<PAGE>
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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 June 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
------------- -------------
COMMISSION FILE NUMBER 0-28292
------------------------
BANK PLUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4571410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 549-3116
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 10, 1999, Registrant had outstanding 19,411,849 shares of
Common Stock, par value $.01 per share.
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<PAGE>
BANK PLUS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 1999 and
December 31, 1998..................................................................... 1
Consolidated Statements of Operations for the quarters and six months ended
June 30, 1999 and 1998................................................................ 2
Consolidated Statements of Comprehensive Income for the quarters and
six months ended June 30, 1999 and 1998............................................... 3
Consolidated Statements of Cash Flows for the quarters and six months ended
June 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........................................................................ 30
Item 4. Submission of Matters to a Vote of Security Holders...................................... 33
Item 6. Exhibits and Reports on Form 8-K......................................................... 33
a. Exhibits........................................................................... 33
b. Reports on Form 8-K................................................................ 33
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................................................... $ 321,181 $ 380,507
Investment securities available for sale ("AFS"), at fair value..................... -- 28,797
Investment securities held to maturity, at amortized cost (market value of
$1,123 and $1,099 at June 30, 1999 and December 31, 1998, respectively)........... 1,117 1,084
Mortgage-backed securities ("MBS") available for sale, at fair value................ 392,277 465,010
Loans receivable, net of allowances for estimated loan losses of $81,095
and $106,171 at June 30, 1999 and December 31, 1998, respectively................. 2,456,734 2,665,576
Investment in Federal Home Loan Bank ("FHLB") stock................................. 34,499 65,358
Premises and equipment.............................................................. 36,949 39,042
Other assets........................................................................ 54,673 66,685
------------- -------------
Total Assets...................................................................... $ 3,297,430 $ 3,712,059
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits.......................................................................... $ 2,618,261 $ 2,922,531
FHLB advances..................................................................... 495,000 585,000
Senior notes...................................................................... 51,478 51,478
Other liabilities................................................................. 21,525 25,390
------------- -------------
Total Liabilities.............................................................. 3,186,264 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 June 30, 1999 and December 31, 1998, respectively......................... 195 194
Paid-in capital................................................................... 275,285 275,131
Accumulated other comprehensive loss.............................................. (5,807) (2,795)
Accumulated deficit............................................................... (158,779) (145,142)
------------- -------------
Total Stockholders' Equity..................................................... 110,894 127,388
------------- -------------
Total Liabilities and Stockholders' Equity............................................. $ 3,297,430 $ 3,712,059
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans................................................. $ 55,809 $ 54,223 $ 113,769 $ 108,228
MBS................................................... 5,139 11,597 10,911 25,274
Investment securities and other....................... 5,712 9,415 10,383 16,408
------------- ------------- ------------- -------------
Total interest income............................... 66,660 75,235 135,063 149,910
------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits.............................................. 28,765 36,624 59,888 72,095
FHLB advances......................................... 7,899 16,947 16,144 33,573
Other borrowings...................................... 1,573 1,542 3,149 3,111
------------- ------------- ------------- -------------
Total interest expense.............................. 38,237 55,113 79,181 108,779
------------- ------------- ------------- -------------
Net interest income...................................... 28,423 20,122 55,882 41,131
Provision for estimated loan losses...................... 31,800 4,250 44,800 6,250
------------- ------------- ------------- -------------
Net interest income after provision for estimated
loan losses............................................ (3,377) 15,872 11,082 34,881
------------- ------------- ------------- -------------
NONINTEREST INCOME (EXPENSE):
Loan fee income....................................... 845 915 1,574 1,434
Credit card fees...................................... 9,765 4,467 20,102 6,588
Fee income from the sale of uninsured investment
products............................................ 1,666 1,956 3,221 3,409
Fee income from deposits and other fee income......... 1,152 793 2,022 1,587
Losses on securities and trading activities........... -- (1,932) -- (1,766)
Fee income from automated teller machine ("ATM")
cash services....................................... -- 713 1,314 1,807
Other (expense) income................................ (311) -- (309) 18
Real estate operations, net........................... (340) (764) (770) (1,598)
------------- ------------- ------------- -------------
Total noninterest income............................ 12,777 6,148 27,154 11,479
------------- ------------- ------------- -------------
OPERATING EXPENSE:
Personnel and benefits................................ 11,003 10,937 21,910 20,193
Occupancy............................................. 3,792 3,662 7,453 7,049
Federal Deposit Insurance Corporation ("FDIC")
insurance........................................... 1,126 658 3,381 1,300
Professional services................................. 4,505 3,963 8,042 7,568
Credit card data processing and servicing............. 2,534 2,118 6,489 3,278
Office-related expenses............................... 1,267 1,445 2,619 2,715
Other................................................. 800 1,036 1,965 1,878
------------- ------------- ------------- -------------
Total operating expense............................. 25,027 23,819 51,859 43,981
------------- ------------- ------------- -------------
(Loss) earnings before income taxes and minority
interest in subsidiary................................ (15,627) (1,799) (13,623) 2,379
Income tax benefit....................................... -- (630) -- --
------------- ------------- ------------- -------------
(Loss) earnings before minority interest in subsidiary... (15,627) (1,169) (13,623) 2,379
Minority interest in subsidiary.......................... 7 7 14 14
------------- ------------- ------------- -------------
(Loss) earnings available for common stockholders........ $ (15,634) $ (1,176) $ (13,637) $ 2,365
============= ============= ============= =============
(LOSS) EARNINGS PER SHARE ("EPS"):
Basic................................................. $ (0.80) $ (0.06) $ (0.70) $ 0.12
============= ============= ============= =============
Diluted............................................... $ (0.80) $ (0.06) $ (0.70) $ 0.12
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic................................................. 19,461,082 19,385,946 19,458,499 19,377,681
============= ============= ============= =============
Diluted............................................... 19,461,082 19,385,946 19,458,499 19,859,896
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(Loss) earnings available for common stockholders......... $ (15,634) $ (1,176) $ (13,637) $ 2,365
------------- ------------- ------------- -------------
Other comprehensive (loss) earnings:
Investment securities and MBS AFS:
Unrealized holding (losses) gains
arising during the period, net..................... (3,568) (1,485) (3,012) 410
Reclassification adjustment for losses
(gains) included in earnings, net.................. -- 38 -- (76)
------------- ------------- ------------- -------------
Total............................................ (3,568) (1,447) (3,012) 334
------------- ------------- ------------- -------------
Derivative financial instruments:
Unrealized holding losses arising during
the period, net.................................... -- (1,933) -- (3,339)
Reclassification adjustment for losses
included in earnings/loss, net..................... -- 4,191 -- 4,282
------------- ------------- ------------- -------------
Total............................................ -- 2,258 -- 943
------------- ------------- ------------- -------------
Other comprehensive (loss) earnings.................... (3,568) 811 (3,012) 1,277
------------- ------------- ------------- -------------
Comprehensive (loss) earnings............................. $ (19,202) $ (365) $ (16,649) $ 3,642
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings.................................... $ (15,634) $ (1,176) $ (13,637) $ 2,365
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Provisions for estimated loan and real
estate losses................................... 31,925 4,259 44,939 6,322
(Gains) losses on sale of loans and securities.... (52) 1,893 (54) 1,597
FHLB stock dividends.............................. (544) (902) (1,351) (1,777)
Depreciation and amortization..................... 2,017 1,762 4,059 3,347
Accretion of premiums and net deferred loan and
credit card fees and amortization of discounts.. (6,950) 2,726 (13,334) 4,636
Deferred income tax benefit....................... -- (612) (56) (92)
Purchases of MBS held for trading...................... -- (18,967) -- (38,809)
Proceeds from sales and principal repayments of
MBS held for trading................................. -- 10,335 -- 40,879
Proceeds from redemption of FHLB stock................. 32,614 -- 32,614 --
Interest receivable decrease........................... 1,192 49 2,822 783
Other assets decrease (increase)....................... 2,964 (4,431) 6,348 (1,323)
Interest payable (decrease) increase................... (945) 2,911 (2,604) (1,186)
Other liabilities increase (decrease).................. 888 3,659 (645) 3,534
------------- ------------- ------------- -------------
Net cash provided by operating activities............ 47,475 1,506 59,101 20,276
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities AFS................ -- -- 28,831 10,000
Proceeds from sales of investment securities AFS ...... -- -- -- 57,805
Purchases of MBS AFS................................... (110,577) (60,052) (110,577) (60,052)
Proceeds from sales and principal repayments
of MBS AFS........................................... 52,332 96,505 177,657 169,304
Purchases of derivative securities..................... -- (408) -- (4,112)
Loans receivable, net decrease (increase).............. 100,112 (18,225) 171,028 (51,103)
Proceeds from sales of real estate..................... 4,932 8,767 9,899 18,944
Purchases of premises and equipment.................... (471) (4,044) (1,008) (6,087)
------------- ------------- ------------- -------------
Net cash provided by investing activities............ 46,328 22,543 275,830 134,699
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings,
net (decrease) increase.............................. (9,546) (10,467) (9,817) 56,698
Certificate accounts, net (decrease) increase.......... (132,191) 69,684 (294,453) 106,672
Proceeds from FHLB advances............................ -- 425,000 -- 605,000
Repayments of FHLB advances............................ (90,000) (424,960) (90,000) (654,960)
Proceeds from exercise of stock options................ 13 29 13 209
------------- ------------- ------------- -------------
Net cash (used in) provided by financing activities.. (231,724) 59,286 (394,257) 113,619
------------- ------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents...... (137,921) 83,335 (59,326) 268,594
Cash and cash equivalents at beginning of period.......... 459,102 351,204 380,507 165,945
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period................ $ 321,181 $ 434,539 $ 321,181 $ 434,539
============= ============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits, advances and other
borrowings........................................... $ (38,812) $ (51,870) $ (81,048) $ (109,265)
Income tax refunds (payments).......................... 1,657 (344) 1,502 (354)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure............... 4,283 7,861 9,298 16,289
Loan originated to finance sale of real estate owned... 796 -- 796 --
Issuance of stock...................................... 8 -- 142 --
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND SIX MONTHS ENDED JUNE 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"), Gateway Investment Services, Inc. ("Gateway") and Bank
Plus Credit Services Corporation ("BPCS") (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 (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of June 30, 1999 and
December 31, 1998, and the results of operations, statements of comprehensive
income and statements of cash flows for the three and six months ended June 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
<PAGE>
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
(Loss) earnings available for common stockholders....... $ (15,634) $ (1,176) $ (13,637) $ 2,365
============= ============= ============= =============
Weighted average common shares outstanding:
Basic............................................... 19,461,082 19,385,946 19,458,499 19,377,681
Effect of dilutive securities-- stock options....... -- -- -- 441,876
Effect of dilutive securities-- deferred
stock awards...................................... -- -- -- 40,339
------------- ------------- ------------- -------------
Diluted............................................. 19,461,082 19,385,946 19,458,499 19,859,896
============= ============= ============= =============
EPS:
Basic............................................... $ (0.80) $ (0.06) $ (0.70) $ 0.12
Effect of dilutive securities -- stock options...... -- -- -- --
Effect of dilutive securities -- deferred
stock awards...................................... -- -- -- --
------------- ------------- ------------- -------------
Diluted............................................. $ (0.80) $ (0.06) $ (0.70) $ 0.12
============= ============= ============= =============
</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
<PAGE>
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; restrictions imposed on the Bank's operations by
regulators such as a prohibition on the payment of dividends to Bank Plus; an
increase in the number of 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 credit card 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 increased provisions for estimated loan losses, the Company
incurred a net loss of $15.6 million, or $0.80 per diluted share, for the second
quarter of 1999 compared to net earnings of $2.0 million, or $0.10 per diluted
share, for the 1999 first quarter. The increase in provisions for estimated loan
losses was primarily due to increased delinquencies and projected losses in the
American Direct Credit, L.L.C. ("ADC") credit card portfolio.
At April 1, 1999 collection services for the ADC credit card portfolio were
transferred from ADC to BPCS in accordance with the settlement agreement between
the Bank and ADC. Delinquencies in the ADC credit card portfolio increased to
23.7% at June 30, 1999 from 12.3% at March 31, 1999 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
originations under the program in February 1999 and transitional difficulties
associated with the transfer of the servicing of accounts from ADC to BPCS.
Overall delinquencies in the credit card portfolio were 20.4% at June 30, 1999
as compared to 16.8% at March 31, 1999 and 21.4% at December 31, 1998.
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 June 30, 1999 delinquencies and REO balances in the mortgage loan
portfolio had decreased to 0.63% and $6.9 million, respectively.
Results for the core bank operations have improved as a result of the
implementation of the Company's revised business plan. This plan includes the
reestablishment of the Bank's real estate lending capabilities, reduction of
operating expenses and the expansion of the net interest margin. During the 1999
second quarter, originations and purchases of mortgage loans totaled $42.0
million, operating expenses of the core bank have decreased by over 13% when
compared to the 1998 second quarter and the net interest margin increased to
2.40%.
7
<PAGE>
The Bank's core and risk-based capital ratios as of June 30, 1999, were
4.51% and 9.05%, respectively, compared to 4.61% and 9.21%, respectively, as of
March 31, 1999. Under the most restrictive of the regulatory capital ratio
measurements, the Bank had an excess of $16.6 million above the minimum level
required to be considered "Adequately Capitalized," compared to an excess of
$21.7 million at March 31, 1999.
During 1999, as part of its plan to regain "Well Capitalized" status, the
Bank continued its deposit repricing and conversion program, completed a sale of
deposits and paid off FHLB advances. Through June 30, 1999, the Bank reduced its
total deposits, primarily through the reduction of higher cost certificates of
deposit, by $304 million and reduced its cost of deposits from 4.53% at December
31, 1998 to 4.16% at June 30, 1999. In August 1999, the Bank completed the sale
of two of its branches with total deposits of $125 million, recording a gain of
$6.2 million. In June and August 1999, $90 million and $100 million,
respectively, of fixed rate FHLB advances with a weighted average rate of 6.43%
were prepaid. The Company may consider other transactions, including additional
sales of deposits, sales of loans or additional prepayments of FHLB advances, to
reduce the overall size of the balance sheet in order to achieve "Well
Capitalized" status.
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.
In the Company's arbitration claim against MMG Direct, Inc. ("MMG"), both
sides have presented their cases to the arbitrator and post arbitration briefing
has been completed. A decision by the Arbitrator is expected in September. A
number of new consumer lawsuits have been filed in connection with the ADC
credit card program in the states of Alabama, Mississippi and West Virginia.
These consumer lawsuits generally allege that misrepresentations were made by
third party salespeople to the plaintiffs in connection with the purchase of
various consumer items, including misrepresentations regarding the nature and
cost of financing such purchases through credit cards issued by the Bank. The
Bank believes it has substantial legal and factual defenses against these
claims.
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 $13.3 million at June 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
The Company continues to explore a potential sale with parties interested
in an acquisition of the Company in whole or in part. The existence and
condition of the Bank's primarily sub-prime credit card portfolio continues to
be viewed as an obstacle by most parties considering an acquisition of the
8
<PAGE>
Company. Accordingly, the Company continues to explore alternative transactions
which may include a sale of the credit card portfolio and the core bank to
separate buyers. The Company continues to discuss a range of alternative
potential transactions with interested parties. To date no definitive offers
have been received. There can be no assurance that any definitive offers will be
received or, if received, will be determined to be adequate by the Board of
Directors of the Company.
RESULTS OF OPERATIONS
SUMMARY
The Company reported net losses of $15.6 million and $13.6 million for the
quarter and six months ended June 30, 1999, respectively, as compared to net
losses of $1.2 million and net earnings of $2.4 million for the corresponding
periods in 1998. Net income from core bank operations was $10.8 million and
$16.1 million for the quarter and six months ended June 30, 1999, respectively
as compared to $3.6 million and $6.5 million for the corresponding periods in
1998. Net losses from the credit card operations were $26.4 million and $29.7
million for the quarter and six months ended June 30, 1999, respectively, as
compared to $4.8 million and $4.1 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, which utilize various management
accounting techniques to ensure that each business segment's financial results
reflect the underlying performance of that business. The following describes
these two business segments:
Core Bank Operations -- The principal business activities of this segment
are attracting funds from the general public and 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, 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 cards and managing the credit risk
associated with the credit card portfolios. Since the first quarter of 1999,
there has 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
fees, late fees and interchange fees. This segment's principal expenses are
interest expense from funding provided by the core bank operations and costs of
servicing the portfolio, including third party processing charges.
