-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jt0VA2w0aRSUpOvwnZ/9D1apdyAJVKiVzyqMnIAQqykyHWGL7mrcA7mTmlq/y7Ab vmiRE4aBvjTdyQ4BzsU1tg== 0000898430-96-003790.txt : 19960816 0000898430-96-003790.hdr.sgml : 19960816 ACCESSION NUMBER: 0000898430-96-003790 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK PLUS CORP CENTRAL INDEX KEY: 0001012616 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954571410 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28292 FILM NUMBER: 96611826 BUSINESS ADDRESS: STREET 1: 4565 COLORADO BLVD CITY: LOS ANGELES STATE: CA ZIP: 90039 BUSINESS PHONE: 8185493330 MAIL ADDRESS: STREET 1: 4565 COLORADO BLVD CITY: LOS ANGELES STATE: CA ZIP: 90039 10-Q 1 FORM 10-Q DATED 06/30/96 ================================================================================ 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, 1996 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 _____ ------------------- BANK PLUS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4571410 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 4565 COLORADO BOULEVARD 90039 LOS ANGELES, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 241-6215 ------------------- 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 July 31, 1996, Registrant had outstanding 18,242,465 shares of Common Stock, par value $.01 per share. ================================================================================ BANK PLUS CORPORATION INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial 1 Condition (Unaudited) as of June 30, 1996 and December 31, 1995..................... Consolidated Statements of Operations (Unaudited) for the quarters and six months ended June 30, 1996 and 1995....... 2 Consolidated Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 1996 and 1995....... 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................... 27 Item 2. Changes in Securities..................... 28 Item 3. Defaults Upon Senior Securities........... 28 Item 4. Submission of Matters to a Vote of Security Holders.......................... 28 Item 5. Other Information......................... 28 Item 6. Exhibits and Reports on Form 8-K.......... 29 a. Exhibits............................... 29 b. Reports on Form 8-K.................... 31
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)
JUNE 30, DECEMBER 31, 1996 1995 ------------ ------------ (Unaudited) ASSETS: Cash and cash equivalents................................................... $ 65,752 $ 94,794 Investment securities available for sale, at fair value..................... 220,607 94,305 Mortgage-backed securities available for sale, at fair value................ 47,522 31,733 Loans receivable, net of allowances of $73,722 and $89,435 at June 30, 1996 and December 31, 1995, respectively.......................... 2,809,860 2,935,116 Interest receivable......................................................... 21,368 20,162 Investment in FHLB stock.................................................... 50,752 49,425 Real estate owned, net...................................................... 20,519 19,521 Premises and equipment, net................................................. 33,399 34,333 Other assets................................................................ 26,854 20,055 ---------- ---------- $3,296,633 $3,299,444 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Deposits................................................................... $2,552,946 $2,600,869 FHLB advances.............................................................. 232,700 292,700 Commercial paper........................................................... 99,000 50,000 Mortgage-backed notes...................................................... 100,000 100,000 Other borrowings........................................................... 53,357 -- Other liabilities.......................................................... 31,882 26,832 ---------- ---------- 3,069,885 3,070,401 ---------- ---------- Preferred stock issued by consolidated subsidiary........................... 51,750 51,750 Stockholders' equity: Common stock, par value $.01 per share; 78,500,000 shares authorized; 18,242,465 shares outstanding............................................. 182 182 Paid-in capital............................................................ 262,151 262,151 Unrealized (losses) gains on securities.................................... (2,119) 788 Accumulated deficit........................................................ (85,216) (85,828) ---------- ---------- 174,998 177,293 ---------- ---------- $3,296,633 $3,299,444 ========== ==========
See notes to consolidated financial statements. 1 BANK PLUS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------------- 1996 1995 1996 1995 ------------ ---------- ------------ ------------ (Unaudited) INTEREST INCOME: Loans................................................................ $ 54,096 $ 57,504 $ 110,276 $ 112,959 Mortgage-backed securities........................................... 756 1,489 1,260 2,464 Investment securities and other...................................... 4,704 3,528 8,074 7,668 ----------- ---------- ----------- ---------- Total interest income............................................... 59,556 62,521 119,610 123,091 ----------- ---------- ----------- ---------- INTEREST EXPENSE: Deposits............................................................. 29,787 32,850 60,822 61,283 FHLB advances........................................................ 3,175 4,020 6,842 9,131 Other borrowings..................................................... 4,828 8,755 8,342 17,852 ----------- ---------- ----------- ---------- Total interest expense.............................................. 37,790 45,625 76,006 88,266 ----------- ---------- ----------- ---------- NET INTEREST INCOME................................................... 21,766 16,896 43,604 34,825 Provision for estimated loan losses.................................. 3,905 11,131 7,810 15,151 ----------- ---------- ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES................................................ 17,861 5,765 35,794 19,674 ----------- ---------- ----------- ---------- NONINTEREST INCOME (EXPENSE): Loan fee income...................................................... 560 895 1,374 2,124 Gains on loan sales, net............................................. 6 938 6 646 Fee income from sale of uninsured investment products................ 1,092 1,155 2,291 2,364 Fee income on deposits and other income.............................. 856 961 1,558 1,769 Gains on securities and trading activities, net...................... 235 3,159 152 4,098 Gains on sale of servicing........................................... -- -- -- 4,319 Other................................................................ 18 (342) 106 (252) ----------- ---------- ----------- ---------- 2,767 6,766 5,487 15,068 ----------- ---------- ----------- ---------- Provision for estimated real estate losses........................... (578) (1,153) (1,246) (1,544) Direct costs of real estate operations, net.......................... (1,237) (1,366) (3,024) (2,986) ----------- ---------- ----------- ---------- (1,815) (2,519) (4,270) (4,530) ----------- ---------- ----------- ---------- Total noninterest income............................................. 952 4,247 1,217 10,538 ----------- ---------- ----------- ---------- OPERATING EXPENSE: Personnel and benefits............................................... 6,833 8,628 13,806 18,025 Occupancy............................................................ 2,689 3,158 5,406 6,144 FDIC insurance....................................................... 1,931 2,059 3,962 4,119 Professional services................................................ 2,780 2,302 5,283 4,597 Office-related expenses.............................................. 846 1,163 1,932 2,416 Other................................................................ 1,459 1,725 2,776 2,885 ----------- ---------- ----------- ---------- Total operating expense............................................. 16,538 19,035 33,165 38,186 ----------- ---------- ----------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES................................... 2,275 (9,023) 3,846 (7,974) Income tax expense................................................... 53 4 93 4 ----------- ---------- ----------- ---------- EARNINGS (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK OF SUBSIDIARY........................................................ 2,222 (9,027) 3,753 (7,978) Dividends on preferred stock of subsidiary........................... 1,552 -- 3,105 -- ----------- ---------- ----------- ---------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS..................... $ 670 $ (9.027) $ 648 $ (7,978) =========== ========== =========== ========== EARNINGS (LOSS) PER COMMON SHARE...................................... $ 0.04 $ (1.39) $ 0.04 $ (1.23) =========== ========== =========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 18,242,465 6,492,465 18,242,465 6,492,465 =========== ========== =========== ==========
See notes to consolidated financial statements. 2 BANK PLUS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------------- 1996 1995 1996 1995 ------------ ---------- ------------ ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Earnings (losses)..................................................... $ 2,222 $ (9,027) $ 3,753 $ (7,978) Adjustments to reconcile earnings (loss) to net cash provided by (used in) operating activities: Provisions for estimated loan and real estate losses................ 4,483 12,284 9,056 16,695 Gains on sale of loans and securities............................... (241) (4,097) (158) (4,744) Amortization of deferred items, net................................. (568) (677) (1,009) (1,566) FHLB stock dividend................................................. (727) (443) (1,375) (1,176) Depreciation and amortization....................................... 992 1,456 1,970 3,024 Proceeds from sales of loans held for sale............................ -- 1,290 -- 1,290 Interest receivable (increase) decrease............................... (285) 553 (1,206) 102 Other assets (increase) decrease...................................... (2,576) 3,384 (6,766) (4,496) Interest payable (decrease) increase.................................. (1,516) (5,774) 82 3,295 Other liabilities increase (decrease)................................. 2,941 (2,559) 4,665 (2,455) -------- --------- --------- --------- Net cash provided by (used in) operating activities............... 4,725 (3,610) 9,012 1,991 -------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available for sale................. (83,450) -- (151,025) (45,569) Maturities of investment securities available for sale................ 22,950 -- 22,950 5,000 Proceeds from sales of investment securities available for sale....... -- 36,907 -- 102,061 Purchases of investment securities held to maturity................... -- -- -- (25,001) Maturities of investment securities held to maturity.................. -- -- -- 10,000 Purchases of mortgage-backed securities available for sale............ (38,961) -- (38,961) (27,858) Principal repayments of mortgage-backed securities available for sale................................................... 852 1,663 2,759 3,998 Proceeds from sales of mortgage-backed securities available for sale................................................... 20,158 127,706 20,158 162,365 Purchases of mortgage-backed securities held to maturity.............. -- -- -- (16,234) Principal repayments of mortgage-backed securities held to maturity..................................................... -- 1,802 -- 3,408 Loans receivable decrease............................................. 53,642 36,509 98,196 58,332 Net proceeds from sales of real estate................................ 13,653 5,152 17,597 7,642 Net (additions to) dispositions of premises and equipment............. (266) 1,176 (1,021) 1,433 -------- --------- --------- --------- Net cash (used in) provided by investing activities............... (11,422) 210,915 (29,347) 239,577 -------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Demand deposits and passbook savings decrease......................... (34,887) (29,267) (101,740) (64,050) Certificate accounts increase......................................... 8,770 16,396 53,817 104,158 Payments of dividends on preferred stock of subsidiary................ (1,552) -- (3,105) -- Proceeds from FHLB advances........................................... -- -- -- 80,000 Repayments of FHLB advances........................................... -- -- (60,000) (120,000) Short-term borrowings increase (decrease)............................. 42,457 (190,500) 102,357 (241,400) Other financing activity.............................................. (36) -- (36) -- -------- --------- --------- --------- Net cash provided by (used in) financing activities.................. 14,752 (203,371) (8,707) (241,292) -------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents.............. 8,055 3,934 (29,042) 276 Cash and cash equivalents at the beginning of the period............. 57,697 70,407 94,794 74,065 -------- --------- --------- --------- Cash and Cash Equivalents at End of Period............................. $ 65,752 $ 74,341 $ 65,752 $ 74,341 ======== ========= ========= =========
(Continued on following page) 3 BANK PLUS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (DOLLARS IN THOUSANDS)
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------------- 1996 1995 1996 1995 ------------ ---------- ------------ ------------ (Unaudited) SUPPLEMENTAL CASH FLOW INFORMATION: Cash (paid) received during the period for: Interest on deposits, advances and other borrowings................... $(38,631) $(51,754) $(74,570) $( 85,257) Income taxes.......................................................... (81) (4) 302 (89) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additions to real estate acquired through foreclosure.................. 12,346 16,950 21,220 28,349 Loans originated to finance sale of real estate acquired through foreclosure................................................... 1,129 4,187 1,379 5,470 Loans originated to finance sale of office building.................... -- 5,339 -- 5,339 Transfers from held to maturity to available for sale portfolio: Loans................................................................. -- 68,995 -- 68,995 Investment securities................................................. -- 141,678 -- 141,678 Mortgage-backed securities............................................ -- 16,404 -- 16,404 Transfer from available for sale to held to maturity portfolio: Mortgage-backed securities............................................ -- -- -- 3,603 Mortgage loans exchanged for mortgage-backed securities................ -- 66,444 -- 112,840
See notes to consolidated financial statements. 4 BANK PLUS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation In May 1996, Fidelity Federal Bank, A Federal Savings Bank ("Fidelity" or the "Bank") completed a reorganization pursuant to which all of the outstanding common stock of Fidelity was converted on a one-for-one basis into all of the outstanding common stock of a recently formed Delaware corporation, Bank Plus Corporation ("Bank Plus"), and Bank Plus became the holding company for Fidelity (the "Reorganization"). Bank Plus' headquarters are in Los Angeles, California and its principal operating subsidiaries are Fidelity and Gateway Investment Services, Inc. ("Gateway"), which prior to the Reorganization was a subsidiary of the Bank. Bank Plus currently has no significant business or operations other than serving as the holding company for Fidelity and Gateway. Unless otherwise indicated, references to the "Company" include Bank Plus, Fidelity, Gateway, and all subsidiaries of Fidelity and Bank Plus. All references to "Fidelity" prior to the Reorganization include Gateway. The Company offers a broad range of consumer financial services, including demand and term deposits, and loans to consumers, through 33 full-service branches, all of which are located in Southern California, principally in Los Angeles and Orange counties. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the current period presentation. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results of operations to be expected for the entire year of 1996. In the fourth quarter of 1995, Fidelity completed a plan of recapitalization (the "1995 Recapitalization"), pursuant to which Fidelity raised approximately $134.4 million in net new equity through the sale of 2,070,000 shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock, Series A ("Series A Preferred Stock"), and 47,000,000 shares of Fidelity Class A Common Stock. As part of the 1995 Recapitalization, Fidelity adopted the accelerated asset resolution plan (the "Accelerated Asset Resolution Plan"), which is designed to aggressively dispose of, resolve, or otherwise manage a pool of primarily multifamily mortgage loans and real estate owned ("REO"). As a result, Fidelity recorded a $45.0 million loan portfolio charge in the allowance for estimated loan losses which represents the estimated additional losses expected to be incurred in connection with the Accelerated Asset Resolution Plan. On February 9, 1996, the Bank's stockholders approved a one-for-four Reverse Stock Split of the issued and outstanding shares of the Bank's Class A Common Stock. Upon effectiveness of the Reverse Stock Split, each stockholder became the owner of one share of Common Stock for each four shares of Common Stock held at the time of the Reverse Stock Split and became entitled to receive cash in lieu of any fractional shares. All per share data and weighted average common shares outstanding have been retroactively adjusted to reflect the Reverse Stock Split. The Series A Preferred Stock of the Bank is presented on the Company's Consolidated Statements of Financial Condition as "Preferred stock issued by consolidated subsidiary." 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 Bank's most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto, as of December 31, 1995, together with the MD&A as of such date. 5 BANK PLUS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 1996 Supplementary Earnings/Loss per Share Data Assuming that 18,242,465 shares of Common Stock were issued at the beginning of 1995, the net loss per common share would have been $0.49 and $0.44 for the quarter and six months ended June 30, 1995, respectively. 2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES The following table summarizes the Company's investment securities and mortgage-backed securities ("MBS") portfolios.
UNREALIZED AMORTIZED --------------------------------- AGGREGATE COST GAINS LOSSES NET FAIR VALUE --------- ------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) JUNE 30, 1996 Available for sale: Investment securities: U.S. Treasury and agency securities (1)........... $213,214 $1,287 $(1,144) $ 143 $213,357 Other investments (2)............................. 7,295 -- (45) (45) 7,250 -------- ------ ------- ------- -------- 220,509 1,287 (1,189) 98 220,607 -------- ------ ------- ------- -------- MBS: FHLMC............................................. 2,491 26 -- 26 2,517 GNMA.............................................. 3,496 197 -- 197 3,693 Participation certificates........................ 26,109 -- -- -- 26,109 LIBOR asset trust................................. 15,528 -- (325) (325) 15,203 -------- ------ ------- ------- -------- 47,624 223 (325) (102) 47,522 -------- ------ ------- ------- -------- Total available for sale......................... $268,133 $1,510 $(1,514) (4) $268,129 ======== ====== ======== ======== Net unrealized losses on investment securities included in amortized cost (1)......... (2,555) Net unrealized gains, hedging activities........... 440 ------- Net unrealized losses included in stockholders' equity............................. $(2,119) ======= DECEMBER 31, 1995 Available for sale: Investment securities: U.S. Treasury and agency securities (1)........... $ 84,200 $2,984 $ -- $ 2,984 $ 87,184 Other investments (2)............................. 7,099 52 (30) 22 7,121 -------- ------ ------- ------- -------- 91,299 3,036 (30) 3,006 94,305 -------- ------ ------- ------- -------- MBS: FHLMC............................................. 3,068 -- (30) (30) 3,038 FNMA.............................................. 55 36 -- 36 91 Participation certificates........................ 28,123 481 -- 481 28,604 -------- ------ ------- ------- -------- 31,246 517 (30) 487 31,733 -------- ------ ------- ------- -------- Total available for sale......................... $122.545 $3,553 $ (60) 3,493 $126.038 ======== ====== ======= ======== Net unrealized losses on investment securities included in amortized cost (1)......... (3,366) Net unrealized gains, hedging activities........... 661 ------- Net unrealized gains included in stockholders' equity............................. $ 788 =======
- ------------------- (1) Amortized cost of certain securities that were previously transferred from available for sale to held to maturity and back to available for sale, includes unamortized market value adjustments recorded at the time of transfer to the held to maturity portfolio. (2) Represents U.S. Treasury securities which have been pledged as credit support to a securitization of loans by the Bank. 6 BANK PLUS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) THREE MONTHS ENDED JUNE 30, 1996 2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (CONTINUED) The Bank reclassified all held to maturity investment securities and MBS to its available for sale portfolio in the second quarter of 1995. Subsequent to their reclassification, certain available for sale securities were sold. Under the Company's current operating plan, all securities are classified as available for sale. The Company may begin classifying securities as held to maturity in the near future. The following table summarizes the weighted average yield of securities as of the dates indicated:
JUNE 30, DECEMBER 31, 1996 1995 -------- ------------ Available for sale Investment securities... 6.26% 4.70% MBS..................... 7.12 6.85
The following table presents the Company's securities at June 30, 1996 by contractual maturity. Actual maturities on MBS may differ from contractual maturities due to prepayments.
