had breached its contract
by, among other things, engaging in regulatory violations and engaging in
conduct which violated rules pertaining to MasterCard issuance.
On September 8, 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. In the latter part of September 1998 the Bank sent MMG an
accounting for program losses and a demand for payment and, further, advised MMG
of its intent to audit MMG's books and records pursuant to a contract provision
expressly entitling the Bank to do so. MMG refused to make any payment to the
Bank for program losses and denied access to the Bank's appointed auditors. In
October 1998 the Bank reasserted MMG's defaults and terminated the MMG contract.
Thereafter, on October 14, 1998 MMG filed an Original Petition and Request
for Injunctive Relief in the County Court at Law No. 5, Dallas County, Texas
entitled MMG DIRECT, INC., PLAINTIFF V. FIDELITY FEDERAL BANK, FSB, DEFENDANT,
Case No. 98-10086-E (the "MMG DIRECT, INC. case"). This lawsuit purported to
state a number of claims, including fraud in the inducement, breach of contract,
common law fraud, negligent misrepresentation, accounting and constructive
trust, and sought injunctive relief and damages based upon various asserted
misrepresentations and omissions and failures to perform and breaches of
contract attributed to the Bank. The Bank removed this case to the United States
District Court and filed a motion to dismiss which was granted.
On December 8, 1998, MMG filed a third-party claim against the Bank in a case
brought by one of its purported creditors. That suit is entitled TIM MCCARTHY
ADVERTISING, INC., PLAINTIFF V. MMG DIRECT, INC., DEFENDANT; MMG DIRECT, INC.
THIRD-PARTY PLAINTIFF V. FIDELITY FEDERAL BANK, FSB, THIRD-PARTY DEFENDANT, No.
98-11717-E in the County Court at Law No. 5, Dallas County, Texas (the "MCCARTHY
case"). In this lawsuit MMG asserted that the Bank was obligated to indemnify
MMG against McCarthy's claims under partnership and other theories. The Bank
moved to abate MMG's third-party complaint pending arbitration. The Court
granted the Bank's motion to abate.
On March 15, 1999 MMG filed a third-party petition against the Bank filed in
the District Court, 116th Judicial district, Dallas County, Texas, Cause No.
DV-99-01269, entitled REVELATION CORPORATION OF AMERICA, PLAINTIFF V. MMG
DIRECT, INC., DEFENDANT AND THIRD PARTY PLAINTIFF V. FIDELITY FEDERAL BANK, FSB,
THIRD PARTY DEFENDANT (the "REVELATION case"). The allegations in MMG's
third-party petition in this action mirror many of the allegations and claims in
the MMG DIRECT, INC. case, although several of those allegations were modified
and expanded. The Bank has filed a motion to dismiss this case; a ruling on the
motion is pending.
In light of MMG's attempts to avoid arbitration and to litigate in the Texas
courts instead, the Bank filed a petition to compel arbitration and an
accompanying motion to compel arbitration. The petition and motion were filed in
the United States District Court, Central District of California, Western
Division, Case No. 99-00589-TJH(SHx), under the caption FIDELITY FEDERAL BANK,
FSB, A CALIFORNIA FEDERAL SAVINGS BANK, PLAINTIFF V. MMG DIRECT, INC., A
DELAWARE CORPORATION, DEFENDANT (the "FIDELITY FEDERAL case"). MMG opposed and
filed a motion to dismiss. On March 18, 1999 the Court denied MMG's motion to
dismiss and granted the Bank's motion to compel arbitration.
31
<PAGE>
After presentations of their cases by Fidelity and MMG the arbitrator issued
his award of arbitration on September 15, 1999. In that award, the arbitrator
(i) terminated the marketing agreements between the parties, and excused the
parties from any existing or future obligations; (ii) gave the Bank the right to
sell or otherwise dispose of the credit card portfolio generated under the
marketing agreements; (iii) ordered the Bank to pay MMG certain fees owed by the
Bank to MMG which were not disputed but which the Bank withheld during the
course of the dispute as a prejudgment offset (iv) ordered the Bank to pay MMG's
legal fees in the amount of $1 million; and (v) ordered the Bank to pay MMG for
its share of the arbitration costs. The award declared that it constituted a
full and final settlement of all claims and counterclaims between the parties as
set forth in their pleadings.
ADC CREDIT CARD LITIGATION
Sixty-nine lawsuits, on behalf of approximately 140 individual plaintiffs,
and two purported class actions, are pending in state and federal courts in the
State of Alabama against Fidelity and, in most instances, ADC, Bank Plus, and
various manufacturers and distributors of consumer appliances. In addition, the
Bank and Bank Plus have been sued in three cases in state court in the State of
Mississippi on behalf of 61 individual plaintiffs (the Mississippi cases have
been removed to Federal Court in that state), and the Bank has been sued in a
state court in the State of West Virginia on behalf of one individual plaintiff
(the West Virginia case has been removed to a Federal Court in that state). All
of these cases arise out of the affinity credit card program between the Bank
and ADC in which independent third-party distributors sold consumer appliances
door-to-door, and concurrently offered the consumer an opportunity to apply for
a credit card arranged by ADC and issued by the Bank which was then used to pay
for the appliance.