9
<PAGE>
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CORE BANK OPERATIONS:
Net interest income................................... $ 18,527 $ 18,614 $ 35,858 $ 38,641
Provision for estimated loan losses................... (5,787) (1,850) (8,024) (350)
Noninterest income.................................... 3,012 1,680 7,052 4,891
Operating expense..................................... 16,524 19,128 34,849 37,396
Income tax benefit.................................... -- (630) -- --
------------- ------------- ------------- -------------
Net earnings........................................ $ 10,802 $ 3,646 $ 16,085 $ 6,486
============= ============= ============= =============
Operating Ratios:
Interest margin....................................... 2.40% 1.79% 2.29% 1.87%
Efficiency ratio...................................... 75.70% 83.20% 79.88% 79.77%
Return on average assets.............................. 1.34% 0.34% 0.98% 0.30%
Return on average equity.............................. 42.85% 8.72% 32.09% 7.60%
CREDIT CARD OPERATIONS:
Net interest income................................... $ 9,896 $ 1,508 $ 20,024 $ 2,490
Provision for estimated loan losses................... 37,587 6,100 52,824 6,600
Noninterest income.................................... 9,765 4,468 20,102 6,588
Operating expense..................................... 8,503 4,691 17,010 6,585
------------- ------------- ------------- -------------
Net loss............................................ $ (26,429) $ (4,815) $ (29,708) $ (4,107)
============= ============= ============= =============
Operating Ratios:
Interest margin....................................... 13.35% 4.30% 12.63% 4.63%
Efficiency ratio...................................... 43.25% 78.50% 42.39% 72.54%
Return on average assets.............................. (43.48)% (13.58)% (22.77)% (7.58)%
Return on average equity.............................. (390.76)% (118.21)% (209.22)% (65.94)%
</TABLE>
CORE BANK OPERATIONS
Net income from core bank operations was $10.8 million and $16.1 million
for the quarter and six months ended June 30, 1999, respectively, as compared to
$3.6 million and $6.5 million for the quarter and six months ended June 30,
1998, respectively. The increase in the 1999 second quarter as compared to the
corresponding period in 1998 was due to higher net recoveries of loan loss
reserves and reduced estimates of future loan losses, higher noninterest income
and lower operating expense. The increase for the six months ended June 30, 1999
as compared to the corresponding period in 1998 was due to higher net recoveries
of loan loss reserves and reduced estimates of future loan losses, higher
noninterest income and lower operating expense offset by lower net interest
income.
For the 1999 second quarter, net yield on interest earning assets increased
to 2.40% while average assets decreased to $3.1 billion as compared to a net
yield of 1.79% and average assets of $4.2 billion in the 1998 second quarter.
For the six months ended June 30, 1999, net yield on interest earning assets
increased to 2.29% while average assets decreased to $3.1 billion as compared to
a net yield of 1.87% and average assets of $4.1 billion in the corresponding
period in 1998. The increase in net yield for the quarter and six-month periods
was primarily the result of decreased costs of deposits and the recognition of
previously deferred interest and fees offset by lower yields on investment
securities. As a result of the deposit repricing program, the average costs of
deposits decreased to 4.28% and 4.36% for the quarter and six months ended June
30, 1999 as compared to 4.90% for both of the corresponding periods in 1998.
10
<PAGE>
During the 1999 second quarter, the Bank recognized $1.8 million of previously
deferred interest and fees as a result of the prepayment of a $17 million
commercial loan. The decrease in yield on investments was primarily the result
of a decrease in general market interest rates. The decrease in average assets
for the quarter and six-month periods was due to the Bank's efforts to reduce
assets as part of its plan to augment its regulatory capital levels and regain
"Well Capitalized" status.
Net recoveries of loan loss reserves and reduced estimates of future loan
losses in 1999 reflect the continuing improvement in the asset quality of the
Bank's mortgage loan portfolio. For the twelve months ended June 30, recoveries
of previously established specific valuation allowances ("SVAs") for the
mortgage loan and REO portfolios, net of new SVAs established, totaled $5.0
million.
Noninterest income increased to $3.0 million and $7.1 million for the
quarter and six months ended June 30, 1999 as compared to $1.7 million and $4.9
million for the corresponding periods in 1998. Included in noninterest income
were losses from treasury activities of $1.9 million and $1.8 million for the
quarter and six months ended June 30, 1998 as compared to $0.3 million for both
of the corresponding periods in 1999. The losses in 1998 were primarily due to
losses from hedging activities while the loss in 1999 represents fees for the
prepayment of FHLB advances. In addition, the continued improvement in the
Bank's mortgage loan portfolio resulted in lower costs of real estate operations
in 1999. These increases in noninterest income were offset by lower fee income
from ATM cash services as a result of the cancellation of the related program in
the first quarter of 1999.
For the quarter and six months ended June 30, 1999, operating expense
decreased to $16.5 million and $34.8 million from $19.1 million and $37.4
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 reductions in staffing and
discretionary expenses.
CREDIT CARD OPERATIONS
For the quarter and six months ended June 30, 1999, net losses from the
credit card operations were $26.4 million and $29.7 million, respectively, as
compared to $4.8 million and $4.1 million for the corresponding periods in 1998.
The increase in net losses in 1999 were due to significant increases in
provisions for estimated loan losses and increases in operating expense which
were partially offset by increased net interest income and noninterest income.
The net yield on credit card receivables increased to 13.35% and 12.63% and
average balances outstanding increased to $297 million and $317 million for the
quarter and six months ended June 30, 1999, respectively, as compared to net
yields of 4.30% and 4.63% and average assets of $140 million and $108 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 significant increases in the provision for loan losses for the quarter
and six months ended June 30, 1999 reflects the significant growth in the
portfolio in the latter half of 1998 and the increased delinquencies and current
and estimated future charge-offs. Delinquencies at June 30, 1999 were 20.4% as
compared to 11.2% at June 30, 1998 and credit card charge-offs for the six
months ended June 30, 1999 totaled $68.3 million as compared to $9.2 million for
the six months ended June 30, 1998. As a result of the increase in current
delinquencies and charge-offs, estimated future charge-offs have increased
significantly. Additionally, in the second quarter of 1999, as a result of a
significant increase in delinquencies and estimated future charge-offs in the
ADC portfolio, provisions for estimated loan losses increased to $37.6 million
as compared to $15.2 million in the first quarter of 1999.
11
<PAGE>
Credit card fees increased to $9.8 million and $20.1 million for the
quarter and six months ended June 30, 1999, respectively, as compared to $4.5
million and $6.6 million for the corresponding periods in 1998. Included in the
credit card fees are origination and annual fees net of origination costs, which
are deferred and amortized into income over a 12-month period, interchange fees,
late payment fees and other ancillary fees. As a result of the wind down of the
credit card programs, the remaining $0.9 million of unamortized deferred
origination fees and costs are expected to be recognized or charged off during
the third quarter of 1999, and no additional credit card origination fees or
costs are expected to be created. The increases in credit card fees over the
prior year periods are due to the growth of the credit card portfolio in the
third and fourth quarters of 1998. Deferred origination fees and costs
recognized during the quarter and six months ended June 30, 1999 were $3.4
million and $8.1 million, respectively, as compared to $1.7 million and $3.0
million for the corresponding periods in 1998.
The increases in operating expenses in the quarter and six months ended
June 30, 1999 as compared to the corresponding periods in 1998 were due
primarily to increased servicing costs and legal expenses. Servicing costs
increased $2.7 million and $8.2 million during the three and six months ended
June 30, 1999 as compared to the corresponding periods in 1998 due to the
significant increases in the outstanding balances and delinquencies in the
Bank's credit card portfolio. In addition, for the three and six months ended
June 30, 1999 the Bank incurred $1.4 million and $1.9 million in legal expenses
associated with litigation related to the termination of the MMG credit card
program.
12
<PAGE>
NET INTEREST INCOME
The following tables present the primary determinants of net interest
income for the periods indicated. For the purpose of this analysis, 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 JUNE 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 .............. $ 2,289,135 $ 43,150 7.54% $ 2,773,858 $ 50,914 7.34%
Credit card loans...................... 296,649 12,659 17.07 144,544 3,309 9.16
MBS.................................... 347,992 5,139 5.91 758,732 11,597 6.11
Investment securities ................. 408,869 5,168 5.07 560,689 8,513 6.09
Investment in FHLB stock .............. 45,102 544 4.84 61,964 902 5.84
------------- ------------- ------------- -------------
Total interest-earning assets ........... 3,387,747 66,660 7.87 4,299,787 75,235 7.00
------------- -------------
Noninterest-earning assets .............. 86,267 149,383
------------- -------------
Total assets ............................ $ 3,474,014 $ 4,449,170
============= =============
Interest-bearing liabilities:
Deposits:
Checking.............................. $ 377,946 1,166 1.24 $ 347,472 1,029 1.19
Savings............................... 119,711 852 2.85 122,811 920 3.00
Certificates of deposits ("CDs")...... 2,196,694 26,747 4.82 2,529,510 34,675 5.44
------------- ------------- ------------- -------------
Total deposits .......................... 2,694,351 28,765 4.28 2,999,793 36,624 4.90
Borrowings .............................. 608,478 9,472 6.24 1,225,025 18,489 6.05
------------- ------------- ------------- -------------
Total interest-bearing liabilities....... 3,302,829 38,237 4.64 4,224,818 55,113 5.23
------------- -------------
Noninterest-bearing liabilities.......... 43,259 40,771
Preferred stock issued by
consolidated subsidiary................ 272 272
Stockholders' equity..................... 127,654 183,309
------------- -------------
Total liabilities and equity............. $ 3,474,014 $ 4,449,170
============= =============
Net interest income; interest rate
spread................................. $ 28,423 3.23% $ 20,122 1.77%
============= ============= ============= =============
Net yield on interest-earning assets
("net interest margin") .............. 3.35% 1.86%
============= =============
Average nonaccruing mortgage loan
balance included in average loan
balance .............................. $ 10,224 $ 23,022
============= =============
Net delinquent interest removed
from interest income ................. $ 203 $ 626
============= =============
Reduction in net yield on
interest-earning assets due to
delinquent interest................... 0.02% 0.06%
============= =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 .............. $ 2,342,490 $ 87,756 7.49% $ 2,792,078 $ 102,977 7.37%
Credit card loans...................... 317,138 26,013 16.40 108,052 5,251 9.72
MBS.................................... 379,422 10,911 5.75 803,476 25,274 6.29
Investment securities ................. 353,598 9,032 5.12 484,044 14,631 6.10
Investment in FHLB stock .............. 55,543 1,351 4.88 61,393 1,777 5.84
------------- ------------- ------------- -------------
Total interest-earning assets ........... 3,448,191 135,063 7.83 4,249,043 149,910 7.07
------------- -------------
Noninterest-earning assets .............. 98,852 159,802
------------- -------------
Total assets ............................ $ 3,547,043 $ 4,408,845
============= =============
Interest-bearing liabilities:
Deposits:
Checking.............................. $ 375,838 2,298 1.23 $ 343,990 2,016 1.18
Savings............................... 119,037 1,683 2.84 123,343 1,836 3.00
CDs................................... 2,262,456 55,907 4.89 2,501,194 68,243 5.44
------------- ------------- ------------- -------------
Total deposits .......................... 2,757,331 59,888 4.36 2,968,527 72,095 4.90
Borrowings .............................. 622,478 19,293 6.22 1,216,219 36,684 6.08
------------- ------------- ------------- -------------
Total interest-bearing liabilities....... 3,379,809 79,181 4.70 4,184,746 108,779 5.24
------------- -------------
Noninterest-bearing liabilities.......... 38,571 41,026
Preferred stock issued by
consolidated subsidiary................ 272 272
Stockholders' equity..................... 128,391 182,801
------------- -------------
Total liabilities and equity............. $ 3,547,043 $ 4,408,845
============= =============
Net interest income; interest rate
spread................................... $ 55,882 3.13% $ 41,131 1.83%
============= ============= ============= =============
Net yield on interest-earning assets
("net interest margin") .............. 3.22% 1.91%
============= =============
Average nonaccruing mortgage loan
balance included in average loan
balance .............................. $ 13,160 $ 22,097
============= =============
Net delinquent interest removed
from interest income ................. $ 232 $ 1,345
============= =============
Reduction in net yield on
interest-earning assets due to
delinquent interest................... 0.01% 0.06%
============= =============
</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 JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO JUNE 30, 1998 COMPARED TO JUNE 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............... $ (9,116) $ 1,352 $ (7,764) $ (16,866) $ 1,645 $ (15,221)
Credit card loans...................... 5,136 4,214 9,350 15,321 5,441 20,762
MBS.................................... (6,090) (368) (6,458) (12,354) (2,009) (14,363)
Investment securities ................. (2,066) (1,279) (3,345) (3,508) (2,091) (5,599)
Investment in FHLB stock .............. (220) (138) (358) (156) (270) (426)
------------- ------------- ------------- ------------- ------------- -------------
Total interest income .................... (12,356) 3,781 (8,575) (17,563) 2,716 (14,847)
------------- ------------- ------------- ------------- ------------- -------------
Interest expense:
Deposits:
Demand deposits ..................... (93) (44) (137) (193) (89) (282)
Savings deposits .................... 23 45 68 60 93 153
Time deposits ....................... 4,249 3,679 7,928 5,991 6,345 12,336
------------- ------------- ------------- ------------- ------------- -------------
Total deposits ........................... 4,179 3,680 7,859 5,858 6,349 12,207
Borrowings ............................ 9,583 (566) 9,017 18,233 (842) 17,391
------------- ------------- ------------- ------------- ------------- -------------
Total interest expense ................... 13,762 3,114 16,876 24,091 5,507 29,598
------------- ------------- ------------- ------------- ------------- -------------
Increase (decrease) in net
interest income ....................... $ 1,406 $ 6,895 $ 8,301 $ 6,528 $ 8,223 $ 14,751
============= ============= ============= ============= ============= =============
</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, the Company does not
expect to record any tax expense or benefit in 1999.
FINANCIAL CONDITION
ASSET QUALITY
Because over 85% 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 multifamily and commercial properties. In addition, the possibility
that borrowers may abandon properties or seek bankruptcy protection with respect
to properties experiencing negative cash flow, particularly where such
properties are not cross-collateralized by other performing assets, can also
adversely affect the multifamily loan portfolio.
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
-------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loan delinquencies by number of days:
30 to 59 days......................... $ 6,087 $ 5,026 $ 6,556 $ 8,706 $ 6,401
60 to 89 days......................... 2,264 4,001 4,936 4,776 4,647
90 days and over...................... 5,905 12,962 13,841 15,551 18,338
------------- ------------- ------------- ------------- -------------
Total............................... $ 14,256 $ 21,989 $ 25,333 $ 29,033 $ 29,386
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 0.27% 0.21% 0.27% 0.35% 0.24%
60 to 89 days....................... 0.10 0.17 0.21 0.19 0.17
90 days and over.................... 0.26 0.55 0.57 0.61 0.69
------------- ------------- ------------- ------------- -------------
Total............................ 0.63% 0.93% 1.05% 1.15% 1.10%
============= ============= ============= ============= =============
Credit card loan delinquencies by number of days:
30 to 59 days......................... $ 15,666 $ 12,801 $ 19,609 $ 26,892 $ 9,187
60 to 89 days......................... 13,940 10,485 15,391 10,606 5,419
90 to 119 days........................ 12,075 11,101 17,969 5,983 3,691
120 to 149 days....................... 8,460 11,148 17,363 5,031 2,278
150 days and over..................... 6,963 6,670 4,460 1,420 1,206
------------- ------------- ------------- ------------- -------------
Total............................... $ 57,104 $ 52,205 $ 74,792 $ 49,932 $ 21,781
============= ============= ============= ============= =============
As a percentage of outstanding
balances:
30 to 59 days....................... 5.60% 4.12% 5.60% 8.64% 4.73%
60 to 89 days....................... 4.98 3.38 4.40 3.41 2.79
90 to 119 days...................... 4.31 3.57 5.13 1.92 1.90
120 to 149 days..................... 3.02 3.59 4.96 1.62 1.17
150 days and over................... 2.49 2.15 1.27 0.46 0.62
------------- ------------- ------------- ------------- -------------
Total............................ 20.40% 16.81% 21.36% 16.05% 11.21%
============= ============= ============= ============= =============
Other loan delinquencies by number of days:
30 to 59 days......................... $ 742 $ 1,002 $ 2,079 $ 965 $ 284
60 to 89 days......................... 364 192 533 227 155
90 days and over...................... 160 175 414 294 349
------------- ------------- ------------- ------------- -------------
Total............................... $ 1,266 $ 1,369 $ 3,026 $ 1,486 $ 788
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days....................... 6.07% 8.79% 8.48% 3.69% 1.45%
60 to 89 days....................... 2.98 1.69 2.18 0.87 0.79
90 days and over.................... 1.31 1.54 1.69 1.12 1.78
------------- ------------- ------------- ------------- -------------
Total............................ 10.36% 12.02% 12.35% 5.68% 4.02%
============= ============= ============= ============= =============
</TABLE>
16
<PAGE>
Mortgage loan delinquencies continued to decline and were at historically
low levels at June 30, 1999. Of the $14.3 million in mortgage loan delinquencies
at June 30, 1999, $1.6 million, or 3.2% 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 increased $5.0 million as of June 30, 1999 as
compared to March 31, 1999, primarily due to increases in delinquencies in the
ADC portfolio. The increase in delinquencies in the ADC portfolio is the 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 BPCS in April 1999. Total delinquencies for the ADC
portfolio increased to 23.73% at June 30, 1999 from 12.28% at March 31, 1999.