MATURITY ------------------------------------------------------------ WITHIN OVER 1 YEAR OVER 5 YEARS OVER 10 1 YEAR TO 5 YEARS TO 10 YEARS YEARS TOTAL ------ ----------- ------------ ------- --------- (DOLLARS IN THOUSANDS) Available for sale: Investment securities... $2,240 $166,359 $9,977 $42,031 $220,607 MBS..................... -- -- -- 47,522 47,522 ------ -------- ------ ------- -------- $2,240 $166,359 $9,977 $89,553 $268,129 ====== ======== ====== ======= ========
The following gains and losses were realized from the sale of investment securities and MBS, the costs of which were computed on a specific identification method, during the periods indicated:
SALES GAINS LOSSES ----- ----- ------ (DOLLARS IN THOUSANDS) THREE MONTHS ENDED JUNE 30, --------------------------- 1996........................ $ 19,923 $ 235 $ -- 1995........................ 160,983 3,154 -- SALES GAINS LOSSES ----- ----- ------ (DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------- 1996........................ $ 19,923 $ 235 $ -- 1995........................ 260,796 3,903 (566)
The Company was engaged in certain option activities related to securities. Realized losses from such activities totaled $0.1 million for the six months ended June 30, 1996 compared to realized gains of $0.8 million for the comparable period in 1995. There were no open positions or option activities in this program at or for the quarter ended June 30, 1996. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company offers a broad range of consumer financial services, including demand and term deposits, and loans to consumers, through 33 full-service branches, all of which are located in Southern California, principally in Los Angeles and Orange counties. The Company also provides residential mortgages and consumer loans, which the Company does not underwrite or fund, by referral to certain established providers of mortgage and consumer loan products with which the Company has negotiated strategic alliances. In addition, through its subsidiary, Gateway, a National Association of Securities Dealers, Inc. ("NASD") registered broker/dealer, the Company provides customers with uninsured investment products, including a number of mutual funds, annuities and unit investment trusts. The principal executive offices of Bank Plus and Fidelity are located at 4565 Colorado Boulevard, Los Angeles, California 90039, telephone number (818) 241-6215. RECENT DEVELOPMENTS 1995 Recapitalization In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of the Bank, pursuant to which Fidelity raised approximately $134.4 million in net new equity. As part of the 1995 Recapitalization, Fidelity adopted an Accelerated Asset Resolution Plan which is designed to aggressively dispose of, resolve or otherwise manage a pool of primarily multifamily loans. See "-- Accelerated Asset Resolution Plan." Reorganization into Holding Company Structure In May 1996, Fidelity completed the Reorganization pursuant to which all of the outstanding common stock of Fidelity was converted on a one-for-one basis into all of the outstanding common stock of Bank Plus, a recently formed Delaware corporation, and Bank Plus became the holding company for Fidelity. Effective May 17, 1996, Bank Plus Common Stock was listed on the Nasdaq National Market ("NASDAQ") under the symbol "BPLS". OTS Examinations The Office of Thrift Supervision ("OTS") has completed its annual safety and soundness examination and the Company is addressing the OTS' concerns. Following the examination, the Company received notice that it is no longer considered by the OTS to be an institution "requiring more than normal supervision." In the fourth quarter of 1995, the OTS completed the Compliance and Community Reinvestment Act ("CRA") examinations of the Bank. The Bank has received a satisfactory compliance rating. The Bank initially received a "needs improvement" CRA rating. Management strongly disagreed with the examiners' CRA findings, and the Bank formally requested the OTS to reevaluate its "needs improvement" rating through the appeals process. On July 18, 1996, the OTS, upon an internal review, reassessed the Bank's overall performance and upgraded its rating to satisfactory. Notwithstanding this upgrade, the OTS indicated that unless the Bank improves its lending activities in delineated lending areas, it would likely receive an adverse rating in future examinations. The Bank is evaluating various options to respond to the OTS' concerns. These actions may include the purchase of whole loans for the Bank's portfolio and other actions. Business Strategy The Company's business strategy is to (i) improve the quality of its loan portfolio by reducing the level of problem assets through aggressive management including execution of the Accelerated Asset Resolution Plan (as discussed below), (ii) continue to increase operating efficiency by reducing and maintaining lower levels of operating expenses and (iii) be a consumer-focused provider of financial services, by enhancing its franchise to integrate its traditional services and products (deposit services, checking and savings accounts) with the offering of investment products by Gateway and consumer credit products through strategic partners. As a part of such strategy, management continues to explore new opportunities to expand the integrated sales platform, to increase 8 fee income growth, and to build upon the use of technology in delivering financial products and services. The Company is examining the use of various electronic delivery systems and software to enhance customer convenience and the Company's fee income opportunities. The Company continues to evaluate its plan to purchase assets (loans and securities) for the Bank of approximately $500 to $700 million during the second half of 1996. The plan, in general terms, is based upon certain risk adjusted return and liquidity objectives. This action is designed to increase the Company's securities and loan portfolios to enhance the Company's earnings capabilities. The proposed increase in earning assets may be at a lower interest rate spread than the Company is currently yielding depending on available financing sources. Accordingly, if the plan is implemented, the Company's interest rate spread may decline. If management implements the plan, it will be undertaken in a manner that is designed to maintain the current well- capitalized status of the Bank. Accelerated Asset Resolution Plan The Company's business strategy includes the reduction of risk in the Company's multifamily portfolio. As a part of the 1995 Recapitalization, the Bank adopted the Accelerated Asset Resolution Plan designed to aggressively dispose of, resolve or otherwise manage a pool of primarily multifamily loans which generally have lower debt coverage ratios than the remainder of the Bank's multifamily loan portfolio and thereby are considered by the Bank to have higher risk of future nonperformance or impairment relative to the remainder of the Bank's multifamily loan portfolio. This plan reflects both an acceleration in estimated timing of resolution of assets within the pool, as well as a potential change in recovery method from that which would be anticipated through the normal course of business. The Accelerated Asset Resolution Pool originally consisted of 411 assets with an aggregate gross book value of approximately $213.3 million with Accelerated Asset Resolution Pool reserves of $45 million. As of June 30, 1996, the Accelerated Asset Resolution Pool consisted of 250 assets with an aggregate gross book value of approximately $131.5 million, comprised primarily of accruing and nonaccruing multifamily real estate loans and REO properties. As of June 30, 1996, the Company had resolved assets with an aggregate gross book value of $80.2 million, and utilized $13.5 million in Accelerated Asset Resolution Pool reserves. In an effort to maximize recovery on loans included in the accelerated resolution pool, the Accelerated Asset Resolution Plan provides for a range of possible methods of resolution including, but not limited to (i) the bulk sale of loans, (ii) individual loan restructuring, which may include additional extensions of credit or write-off of existing principal, (iii) foreclosure and sale of collateral properties, and (iv) securitization of loans. While resulting in reduced recoveries on certain assets, the Accelerated Asset Resolution Plan is intended to reduce, among other things, levels of problem assets, the related utilization of management resources, and direct and indirect costs of credit administration and problem asset management. Execution of this plan will allow management to focus on the Company's core operations. Continued Reduction of Operating Expenses During the first six months of 1996 as compared to the same 1995 period, the Company reduced operating expenses by 13.2%, including reductions in personnel expenses of 23.4%, which reflects a reduction of 25.5% in the six month average number of full-time-equivalent employees (from 697 during 1995 to 519 during 1996). During the second quarter of 1996, loan servicing rights were sold on approximately $1.0 billion of the Company's single family loans. The gain on the sale of the servicing is being deferred over the estimated life of the loans included in the sale. As a result of this transaction, the Company reduced the number of full-time equivalent employees in the servicing department by 14. Insurance Premium Assessments Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") directed the Federal Deposit Insurance Corporation ("FDIC") to establish a risk- based system for setting deposit insurance premium assessments. The FDIC has implemented such a system, under which an institution's insurance assessments will 9 vary depending on the level of capital the institution holds and the degree to which it is the subject of supervisory concern to the FDIC. Congress has discussed proposing legislation to address the disparity in bank and thrift deposit insurance premiums. The proposed legislation would, among other things, impose a requirement on all Savings Association Insurance Fund ("SAIF") member institutions to fully recapitalize the SAIF by paying a one-time special assessment of approximately 80 basis points on all assessable deposits as of a certain date. While the outcome of the proposed legislation cannot be predicted with certainty, it is possible that some kind of legislative or regulatory action will be taken that will impact the Bank's insured deposits. A one-time special