The plaintiffs in the litigation are cardholders who allege, generally, that
misrepresentations were made to them by the sales people in connection with
their purchases of the consumer appliances and applications for credit card
accounts, including misrepresentations with respect to the nature and cost of
financing such purchases through credit cards issued by the Bank. The Bank
believes that it has substantial legal defenses to these claims in that it did
not control, direct, or otherwise have any dealings with the sales people who
allegedly made such misrepresentations, and the financing and other terms of the
credit cards were disclosed in writing to cardholders by the Bank. Most of the
cases are in discovery.
The Bank is a beneficiary of agreements in which ADC and the distributors of
the consumer appliances covenanted to indemnify and defend the Bank against
potential claims relating to the program. The Bank believes that the claims of
the plaintiffs are within the scope of the indemnity and defense covenants, and
the Bank has demanded that ADC and the distributors indemnify the Bank and
provide a defense. Since the commencement of these cases ADC has performed its
obligation to provide a defense to the Bank. However, so far as is known, ADC is
no longer actively in business, and uncertainty exists as to ADC's financial
ability to indemnify or continue to provide a defense to the Bank. Thus far the
distributors have either not responded to the Bank's demands for indemnity and
defense, denied such demands, or declined to respond until such time as the
distributors have had additional opportunity to investigate the claims. The Bank
is evaluating its options for enforcing its rights with respect to the
distributors including any rights the distributors may have under applicable
insurance policies.
INTERNET CASINO LITIGATION
The Bank and Mastercard International, Inc. have been named as defendants in
a purported class action filed July 27, 1999 in the United States District Court
for the Middle District of Alabama, entitled EVELYN L. BROWN, ON BEHALF OF
HERSELF AND ALL OTHERS SIMILARLY SITUATED VS. MASTERCARD INTERNATIONAL, INC. AND
FIDELITY FEDERAL BANK, Civil Action Case No. CV 99-A-788-N. The plaintiff
alleges that she placed bets through a gambling site on the internet. The
internet site instructed her to open an account by entering her credit card
number. By this means, the plaintiff's gambling expenses incurred on the
internet site were charged to a Mastercard issued to the plaintiff by the Bank.
The plaintiff alleges that, in allowing its credit card to be used for illegal
gambling, the Bank violated a variety of Federal and State statutes, including
the Wire Act (18 U.S.C. Section 1084(a)), the Travel Act (18 U.S.C. Section
1952), a Federal statute that specifically prohibits conducing an illegal
gambling business (18 U.S.C. Section 1955), the Racketeer Influenced and Corrupt
Organizations Act ("RICO")(18 U.S.C. Section 1962(c) and 1964(a)), and a number
of Alabama statutes. The plaintiff seeks certification of a class, declaratory
relief voiding her credit card charges, unspecified compensatory damages, triple
exemplary damages under RICO, punitive damages, and attorneys fees and costs.
32
<PAGE>
The Bank is informed that this lawsuit is substantially similar to a number
of lawsuits filed around the country against credit card issuers, Mastercard,
and Visa. The Bank and Mastercard have filed motions to dismiss the case. The
plaintiff is seeking to have the lawsuit consolidated with similar lawsuits in a
Federal court in New York. The Bank believes that it should not have liability
and has substantial legal defenses to the lawsuit and the Bank intends to defend
itself vigorously.
PURPORTED CLASS ACTION LITIGATION
On October 19, 1998 a purported class action was filed against the Company
and its current and immediately preceding chief executive officers. The case was
originally 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 originally alleged 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). An
amended complaint was filed in the Los Angeles Superior Court, Central Judicial
District, Case No. BC199336, entitled HOWARD GUNTY PROFIT SHARING PLAN AND
ROBERT E. YELIN, BOTH INDIVIDUALLY AND ON BEHALF OF THE YELIN FAMILY TRUST U/A,
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. The amended complaint purports to expand the class period to
extend from March 30, 1998 through September 22, 1998. The complaint includes
claims for negligent misrepresentation, common law fraud, statutory fraud and
violations of the California Corporations Code. 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 plaintiffs have merit.
On September 20, 1999 a second purported class action was filed against the
Company and its current and immediately preceding chief executive officers. The
case is entitled GARY FELDMAN AND PETER WACHTEL, EACH INDIVIDUALLY AND ALSO ON
BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS V. BANK PLUS CORPORATION,
RICHARD M. GREENWOOD, MARK K. MASON AND DOES 1 THROUGH 50 INCLUSIVE, DEFENDANTS,
Superior Court of the State of California, County of Los Angeles, Case No. BC
217063. Except for the named individual plaintiffs' dates of purchase and
certain other minor variations, the FELDMAN complaint is virtually identical to
the GUNTY complaint and was filed by the same plaintiffs' counsel. The Company
believes the claims are meritless. Further, the Company believes the claims in
FELDMAN are barred by the Security Litigation Reform Standards Act of 1998
("SLUSA"), which requires securities fraud actions commenced after the date of
SLUSA's enactment to be brought in federal court under federal law. The Company
has filed papers seeking to remove the FELDMAN case to the Federal District
Court.