The following table presents the credit card loan portfolio by program at
the dates indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MMG outstanding balances:
Current.............................. $ 95,145 $ 105,133 $ 116,431 $ 132,855 $ 78,446
Delinquencies:
30 to 59 days...................... 6,291 6,064 11,810 19,486 4,419
60 to 89 days...................... 5,260 5,765 10,089 6,257 1,589
90 to 119 days..................... 4,796 6,390 13,472 2,944 986
120 to 149 days.................... 3,942 7,689 14,660 2,304 338
150 days and over.................. 3,837 6,670 4,460 1,175 4
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 24,126 32,578 54,491 32,166 7,336
------------- ------------- ------------- ------------- -------------
Total................................ $ 119,271 $ 137,711 $ 170,922 $ 165,021 $ 85,782
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 5.27% 4.40% 6.91% 11.81% 5.15%
60 to 89 days...................... 4.41 4.19 5.90 3.79 1.85
90 to 119 days..................... 4.02 4.64 7.88 1.78 1.15
120 to 149 days.................... 3.30 5.58 8.58 1.40 0.40
150 days and over.................. 3.22 4.84 2.61 0.71 --
------------- ------------- ------------- ------------- -------------
Total........................... 20.22% 23.65% 31.88% 19.49% 8.55%
============= ============= ============= ============= =============
ADC outstanding balances:
Current.............................. $ 98,701 $ 122,989 $ 129,450 $ 107,099 $ 82,506
Delinquencies:
30 to 59 days...................... 8,212 5,529 6,603 6,755 4,610
60 to 89 days...................... 8,113 4,012 4,633 3,973 3,687
90 to 119 days..................... 6,764 4,245 3,959 2,864 2,695
120 to 149 days.................... 4,487 3,431 2,699 2,727 1,940
150 days and over.................. 3,121 -- -- 245 1,202
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 30,697 17,217 17,894 16,564 14,134
------------- ------------- ------------- ------------- -------------
Total................................ $ 129,398 $ 140,206 $ 147,344 $ 123,663 $ 96,640
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 6.35% 3.94% 4.48% 5.46% 4.77%
60 to 89 days...................... 6.27 2.86 3.14 3.21 3.82
90 to 119 days..................... 5.23 3.03 2.69 2.32 2.79
120 to 149 days.................... 3.47 2.45 1.83 2.21 2.00
150 days and over.................. 2.41 -- -- 0.20 1.24
------------- ------------- ------------- ------------- -------------
Total........................... 23.73% 12.28% 12.14% 13.40% 14.62%
============= ============= ============= ============= =============
(CONTINUED)
</TABLE>
17
<PAGE>
(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other credit card loans outstanding balances:
Current.............................. $ 28,959 $ 30,273 $ 29,405 $ 21,365 $ 11,590
Delinquencies:
30 to 59 days...................... 1,163 1,208 1,196 651 158
60 to 89 days...................... 567 708 669 376 143
90 to 119 days..................... 515 466 538 175 10
120 to 149 days.................... 31 28 4 -- --
150 days and over.................. 5 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total delinquencies............. 2,281 2,410 2,407 1,202 311
------------- ------------- ------------- ------------- -------------
Total................................ $ 31,240 $ 32,683 $ 31,812 $ 22,567 $ 11,901
============= ============= ============= ============= =============
As a percentage of outstanding balances:
30 to 59 days...................... 3.72% 3.70% 3.76% 2.88% 1.33%
60 to 89 days...................... 1.81 2.17 2.10 1.67 1.21
90 to 119 days..................... 1.65 1.43 1.69 0.77 0.08
120 to 149 days.................... 0.10 0.08 0.01 -- --
150 days and over.................. 0.01 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total........................... 7.29% 7.38% 7.56% 5.32% 2.62%
============= ============= ============= ============= =============
</TABLE>
The available credit on credit cards outstanding at June 30, 1999 was
$20.6 million, $29.4 million and $9.7 million for 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
-------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets ("NPAs") by Type:
NPLs................................... $ 6,412 $ 13,137 $ 14,372 $ 16,884 $ 20,450
REO.................................... 6,861 8,431 8,397 10,161 9,566
Other repossessed assets............... 139 320 535 183 288
------------- ------------- ------------- ------------- -------------
Total NPAs........................... $ 13,412 $ 21,888 $ 23,304 $ 27,228 $ 30,304
============= ============= ============= ============= =============
Number of REO properties.................. 42 57 62 72 64
============= ============= ============= ============= =============
NPAs by Composition:
Single family residences............... $ 6,586 $ 9,761 $ 8,923 $ 8,594 $ 8,408
Multifamily 2 to 4 units............... 444 2,423 3,890 4,192 4,295
Multifamily 5 units and over........... 4,504 7,061 7,709 11,917 14,800
Commercial and other................... 1,951 2,705 2,590 2,730 2,914
Consumer............................... 427 438 692 295 387
REO valuation allowances............... (500) (500) (500) (500) (500)
------------- ------------- ------------- ------------- -------------
Total NPAs........................... 13,412 21,888 23,304 27,228 30,304
Total troubled debt restructurings
("TDRs")............................. 31,255 48,020 48,018 47,222 44,990
------------- ------------- ------------- ------------- -------------
Total TDRs and NPAs.................. $ 44,667 $ 69,908 $ 71,322 $ 74,450 $ 75,294
============= ============= ============= ============= =============
Classified Assets:
NPAs................................... $ 13,412 $ 21,888 $ 23,304 $ 27,228 $ 30,304
Performing classified loans ........... 83,423 88,623 108,355 87,401 92,390
Other classified assets................ 889 1,242 1,426 3,999 3,782
------------- ------------- ------------- ------------- -------------
Total classified assets.............. $ 97,724 $ 111,753 $ 133,085 $ 118,628 $ 126,476
============= ============= ============= ============= =============
Classified Asset Ratios:
NPLs to total assets................... 0.19% 0.37% 0.39% 0.44% 0.48%
NPLs to total loans.................... 0.26% 0.51% 0.54% 0.61% 0.73%
NPAs to total assets................... 0.41% 0.62% 0.63% 0.71% 0.71%
TDRs to total assets................... 0.95% 1.35% 1.29% 1.23% 1.05%
NPAs and TDRs to total assets.......... 1.35% 1.97% 1.92% 1.95% 1.76%
Classified assets to total assets...... 2.96% 3.15% 3.59% 3.10% 2.95%
REO to NPAs............................ 51.16% 38.52% 36.03% 37.32% 31.57%
NPLs to NPAs........................... 47.81% 60.02% 61.67% 62.01% 67.48%
</TABLE>
Total classified assets decreased $14.0 million from March 31, 1999, to
$97.7 million at June 30, 1999. This decrease was primarily due to a $8.5
million decrease in NPAs and $5.6 million decrease in classified mortgage loans.
These decreases reflect the continuing improvement in the performance of the
Bank's mortgage loan portfolio, including improvements in the underlying income
properties of the 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 for
estimated loan and REO losses:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period........................... $ 80,811 $ 55,591 $ 109,198 $ 55,993
------------- ------------- ------------- -------------
Charge-offs........................................... (30,473) (2,342) (73,701) (8,952)
Recoveries............................................ 1,815 1,908 2,502 3,897
------------- ------------- ------------- -------------
Net charge-offs..................................... (28,658) (434) (71,199) (5,055)
Provision:
Estimated loan losses............................... 31,800 4,250 44,800 6,250
REO................................................. 125 10 139 73
Net change in cash reserves(1)........................ 552 1,846 1,692 4,002
------------- ------------- ------------- -------------
Balance at end of period................................. $ 84,630 $ 61,263 $ 84,630 $ 61,263
============= ============= ============= =============
Ratio of net charge-offs during the period to
average loans outstanding.............................. 1.11% 0.01% 2.68% 0.17%
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Charge-offs:
Single family........................................ $ 341 $ 354 $ 533 $ 797
Multifamily loans:
2 to 4 units....................................... 35 392 302 909
5 to 36 units...................................... 589 1,115 1,107 5,313
37 units and over.................................. 285 431 285 1,548
Commercial and industrial............................ 33 50 1,187 385
Credit card loans.................................... 28,391 -- 67,775 --
Other loans.......................................... 799 -- 2,512 --
------------- ------------- ------------- -------------
Total charge-offs....................................... $ 30,473 $ 2,342 $ 73,701 $ 8,952
============= ============= ============= =============
Recoveries:
Single family........................................ $ 446 $ 590 $ 521 $ 1,001
Multifamily loans:
2 to 4 units....................................... 22 326 169 545
5 to 36 units...................................... 146 945 266 2,038
37 units and over.................................. 168 (3) 168 263
Commercial and industrial............................ 398 50 398 50
Credit card loans.................................... 635 -- 980 --
------------- ------------- ------------- -------------
Total recoveries........................................ $ 1,815 $ 1,908 $ 2,502 $ 3,897
============= ============= ============= =============
</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 June 30, 1999 and 1998, cash reserves were $2.5
million and $8.3 million, respectively, and were recorded as deposits on the
Company's statements of financial condition. Accounts purchased from cash
reserves during the first six months of 1999 and 1998 totaled $1.5 million and
$8.4 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
-------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
Allowance for Loan and Lease
Losses ("ALLL") ..................... $ 75,414 $ 70,606 $ 98,229 $ 88,500 $ 36,088
SVA.................................... 5,681 7,292 7,942 10,522 15,800
------------- ------------- ------------- ------------- -------------
Total ALLL and SVA................... 81,095 77,898 106,171 99,022 51,888
Cash reserves.......................... 2,467 1,915 1,888 7,656 8,334
------------- ------------- ------------- ------------- -------------
Total loan allowances and cash
reserves........................... 83,562 79,813 108,059 106,678 60,222
REO valuation allowances.................. 1,068 998 1,139 1,032 1,041
------------- ------------- ------------- ------------- -------------
Total allowances and cash reserves........ $ 84,630 $ 80,811 $ 109,198 $ 107,710 $ 61,263
============= ============= ============= ============= =============
Selected ratios:
Total allowances to net loans and REO.. 3.33% 3.03% 3.94% 3.77% 2.12%
Total ALLL and cash reserves to:
Net loans............................ 3.08% 2.73% 3.62% 3.38% 1.31%
Net NPLs............................. 1246.89% 552.04% 696.61% 573.28% 217.22%
Net loans and REO.................... 3.09% 2.74% 3.63% 3.38% 1.55%
Net NPAs............................. 591.73% 333.61% 431.75% 356.44% 148.24%
Total assets......................... 2.38% 2.06% 2.71% 2.53% 1.05%
</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 JUNE 30, 1999:
Total capital (to risk-weighted
assets)............................... $ 172,410 9.05% $ 152,460 8.00% $ 190,575 10.00%
Core capital (to adjusted tangible
assets)............................... 147,951 4.51 98,494 3.00 164,157 5.00
Tangible capital (to tangible
assets)............................... 147,951 4.51 49,247 1.50 N/A
Core capital (to risk-weighted
assets)............................... 147,951 7.76 N/A 114,345 6.00
AS OF JUNE 30, 1998:
Total capital (to risk-weighted
assets)............................... 248,730 10.78 184,636 8.00 230,795 10.00
Core capital (to adjusted tangible
assets)............................... 219,791 5.15 128,104 3.00 213,507 5.00
Tangible capital (to tangible
assets)............................... 219,791 5.15 64,052 1.50 N/A
Core capital (to risk-weighted
assets)............................... 219,791 9.52 N/A 138,477 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 JUNE 30, 1999:
Consolidated stockholders' equity................ $ 110,894 $ 110,894 $ 110,894
Adjustments:
Fidelity's preferred stock..................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............ (7,186) (7,186) (7,186)
------------- ------------- -------------
Fidelity's stockholders' equity.................. 155,458 155,458 155,458
Accumulated other comprehensive loss............. 5,807 5,807 5,807
Adjustments:
Intangible assets.............................. (13,310) (13,310) (13,310)
Excess ALLL.................................... -- -- 24,459
Nonincludable subsidiaries..................... (4) (4) (4)
------------- ------------- -------------
Regulatory capital................................. $ 147,951 $ 147,951 $ 172,410
============= ============= =============
AS OF JUNE 30, 1998:
Consolidated stockholders' equity................ $ 185,196 $ 185,196 $ 185,196
Adjustments:
Fidelity's preferred stock..................... 51,750 51,750 51,750
Bank Plus equity excluding Fidelity............ (5,105) (5,105) (5,105)
------------- ------------- -------------
Fidelity's stockholders' equity.................. 231,841 231,841 231,841
Accumulated other comprehensive loss............. 3,190 3,190 3,190
Adjustments:
Intangible assets.............................. (15,227) (15,227) (15,227)
Excess ALLL.................................... -- -- 28,939
Nonincludable subsidiaries..................... (13) (13) (13)
------------- ------------- -------------
Regulatory capital................................. $ 219,791 $ 219,791 $ 248,730
============= ============= =============
</TABLE>
As of June 30, 1999, the Bank was "adequately capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991. As of June 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 $16.6
million above the minimum level required to be considered adequately
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 June 30, 1999 that
management believes have changed 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 June 30, 1999,
the Bank had deposits of $2.6 billion. The following table presents the
distribution of deposit accounts at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts..................................... $ 366,459 $ 380,292 $ 341,607
Passbook accounts..................................... 58,397 56,836 57,909
Money market savings accounts......................... 58,906 56,451 64,163
------------- ------------- -------------
Total transaction accounts......................... 483,762 493,579 463,679
------------- ------------- -------------
CDs:
Less than $100,000................................. 1,539,946 1,795,000 1,745,926
Greater than $100,000.............................. 594,553 633,952 845,566
------------- ------------- -------------
Total CDs........................................ 2,134,499 2,428,952 2,591,492
------------- ------------- -------------
Total deposits........................................ $ 2,618,261 $ 2,922,531 $ 3,055,171
============= ============= =============
Weighted average interest rate on deposits............ 4.16% 4.53% 4.84%
============= ============= =============
</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:
June 30, 1998........................ $ 547,750 $ 617,404 $ 69,654 5.26% 5.24%
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
</TABLE>
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 June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Matures in quarter ended:
September 30, 1999..................................... $ 521,657 5.01%
December 31, 1999...................................... 381,616 4.69
March 31, 2000......................................... 568,349 4.67
June 30, 2000.......................................... 380,146 4.52
September 30, 2000..................................... 87,562 4.35
December 31, 2000...................................... 125,972 4.32
March 31, 2001......................................... 11,887 4.78
June 30, 2001 and after................................ 57,310 5.52
-------------
Total CDs........................................... $ 2,134,499 4.72%
=============
</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>
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Fixed rate advances................................... $ 495,000 $ 585,000 $ 785,000
Floating rate advances................................ -- -- 175,000
------------- ------------- -------------
Total FHLB advances.................................. 495,000 585,000 960,000
Other borrowings:
Senior notes.......................................... 51,478 51,478 51,478
------------- ------------- -------------
Total borrowings......................................... $ 546,478 $ 636,478 $ 1,011,478
============= ============= =============
Weighted average interest rate on all borrowings......... 6.18% 6.20% 6.08%
============= ============= =============
Percent of total borrowings to total liabilities and
stockholders' equity.................................. 16.57% 17.15% 23.60%
============= ============= =============
</TABLE>
UNDRAWN SOURCES
The Company maintains other sources of liquidity to draw upon, which at
June 30, 1999 include (a) a line of credit with the FHLB with $163.0 million
available, (b) $114.6 million in unpledged securities available to be placed in
reverse repurchase agreements or sold and (c) $493.0 million of unpledged loans,
some of which would be available to collateralize additional FHLB or private
borrowings, or to be securitized.
CONTINGENT OR POTENTIAL USES OF FUNDS
The Bank had commitments to fund $4.6 million of loans at June 30, 1999 and
unused lines of credit related to credit card loans and other credit lines
totaled $103.4 million at June 30, 1999.