assessment of 80 basis points would result in the Bank paying approximately $22 million in additional SAIF premiums, gross of related tax benefits, if any. The enactment of such legislation may have the effect of immediately reducing the regulatory capital of SAIF member institutions by the amount of the fee, although provisions are included in the legislation that could exempt a savings association from paying the assessment in a lump sum if the payment would result in the association becoming undercapitalized. As of June 30, 1996, after giving effect to the payment and deduction of an 80 basis point assessment, the Bank's core and risk-based capital ratios would have been approximately 6.23% and 11.49%, respectively, and the Bank would have remained well capitalized under the Prompt Corrective Action ("PCA") regulations. Due to the uncertainty of the legislative process generally, management cannot predict whether legislation reducing SAIF premiums and/or imposing a special one-time assessment will be adopted, or, if adopted, the amount of the assessment, if any, that would be imposed on the Bank. RESULTS OF OPERATIONS The Company reported earnings before dividends on preferred stock of subsidiary of $2.2 million ($0.04 per common share after giving effect to the dividends on preferred stock of subsidiary of $1.6 million, computed on the basis of 18,242,465 weighted average common shares outstanding) for the quarter ended June 30, 1996, and earnings before dividends on preferred stock of subsidiary of $3.8 million ($0.04 per common share after giving effect to the dividends on preferred stock of subsidiary of $3.1 million, computed on the basis of 18,242,465 weighted average common shares outstanding) for the six months ended June 30, 1996. This compares to a loss of $9.0 million ($1.39 per common share; computed on the basis of 6,492,465 weighted average common shares outstanding) for the second quarter of 1995 and a loss of $8.0 million ($1.23 per common share; computed on the basis of 6,492,465 weighted average common shares outstanding) for the six months ended June 30, 1995. Results of operations for the quarter ended June 30, 1996, as compared to the same period in 1995, were favorably impacted by: (a) increased net interest income of $4.9 million due primarily to the impact of increased interest rates on the Company's interest-earning assets and lower interest rates on interest- bearing liabilities; (b) decreased provisions for estimated loan losses of $7.2 million and (c) decreased operating expenses of $2.5 million. These favorable variances were partially offset by a decrease in noninterest income of $3.3 million. Results of operations for the six months ended June 30, 1996, as compared to the same period in 1995, were favorably affected by: (a) increased net interest income of $8.8 million, primarily due to the impact of increased interest rates on the Company's interest-earning assets and lower interest rates on interest- bearing liabilities; (b) decreased provisions for estimated loan losses of $7.3 million, and (c) decreased operating expenses of $5.0 million. These favorable variances were partially offset by a reduction in noninterest income of $9.3 million, primarily due to: (a) decreased gains on sales of loans, investment securities and mortgage-backed securities of $4.6 million; and (b) a gain on sale of servicing of $4.3 million in the first quarter of 1995 with no comparable amounts in 1996. 10 NET INTEREST INCOME Net interest income is the difference between interest earned on loans, mortgage-backed securities and investment securities ("interest-earning assets") and interest paid on savings deposits and borrowings ("interest-bearing liabilities"). For the quarter ended June 30, 1996, net interest income totaled $21.8 million, increasing by $4.9 million from $16.9 million for the comparable period in 1995. For the six months ended June 30, 1996, net interest income totaled $43.6 million, increasing by $8.8 million from $34.8 million for the comparable period in 1995. Net interest income is affected by (a) the average volume and repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities, (b) the level and volatility of market interest rates, (c) the level of nonaccruing loans ("NPLs") and (d) the interest rate spread between the yields earned and the rates paid. The following table presents the primary determinants of the Company's net interest income for the three months ended June 30, 1996 and 1995:
THREE MONTHS ENDED JUNE 30, --------------------------------------------------------------------- 1996 1995 -------------------------------- -------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE DAILY YIELD/ DAILY YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE ----------- -------- -------- ----------- -------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans.............................................. $2,932,512 $54,096 7.38% $3,248,418 $57,504 7.08% MBS................................................ 42,642 756 7.09 94,182 1,489 6.32 Investment securities.............................. 230,317 3,977 6.94 196,722 3,085 6.29 Investment in FHLB stock........................... 50,638 727 5.77 48,058 443 3.70 ---------- ------- ---------- ------- Total interest-earning assets.................... 3,256,109 59,556 7.32 3,587,380 62,521 6.97 ------- ------- Noninterest-earning assets........................... 70,712 93,879 ---------- ---------- Total assets..................................... $3,326,821 $3,681,259 ========== ========== Interest-bearing liabilities: Deposits: Demand deposits................................... $ 300,560 761 1.02 $ 302,336 662 0.88 Savings deposits.................................. 142,438 918 2.59 163,118 1,087 2.67 Time deposits..................................... 2,109,557 28,108 5.34 2,248,958 31,101 5.54 ---------- ------- ---------- ------- Total deposits................................... 2,552,555 29,787 4.68 2,714,412 32,850 4.85 ---------- ------- ---------- ------- Borrowings.......................................... 509,699 8,003 6.30 783,163 12,775 6.54 ---------- ------- ---------- ------- Total interest-bearing liabilities............... 3,062,254 37,790 4.95 3,497,575 45,625 5.23 ---------- ------- ---------- ------- Noninterest-bearing liabilities...................... 38,334 29,131 Stockholders' equity................................. 226,233 154,553 ---------- ---------- Total liabilities and equity......................... $3,326,821 $3,681,259 ========== ========== Net interest income; interest rate spread............ $21,766 2.37% $16,896 1.74% ======= ==== ======= ==== Net yield on interest-earning assets ("net interest margin")............................. 2.66% 1.87% ==== ===== Average nonaccruing loan balance included in average loan balance.................... $ 60,591 $ 81,711 =========== =========== Net delinquent interest reserve removed from interest income................................ $ 1,627 $ 1,713 ======= ======= Reduction in net yield on interest-earning assets due to delinquent interest (in basis points)................................... 20 19 ==== ===
11 The following table presents the primary determinants of the Company's net interest income for the six months ended June 30, 1996 and 1995:
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 1996 1995 ------------------------------------ ---------------------- AVERAGE AVERAGE AVERAGE AVERAGE DAILY YIELD/ DAILY YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE ----------- --------- -------- ----------- --------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Loans.................................. $2,968,577 $110,276 7.43% $3,295,653 $112,959 6.86% MBS.................................... 36,536 1,260 6.90 77,853 2,464 6.33 Investment securities.................. 188,978 6,699 7.13 202,847 6,492 6.45 Investment in FHLB stock............... 50,252 1,375 5.50 47,780 1,176 4.96 ---------- -------- ---------- -------- Total interest-earning assets........ 3,244,343 119,610 7.38 3,624,133 123,091 6.80 -------- -------- Noninterest-earning assets.............. 61,364 92,964 ---------- ---------- Total assets......................... $3,305,707 $3,717,097 ========== ========== Interest-bearing liabilities: Deposits: Demand deposits....................... $ 302,602 1,516 1.00 $ 306,038 1,318 0.87 Savings deposits...................... 148,581 1,817 2.45 177,168 2,376 2.70 Time deposits......................... 2,112,847 57,489 5.46 2,209,599 57,589 5.24 ---------- -------- ---------- -------- Total deposits....................... 2,564,030 60,822 4.76 2,692,805 61,283 4.59 ---------- -------- ---------- -------- Borrowings............................. 477,145 15,184 6.38 839,439 26,983 6.48 ---------- -------- ---------- -------- Total interest-bearing liabilities... 3,041,175 76,006 5.01 3,532,244 88,266 5.04 ---------- -------- ---------- -------- Noninterest-bearing liabilities......... 37,153 29,637 Stockholders' equity.................... 227,379 155,216 ---------- ---------- Total liabilities and equity......... $3,305,707 $3,717,097 ========== ========== Net interest income; interest rate spread................................. $ 43,604 2.37% $ 34,825 1.76% ======== ===== ======== ===== Net yield on interest-earning assets ("net interest margin")................ 2.68% 1.89% ===== ======= Average nonaccruing loan balance included in average loan balance....... $ 66,458 $ 81,035 ========== ========== Net delinquent interest reserve removed from interest income................... $ 3,318 $ 3,010 ======== ========= Reduction in net yield on interest-earning assets due to delinquent interest (in basis points).. 20 17 ===== =====
12 The following tables present the dollar amount of changes in interest income and expense for each major component of interest-earning assets and interest- bearing liabilities and the amount of change attributable to changes in average balances and average rates for the periods indicated. Because of numerous changes in both balances and rates, it is difficult to allocate precisely the effects thereof. For purposes of these tables, the change due to volume is initially calculated as the change in average balance multiplied by the average rate during the prior period and the change due to rate is calculated as the change in average rate multiplied by the average volume during the prior period. Any change that remains unallocated after such calculations is allocated proportionately to changes in volume and changes in rates.