OTHER MATTERS
In the course of the current compliance examination of the Bank, certain
concerns have been raised by the Office of Thrift Supervision in connection with
the Bank's credit card operations. These concerns principally relate to
origination, servicing and collection activities of third parties who were
responsible for regulatory compliance related to their respective functions
under contracts which have been terminated or which are in a wind down process.
The Bank is seeking to address these concerns, including by providing the Office
of Thrift Supervision with additional information. While it is the Bank's
intention to resolve these concerns as expeditiously as possible, no assurances
can be given that these concerns can be resolved on a basis that would not have
an adverse financial or regulatory impact on the Bank in future periods.
The legal responsibility and financial exposure with respect to some of the
foregoing claims presently cannot be reasonably ascertained and, accordingly,
there is a risk that the outcome of one or more of these outstanding claims
could result in the payment of amounts which could be material in relation to
the financial condition or results of operations of the Company.
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 these
other lawsuits or claims will have a material adverse effect on the financial
condition or business of the Company.
33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT
NO. DESCRIPTION
------------ -----------------------------------------------------------------
3.1 Certificate of Incorporation of Bank Plus Corporation
(incorporated by reference to Exhibit 3.1 to the Form 8-B of Bank
Plus filed with the Securities and Exchange Commission ("SEC") on
April 22, 1996 (the "Form 8-B")).*
3.2 Amended and Restated Bylaws of Bank Plus Corporation
(incorporated by reference to Exhibit 5 to the current report on
Form 8-K filed with the SEC on March 30, 1999).*
3.3 Certificate of Designations of Series C Junior Participating
Cumulative Preferred Stock (Par Value $.01 per share) of Bank
Plus Corporation (incorporated by reference to Exhibit 3.3 to the
annual report on Form 10-K for the year ended December 31,
1998).*
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).*
4.3 Form of Amended and Restated Rights Agreement, dated as of March
26, 1999, between Bank Plus and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit 4
to the current report on Form 8-K filed with the SEC on March 30,
1999).*
27. Financial Data Schedule.
------------
* Indicates previously filed documents.
REPORTS ON FORM 8-K
None
34
<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 15, 1999 /s/ Mark K. Mason
----------------------------------------
Mark K. Mason
PRESIDENT AND CHIEF EXECUTIVE OFFICER;
VICE CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 15, 1999 /s/ John M. Michel
----------------------------------------
John M. Michel
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
35
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 44,520 0
<INT-BEARING-DEPOSITS> 163,976 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 364,918 0
<INVESTMENTS-CARRYING> 1,134 0
<INVESTMENTS-MARKET> 366,054 0
<LOANS> 2,341,286 0
<ALLOWANCE> 70,590 0
<TOTAL-ASSETS> 2,958,297 0
<DEPOSITS> 2,480,446 0
<SHORT-TERM> 20,000 0
<LIABILITIES-OTHER> 23,687 0
<LONG-TERM> 326,478 0
0 0
0 0
<COMMON> 195 0
<OTHER-SE> 272 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,958,297 0
<INTEREST-LOAN> 165,531 51,762
<INTEREST-INVEST> 17,012 6,101
<INTEREST-OTHER> 13,650 3,267
<INTEREST-TOTAL> 196,193 61,130
<INTEREST-DEPOSIT> 86,623 26,735
<INTEREST-EXPENSE> 27,132 7,839
<INTEREST-INCOME-NET> 82,438 26,556
<LOAN-LOSSES> 62,300 17,500
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 77,712 25,839
<INCOME-PRETAX> (16,016)<F2> (2,393)<F1>
<INCOME-PRE-EXTRAORDINARY> (16,016) (2,393)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,037) (2,400)
<EPS-BASIC> (0.82) (.12)
<EPS-DILUTED> (0.82) (.12)
<YIELD-ACTUAL> 3.29 3.45
<LOANS-NON> 7,108 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 25,022 0
<LOANS-PROBLEM> 78,685 0
<ALLOWANCE-OPEN> 106,171 81,095
<CHARGE-OFFS> (101,855) (29,477)
<RECOVERIES> 3,974 1,472
<ALLOWANCE-CLOSE> 70,590 70,590
<ALLOWANCE-DOMESTIC> 70,590 70,590
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 65,550 65,550
<FN>
(1) Earnings before income taxes and $7 minority interest in subsidiary which
is included in (Expense-Other)
(2) Earnings before income taxes and $14 minority interest in subsidiary which
is included in (Expense-Other)
</FN>
</TABLE>