25
<PAGE>
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 18.4% and 26.0% for the six months ended
June 30, 1999 and 1998, respectively.
HOLDING COMPANY LIQUIDITY
At June 30, 1999, Bank Plus had cash and cash equivalents of $1.5 million.
Bank Plus has no material potential cash producing operations or assets other
than its investments in Fidelity, Gateway and BPCS. Accordingly, Bank Plus is
substantially dependent on dividends from Fidelity, Gateway and BPCS in order to
fund its cash needs, including its payment obligations on its $51.5 million
senior notes.
The February and May 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 BPCS and preferred stock dividends from Fidelity. The preferred
stock dividends from Fidelity are anticipated to provide substantially all of
the funds necessary to make the interest payments on the senior notes.
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 or BPCS 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 June 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 JUNE 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............... $ 276,952 $ -- $ -- $ -- $ -- $ 276,952
Investment securities (1) (2)........... 34,499 1,117 -- -- -- 35,616
MBS (1)................................. 147,203 871 -- -- 244,203 392,277
Loans receivable:
Adjustable rate mortgages ("ARMs")
and other adjustables (3)........... 1,937,325 262,750 47,407 8,247 512 2,256,241
Fixed rate loans...................... 141,246 325 5,234 13,833 125,058 285,696
------------- ------------- ------------- ------------- ------------- -------------
Total gross loans receivable........ 2,078,571 263,075 52,641 22,080 125,570 2,541,937
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets............. 2,537,225 265,063 52,641 22,080 369,773 $ 3,246,782
------------- ------------- ------------- ------------- ------------- =============
Interest-bearing liabilities:
Deposits:
Checking and savings accounts (4)..... 424,856 -- -- -- -- $ 424,856
Money market accounts (4)............. 58,906 -- -- -- -- 58,906
Fixed maturity deposits:
Retail customers.................... 521,657 1,330,098 266,726 15,753 252 2,134,486
Wholesale customers................. -- 13 -- -- -- 13
------------- ------------- ------------- ------------- ------------- -------------
Total deposits.................... 1,005,419 1,330,111 266,726 15,753 252 2,618,261
------------- ------------- ------------- ------------- ------------- -------------
Borrowings:
FHLB advances......................... -- 20,000 475,000 -- -- 495,000
Other................................. -- -- -- 51,478 -- 51,478
------------- ------------- ------------- ------------- ------------- -------------
Total borrowings.................... -- 20,000 475,000 51,478 -- 546,478
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities........ 1,005,419 1,350,111 741,726 67,231 252 $ 3,164,739
------------- ------------- ------------- ------------- ------------- =============
Repricing Gap............................. $ 1,531,806 $ (1,085,048) $ (689,085) $ (45,151) $ 369,521
============= ============= ============= ============= =============
Gap to total assets....................... 46.45% (32.91)% (20.90)% (1.37)% 11.21%
Cumulative Gap to Total Assets............ 46.45% 13.55% (7.35)% (8.72)% 2.49%
</TABLE>
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $34.5 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 94% of the total mortgage loan portfolio at June 30, 1999
and 93% 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 interest
27
<PAGE>
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.
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<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 quality assurance phase will also include the certification of the
Company's non mission critical Systems by 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. 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 at least quarterly or 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 is for the staffing of technology and support personnel to implement the
required modifications and upgrades. Additional personnel are also required to
perform the system testing, produce testing documentation, and prepare
contingency plans required by the FFIEC. As of June 30, 1999, the Company had
incurred Y2K related expenses of $5.6 million. 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 the 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.
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.
MMG also on December 8, 1998 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 have been
modified and expanded. The Bank has filed a motion to dismiss this case; a
ruling on the motion is pending.
30
<PAGE>
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.
Following the granting of the Bank's motion to compel arbitration a date
was set for commencement of arbitration hearings in late May of 1999. During
approximately twenty arbitration hearing days in the period from May 20, 1999
through July 23, 1999, Fidelity presented its case against MMG and its defense
to MMG's claims, which asserted essentially the same claims that it asserted in
the various lawsuits in Texas, and MMG presented its case against Fidelity and
its defense to Fidelity's claims. Post-arbitration briefing has been completed
and a decision by the arbitrator is expected in September 1999. In addition to
monetary damages for MMG's asserted fraud and breach of contract, the Bank has
requested declaratory relief that the contracts between the parties be
terminated, declaratory relief that the Bank has no further obligations or
duties to MMG, a declaration that the arbitration proceedings have disposed of
all disputes between the parties, so as to preclude any further attempts by MMG
to litigate in the Texas courts, and a recovery of attorneys' fees. The Bank
believes that its affirmative and defensive claims were vigorously presented,
but cannot predict the decision of the arbitrator.
ADC CREDIT CARD LITIGATION
Sixty-one lawsuits, on behalf of approximately 130 individual plaintiffs,
and 2 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 recently been sued in a state court in the State of
Mississippi on behalf of 26 individual plaintiffs, and the Bank has recently
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 issued by the Bank and use the card to
pay for the appliance.
The plaintiffs in the litigation are cardholders who allege, generally,
that misrepresentations were made to them 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 terms of the credit cards were disclosed. 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.
31
<PAGE>
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. The Company accepted service of
the complaint on June 21, 1999 and has until August 26, 1999 to file a
responsive pleading. 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.
SETTLEMENT OF ADJUSTABLE RATE MORTGAGE LITIGATION
The Bank was named a defendant in several individual and class actions
brought by several borrowers, which raised claims with respect to the manner in
which the Bank serviced certain adjustable rate mortgages which were originated
during the period 1983 through 1988. The plaintiffs' principal claim in these
actions was that the Bank selected an inappropriate review date to consult the
index upon which the rate adjustment was based that was one or two months
earlier than what was required under the notes. In a declining interest rate
environment, the lag effect of an earlier review date defers the benefit to the
borrower of such decline, and the reverse would be true in a rising interest
rate environment. All but one of these cases were dismissed or concluded in
favor of the Bank prior to this year. The parties to the one remaining suit,
MONICA J. HUBBARD, FORMERLY KNOWN AS MONICA J. ROEGLER, ON BEHALF OF HERSELF AND
OTHERS SIMILARLY SITUATED, PLAINTIFF v. FIDELITY FEDERAL BANK, A FEDERAL SAVINGS
BANK, Case No. Civil No. 92-3939 MRP (Ex), entered into a stipulation of
settlement dated April 1, 1999, which was filed with the Court on April 14,
1999. Notices were mailed to class members and published, and the court gave
final approval to the settlement on July 12, 1999. Under the settlement, the
Bank admitted no fault, wrongdoing, or liability whatsoever, but agreed to
contribute $0.6 million to a settlement fund.
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.
32
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on April 28, 1999, the
stockholders elected Victor H. Indiek and Robert W. Medearis to the Board of
Directors of Bank Plus to serve for three year terms. Of the 19,408,449 share of
Common Stock outstanding as of the record date, March 12, 1999, the following
indicates the number of votes cast for and withheld:
NUMBER OF VOTES
----------------------------
FOR WITHHELD
------------- -------------
Election of Directors:
Victor H. Indiek............................ 15,438,239 3,197,028
Robert W. Medearis.......................... 15,438,239 3,197,028
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).*
10.01 Loan Servicing Purchase and Sale Agreement dated as of July 19,
1999 between Fidelity and Western Financial Bank.
27. Financial Data Schedule.
-------
* Indicates previously filed documents.
REPORTS ON FORM 8-K
None
33
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BANK PLUS CORPORATION
Registrant
Date: August 16, 1999 /s/ Mark K. Mason
-------------------------------------------
Mark K. Mason
PRESIDENT AND CHIEF EXECUTIVE OFFICER;
VICE CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 16, 1999 /s/ John M. Michel
-------------------------------------------
John M. Michel
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
34
Exhibit No. 10.01
LOAN SERVICING PURCHASE AND SALE AGREEMENT
This Loan Servicing Purchase and Sale Agreement (the "Agreement") is
made and entered into as of July 19, 1999 by and between Fidelity Federal Bank,
a Federal Savings Bank, a federally chartered savings association ("Buyer"),
having its principal place of business at 4565 Colorado Boulevard, Los Angeles,
California 90039, and Western Financial Bank, a federally chartered savings
association ("Seller"), having its principal place of business at 23 Pasteur,
Irvine, California 92718.
W I T N E S S E T H:
WHEREAS, Buyer desires to buy and Seller desires to sell the Servicing
Rights in certain Mortgage Loans secured by first or second liens on real
estate;
WHEREAS, pursuant to a Loan Servicing Purchase and Sale Agreement dated
May 15, 1996 between Seller, as purchaser and Purchaser, as seller (the "Initial
Sale Agreement"), the Seller purchased the Servicing Rights to certain
residential mortgage loans, including the Mortgage Loans; and
WHEREAS, pursuant to a Loan Servicing Agreement dated May 15, 1996 by
and between Buyer, as seller and investor, and Seller as buyer and servicer (the
"Servicing Agreement"), Buyer engaged Seller to service on behalf of Buyer
certain of the Mortgage Loans which were owned by Buyer; and
WHEREAS, pursuant to Amendment No. 1 to the Initial Sale Agreement
dated October 24, 1996 but effective as of May 15, 1996 (the "Initial Sale
Amendment"), Buyer and Seller specified certain additional rights, obligations
and responsibilities with respect to the FNMA Pool, as defined below; and
WHEREAS, Buyer wishes to purchase and Seller wishes to sell the
Servicing Rights, as defined herein, upon the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows.
ARTICLE I
DEFINITIONS
Section 1.01 Definitions
All words or phrases defined in this Article I (except as herein
otherwise expressly provided or unless the context otherwise requires) shall,
for all purposes of the Agreement, have the respective meanings specified in
this Article.
<PAGE>
1.01.01 Accounts Receivable means, including but without limitation,
principal and interest Advances with respect to Mortgage Loans, escrow account
receivables and foreclosure account receivables net of escrow Advances.
1.01.02 Advances means payments of principal, interest, taxes,
insurance, ground rents, assessments and similar charges advanced on behalf of
the Mortgagor under a Mortgage Loan by Seller or Buyer, as the case may be, with
respect to the Mortgage Loans.
1.01.03 Agreement means this Loan Servicing Purchase and Sale Agreement
and any written amendments or modifications thereto.
1.01.04 ARM Claim is defined in Section 5.01.02 of the Initial Sale
Agreement.
1.01.05 ARM Claim Mortgage Loan means any Mortgage Loan which (i) was,
on the Initial Transfer Date, subject to an ARM Claim or (ii) has otherwise
become subject to an ARM Claim after the Initial Transfer Date.
1.01.06 Bankruptcy Mortgage Loan means any Mortgage Loan as to which
any borrower is a debtor with respect to any proceeding under the federal
Bankruptcy Code, and which is delinquent by more than one payment.
1.01.07 Borrower means the obligor on a Mortgage Note.
1.01.08 Business Day means any day other than Saturday, Sunday or a
legal holiday or a day during which the Purchaser or the Seller is not open for
business.
1.01.09 Buyer Owned Mortgage Loan means any Mortgage Loan which is
owned by Buyer.
1.01.10 Class I Mortgage Loan is defined in Section 2.02.
1.01.11 Class II Mortgage Loan is defined in Section 2.02.
1.01.12 Custodian means an entity acting as a document custodian with
respect to any Mortgage Loan under any custodial agreement or pursuant to FNMA
requirements, or any successor in interest to the Custodian.
1.01.13 Cutoff Date means the date each month coinciding with the
applicable Investor accounting cycle on which a reconciliation is performed of
all funds received on behalf of any Investor during the preceding accounting
cycle.
1.01.14 Document Exception Mortgage Loan means any Mortgage Loan
identified on the schedule of Document Exception Mortgage Loans provided by
Buyer pursuant to Section 2.09.
2
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1.01.15 Escrow or Escrow Account means any escrow, impound and
custodial accounts maintained under the Servicing Agreements or otherwise
relating to the Mortgage Loans including, without limitation, any buydown
account and any account established for purposes of receiving funds for the
payment of principal, interest, taxes, insurance premiums, assessments and
similar charges, suspense, buydown funds, completion escrow monies and unearned
fees, provided such fees are deemed earned as collected relating to the Mortgage
Loans and interest accrued on such funds for the benefit of the Mortgagors under
the terms of the Mortgage Loan or applicable law or otherwise.
1.01.16 Estimated Purchase Price is defined in Section 2.03.01.
1.01.17 FNMA means the Federal National Mortgage Association, and any
successor thereto.
1.01.18 FNMA Pool means FNMA Investor Pool 303.
1.01.19 Foreclosure Mortgage means any Mortgage Loan which has been
either recommended to the Investor for foreclosure by Seller, or is 90 days or
more past due as of the Sale Date, or is actually in foreclosure provided, the
term Foreclosure Mortgage shall exclude any Pending Sale Foreclosure Mortgage.
1.01.20 Initial Sale Agreement is defined in the second recital.
1.01.21 Initial Sale Amendment is defined in the fourth recital.
1.01.22 Initial Transfer Date means the applicable Transfer Date with
respect to a Mortgage Loan as specified in the Initial Sale Agreement.
1.01.23 Interim Period, with respect to a Mortgage Loan, is the period
between the Sale Date and the applicable Transfer Date.
1.01.24 Investor means FNMA, Buyer or any other person, party or entity
that owns in whole or in part a Mortgage Loan.
1.01.25 Mortgage means a mortgage, deed of trust or other instrument
creating a lien or similar interest in real property as security for payment of
a Mortgage Note.
1.01.26 Mortgage Documents means all documents specified in Exhibit B,
pertaining to a Mortgage Loan.
1.01.27 Mortgage Loan means a mortgage loan the Servicing Rights with
respect to which are sold by Seller to Buyer under this Agreement, as more fully
identified in Exhibit A, attached hereto. This term includes Class I Mortgage
Loans and Class II Mortgage Loans, but excludes Foreclosure Mortgages and REO
Property, even if the latter are identified on Exhibit A.
1.01.28 Mortgage Loan File means all documents relating to a Mortgage
Loan that are necessary or customary for servicing in accordance with Investor
guidelines and procedures, applicable law and regulatory requirements,
including, but not limited to those documents described in Exhibit B.
1.01.29 Mortgage Note means a promissory note secured by a Mortgage.
3
<PAGE>
1.01.30 Mortgagor means any mortgagor or trustor of the real estate
encumbered as security for a Mortgage Note.
1.01.31 P & I means principal and interest.
1.01.32 PMI means private mortgage insurance and refers, except where
the context otherwise indicates, to the companies providing such insurance.
1.01.33 Pending Disposition REO Property means REO Property which is,
at the Transfer Date, subject to a pending written purchase and sale agreement.
1.01.34 Pending Payoff Loan means a Mortgage Loan as to which Seller
has, within the 30 days preceding the Sale Date, received a written request for
beneficiary demand.
1.01.35 Pending Sale Foreclosure Mortgage shall mean a Foreclosure
Mortgage as to which a notice of sale has been published on or prior to the
Transfer Date.
1.01.36 Pool means a group of Mortgage Loans that collateralize a
mortgage-backed security issue.
1.01.37 Purchase Price is defined in Section 2.03.
1.01.38 Records means Mortgage Loan Files, insurance files, tax
records, collection records, copies of correspondence with the Borrower,
Mortgage Documents, ledgers, computer printouts and other records, data or
information relating to the Mortgage Loans, the Escrow Accounts, the Pools or as
otherwise provided in this Agreement.
1.01.39 REO Property means real property acquired by Seller upon
foreclosure or deed in lieu of foreclosure in connection with the enforcement of
a Mortgage Loan, including REO Property as defined in the Servicing Agreement.
1.01.40 Sale Date is defined in Section 2.04.
1.01.41 Servicing Agreement is defined in the third recital.
1.01.42 Subservicing Fee is defined in Section 3.01.
1.01.43 Servicing Rights means all of Seller's right to receive the
servicing fee income and any and all ancillary or other income including,
without limitation, late charge income, and all of Seller's right to hold and
administer any related Escrows and the Records arising from or connected to any
of the servicing of the Mortgage Loans, as of the Sale Date.
1.01.44 T & I means taxes and insurance.
1.01.45 Transfer Date is defined in Section 2.05.
4
<PAGE>
ARTICLE II
BASIC TERMS OF PURCHASE AND SALE
Section 2.01 Purchase and Sale
2.01.01 Purchase, Sale and Assumption. Buyer hereby agrees to buy from
Seller and Seller hereby agrees to sell, transfer and assign to Buyer, in either
case at the Sale Date, all right, title and interest of Seller in and to the
Servicing Rights. Such sale shall be without recourse except as provided in this
Agreement. Buyer agrees to assume all obligations in connection with the
Servicing Rights arising on and after the Sale Date, subject to the approval of
FNMA prior to the applicable Transfer Date.