QUARTER ENDED JUNE 30, 1996 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995 COMPARED TO JUNE 30, 1995 FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE) ------------------------------------ ------------------------------------- VOLUME RATE NET VOLUME RATE NET ----------- -------- ----------- ------------ -------- --------- (DOLLARS IN THOUSANDS) Interest income: Loans............................ $(5,768) $2,360 $(3,408) $(11,685) $ 9,002 $(2,683) Mortgage-backed securities....... (896) 163 (733) (1,409) 205 (1,204) Investment securities............ 555 337 892 (461) 668 207 Investment in FHLB stock......... 25 259 284 64 135 199 ------- ------ ------- -------- ------- ------- Total interest income......... (6,084) 3,119 (2,965) (13,491) 10,010 (3,481) ------- ------ ------- -------- ------- ------- Interest expense: Deposits: Demand deposits................. 4 (103) (99) 14 (212) (198) Savings deposits................ 136 33 169 355 204 559 Time deposits................... 1,853 1,140 2,993 2,447 (2,347) 100 ------- ------ ------- -------- ------- ------- Total deposits................ 1,993 1,070 3,063 2,816 (2,355) 461 Borrowings....................... 3,885 887 4,772 10,275 1,524 11,799 ------- ------ ------- -------- ------- ------- Total interest expense........ 5,878 1,957 7,835 13,091 (831) 12,260 ------- ------ ------- -------- ------- ------- Increase in net interest income... $ (206) $5,076 $ 4,870 $ (400) $ 9,179 $ 8,779 ======= ====== ======= ======== ======= =======
The $4.9 million increase in net interest income between the second quarter 1996 and the second quarter 1995 was primarily the result of increased rates on average interest-earning assets combined with decreased rates and level of average interest-bearing liabilities. This was partially offset by a decline in the level of interest-earning assets. The $8.8 million increase in net interest income between the six months ended June 30, 1996 and the comparable period in 1995 was primarily due to increased rates on average interest-earning assets combined with a decline in the average level of interest-bearing liabilities. This was partially offset by a decline in the level of interest-earning assets and increased rates on interest-bearing liabilities. The rates on interest-earning assets and interest-bearing liabilities of the Company both tend to rise or fall in step with the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI"), the index to which most of the Company's loans are tied. However, due to reporting and contractual look-back periods contained in the Company's loan documents, the 93% of the Company's loans which are indexed to COFI, as with all COFI portfolios in the industry, do not reprice until some time after the industry liabilities composing COFI reprice. The Company's liabilities reprice in the same period as 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 adjustable rate mortgage ("ARM") loans indexed to COFI is approximately four months. As such, when rates rise sharply there will be upward pressure on rates paid on deposit accounts and wholesale borrowings, and the Company's net interest income will be adversely affected until the majority of its interest- earning assets fully reprice. Conversely, in a falling interest rate environment, net interest income will be positively affected. As interest rates continued to fall in the second quarter 1996, the Company's liabilities continued to reprice at lower rates throughout the quarter. 13 ASSET/LIABILITY MANAGEMENT To reduce fluctuations in net interest income, the Company maintains a loan portfolio with a yield that generally fluctuates in step with the cost of its liabilities. The Company has traditionally accomplished this by originating and purchasing primarily ARM loans for its portfolio. ARM loans comprised 97% of the total loan portfolio at June 30, 1996. All else being equal, to the extent that the composition of the Company's liabilities parallels the composition of COFI, changes in the Company's cost of funds should parallel changes in COFI. However, due to the lag in COFI-based ARMs repricing discussed above and depending upon the level of increase or decrease in interest rates, interim disparities do occur. The decline in short-term rates from 1990 to early 1993 contributed significantly to the Company's net interest margin. Subsequent increases in rates have caused a reduction in net interest income. If interest rates were to increase again, the Company's net interest income may again be negatively impacted. The Company may employ interest rate swaps, caps and floors in the management of interest rate risk. Interest rate swaps generally involve the exchange of fixed or floating interest payments without the exchange of the underlying principal amounts. Interest rate caps and floors generally involve the payment of a one-time premium to a counterparty who, if interest rates rise or fall above or below a predetermined level, will make payments to the Company at an agreed upon rate for the term of the agreement until such time as interest rates fall below or rise above the cap or floor level. During the first quarter of 1995, the Bank terminated interest rate swap agreements with a notional amount of $700 million, resulting in a deferred gain of $1.2 million, which was fully amortized in 1995. Also, during the fourth quarter of 1995, the Bank terminated the remaining interest swap agreements with a notional amount of $446.7 million and as a result recorded a deferred loss of $3.2 million being amortized over the original term of the interest swap agreements. There were no outstanding interest rate swap agreements at June 30, 1996. 14 The following table sets out the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of June 30, 1996. "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 and based on certain assumptions, including those stated in the notes to the table. MATURITY AND RATE SENSITIVITY ANALYSIS
AS OF JUNE 30, 1996 MATURITY OR REPRICING --------------------------------------------------------------------------------------- WITHIN 3 4-12 1-5 6-10 OVER 10 MONTHS MONTHS YEARS YEARS YEARS TOTAL ---------- ---------- --------- --------- --------- ------------ INTEREST-EARNING ASSETS: Cash................................... $ 13,973 $ -- $ -- $ -- $ -- $ 13,973 Investment securities(1)(2)............ 50,752 2,240 166,359 9,977 42,031 271,359 MBS(1)................................. 41,312 2,517 -- -- 3,693 47,522 Loans receivable: ARMs and other adjustables(3)........ 2,320,940 349,670 143,782 2,678 113 2,817,183 Fixed rate loans..................... 459 2,364 7,532 13,276 55,055 78,686 ---------- ----------- -------- -------- -------- ---------- Total gross loans receivable....... 2,321,399 352,034 151,314 15,954 55,168 2,895,869 ---------- ------------ -------- -------- -------- ---------- Total............................ 2,427,436 356,791 317,673 25,931 100,892 $3,228,723 ---------- ------------ -------- -------- -------- ========== INTEREST-BEARING LIABILITIES: Deposits: Checking and savings accounts(4)..... 351,960 -- -- -- -- $ 351,960 Money market accounts(4)............. 78,870 -- -- -- -- 78,870 Fixed maturity deposits: Retail customers................. 423,181 1,562,282 121,595 432 254 2,107,744 Wholesale customers............. 3,079 3,125 8,168 -- -- 14,372 ---------- ------------ -------- -------- -------- ---------- Total deposits................... 857,090 1,565,407 129,763 432 254 2,552,946 ---------- ------------ -------- -------- -------- ---------- Borrowings: FHLB advances(3)..................... 212,700 -- 20,000 -- -- 232,700 Other................................ 112,357 140,000 -- -- -- 252,357 ---------- ------------ -------- -------- -------- ---------- Total borrowings................. 325,057 140,000 20,000 -- -- 485,057 ---------- ------------ -------- -------- -------- ---------- Total.......................... 1,182,147 1,705,407 149,763 432 254 $3,038,003 ---------- ------------ -------- -------- -------- ========== REPRICING GAP............................ $1,245,289 $(1,348,616) $167,910 $ 25,499 $100,638 ========== ============ ======== ======== ======== GAP TO TOTAL ASSETS...................... 37.77% (40.91)% 5.09% .77% 3.05% ========== ============ ======== ======== ======== CUMULATIVE GAP TO TOTAL ASSETS........... 37.77% (3.14)% 1.95% 2.72% 5.77% ========== ============ ======== ======== ========