Section 2.02 Class I and Class II Mortgage Loans
2.02.01 Class I Mortgage Loans are Mortgage Loans which, as of the Sale
Date, are neither (i) more than 60 days past due, (ii) Foreclosure Mortgages,
(iii) Bankruptcy Mortgages, (iv) in litigation (provided that this clause (iv)
shall not include Mortgage Loans which were in litigation on the Initial
Transfer Date, including the ARM Claim Mortgage Loans) (v) Mortgage Loans where
the properties, in the sole discretion of Buyer, require substantial repairs due
to natural disasters which occurred after the Initial Transfer Date, (vi)
Mortgage Loans subject to a payment plan with property tax authorities where the
Borrower is delinquent with respect to more than one payment required under such
payment plan, (vii) Mortgage Loans with respect to which the Borrower is
delinquent with respect to more than one installment of real property taxes or
(viii) Mortgage Loans which pay in full within 30 days after the applicable Sale
Date. Any Mortgage Loan described in (i), (ii), (iii), (iv), (v), (vi) and (vii)
above on the Sale Date and any Mortgage Loan which pays in full within such
30-day period, shall be deemed a Class II Mortgage Loan for purposes of this
Agreement. Buyer shall have no obligation to pay for the Servicing Rights to any
Class II Mortgage Loans; however, Servicing Rights with respect to Class II
Mortgage Loans shall be transferred to and accepted under and subject to all
terms of this Agreement. Buyer shall be entitled to a reduction in the Purchase
Price for the Servicing Rights with respect to a Mortgage Loan in the event such
Mortgage Loan pays in full on or before the expiration of the 30-day period
following the Sale Date.
Section 2.03 Purchase Price and Terms of Payments
2.03.01 Purchase Price. The Purchase Price shall be the result of
multiplying 0.92% by the unpaid principal balance of all Class I Mortgage Loans
as defined in Section 2.02., subject to adjustment as described in Section 2.02,
Section 2.03.03 and Section 2.03.04. On the Business Day prior to the Sale Date,
the Purchase Price shall be estimated based upon the most recent available
information regarding the Mortgage Loans, Accounts Receivable and Escrow
Accounts (the "Estimated Purchase Price").
2.03.02 Terms of Payment. The payment of the Purchase Price shall be as
follows:
(A) 20% of the Estimated Purchase Price shall be paid to Seller by wire transfer
of immediately available funds on the Sale Date.
(B) 70% of the Estimated Purchase Price shall be paid to Seller by wire transfer
of immediately available funds on or before the expiration of seven Business
Days after the Sale Date.
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(C) Any amounts (i) required to be paid by Buyer to Seller or by Seller to Buyer
as a result of the reconciliations described in Sections 2.03.03 and 2.03.04 or
(ii) required to be paid by Seller to Buyer in respect of a Mortgage Loan which
pays in full on or before the expiration of 30 days following the Sale Date, as
provided in Section 2.02.01, in either case, shall be paid at the times
prescribed in such sections.
(D) The remaining balance of the Purchase Price shall be paid to Seller by wire
transfer of immediately available funds in increments (i) on the third Business
Day after the delivery by Buyer of the schedule of the Document Exception
Mortgage Loans, in an amount equal to the amount by which the remaining balance
of the Purchase Price exceeds the product of $500.00 times the number of
Document Exception Mortgage Loans set forth on such schedule; (ii) on the
thirtieth day after the delivery by Buyer of the schedule of Document Exception
Mortgage Loans in an amount equal to $500.00 for each Document Exception
Mortgage Loan for which a complete Mortgage File has been received and accepted
as such by Buyer during the preceding 30-day period, and (iii) on the expiration
of each of two subsequent 30-day periods in an amount equal to $500.00 for each
Document Exception Mortgage Loan for which a complete Mortgage File has been
received and accepted as such by Buyer during the applicable 30-day period. If
all required documentation has not been received within 90 days after the
delivery of the schedule of Schedule of Document Exception Mortgage Loans
pursuant to Section 2.08.02, Purchaser shall be entitled to retain the portion
of the remaining Purchase Price held in accordance with this subparagraph (D).
2.03.03 Verification of Estimated Purchase Price and Other Amounts to
be Transferred (a) As soon as possible, but no later than within five (5)
Business Days after the Sale Date, Seller shall determine with respect to the
Mortgage Loans as of the Sale Date from its books and Records and promptly
notify Buyer in writing of: (i) the aggregate outstanding principal balance of
all Mortgage Loans; (ii) the aggregate principal balance of all Class I Mortgage
Loans and Class II Mortgage Loans; (iii) the amount of all Accounts Receivable;
and (iv) the amount of Escrow Accounts. All such amounts shall be reconciled by
Seller to reports generated by the Seller's automated servicing system and to
reports made to the Investors and all such reports shall be sent to the Buyer
within five (5) Business Days after the Sale Date. Buyer shall notify Seller of
any discrepancies identified as a result of such reconciliation promptly, and in
any event within ten (10) Business Days of identification thereof. Any
adjustment to the Purchase Price arising as a result of such reconciliation
shall be promptly paid by Buyer to Seller, or by Seller to Buyer, as
appropriate.
2.03.04 Verification of Purchase Price and Other Amounts Transferred
(a) As soon as possible, but no later than within five (5) Business Days after
the applicable Transfer Date, Seller shall determine with respect to the
Mortgage Loans as of the Cutoff Date immediately preceding the applicable
Transfer Date from its books and Records and promptly notify Buyer in writing
of: (i) the aggregate outstanding principal balance of all Mortgage Loans; (ii)
the aggregate principal balance of all Class II Mortgage Loans; (iii) the amount
of all Accounts Receivable; and (iv) the amount of Escrow Accounts. All such
amounts shall be reconciled by Seller to reports generated by Seller's automated
servicing system and to reports made to the Investors and all such reports and
reconcilements shall be sent to the Buyer within five (5) Business Days after
the applicable Transfer Date. Buyer shall notify Seller of any discrepancies
identified as a result of such reconciliation promptly, and in any event within
ten (10) Business Days of identification thereof. Any adjustment to the Purchase
Price arising as a result of such reconciliation shall be promptly paid by Buyer
to Seller, or by Seller to Buyer, as appropriate.
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Section 2.04 Sale Date
2.04.01 The Sale Date shall be: with respect to the Buyer Owned
Mortgage Loans, July 1, 1999; and with respect to the Mortgage Loans in the FNMA
Pool, September 1, 1999 or, if the Transfer Date for the Mortgage Loans in the
FNMA Pool is extended pursuant to Section 2.05.01, to such date as so extended.
The Servicing Rights shall be transferred to Buyer on the applicable Sale Date
and Seller shall subservice the Mortgage Loans on behalf of Buyer, pursuant to
Section 3.01 below, from the Sale Date to the applicable Transfer Date.
Section 2.05 Transfer Date
2.05.01 The applicable Transfer Date shall be the date on which the
Buyer assumes the physical servicing administration of the Mortgage Loans. The
Transfer Date shall be: with respect to the Buyer Owned Mortgage Loans, August
11, 1999; and with respect to the Mortgage Loans in the FNMA Pool, September 1,
1999; provided that in the event the conditions for transfer for such Mortgage
Loans have not been met by either such date, the applicable Transfer Date shall
be postponed at the option of Buyer until such conditions for transfer have been
satisfied, but not to exceed 60 days. On the applicable Transfer Date, Buyer
shall relieve Seller of its subservicing responsibilities for the Mortgage Loans
transferred on such Transfer Date. The latest date for the posting of
transactions by the Seller shall be the close of business July 31, 1999 for the
Buyer Owned Mortgage Loans and August 30, 1999 for the Mortgage Loans in the
FNMA Pool; provided that in the event the applicable Transfer Date is extended
in accordance with this Section 2.05.01, such transaction posting deadline shall
be extended a like number of days.
2.05.02 On the applicable Transfer Date, Seller shall transfer to Buyer
or its designee tax service contracts relating to each Mortgage Loan (each of
which shall be a life-of-loan tax service contract), at no cost to Buyer.
2.05.03 On the applicable Transfer Date, Seller shall transfer to Buyer
or its designee flood insurance contracts relating to each Mortgage Loan (each
of which shall be a life-of-loan flood insurance contract), at no cost to Buyer.
2.05.04 On the applicable Transfer Date, Seller shall transfer to Buyer
all REO Property acquired in connection with liquidation of a loan which is or
was a Buyer Owned Mortgage Loan, except for any Pending Disposition REO
Property, together with any REO Account maintained in accordance with the
Servicing Agreement. On the applicable Transfer Date, Seller shall transfer all
REO Property acquired in connection with liquidation of a loan which is or was a
Mortgage Loan in the FNMA Pool, except any Pending Disposition REO Property,
together with any account maintained in accordance with FNMA requirements, to
the extent such treatment is consistent with FNMA requirements.
Section 2.06 Conditions of Sale
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2.06.01 The obligations of Buyer hereunder shall be subject to the
satisfaction of the following conditions or Buyer's written waiver thereof:
(A) Delivery by Seller to Buyer of FNMA's written approval of the transfer of
Servicing Rights and responsibilities to Buyer prior to the applicable Transfer
Date;
(B) The material accuracy of all representations and warranties of Seller as of
the Sale Date and Transfer Date;
(C) Material compliance by Seller with all its obligations hereunder as of the
Sale Date and the applicable Transfer Date;
(D) Approval by FNMA to transfer the Servicing Rights to the Buyer as
contemplated herein;
(E) Seller shall have no knowledge of any litigation, legal or regulatory
proceeding pending, threatened or contemplated against the Seller which would
have a material adverse effect upon the related Servicing Agreements, the
Mortgage Loans, the Servicing Rights, or the transactions contemplated herein,
or the ability of the Seller to consummate the transaction contemplated herein
or to perform the obligations of the Seller under this Agreement as of the Sale
Date and the Transfer Date, except for such litigation, legal or regulatory
proceedings which (i) were in existence on the Initial Transfer Date or, (ii)
relate to an ARM Claim;
(F) Prior to Sale Date, Buyer's receipt of the resolution of the Board of
Directors of the Seller acceptable to Buyer approving the execution of the
delivery and performance of this Agreement certified by the Secretary or an
Assistant Secretary of the Seller; and
(G) Approval of the OTS or any other regulatory agency having jurisdiction over
the Buyer.
Buyer's election to close the transaction contemplated herein shall not be
deemed to constitute a waiver of any inaccuracy of any representation or
warranty or of any noncompliance by Seller of any of its obligations under this
Agreement.
2.06.02 The obligations of Seller hereunder shall be subject to the
satisfaction of each of the following conditions or Seller's written waiver
thereof:
(A) The material accuracy of all representations and warranties of Buyer as of
the Sale Date and Transfer Date;
(B) Material compliance by Buyer with all its obligations hereunder as of the
Sale Date and the applicable Transfer Date; and
(C) Approval by FNMA to transfer the Servicing Rights to the Buyer as
contemplated herein.
2.06.03 In the event of the failure of any condition set forth in
Section 2.06.01 or Section 2.06.02 prior to the applicable Transfer Date, after
notice and a 15-day period during which Seller or Buyer, as applicable shall
have the right to cure such failure, Buyer, with respect to the failure of any
condition set forth in Section 2.06.01 and Seller, with respect to the failure
of any condition set forth in Section 2.06.02, may elect to cancel and terminate
this Agreement and forthwith receive refund of all sums paid to Seller together
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with per diem interest at the average Federal Funds Rate as published in the
Wall Street Journal during the period from payment by the Buyer through refund
to the Buyer, and subservicing fees paid to Seller less any servicing fees
actually remitted to Buyer in accordance with 3.01 from the date such funds were
deposited with Seller through the date of cancellation or termination; provided,
that in the event of the failure of the condition set forth in Section
2.06.01(A) or Section 2.06.02(C), Buyer or Seller shall be entitled to terminate
this Agreement solely with respect to Mortgage Loans owned by the nonconsenting
Investor.
Section 2.07 Division of Costs
2.07.01 Seller shall pay all costs incurred by Seller in the
performance of its obligations under this Agreement, including but not limited
to fees for Seller's attorneys, accountants, Seller's computer service and
related costs. Seller shall pay the applicable Investor transfer fee(s) for the
Mortgage Loans transferred to the Buyer. Seller shall prepare individual
assignments and interim or intervening assignments as required on each of the
Mortgage Loans to complete the chain of title to the Buyer and/or Investor as
applicable and as required by Investor guidelines, regulations or requirements,
or state or federal law. Seller shall record all such assignments, if necessary,
except those from Buyer to Investor, and deliver all unrecorded assignments to
Buyer, within five (5) business days after the applicable Transfer Date, at its
own expense. Prior to the expiration of five (5) business days after the
applicable Transfer Date the Seller will deliver to the Buyer the Seller's
certification that such assignments have been prepared as provided herein and
mailed for recording and Seller shall deliver copies of such assignments sent
for recording to the Buyer. All assignments sent for recording or copies thereof
sent to Buyer shall contain the Seller's and Buyer's loan numbers. Substitutions
of trustee, if necessary, are to be prepared and recorded on each individual
loan, in each respective county at Seller's expense. On Buyer Owned Mortgage
Loans, a Power of Attorney will be provided to Buyer to allow Buyer to execute
all necessary documents to process foreclosures and or documents to discharge
the lien and or any other documents needed to service the Mortgage Loans
pursuant to the Agreement.
2.07.02 Buyer shall pay all costs incurred by Buyer in the performance
of its obligations under this Agreement including but not limited to fees for
Buyer's attorneys, accountants, Buyer's computer services, and related costs.
Section 2.08 Transportation Costs
2.08.01 Seller shall pay for all costs associated with the shipment of
all Records and Mortgage Loan Files required to be transferred to Buyer or
Buyer's Custodian hereunder. Seller shall bear the risk of loss during transit
until such Records and files are received by the Buyer, or Buyer's Custodian.
Section 2.09 Document Exception Mortgage Loans. Within 90 calendar days from the
applicable Transfer Date, Buyer shall transmit to Seller a schedule of Mortgage
Loans with respect to which the Mortgage File does not contain all of the
documents required by Exhibit B (the "Document Exception Mortgage Loans").
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Section 2.10 Provisions relating to Initial Sale Agreement. With respect to a
Mortgage Loan, on and after the applicable Transfer Date, any continuing
obligation of any party as to such Mortgage Loan shall terminate; provided,
however, that except as specified herein, the Initial Sale Agreement, including
without limitation the provisions of Section 5.01.02 of the Initial Sale
Agreement, shall continue in full force and effect. On and after the applicable
Transfer Date, Seller agrees to transfer to Buyer all right, title and interest
in and to the funds held by FNMA on behalf of Buyer under that certain
Investment Agreement, as defined in the Sale Agreement Amendment. Buyer agrees
to cooperate with Seller in connection with the termination or assignment of
that certain Credit Enhancement Maintenance Agreement between Seller and FNMA.
Section 2.11 Provisions relating to Servicing Agreement. With respect to a Buyer
Owned Mortgage Loan, on and after the Transfer Date relating to Buyer Owned
Mortgage Loans, any continuing obligation of any party as to such Mortgage Loan
shall terminate. Seller shall continue to be obligated to deal with any REO
Property or Mortgage Loans not transferred to Buyer in accordance with the
Servicing Agreement on and after such Transfer Date.
Section 2.12 Resolution of Preexisting Dispute. The Parties acknowledge the
existence of a dispute relating to Loan No 97873 (Campos). Buyer contends that
Seller was deficient in the performance of its obligations under the Servicing
Agreement with respect to such loan, and Buyer unilaterally asserted a setoff
against servicing cost reimbursements to compensate itself for the damages it
alleged it suffered on account of the alleged deficient performance. Seller
denies that its performance was deficient or that Buyer suffered any damages.
The parties hereby agree to settle and compromise all of their disputes and
release each other from all claims relating to the servicing of this loan and
the offset. As settlement in full of all such disputes, and as an accord and
satisfaction with respect thereto, Buyer shall pay to Seller, on the Sale Date
with respect to the Buyer Owned Mortgage Loans, the sum of $14,000.
ARTICLE III
COVENANTS OF SERVICER
Section 3.01 Servicing Duties Prior to and Subsequent to Transfer Date. (a)
Seller shall subservice for Buyer, during the Interim Period, the Buyer Owned
Mortgage Loans in accordance with the provisions of the Servicing Agreement
(except as provided herein), applicable laws and regulations, and generally
accepted prudent servicing standards. Notwithstanding anything to the contrary
in the Servicing Agreement, Seller shall be entitled to a subservicing fee for
such subservicing activities in an amount of $6.00 per loan per month (the
"Subservicing Fee"). Buyer shall be entitled to Servicing Fees as provided in
the Servicing Agreement on a pro-rata basis for the portion of the month prior
to and including a Transfer Date, and shall be entitled to Subservicing Fees as
provided herein on a pro-rata basis for the portion of the month following a
Transfer Date. Such proration shall be computed on the basis of the outstanding
balance of the Mortgage Loans transferred on the applicable Transfer Date (with
respect to the Servicing Fee) and the last Business Day of the month (with
respect to the Subservicing Fee), the number of days prior to and including such
Transfer Date (with respect to the Servicing Fee) or after such Transfer Date
and prior to and including the end of such month (with respect to the
Subservicing Fee), and the total number of days in such month.
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(b) Seller shall continue to service in accordance with the relevant
provisions of the Servicing Agreement, and for no compensation all Pending Sale
Foreclosure Mortgages on and after the Transfer Date until such time as such
Pending Sale Foreclosure Mortgages are acquired as REO Property. Thereafter,
Seller shall transfer such REO Property to Seller.
(c) Seller shall administer and manage all Pending Disposition REO
Property in accordance with the relevant provisions of the Servicing Agreement
and for no compensation until such Pending Disposition REO Property is disposed,
at which time the net proceeds of such disposition shall be remitted to Buyer.
(d) Buyer shall reimburse Seller for all servicing advances made prior
to the applicable Transfer Date and not previously reimbursed within 30 days
after submission of documentation relating to such advance.
Section 3.02 Transfer of Records.
3.02.01 At its sole expense, Seller shall deliver to Buyer all
documents, files, reports and similar items as set forth in Exhibit B attached
hereto organized in loan number order. All Mortgage Loan Files and microfiche
jackets must be delivered to Buyer's office no later than the fifth (5th)
Business Day after the applicable Transfer Date. Mortgage Loan Files shall be
delivered to:
Fidelity Federal Bank, a Federal Savings Bank
4565 Colorado Boulevard
Los Angeles, CA 90039
Attn: Robert Dalton
3.02.02 All custodial files held by the Seller's Custodian shall be
delivered to the office of Buyer's Custodian, or as otherwise directed by the
Buyer, within five (5) Business Days after the Transfer Date.
3.02.03 Custodial files for FNMA shall be delivered to: Same.
Section 3.03 Payments and Notices Received After Transfer Date
3.03.01 Seller and Buyer acknowledge that, during the 90-day period
after the applicable Transfer Date, all correspondence and funds received by
Seller in connection with the Mortgage Loans, including, but not limited to, tax
bills, insurance premiums, principal, interest, mortgage guaranty or mortgage
insurance payment bills, insurance loss drafts, tax refunds and all other types
of payments, are to be immediately paid over to the Buyer without offset or
deduction. Buyer shall be entitled to the Servicing Fees and other
servicing-related income on all such payments. During the first 60-day period
such correspondence and funds shall be identified by the Seller by the Seller's
loan numbers and shall be immediately delivered to the Buyer at the Seller's
expense by overnight courier, for next Business Day delivery, at the address for
notice to Buyer. During the ensuing 30-day period, Seller shall use regular mail
to make such delivery to Buyer. In addition, the Seller shall deliver or cause
to be delivered to the Buyer, as promptly as practicable after receipt by the
Seller, copies of all correspondence received from any Borrower or otherwise
relating to the Mortgage Loans. Following such 90-day period, all such funds and
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correspondence shall be returned by Seller to the sender with a letter of
explanation, a copy of which letter shall be sent to the Buyer. Funds accepted
by Seller shall be forwarded to Buyer with a letter of explanation.
Section 3.04 Service Bureau Cooperation
3.04.01 The Seller and Buyer will timely cooperate, and will use
commercially reasonable efforts to cause their respective service bureaus to
timely cooperate, with each other and their respective service bureaus, such
cooperation shall include without limitation the identification by Seller of its
user-defined codes. Seller shall deliver or cause to be delivered a test tape,
trial tape and an accurate conversion tape at the request of the Buyer. Seller
will provide or cause to be provided a written report of all such reports,
computer file layouts, and definitions as needed to facilitate automated
transfer, which may be reasonably requested. Costs incurred by the Seller in the
performance of these aforementioned requirements will be borne by the Seller.
Section 3.05 Investor Approvals and Costs
3.05.01 Prior to the applicable Transfer Date, Seller shall have
secured and delivered to the Buyer, the written applicable FNMA approvals,
satisfactory to Buyer, to transfer the Servicing Rights contemplated hereunder,
together with all requisite approvals for the transfer of custodial and trust
documentation and funds (i.e., P&I and T&I) to Buyer.
3.05.02 Seller will satisfy all FNMA requirements to transfer
effectively the Servicing Rights from Seller to Buyer and pay and bear any and
all fees imposed by FNMA to effect the transfer.
Section 3.06 Year-End Reporting
3.06.01 Seller shall be responsible for all government and regulatory
reporting pertaining to servicing activities prior to the applicable Transfer
Date, including but not limited to all 1999 year-end Statements to the
Mortgagors and to government agencies, such as Form 1099s, 1098s, K-1s and HMDA
reporting. Buyer shall be responsible for all such reporting pertaining to
servicing activities after the applicable Transfer Date.
Section 3.07 Interest on Escrow
3.07.01 Seller shall indemnify and hold Buyer harmless from any and all
claims, damages, costs and/or liabilities arising out of or in connection with
Seller's obligations to pay interest on Escrow Accounts from the Initial
Transfer Date to the applicable Transfer Date. At Seller's election, Seller
shall post or cause to be posted accrued interest on each Escrow Account to the
Borrower's account up to and including the Business Day prior to the applicable
Transfer Date. In the event Seller does not elect to post interest on each
Escrow Account in accordance with the preceding sentence, then, within five (5)
business days after the applicable Transfer Date, Seller shall remit to Buyer a
sum equal to the interest accrued on impounds as of the Sale Date along with
reports separately detailing the accrued but unpaid interest as of the Sale Date
and as of such Transfer Date.
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Section 3.08 Notification to Mortgagors
3.08.01 No later than 15 days prior to the applicable Transfer Date,
Seller shall mail to all Mortgagors, at Seller's cost and expense, a notice
advising them of the occurrence of the transfer contemplated hereby and when and
where to make payments on and after such Transfer Date and such other
disclosures as required by Investor or federal or state law. The letter
effecting such notification shall be reviewed and accepted by Buyer prior to
mailing to Mortgagors. In any event, such notification will be in compliance
with all Investor, federal and state requirements. Buyer shall at its own
expense, within the time period provided by applicable federal or state law,
provide such notification required to be given by Buyer with respect to the
transfer of Servicing Rights pursuant to this Agreement.
Section 3.09 Notification to Insurance Carriers
3.09.01 Seller shall mail a notice to all appropriate insurance
companies, with respect to the property securing each Mortgage Loan, of the
occurrence of the transfer contemplated hereby and request the following:
a. The fire and extended coverage policy with respect to the
property securing each Mortgage Loan shall name Buyer, its successors and
assigns, as mortgagee;
b. The Private Mortgage Insurance companies and optional
insurance companies Records shall reflect Buyer as servicer of the Mortgage
Loans; and
c. Any flood insurance or hazard insurance policy, with
respect to the property securing each Mortgage Loan, shall name Buyer, its
successors and assigns as an insured and contain a lender's loss payable
endorsement in favor of Buyer, its successors and assigns.
Section 3.10 Payment of Property Insurance and Mortgage Insurance Premiums
3.10.01 Seller shall pay, or cause to be paid, prior to the applicable
Transfer Date, all property and mortgage insurance premiums due prior to and
including such Transfer Date and those due 30 days after such Transfer Date for
any Mortgage Loan as to which an escrow or impound account has been established
and shall use its reasonable best efforts, consistent with any obligations under
the Servicing Agreement, to cause the payment of such premiums with respect to
any other Mortgage Loan. On the applicable Transfer Date, Seller shall provide
to Buyer a list of those loans on which insurance premiums are due but, despite
Seller's best efforts, it has been unable to pay due to non receipt of premium
billing or for other reasons outside of Sellers control. Seller agrees to
forward to Buyer within three (3) Business Days of receipt all such insurance
bills received by Seller. Seller shall use its reasonable best efforts,
consistent with any obligations under the Servicing Agreement, to cause all
policies of property and other insurance which have been force-placed by Seller
to be transferred to Buyer.
Section 3.11 Payment of Property Taxes
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3.11.01 Seller shall pay, or cause to be paid, on all impounded loans,
prior to the applicable Transfer Date, all real estate tax bills issued by the
jurisdictions (including all interest, late payments and penalties in connection
therewith) that are due to each taxing authority and relating to the property
securing the Mortgage Loan, and shall use its reasonable best efforts,
consistent with any obligations under the Servicing Agreement, to cause such
real estate tax bills to be paid by the applicable Borrower on nonimpounded
Mortgage Loans, prior to the applicable Transfer Date. Set forth on Schedule
3.11 is a list of all Mortgage Loans with delinquent taxes, setting forth the
amount thereof and whether an impound has been established with respect to such
Mortgage Loan. Seller agrees to forward to Buyer within three (3) Business Days
of receipt thereof of all tax bills received by the Seller.
3.11.02 Seller shall forward to Buyer, within three (3) Business Days
after Seller's receipt thereof, all property tax bills received by Seller
relating to the Mortgage Loans and which are due more than thirty (30) days
after the applicable Transfer Date.
3.11.03 For the first sixty days following the applicable Transfer
Date, such delivery shall be made by overnight express service and shall be
delivered to the address referenced in Section 3.03.01.
3.11.04 Seller will insure that all tax identification information for
each Mortgage Loan is maintained on Seller's servicing system to allow the
automated transfer of such data on the applicable Transfer Date.
3.11.05 Seller will load all available hazard insurance policy numbers
in a manner that will allow automated transfer of such data on the applicable
Transfer Date.
3.11.06 Seller shall load all PMI Certificate numbers on Seller's
servicing system to allow the automated transfer of such data on the applicable
Transfer Date.
3.11.07 Seller, prior to the applicable Transfer Date, shall correctly
code all conventional insured loans on its system to allow the automated
transfer of such data on the applicable Transfer Date.
3.11.08 Seller shall insure that the appraisal values maintained on its
system are accurate, as of the date of the last appraisal, prior to the
applicable Transfer Date.
3.11.09 Seller shall cause Fidelity Tax Service to perform an audit
with respect to all Mortgage Loans to determine if there are any unpaid taxes
outstanding as of the applicable Transfer Date (or the most recent practicable
date prior thereto to the extent county tax records do not permit such an audit
to be conducted as of such Transfer Date), and issue a certification to Buyer
stating all taxes due have been paid, or list all such outstanding taxes due
with explanations of why the taxes are not paid.
3.11.10 On or before the applicable Transfer Date, Seller shall cause
Seller's tax service to provide Buyer's tax service with all necessary data to
facilitate the transfer of service without cost to Buyer.[resolution of
life-of-loan issue to be discussed]
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Section 3.12 Assumptions
3.12.01 Simultaneously with the delivery of the Mortgage Loan Files
after the applicable Transfer Date, Seller shall deliver to Buyer a list of
Mortgage Loans on which Seller has received written notice of pending
assumptions. Such list shall include the assuming Mortgagor's name and social
security number, Seller's Mortgage Loan number, and, if any, the name and social
security number of co-borrowers. Additionally, Seller shall provide to Buyer
copies of any assumption instructions Seller has issued.
Section 3.13 Solicitation Rights of Buyer and Seller Solicitation
Prohibition
3.13.01 From and after the Sale Date, Buyer and any of its affiliates,
have the unconditional right to directly or indirectly solicit, by means of
direct mail, telephonic or personal solicitation, or otherwise, the Borrower
with respect to any of the Mortgage Loans subject to this Agreement, for
purposes of prepayment, refinance, modification of such Mortgage Loans, optional
insurance or for any related or other types of products or services offered by
Buyer or any of its affiliates, for the life of such Mortgage Loans.
3.13.02 From and after the date of this Agreement, Seller, its agents
and affiliates, shall not directly or indirectly, solicit, for themselves or for
any other party, and Seller shall exercise reasonable efforts to prevent any of
its agents and affiliates from directly or indirectly soliciting, by means of
direct mail, telephonic, personal solicitation, or otherwise, the Borrowers with
respect to any of the Mortgage Loans subject to this Agreement, for purposes of
prepayment, refinance, or modification of such Mortgage Loans, optional
insurance or for any related or other types of products or services offered by
Seller or any of its affiliates or agents, for the life of such Mortgage Loans.
Notwithstanding the foregoing, it is understood and agreed that promotions
undertaken by Seller or any affiliate of Seller which are directed at the
general public at large or to Seller's depositors and other non-mortgage
customers, including without limitation mass-mailings based on commercially
acquired mailing lists, and newspaper, radio and television, internet and web
page advertisements, shall not constitute solicitation under this section.
Section 3.14 Powers of Attorney
3.14.01 Seller shall endorse to Buyer, on and after the Transfer Date,
Mortgage Loan Payment checks, loss draft checks relating to Mortgage Loans and
similar items. On the Transfer Date, Seller shall deliver to Buyer a special
power of attorney, in a form satisfactory to Buyer and its counsel, empowering
Buyer to endorse in the name of Seller, Mortgage Loan payment checks, loss draft
checks relating to Mortgage Loans, and similar items to Buyer. Such power of
attorney shall be solely for use in the event Seller inadvertently fails to
endorse an item over to Buyer. Such power of attorney shall expire on December
31, 1999.
Section 3.15 Escrow and Escrow Analysis
3.15.01 All negative escrow or impound balances will be researched and
analyzed prior to transfer and shall be reported to Buyer. Seller shall, at its
own cost and expense, provide short-year statements in compliance with RESPA and
shall furnish a copy of each such short-year statement to Buyer. Seller
acknowledges that Buyer will rely upon such short-year statement in connection
with its escrow accounting activities with respect to the Mortgage Loans and
agrees that such short-year statements will be true and correct in all material
respects.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01 General Representation and Warranties of Seller
4.01.01 Seller hereby represents and warrants that as of the Sale Date
and as of the applicable Transfer Date:
4.01.02 Seller is duly organized and validly existing as a federally
chartered savings association, with full corporate authority to enter into and
perform its obligations under this Agreement.
4.01.03 This Agreement has been duly authorized by all requisite
corporate action of Seller and is a legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms, subject to laws
respecting bankruptcy, receivership, insolvency and other laws affecting
creditors' rights generally and the rights of creditors of federally insured
financial institutions, and further subject to limitations on the availability
of equitable remedies.
4.01.04 Seller owns the Servicing Rights, and has the power to transfer
the Servicing Rights free and clear of any claim, lien, encumbrance or charge,
subject to any approval rights of FNMA or any Investor, and is aware of no
adverse claims to or encumbrances on such rights. Seller has the sole right and
authority to sell the Servicing Rights to Buyer and is not contractually or
otherwise obligated to sell the Servicing Rights to any other party. Neither the
Mortgage Loans nor the Servicing Rights are hypothecated, assigned or pledged as
collateral for any obligations of Seller.
4.01.05 Neither the execution of this Agreement nor the consummation of
the transactions contemplated herein constitutes a violation of Seller's charter
or bylaws, is a breach of or constitutes an event of default under, or conflicts
with any contract, loan agreement, indenture, mortgage or other undertaking to
which Seller is subject, nor violates any outstanding judgment, order,
injunction, law, rule or regulations to which Seller is subject or by which it
or its properties may be bound.
4.01.06 No authorization, approval or consent of or declaration of
filing including, but not limited to, any filing required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with any
governmental authority or regulatory body, Federal, State or local, is necessary
or required of the Seller in connection with the execution and delivery of this
Agreement or the performance by the Seller, except approval from the Investor
for the transfer of the Servicing Rights to the Buyer.
4.01.07 The Seller has not, and has not permitted any third party to,
solicit the Borrowers for refinancing of the Mortgage Loans within 90 days prior
to the date of this Agreement; PROVIDED, that general mass media solicitations,
including through the media of television, radio, internet, web page or print
advertisements not targeted to such Borrowers shall not constitute a breach or
exception to the foregoing representation and warranty.
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Section 4.02 Representations and Warranties of Seller Relating to the Pools and
Servicing Rights: Seller represents and warrants that as of the date hereof and
as of the Sale Date:
4.02.01 Seller is duly and validly authorized to sell, assign and
transfer the Servicing Rights, and the sale is be in compliance with all laws,
regulations and guidelines under which Seller operates, subject to approval of
such transfer by the Investors on or prior to the applicable Transfer Date.