- ------------------ (1) Repricings shown are based on the contractual maturity or repricing frequency of the instrument. (2) Investment securities include FHLB stock of $50.8 million. (3) ARMs and variable rate borrowings from the FHLB system ("FHLB advances") are primarily in the shorter categories as they are subject to interest rate adjustments. (4) These liabilities are subject to daily adjustments and are therefore included in the "Within 3 Months" category. Analysis of the Gap provides only a static view of the Company's interest rate sensitivity at a specific point in time. The actual impact of interest rate movements on the Company's net interest income may differ from that implied by any Gap measurement. The actual impact on net interest income may depend on the direction and magnitude of the interest rate movement, as well as competitive and market pressures. The Company's interest rate risk is reviewed on an ongoing basis. At March 31, 1996, the latest date for which information is available, the Company's interest rate sensitivity measure was in the 5th percentile (only 10% of institutions were less sensitive) of all institutions supervised by the OTS, as measured by the OTS' interest rate risk model. Due to the Company's level of interest rate risk, the Bank would not have been required to include an interest rate risk component in its risk-based capital had the new regulation regarding such inclusion been in effect at June 30, 1996. See "-- Regulatory Capital Compliance." 15 ASSET QUALITY The Company's loan portfolio is primarily located in Southern California and is comprised principally of single family and multifamily (2 units or more) residential loans. At June 30, 1996, 19% of the Company's real estate loan portfolio consisted of California single family residences, while another 11% and 62% consisted of California multifamily dwellings of 2 to 4 units and 5 or more units, respectively. At June 30, 1995, 20% of the Company's real estate loan portfolio consisted of California single family residences while another 11% and 61% consisted of California multifamily dwellings of 2 to 4 units and 5 or more units, respectively. The performance of the Company's multifamily and commercial loan portfolios has been adversely affected by Southern California economic conditions. These portfolios are particularly susceptible to the potential for further declines in the Southern California economy, such as increasing vacancy rates, declining rents, increasing interest rates, declining debt coverage ratios, and declining market values for multifamily and commercial properties. In addition, the possibility that investors may abandon properties or seek bankruptcy protection with respect to properties experiencing negative cash flow, particularly where such properties are not cross-collateralized by other performing assets, can also adversely affect the multifamily loan portfolio. California has been hit particularly hard by adverse economic conditions and Southern California has experienced the brunt of the economic downturn in the state. The Southern California economy continued to be characterized by higher unemployment than the national and state averages and real estate values that, in some cases, continue to decline. There can be no assurances that these economic conditions will improve in the near future as many factors key to recovery may be impacted adversely by the Federal Reserve Board's interest rate policy as well as other factors. Consequently, rents and real estate values may not stabilize, which may affect future delinquency and foreclosure levels and may adversely impact the Company's asset quality, earnings performance and capital levels. 16 During the second quarter of 1996, total delinquent loans increased $8.0 million, or 12.0%, from March 31, 1996. The following table presents loan delinquencies by number of days delinquent and by property type as of the dates indicated. All assets are reported net of specific reserves and writedowns. Management believes the increase at June 30, 1996 in the 30 to 59 days delinquent category was primarily the result of the sale of servicing of the single family portfolio to an outside party which resulted in a temporary disruption of the collection process.
JUNE 30, MARCH 31, DECEMBER 31, 1996 1996 1995 --------- ---------- ------------- (DOLLARS IN THOUSANDS) Delinquencies by number of days: 30 to 59 days.......................................... 0.82%(1) 0.59% 0.43% 60 to 89 days.......................................... 0.28 0.33 0.24 90 days and over....................................... 1.52 1.37 1.74 ------- ------- ------- Loan delinquencies to net loan portfolio................. 2.62% 2.29% 2.41% ======= ======= ======= Delinquencies by property type: Single family: 30 to 59 days.......................................... $10,099 (1) $ 4,285 $ 4,283 60 to 89 days.......................................... 2,052 1,704 924 90 days and over....................................... 6,306 5,897 7,226 ------- ------- ------- 18,457 11,886 12,433 ------- ------- ------- Percent to applicable loan portfolio.................. 3.38% 2.09% 2.10% Multifamily (2 to 4 units): 30 to 59 days.......................................... 2,169 1,914 1,748 60 to 89 days.......................................... 1,508 1,735 282 90 days and over....................................... 4,453 4,951 6,671 ------- ------- ------- 8,130 8,600 8,701 ------- ------- ------- Percent to applicable loan portfolio.................. 2.50% 2.60% 2.57% Multifamily (5 to 36 units): 30 to 59 days.......................................... 8,978 8,427 5,434 60 to 89 days.......................................... 4,466 5,128 5,801 90 days and over....................................... 24,989 20,698 14,312 ------- ------- ------- 38,433 34,253 25,547 ------- ------- ------- Percent to applicable loan portfolio.................. 2.65% 2.33% 1.71% Multifamily (37 units and over): 30 to 59 days.......................................... -- 698 304 60 to 89 days.......................................... -- -- -- 90 days and over....................................... 4,019 4,720 3,190 ------- ------- ------- 4,019 5,418 3,494 ------- ------- ------- Percent to applicable loan portfolio.................. 1.27% 1.67% 1.07% Commercial and Industrial: 30 to 59 days.......................................... 2,221 1,811 958 60 to 89 days.......................................... -- 985 213 90 days and over....................................... 3,525 3,845 20,511 (2) ------- ------- ------- 5,746 6,641 21,682 ------- ------- ------- Percent to applicable loan portfolio.................. 2.67% 2.94% 9.26% Total loan delinquencies, net............................ $74,785 $66,798 $71,857 ======= ======= ======= Loan delinquencies to net loan portfolio................. 2.62% 2.29% 2.41% ======= ======= =======
- ------------------- (1) Management believes the increase at June 30, 1996 in the 30 to 59 days delinquent category was primarily the result of the sale of servicing of the single family portfolio to an outside party which resulted in a temporary disruption of the collection process. (2) Includes two loans on one hotel property with a total balance of $15.9 million. 17 The following table presents net delinquent loans at the dates indicated:
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 1996 1996 1995(1) 1995(1) 1995(1) ------------- --------- ------------- -------------- --------- (DOLLARS IN THOUSANDS) Number of days delinquent: 30 to 59 days.............. $23,467(2) $17,135 $12,727 $17,963 $ 9,567 60 to 89 days.............. 8,026 9,552 7,220 8,379 10,343 90 days and over........... 43,292 40,111 51,910 54,313 64,827 ------- ------- ------- ------- ------- Total delinquencies..... $74,785 $66,798 $71,857 $80,655 $84,737 ======= ======= ======= ======= =======
- -------------------- (1) Includes two loans on one hotel property with a total balance of $15.9 million for all 1995 periods presented. (2) Management believes the increase at June 30, 1996 in the 30 to 59 days delinquent category was primarily the result of the sale of servicing of the single family portfolio to an outside party which resulted in a temporary disruption of the collection process. Total classified assets increased $99.7 million or 45.5% from December 31, 1995, to $318.8 million at June 30, 1996. This increase was primarily due to an increase of $104.2 million in performing classified assets during the first six months of 1996 as a result of the continued implementation of the loan grading system. This enhanced grading process, started in the second half of 1995, involved a substantial portion of the loan portfolio and as a result downgraded a considerable number of loans to Special Mention or Substandard for reasons other than degradation of collateral or the borrower's ability to fully repay the debt. This increase was partially offset by a decrease in nonperforming assets ("NPAs") of $7.6 million during the first six months of 1996. The ratio of NPAs to total assets decreased from 2.16% at December 31, 1995, to 1.94% at June 30, 1996. This decrease is primarily due to reduced levels of nonperforming loans ("NPLs") at June 30, 1996, compared to December 31, 1995. This level of classified assets continues to cause management concern and will continue to receive specific attention. See "-- Accelerated Asset Resolution Plan." All assets and ratios are reported net of specific reserves and writedowns unless otherwise stated. The following table presents asset quality details at the dates indicated:
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 1996 1996 1995(1) 1995(1) 1995(1) ------------- --------- ------------- -------------- --------- (DOLLARS IN THOUSANDS) NPAs by Type: NPLs.............................. $ 43,292 $ 40,111 $ 51,910 $ 55,114 $ 64,944 REO, net of REO general valuation allowance ("GVA")................ 20,519 23,533 19,521 37,550 27,808 -------- -------- -------- -------- -------- Total NPAs....................... $ 63,811 $ 63,644 $ 71,431 $ 92,664 $ 92,752 ======== ======== ======== ======== ======== NPAs by Composition: Single family residences.......... $ 9,108 $ 9,461 $ 10,178 $ 12,396 $ 10,627 Multifamily 2 to 4 units.......... 7,750 10,197 9,269 11,266 10,593 Multifamily 5 units and over...... 37,730 34,202 25,923 36,956 37,987 Commercial and other.............. 9,923 10,184 28,361 32,046 33,545 REO GVA........................... (700) (400) (2,300) -- -- -------- -------- -------- -------- -------- Total NPAs....................... 63,811 63,644 71,431 92,664 92,752 Total troubled debt restructurings ("TDRs")......................... 57,079 53,745 32,691 47,340 47,991 -------- -------- -------- -------- -------- Total TDRs and NPAs.............. $120,890 $117,389 $104,122 $140,004 $140,743 ======== ======== ======== ======== ======== Classified Assets: NPAs.............................. $ 63,811 $ 63,644 $ 71,431 $ 92,664 $ 92,752 Performing classified loans....... 251,847 222,279 147,646 88,337 74,140 Other classified assets........... 3,100 2,979 -- -- -- -------- -------- -------- -------- -------- Total classified assets.......... $318,758 $288,902 $219,077 $181,001 $166,892 ======== ======== ======== ======== ======== Classified Asset Ratios: NPLs to total assets.............. 1.31% 1.22% 1.57% 1.63% 1.88% NPAs to total assets.............. 1.94% 1.94% 2.16% 2.74% 2.68% TDRs to total assets.............. 1.73% 1.64% 0.99% 1.40% 1.39% NPAs and TDRs to total assets..... 3.67% 3.58% 3.16% 4.14% 4.06% Classified assets to total assets. 9.67% 8.81% 6.64% 5.35% 4.82% REO to NPAs....................... 32.16% 36.98% 27.33% 40.52% 29.98% NPLs to NPAs...................... 67.84% 63.02% 72.67% 59.48% 70.02%
- ----------------- (1) Includes two loans on one hotel property with a total balance of $15.9 million for all 1995 periods presented. 18 Direct costs of foreclosed real estate operations totaled $1.2 million and $1.4 million for the three months ended June 30, 1996, and 1995, respectively, and $3.0 million for both the six months ended June 30, 1996 and 1995. The following table provides information about the change in the book value and the number of properties owned and foreclosed for the periods indicated:
AT OR FOR THE QUARTER AT OR FOR THE SIX ENDED JUNE 30, MONTHS ENDED JUNE 30, ---------------------- ----------------------- 1996 1995 1996 1995 ------- ------- -------- ------- (DOLLARS IN THOUSANDS) REO net book value....................................... $20,519 $27,808 $20,519 $27,808 (Decrease) increase in REO for the period................ $(3,014) $ 6,458 $(1,302) $13,693 Number of real properties owned.......................... 120 128 120 128 (Decrease) increase in number of properties owned for the period.......................................... (11) 55 11 64 Number of properties foreclosed for the period........... 53 91 122 129 Gross book value of properties foreclosed................ $15,819 $25,756 $36,383 $42,498 Average gross book value of properties foreclosed........ $ 298 $ 283 $ 298 $ 329
19 The following table summarizes the Company's reserves, writedowns and certain coverage ratios at the dates indicated:
JUNE 30, DECEMBER 31, JUNE 30, 1996 1995 1995 -------- ----------- -------- (DOLLARS IN THOUSANDS) Loans: GVA................................................................. $32,053 $48,921 $40,000 Specific reserves................................................... 41,669(1) 40,514 22,955 ------- ------- ------- Total allowance for estimated losses.............................. $73,722 $89,435(2) $62,955 ======= ======= ======= Writedowns (3)...................................................... $ 316 $ 316 $ 322 ======= ======= ======= Total allowance and loan writedowns to gross loans.................. 2.54% 2.96% 2.01% Total loan allowance to gross loans (3)............................. 2.53% 2.95% 2.00% Loan GVA to loans (4)............................................... 1.13% 1.64% 1.28% Loan GVA to NPLs.................................................... 74.04% 94.24% 61.59% NPLs to total loans................................................. 1.54% 1.77% 2.11% Real Estate Owned: REO GVA............................................................. $ 700 $ 2,300 $ -- Specific reserves................................................... 3,050 1,192 832 ------- ------- ------- Total allowance for estimated losses.............................. $ 3,750 $ 3,492 $ 832 ======= ======= ======= Writedowns (3)...................................................... $17,321 $17,584 $19,937 ======= ======= ======= Total REO allowance and REO writedowns to gross REO................. 50.66% 51.92% 42.75% Total REO allowance to gross REO (5)................................ 15.45% 15.17% 2.91% REO GVA to REO (4).................................................. 3.30% 10.54% --% Total Loans and REO: GVA................................................................. $32,753 $51,221 $40,000 Specific reserves................................................... 44,719 41,706 23,787 ------- ------- ------- Total allowance for estimated losses.............................. $77,472 $92,927 $63,787 ======= ======= ======= Writedowns (3)...................................................... $17,637 $17,900 $20,259 ======= ======= ======= Total allowance and writedowns to gross loans and REO............... 3.22% 3.60% 2.62% Total allowance to gross loans and REO (4).......................... 2.64% 3.04% 2.00% Total GVA to loans and REO.......................................... 1.14% 1.70% 1.27% Total GVA to NPAs................................................... 50.77% 69.47% 43.13%
- --------------- (1) Includes specific reserves on non-mortgage loans totaling $0.02 million. (2) The allowance for estimated loan losses includes the effect of the $45 million reserve established in 1995 in connection with the adoption of the Accelerated Asset Resolution Plan. (3) Writedowns include cumulative charge-offs on outstanding loans and REO as of the date indicated. (4) Loans and REO, as applicable, in these ratios are calculated prior to their reduction for loan and REO GVA, respectively, but are net of specific reserves and writedowns. (5) Net of writedowns. 20 The following schedules summarize the activity in the Company's allowances for estimated loan and real estate losses:
QUARTER ENDED JUNE 30, ----------------------------------------------------------------------------- 1996 1995 ------------------------------------- ------------------------------------ REAL ESTATE REAL ESTATE LOANS OWNED TOTAL LOANS OWNED TOTAL ---------- ------------ ---------- ---------- ------------ --------- (DOLLARS IN THOUSANDS) Balance on April 1, .......... $ 81,430 $ 3,093 $ 84,523 $ 62,834 $ 2,029 $ 64,863 Provision for losses......... 3,905 579 4,484 11,131 1,153 12,284 Charge-offs.................. (10,582) (1,904) (12,486) (11,923) (2,350) (14,273) Allocation from GVA to REO... (1,982) 1,982 -- -- -- -- Recoveries and other......... 951 -- 951 913 -- 913 -------- ------- -------- -------- ------- -------- Balance on June 30,........... $ 73,722 $ 3,750 $ 77,472 $ 62,955 $ 832 $ 63,787 ======== ======= ======== ======== ======= ======== SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------------------- 1996 1995 ------------------------------------- ------------------------------------ REAL ESTATE REAL ESTATE LOANS OWNED TOTAL LOANS OWNED TOTAL ---------- ------------ ---------- ---------- ------------ ---------- (DOLLARS IN THOUSANDS) Balance on January 1, ........ $ 89,435 $ 3,492 $ 92,927 $ 67,202 $ 2,318 $ 69,520 Provision for losses......... 7,805 1,247 9,052 15,151 1,544 16,695 Charge-offs.................. (22,704) (3,295) (25,999) (21,396) (3,030) (24,426) Allocation from GVA to REO... (2,306) 2,306 -- -- -- -- Recoveries and other......... 1,492 -- 1,492 1,998 -- 1,998 -------- ------- -------- -------- ------- -------- Balance on June 30,........... $ 73,722 $ 3,750 $ 77,472 $ 62,955 $ 832 $ 63,787 ======== ======= ======== ======== ======= ========