4.02.02 Except for any such contract entered into with FNMA, the Seller
has not entered into any contract affecting the Servicing Rights which is or
will be binding to Buyer.
Section 4.03 Representations and Warranties of Seller Relating to the Servicing
of the Mortgage Loans: Seller represents and warrants that as of the Sale Date
and the Transfer Date, provided that any representation or warranty that relates
to any event prior to the Sale Date or Transfer Date shall be deemed to be
limited to that period of time commencing on the Initial Transfer Date and
ending on the Sale Date or Transfer Date, as applicable:
4.03.01 (i) The unpaid balances of the Mortgage Loans are as stated on
Exhibit A. All payments received by Seller with respect to any Mortgage Loan
have been remitted and properly accounted for as required by the Investors.
(ii) No payment of principal or interest on any such Mortgage
Loan has been forgiven, suspended or rescheduled except as disclosed in
writing to Buyer and no waiver, alteration or modification has been made to
the terms or provisions of such Mortgage Loans except as allowed by Investor
guidelines, regulations or requirements.
4.03.02 There are no actions, claims, litigation, lawsuits or
governmental investigations pending or, to the knowledge of the Seller,
threatened that relate to the Servicing Rights, the Mortgage Loans or any of
them, other than usual and customary actions such as foreclosure proceedings and
the ARM Claims.
4.03.03 Seller has and will keep in full force and effect an errors and
omissions policy with respect to its servicing operations and a financial
institution's fidelity blanket bond in an amount sufficient to comply with
Investor guidelines. Such policies shall be maintained for a period of no less
than one year subsequent to any Transfer Date.
4.03.04 There is in force with respect to mortgaged property subject to
any Mortgage Loan, (i) a hazard insurance policy issued by an insurance carrier,
which provides at a minimum for fire and extended coverage in an amount not less
than the outstanding principal balance of the Mortgage Loan or guaranteed
replacement value of improvements, whichever is less, and, conforms with
Investor guidelines and applicable statutes and (ii) if required by the flood
Disaster Protection Act of 1973, a flood insurance policy in an amount
representing coverage not less than the lesser of: (1) the outstanding principal
balance, or (2) the maximum amount of insurance which is available under such
Act.
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4.03.05 The Accounts Receivable are valid and existing accounts owing
to Seller, and are carried on the books of Seller at values determined in
accordance with generally accepted accounting principles, and are not subject to
any setoffs or claims of the account debtor arising from acts or omissions of,
or otherwise known to, Seller.
4.03.06 The Seller will, at the applicable Transfer Date, provide a
report satisfactory in form and content to the Buyer to substantiate compliance
with Internal Revenue Service and other applicable U.S. Treasury Department
regulations and requirements applicable to reporting of interest and obtaining
Social Security numbers. The Seller also agrees to provide the certification of
an authorized officer of the Seller certifying that the Seller has complied with
all Internal Revenue Service and U.S. Treasury Department requirements for due
diligence in obtaining and maintaining tax identification numbers for each
Mortgage Loan. In addition to the foregoing, the Seller agrees to reimburse the
Buyer for any and all penalties and/or costs incurred because of Internal
Revenue Service and/or U.S. Treasury Department requirements for any missing tax
identification numbers and forms incurred as a result of infractions which
occurred prior to the applicable Transfer Date.
4.03.07 All Investor Pools have been properly certified and/or
recertified as required by Investor requirements and otherwise comply with all
Investor requirements and regulations.
Section 4.04 Representations and Warranties Relating to Mortgage Loans. Seller
represents and warrants that as of the Sale Date and Transfer Date, provided
that any representation or warranty that relates to any event prior to the Sale
Date or Transfer Date shall be deemed to be limited to that period of time
commencing on the Initial Transfer Date and ending on the Sale Date or Transfer
Date, as applicable:
4.04.01 Seller has received no notice as to any Mortgage Loan (i) that
the Mortgage Note and the related Mortgage are not genuine or are not a legal,
valid and binding obligation of the maker thereof, enforceable in accordance
with its terms; (ii) that any party to the Mortgage Note and the Mortgage did
not have legal capacity to execute the Mortgage Note and the Mortgage and each
Mortgage Note and Mortgage have been duly and properly executed by such parties,
and is properly assigned in the name of the Investor.
4.04.02 The terms of each Mortgage Note and Mortgage have not been
modified, no party thereto has been released in whole or in part and no part of
the mortgaged property has been released unless approved by the Investor, if
required.
4.04.03 To Seller's knowledge there are no uninsured casualty losses or
casualty losses, where coinsurance has been, or Seller has reason to believe it
will be, claimed by the insurance company or where the loss, exclusive of
contents, is greater than the net recovery from the hazard insurance carrier. No
casualty insurance proceeds have been used to reduce Mortgage Loan balances or
for any other purposes except to make repairs to the mortgaged premises or as
otherwise allowed by the Investor. All damages with respect to which casualty
insurance proceeds have been received by or through Seller have been properly
repaired or are in the process of such repair with such proceeds in accordance
with Investor requirements, regulations and guidelines.
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4.04.04 All other documentation with respect to the Mortgage Loans has
been properly and accurately completed and executed and all documents required
by the Investor and necessary to service the Mortgage Loans are in Mortgage Loan
Files or such documentation is held in the Seller's Pool custodial files held by
the Seller's document custodian.
4.04.05 The PMI premiums, if applicable, have been paid. Seller has not
acted or failed to act in any manner, the effect of which with respect to each
Mortgage Loan would be to invalidate the contract of insurance or guarantee with
the PMI carriers.
4.04.06 Each Mortgage Loan meets, or is exempt from, applicable state
or federal laws, regulations and other requirements pertaining to usury and no
Mortgage Loan is usurious.
4.04.07 Seller has no knowledge of damage to the property securing a
Mortgage Loan by fire, windstorm or other casualty, or any other circumstances
or conditions which would cause any Mortgage Loan to become delinquent, or
adversely affect the value or marketability of the Mortgage Loans. If timely
repair is presently being undertaken with casualty insurance proceeds or an
insurance claim is being processed with the appropriate insurance company, no
breach of this warranty shall occur provided the repaired property securing a
Mortgage Loan is restored to substantially the same condition it was in prior to
the casualty.
4.04.08 Seller and Buyer acknowledge that Buyer, as seller and investor
under the Initial Sale Agreement, instructed Seller, as buyer and servicer under
the Initial Sale Agreement, to service the ARM Claim Mortgage Loans
substantially in the same manner as Buyer, as seller and investor under the
Initial Sale Agreement, did prior to the Initial Transfer Date, and that
compliance with the requirements of this Section 4.04.08 and Sections 4.04.13
and 4.04.17, to the extent of those instructions, is the responsibility of
Buyer. Except as provided in the previous sentence, to Mortgage Loan has been
serviced in violation of (a) any applicable federal or state law or regulation,
or (b) the rules, regulations or requirements of (i) any regulatory agency
having jurisdiction over Seller or (ii) any insurance company in any way
associated with any Mortgage Loan, the effect of which violation, (1) would
impair, invalidate or reduce (i) any Investor approvals, (ii) any private
insurer (iii) any title insurance policy, (iv) any hazard insurance policy, (v)
any flood insurance policy required by the National Flood Insurance Act of 1968
as amended, (vi) any tax liens or assessment or (vii) any fidelity bond direct
surety bond or errors and omissions insurance required by FNMA and private
mortgage insurer, or any investor; or (2) would result in a breach of a
representation or warranty made by Seller to Buyer or its successors and assigns
hereunder or made by Seller to any Investor; or (3) would result in Buyer, or
its permitted assigns, having to repurchase or incur curtailment of full
reimbursement or enter into any form of indemnification agreement with respect
to such Mortgage Loan, or pay a fine.
4.04.09 Seller has properly conducted an escrow analysis for each
Mortgage Loan during the preceding twelve month period ending on the applicable
Transfer Date in compliance with federal, state and RESPA regulations. All books
and conditions with respect to each Mortgage Loan are in good condition and
shall have been adjusted to reflect properly the results of the escrow analysis.
Seller shall have delivered notification to the Mortgagor under each Mortgage
Loan of all payment adjustments resulting from such escrow analysis.
4.04.10 Seller has not been informed that any property subject to a
Mortgage has been or will be condemned, except if such condemnation will not
have a material adverse effect on the value of such property or its status as
security for a Mortgage Loan.
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4.04.11 All documents submitted, to the extent generated after the
Initial Transfer Date, are genuine, and all other representations as to each
such Mortgage Loan are true and correct and meet the requirements and
specifications of all parts of this Agreement.
4.04.12 Seller represents that to the best of its knowledge as of the
applicable Transfer Date there are no properties securing mortgage Loans subject
to this Agreement which are subject to any homeowner's assessment which impairs
or could impair the first lien priority on such properties.
4.04.13 All Mortgage Loans have been properly serviced in all material
respects in accordance with Investor guidelines, regulations and requirements.
4.04.14 Where applicable law requires the payment of interest on Escrow
Accounts, all such interest has been properly accrued and credited.
4.04.15 To the best of Seller's knowledge, each Mortgage Loan that may
have been damaged due to earthquake, flood, fire or other natural disaster has
been fully repaired and restored, each loan file will have documentation to
substantiate required major repairs.
4.04.16 Each Mortgage Loan has in effect a lender's policy of title
insurance that extends coverage to its successors and assigns as additional
named insured of said policy of title insurance running for the benefit of the
Seller, its successors or assigns, and to Seller's knowledge, no event has
occurred which would have the effect of invalidating such title insurance
policy.
4.04.17 All interest rate adjustments with respect to adjustable rate
mortgage loans, including those which have converted to fixed rate mortgage
loans, including periodic adjustments and the conversion adjustment, have been
(a) calculated properly; and (b) made in accordance with (i) the terms of the
related Mortgage Note and (ii) applicable law.
Section 4.05 Representations and Warranties of Buyer
4.05.01 Buyer hereby represents and warrants as follows:
4.05.02 Buyer is duly organized and validly existing as a federally
chartered savings institution, with full corporate authority to enter into and
perform its obligations under this Agreement.
4.05.03 This Agreement has been duly authorized by all requisite
corporate action of Buyer and is a legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, subject to laws
respecting bankruptcy, receivership, insolvency and other laws affecting
creditors' rights generally and the rights of creditors of federally insured
financial institutions, and further subject to limitations on the availability
of equitable remedies.
4.05.04 Neither the execution of this Agreement nor the consummation of
the transactions contemplated herein constitutes a violation of Buyer's charter
or bylaws, is a breach of or constitutes an event of default under, or conflicts
with any contract, loan agreement, indenture, mortgage or other undertaking to
which Buyer is subject, nor violates any outstanding judgment, order,
injunction, law, rule or regulations to which Seller is subject or by which it
or its properties may be bound.
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4.05.05 There is no litigation, legal proceedings, or regulatory
actions pending, or threatened against the Buyer which can reasonably be
expected to have a material adverse effect upon this Agreement, or the
transaction contemplated hereunder, or Buyer's ability to perform its
obligations hereunder.
4.05.06 No authorization, approval or consent of, or declaration of
filing including, but not limited to, any filing required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with any
governmental authority or regulatory body, federal, state or local, is necessary
or required of Buyer in connection with the execution and delivery of this
Agreement or the performance by Buyer hereunder, except approval from FNMA for
the transfer of the Servicing Rights to Buyer and any required approval of the
OTS.
Section 4.06 Survival
4.06.01 All representations and warranties contained herein, and all
rights of the parties arising hereunder, shall remain in force for the life of
each Mortgage Loan and for one (1) year thereafter relative to the Mortgage
Loans, Mortgage Documents and Mortgage Loan files, and for a period of ten (10)
years after Transfer Date(s) relative to the servicing of the Mortgage Loans.
Notwithstanding the foregoing, the indemnification obligation of Buyer under
Section 5.02.01 of the Initial Sale Agreement shall survive for the period
provided therein.
ARTICLE V
Section 5.01 Indemnification of Buyer by Seller
5.01.01 Seller hereby agrees to defend and indemnify and hold Buyer,
and Buyer's stockholders, directors, officers and employees, harmless, against
any claim, cause of action, suit, proceeding or demand, and any and all losses,
liabilities, costs and expenses of any nature whatsoever associated therewith
("Buyer's Claims") arising out of, or in connection with, directly or
indirectly, any breach of any representation or warranty or any other obligation
of Seller under this Agreement or the Servicing Agreement or otherwise,
resulting from any state of facts and or conditions existing (i) on or before
the applicable Transfer Date but after the Initial Transfer Date and (ii) on or
after the applicable Transfer Date as to the Pending Sale Foreclosure Mortgages
and the Pending Disposition REO Property involving the Servicing Rights,
Mortgage Loans, Pools, Pending Sale Foreclosure Mortgages and REO Property,
including without limitation the Pending Disposition REO Property subject to
this Agreement, including but not limited to:
(A) In the event any Investor requests or demands repurchase of any Mortgage
Loan and/or the Servicing Rights to which are transferred under this Agreement,
for any reason, or requires Buyer to indemnify such Investor with respect to a
Mortgage Loan, Seller shall indemnify and hold Buyer harmless and make Buyer
whole pursuant to any such repurchase and indemnity required or demanded by
Investor. This shall include, but is not limited to Seller agreeing upon Buyer's
demand to repurchase any Mortgage Loan and Repurchase the Servicing Rights where
there occurred fraud by the Borrower, Mortgagor, or any other party, whether or
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not Seller had reason to believe or know that such fraud occurred or existed;
provided, however that notwithstanding the foregoing, Buyer's Claims involving
misrepresentations, breach of warranty or nonfulfillment of any agreement, duty
or obligation of Seller involving the Pools, Mortgage, Mortgage Loans, or this
Agreement and based upon a state of facts existing on or before the Initial
Transfer Date shall not be subject to indemnification by Seller.
(B) Any and all Buyer's Claims involving unfair collection practices, failure to
disclose, deceptive acts or practices, breach of contract, the collection of
usurious interest and the like, pertaining to the subject matter of this
Agreement, and based upon a state of facts existing on or after the Initial
Transfer Date.
(C) Any and all Buyer's Claims involving tax and insurance payments or escrow
deposits relating to the subject matter of this Agreement upon which tax and
insurance escrow deposits are provided for in the instruments securing the
Mortgage Loans and which were payable on or after the Initial Transfer Date.
(D) Any misrepresentation made by Seller pursuant to this Agreement, or in any
schedule, statement or certificate furnished by Seller pursuant to this
Agreement.
(E) Any breach of a representation or warranty by Seller, or the nonfulfillment
of any covenant or obligation of Seller contained in this Agreement, or in any
schedule, statement or certificate furnished by Seller pursuant to this
Agreement.
5.01.02 This indemnity of the Buyer by the Seller provided in this
Article V shall remain in full force and effect regardless of any investigation
made by Buyer or its representatives.
5.01.03 The indemnity of the Buyer by the Seller provided in this
Section 5.01 shall remain in full force and effect for as long the
representations and warranties survive.
Section 5.02 Indemnification of Seller by Buyer
5.02.01 Buyer hereby agrees to indemnify and hold Seller harmless
against any claim, cause of action, suit, proceeding or demand, and any and all
losses, liabilities, costs and expenses of any nature whatsoever associated
therewith ("Seller's Claims") arising out of, or in connection with, directly or
indirectly, any breach of any representation or warranty or any other obligation
of Buyer under this Agreement, any state of facts existing after the Transfer
Date which (except for any Seller's Claims which arise out of, or in connection
with, directly or indirectly, an ARM Claim or an ARM Claim Mortgage Loan) did
not exist prior to the Transfer Date, involving the Servicing Rights, Mortgage
Loans and/or Pools subject to this Agreement, whether or not such Seller's
Claims relate to the Servicing Rights, or this Agreement including but not
limited to:
(A) Any and all Seller's Claims involving unfair collection practices, failure
to disclose, deceptive acts or practices, breach of contract, the collection of
usurious interest and the like, pertaining to the subject matter of this
Agreement, and based upon a state of facts existing after the applicable
Transfer Date, which did not exist prior to the applicable Transfer Date.
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(B) Any misrepresentation made by Buyer pursuant to this Agreement, or in any
schedule, statement or certificate furnished by Buyer pursuant to this
Agreement.
(C) Any breach of warranty by Buyer, or the nonfulfillment of any covenant of
Buyer contained in this Agreement, or in any schedule, statement or certificate
furnished by Buyer pursuant to this Agreement.
(D) Any and all actions of Buyer, its employees, representatives and agents,
whether by omission or commission, pertaining to the subject matter of the
Agreement and occurring after the applicable Transfer Date, which (except as
otherwise provided in the preamble to this Section 5.02.01) did not exist prior
to the applicable Transfer Date, which materially adversely affect the
enforceability of the instruments securing a Mortgage Loan or the collectability
of the Mortgage Notes.
There shall be excluded from the foregoing indemnification provision any claim,
cause of action, suit, proceeding or demand, and any and all losses,
liabilities, costs and expenses of any nature whatsoever associated therewith
arising out of, or in connection with, directly or indirectly, the activities of
Seller in connection with its servicing, or administration, after the Transfer
Date of the Pending Foreclosure Mortgage Loans and the Pending Disposition REO
Property.
Section 5.03 Notification of Claims for Indemnification
5.03.01 Buyer agrees to promptly notify Seller in writing of the
existence of any fact known to Buyer giving rise to any obligations of Seller
under Section 5.01.01, and any fact known to Buyer which may give rise to any
such obligations. Buyer agrees promptly to notify Seller of the making of such
Claim or the commencement of such action by a third party as and when same
becomes known to Buyer. Seller shall be entitled to participate in the defense
of any action brought by a third party against Buyer, which may give rise to any
obligation of Seller, and, at its election, to direct the defense thereof at
Seller's own expense. In the event that any cost, expense, judgment or award is
incurred by or levied against Buyer where Seller has undertaken the defense of
any such action, Seller shall pay or reimburse the full amount of any such cost,
expense, judgment or award to or for the benefit of Buyer. Seller shall have
thirty (30) days from receipt of such notice, in accordance with Section 6.05,
to cure the condition or state of facts giving rise to any obligations of Seller
under Section 5.01.01. Unless Buyer or Seller is required by an Investor to
repurchase a Mortgage Loan or indemnify an Investor with respect to a Mortgage
Loan in the meantime, in no event shall Seller be required to repurchase any
Mortgage Loan, pay any money or tender any performance under Section 5.01.01
until the expiration of this thirty (30) day period. If Seller elects to defend
any actions in accordance with this Section, Seller shall not be liable under
Section 5.01.01 for the payment of legal fees of Buyer with respect to such
action, from and after the date that Seller assumes such defense.
5.03.02 Seller agrees to promptly notify Buyer in writing of the
existence of any fact know to Seller giving rise to any obligations of Buyer
under Section 5.02.01, hereof or elsewhere in this Agreement and, in the case of
any Claim or any litigation brought by a third party, any fact known to Seller
which may give rise to any such obligations. Seller agrees promptly to notify
Buyer of the making of such claim or the commencement of such action by a third
party as and when same becomes known to Seller. Buyer shall be entitled to
participate in the defense of any action brought by a third party against Seller
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which may give rise to any obligation of Buyer, and, at its election, to direct
the defense thereof at its own expense. In the event that any cost, expense,
judgment or award is incurred by or levied against Seller where Buyer has
undertaken the defense of any such action, Buyer shall pay or reimburse the full
amount of any such cost, expense, judgment or award to or for the benefit of
Seller. Buyer shall have thirty (30) days from receipt of such notice, in
accordance with Section 6.07, to cure the condition or state of facts giving
rise to any obligations of Seller under Section 5.02.01. In no event shall Buyer
be required to pay any money or tender any performance under Section 5.02.01
until the expiration of this thirty (30) day period. If Buyer elects to defend
any actions in accordance with this Section, Buyer shall not be liable under
Article V for the payment of legal fees and expenses of Seller with respect to
such action, from and after the date that Buyer assumes such defense.
5.03.03 For purposes of Article V, the term "Mortgage Loan(s)" shall
include within its definition Foreclosure Mortgages if any Foreclosure Mortgages
are transferred to Buyer pursuant to this Agreement.
ARTICLE VI
LOAN REPURCHASE
Section 6.01 Seller's Repurchase After Sale Date.
6.01.01 If (i) Buyer is required to repurchase any Mortgage Loan by any
Investor after the Sale Date or (ii) Buyer concludes that a Mortgage Loan has
been impaired so as to materially and adversely affect its value as an asset, in
the case of either clause (i) or clause (ii), for reasons resulting from (x)
improper, incorrect, missing and or fraudulent documentation related to a
Mortgage Loan which was created by Seller prior to the applicable Transfer Date
but after the Initial Transfer Date, (y) a breach of Seller's representations
and warranties or other obligations hereunder or under the Servicing Agreement
(z) Seller's improper pooling, errors, omissions, origination or servicing of
such Mortgage Loan prior to the applicable Transfer Date but after the Initial
Transfer Date or for reasons relating to the certification status of the pools,
Seller, at the request of Buyer, and in addition to any indemnification
obligations hereunder, shall reimburse Buyer for the sum of (a) the outstanding
balance of such Mortgage Loan and (b) the Purchase Price for the Servicing
Rights determined hereunder attributable to such Mortgage Loan, and shall
repurchase such Mortgage Loan and the Servicing Rights on the earlier of thirty
(30) days of Buyer's written demand or the date by which the Investor has
requested Buyer to indemnify or to repurchase the Mortgage Loan. The funds to be
provided by Seller to Buyer pursuant to this section shall be the unpaid
principal balance and any accrued unpaid interest paid by Buyer to Investor,
plus any unpaid advances, plus any Purchase Price with respect to the Servicing
Rights paid for the Mortgage Loan under this Agreement.
6.01.02 In the event of a breach of Seller's representations and
warranties or other obligations hereunder or under the Servicing Agreement, or
Seller's improper pooling, errors, omissions, origination or servicing of such
Mortgage Loan prior to the applicable Transfer Date but after the Initial
Transfer Date or for reasons relating to the certification status of the pools,
where such breach or improper pooling, error, omission, origination or servicing
materially and adversely affects the value of the Servicing Rights as an asset
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(but which does not materially and adversely affect the value or the related
Mortgage Loan as an asset) Seller, at the request of Buyer, and in addition to
any indemnification obligations hereunder, shall reimburse Buyer for the
Purchase Price for the Servicing Rights determined hereunder attributable to
such Mortgage Loan, within thirty (30) days of Buyer's written demand. The funds
to be provided by Seller to Buyer pursuant to this section shall be the Purchase
Price for such Servicing Rights, plus any unpaid advances.
Section 6.02 Seller's Right to Contest Repurchase
6.02.01 Seller shall have the right to contest any repurchase request
of Buyer or any Investor, pursuant, in the case of a repurchase request of an
Investor, to the Investor requirements and within the Investor time limits as
they may be extended. However, if Buyer, pursuant to an Investor request, is
required to repurchase or if Buyer suffers any damages in the meantime, then
Seller shall, notwithstanding any contest or defense, repurchase the Mortgage
Loan and otherwise make Buyer whole at the time of Buyer's request.
Section 6.03 Buyer's Repurchase
6.03.01 If Buyer should be required to repurchase any Mortgage Loan by
any Investor, at any time after the Sale Date for reasons resulting from the
improper servicing, error or omission of Buyer, then Seller shall not be
responsible for any reimbursement with respect to such Mortgage Loan.
Section 6.04 Seller's Cure Rights
6.04.01 Within 30 days of Seller's receipt of a notice from Buyer of a
claim under Article V or a repurchase or indemnity request under this Agreement,
Seller shall cure the condition or state of facts giving rise to such claim or
if a cure cannot reasonably be completed within such 30 day period, Seller shall
have commenced a cure for and hereby agrees to diligently pursue such cure to
completion provided, however, Seller may continue to pursue such cure for a
reasonable time beyond the 30 day period for so long as Buyer is not required by
an Investor to repurchase or indemnify the Investor with respect to the Mortgage
Loan which is the subject of the cure. However, if Buyer, pursuant to an
Investor request, has to repurchase, indemnify or if Buyer suffers any damages
in the meantime, then Seller shall, notwithstanding any cure or cure period,
repurchase the Mortgage Loan and otherwise make Buyer whole at the time of
Buyer's request.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01 Integration
7.01.01 This Agreement and the documents referred to herein, including
without limitation the Initial Sale Agreement and the Servicing Agreement,
constitute a final and complete integration of the agreement of the parties
respecting the subject matter hereof, thereby superseding all previous or
contemporaneous oral and written agreements. There are no contemporaneous oral
agreements relating to the subject matter of this Agreement.
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Section 7.02 Modification
7.02.01 This Agreement may not be changed orally but only by an
agreement in writing signed by all parties. Subject to the foregoing, any of the
terms or conditions of this Agreement may be waived or modified at any time by
the party entitled to the benefit thereof, but no such waiver, express or
implied, shall affect or impair the right of the waiving party to require
observance, performance or satisfaction of either (1) the same term or condition
as it applied to a subsequent or previous occasion of (2) any other term or
condition hereof.
Section 7.03 Successors
7.03.01 This Agreement shall inure to the benefit of and be binding
upon the heirs, representatives, successors and assigns of each party.
Section 7.04 Governing Law
7.04.01 This Agreement is entered into and its construction and rights,
remedies and obligations arising by, under, through, or an account of it shall
be governed by the laws of the State of California.
Section 7.05 Assignability
7.05.01 Buyer shall have the right, without Seller's consent, to assign
and transfer this Agreement and all rights, obligations, benefits, privileges
and agreements of Buyer hereunder provided, however, Buyer shall not be
permitted to assign and transfer this Agreement without Seller's consent, which
consent shall not be unreasonably withheld, prior to the payment by Buyer to
Seller of 100% of the Purchase Price. No assignment of this Agreement nor any
rights, obligations, privileges and agreements of Buyer hereunder shall relieve
Buyer of any indemnification obligation hereunder.
Section 7.06 Notices
7.06.01 Any notice provided for or permitted hereunder shall be in
writing and sent by first class mail, addressed to the parties at the address
for such party set forth in the preamble hereof. All such notices shall be
addressed to the attention of the Bobbi J. Koehler, Senior Vice President, of
Seller and Keith Palmer, Vice President, Loan Administration for the Buyer. The
giving of notice shall be complete three (3) Business Days after depositing of
it, properly addressed and postage prepaid, with the United States Postal
Service.. Address for notices may be changed by giving notice hereunder in
accordance with the requirements of this section.
Section 7.07 Attorney Fees, Costs, Etc.
7.07.01 If any action at law or in equity, including an action for
declaration relief, is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees from the other party. Such fees may be set by the court in the
trial of such action or may be enforced in a separate action brought for that
purpose. Such fees shall be in addition to any other relief that may be awarded.
26
<PAGE>
Section 7.08 Independent Contractor
7.08.01 At no time shall Seller represent that it is acting as an agent
for or on behalf of Buyer. At all times, Seller shall act as an independent
contractor. At no time shall Buyer represent that it is acting as an agent for
or on behalf of the Seller. At all times Buyer shall act as an independent
contractor.
Section 7.09 Broker's Fees
7.09.01 Each party will indemnify the other against claims by any
person claiming a finder's fee, commission, transfer or termination fee in
connection with the negotiation or consummation of this Agreement or the
transaction contemplated hereby.
Section 7.10 Counterparts
7.10.01 This Agreement may be executed in multiple counterparts, each
of which shall be an original regardless of whether all parties sign the
document. Regardless of the number of counterparts, they shall constitute only
one Agreement.
Section 7.11 Documentation
7.11.01 Prior to the applicable Transfer Date, Seller shall deliver to
Buyer a certification from the Seller or its Custodian that all Pools are
documented and certified in accordance with Investor guidelines and applicable
law and regulations. Seller will deliver a copy of the inventory of Pools with
such certification. Such inventory and certification shall be in a form and
content satisfactory to Buyer. Seller will have their document custodian(s)
contact Buyer by letter to provide a status report of all Pools under their
control that are to be transferred as contemplated hereunder. Such custodian
status reports (if applicable) will be delivered to Buyer each month until the
transfer is completed and such reports will commence no later than thirty (30)
days after the applicable Transfer Date.
7.11.02 Not later than the applicable Transfer Date, Seller shall
deliver to Buyer a certification from the Seller that all original documents
including the Mortgage Note, PMI, title policy assignments to Investor,
intervening assignments not properly held by the custodian or Investor are held
by the Seller for each of the Mortgage Loans, and all such documents have been
inventoried and accounted for by the Seller. Seller shall deliver to Buyer a
copy of said inventory with such certification and inventory in a form and
content satisfactory to the Buyer, by placing a copy of all such documents in
the Seller's servicing file, identified with the Seller's loan number, for
delivery to Buyer together with a copy of said inventory on the applicable
Transfer Date.
7.11.03 All servicing files will be organized and fastened on file
folders that are clearly labeled with the Mortgagor's name and loan number as
specified by Buyer.
7.11.04 Original loan documents for each loan held by the custodian
will be filed in a separate file, labeled with the loan and Pool/PC number (if
applicable). In addition, all Pool documents will be filed in a separate "Master
Pool File" for each Pool held by the custodian, in compliance with all Investor
guidelines.
27
<PAGE>
7.11.05 Seller shall provide Buyer a schedule indicating the location
of all the original documents described in Exhibit B for the Mortgage Loans not
later than the applicable Transfer Date.
Section 7.12 Effect of Termination in Part
7.12.01 Upon termination of this Agreement in part upon the failure of
the condition set forth in Section 2.06.01(A) or 2.06.02(C), (i) all right,
title and interest in the Servicing Rights relating to the Mortgage Loans
affected by such termination shall revert to Seller, (ii) Seller shall refund to
Buyer any and all portions of the Purchase Price, together with interest,
previously paid to the Seller and attributable to such Mortgage Loans and (iii)
the Buyer shall return to the Seller all Mortgage Documents and Records
previously delivered to Buyer by Seller at Seller's expense in connection with
such Mortgage Loans, (iv) Buyer shall promptly execute and deliver to Seller for
filing all documents necessary to terminate the assignment to Buyer and transfer
to Seller all of Buyer's right, title and interest in the Servicing Rights as to
such Mortgage Loans and (v) Buyer shall refund to Seller all servicing fees
received by Buyer during the Interim Period and Seller shall refund all Interim
subservicing fees with respect to such Mortgage Loans.
28
<PAGE>
IN WITNESS WHEREOF, each of the undersigned parties to this Agreement has caused
this Agreement to be duly executed by one of its duly authorized officers as of
this 1st day of July, 1999.
FIDELITY FEDERAL BANK, A FEDERAL
SAVINGS BANK
By: /s/ MYRON MUELLER
----------------------------------
Myron Mueller
Vice President
ATTEST:
Name: /s/ MYRON MUELLER
-----------------------------
Its: SVP and Senior Counsel
-----------------------------
WESTERN FINANCIAL BANK
By: /s/ KEITH PALMER
----------------------------------
Keith Palmer
Vice President
Loan Administration
ATTEST:
Name: /s/ SANDRA J. MURRAY
-----------------------------
Its: Secretary
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 MAR-31-1999
<CASH> 44,229 0
<INT-BEARING-DEPOSITS> 13,952 0
<FED-FUNDS-SOLD> 263,000 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 392,277 0
<INVESTMENTS-CARRYING> 1,117 0
<INVESTMENTS-MARKET> 393,400 0
<LOANS> 2,537,829 0
<ALLOWANCE> 81,095 0
<TOTAL-ASSETS> 3,297,430 0
<DEPOSITS> 2,618,261 0
<SHORT-TERM> 20,000 0
<LIABILITIES-OTHER> 21,525 0
<LONG-TERM> 526,478 0
0 0
0 0
<COMMON> 195 0
<OTHER-SE> 272 0
<TOTAL-LIABILITIES-AND-EQUITY> 3,297,430 0
<INTEREST-LOAN> 113,769 55,809
<INTEREST-INVEST> 16,409 8,385
<INTEREST-OTHER> 4,885 2,466
<INTEREST-TOTAL> 135,063 66,660
<INTEREST-DEPOSIT> 59,888 28,765
<INTEREST-EXPENSE> 19,293 9,472
<INTEREST-INCOME-NET> 55,882 28,423
<LOAN-LOSSES> 44,800 31,800
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 52,643 25,374
<INCOME-PRETAX> (13,623)<F2> (15,537)<F1>
<INCOME-PRE-EXTRAORDINARY> (13,623) (15,627)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,637) (15,634)
<EPS-BASIC> (0.70) (.80)
<EPS-DILUTED> (0.70) (.80)
<YIELD-ACTUAL> 3.22 3.35
<LOANS-NON> 6,412 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 31,255 0
<LOANS-PROBLEM> 83,423 0
<ALLOWANCE-OPEN> 106,171 77,898
<CHARGE-OFFS> (72,856) (29,783)
<RECOVERIES> 1,867 1,180
<ALLOWANCE-CLOSE> 81,095 81,095
<ALLOWANCE-DOMESTIC> 81,095 81,085
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 75,414 75,414
<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>