The following table details the activity affecting specific loss reserves for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1996 ------------------------------------ ------------------------------------- REAL ESTATE REAL ESTATE LOANS OWNED TOTAL LOANS OWNED TOTAL ---------- ------------ --------- -------- ------------ ---------- (DOLLARS IN THOUSANDS) Balance at beginning of period........................ $ 43,228 $ 2,693 $ 45,921 $ 40,514 $ 1,192 $ 41,706 Allocations from GVA to specific reserves........... 9,023 2,261 11,284 23,859 5,153 29,012 Charge-offs.................. (10,582) (1,904) (12,486) (22,704) (3,295) (25,999) -------- ------- -------- -------- ------- -------- Balance at end of period indicated..................... $ 41,669 $ 3,050 $ 44,719 $ 41,669 $ 3,050 $ 44,719 ======== ======= ======== ======== ======= ========
21 NONINTEREST INCOME (EXPENSE) Noninterest income has three major components: (a) noninterest income from ongoing operations, which includes loan fee income, gains or losses on loans held for sale, fees earned on the sale of securities and annuities and retail banking fees, (b) income/expenses associated with REO, which includes both the provision for real estate losses as well as income/expenses incurred by the Company associated with the operation of its REO properties and (c) gains and losses on the sales of loan servicing, investment securities and mortgage-backed securities. Items (b) and (c) can fluctuate widely, and could therefore mask the underlying fee generating performance of the Company on an ongoing basis. Net noninterest income decreased by $3.3 million from net noninterest income of $4.2 million in the second quarter 1995 to net noninterest income of $0.9 million in the second quarter 1996. The major components of this decrease are: (a) net gains on loan sales decreased in the second quarter of 1996 by $0.9 million from the second quarter of 1995; (b) net gains on sales of mortgage- backed securities decreased in the second quarter of 1996 by $1.0 million from the 1995 second quarter and (c) net gains on securities activities in the second quarter of 1996 decreased by $1.9 million from the 1995 second quarter. The increased sales activity in loans, mortgage-backed securities and investment securities in 1995 was primarily for regulatory capital maintenance purposes. This was partially offset by decreased real estate provisions and costs of $0.7 million as a result of decreased levels of REO properties. Net noninterest income decreased by $9.3 million from net noninterest income of $10.5 million in the six months ended June 30, 1995 to net noninterest income of $1.2 million in the six months ended June 30, 1996. The major components of this decrease are: (a) other noninterest income (expense) decreased by $4.0 million as a result of a net gain of $4.3 million realized from the sale of $435.8 million in rights to service loans for others in the first quarter of 1995, with no comparable amounts in 1996; (b) loan service fees decreased by $1.1 million in the first six months of 1996 from the 1995 six month period primarily as a result of the sale of the rights to service loans in the first quarter of 1995; (c) net gains on loan sales decreased in the first six months of 1996 by $0.6 million from first six months of 1995; (d) net gains on sales of mortgage-backed securities decreased in the first six months of 1996 by $1.0 million from the 1995 six month period and (e) net gains on securities activities in the first six months of 1996 decreased by $2.9 million from the 1995 six month period. The increased sales activity in loans, mortgage-backed securities and investment securities in 1995 was primarily for regulatory capital maintenance purposes. This was partially offset by decreased real estate provisions and costs of $0.3 million as a result of decreased levels of REO properties. OPERATING EXPENSES Operating expenses decreased by $2.5 million to $16.5 million for the second quarter 1996 compared to $19.0 million for the second quarter 1995. The change was primarily due to (a) a $1.8 million decrease in personnel and benefit expense due to a decline of 177 or 26.0% in the three month average number of full-time equivalent employees; (b) a decrease of $0.5 million in occupancy costs; (c) a decrease of $0.6 million in marketing expenses and (d) a decrease of $0.3 million in office-related expenses. These favorable variances were partially offset by an increase of $0.7 million in professional services and other costs. Operating expenses decreased by $5.0 million to $33.2 million for the six months ended June 30, 1996 compared to $38.2 million for the same six months of 1995. The change was primarily due to (a) a $4.2 million decrease in personnel and benefit expense due to a decline of 178 or 25.5% in the six month average number of full-time equivalent employees; (b) a decrease of $0.7 million in occupancy costs; (c) a decrease of $0.9 million in marketing expenses and (d) a decrease of $0.5 million in office-related expenses. These favorable variances were partially offset by an increase of $1.3 million in professional services and other costs. Decreased operating expenses resulted in a decrease in the annualized operating expense ratio to 2.00% for the six months ended June 30, 1996 from 2.07% for the same period in 1995, notwithstanding the decrease in total average asset size of the Company (from $3.7 billion for the six months ended June 30, 1995 to $3.3 billion for the six months ended June 30, 1996). 22 Due to the sensitivity of the operating expense ratio to changes in the size of the balance sheet, management also looks at trends in the efficiency ratio to assess the changing relationship between operating expenses and income. The efficiency ratio measures the amount of cost expended by the Company to generate a given level of revenues in the normal course of business. It is computed by dividing total operating expense by net interest income and noninterest income, excluding infrequent items. A decrease in the efficiency ratio is favorable as it indicates that less expenses were incurred to generate a given level of revenue. The efficiency ratio improved to 68.06% for the second quarter 1996 from 95.73% for the second quarter 1995. The efficiency ratio also improved between the six months ended June 30, 1995 and June 30, 1996 from 92.46% to 67.77%. This decrease was due to increased net interest income and decreased operating expense, which were partially offset by decreased net noninterest income (expense). INCOME TAXES The Company's combined federal and state statutory tax rate is approximately 42.4% of earnings before income taxes. The effective tax rates of 2.3% and 2.4% on earnings before income taxes for the quarter and six months ended June 30, 1996, respectively, reflect the utilization of federal and state net operating loss carryforwards offset by alternative minimum tax for financial reporting purposes. The income tax provision for both the quarter and six months ended June 30, 1995, reflects only the state minimum corporation taxes. Due to the 1995 Recapitalization and the restructuring and recapitalization completed in the third and fourth quarters of 1994 (the "1994 Restructuring and Recapitalization"), the utilization in future periods of net operating loss carryforwards generated prior to these events will be limited. REGULATORY CAPITAL COMPLIANCE The FDICIA required the OTS to implement a system providing for regulatory sanctions against institutions that are not adequately capitalized. The severity of these sanctions increases to the extent that an institution's capital continues to decline. Under FDICIA, the OTS issued the PCA Regulations which established specific capital ratios for five separate capital categories as set forth below:
CORE CAPITAL TO CORE CAPITAL ADJUSTED TO TOTAL CAPITAL TOTAL ASSETS RISK-WEIGHTED TO (LEVERAGE RATIO) ASSETS RISK-WEIGHTED ASSETS ---------------- -------------- --------------------- Well capitalized................. 5% or above 6% or above 10% or above Adequately capitalized........... 4% or above 4% or above 8% or above Undercapitalized................. Under 4% Under 4% Under 8% Significantly undercapitalized... Under 3% Under 3% Under 6% Critically undercapitalized...... Ratio of tangible equity to adjusted total assets of 2% or less
The following table summarizes the capital ratios required by FDICIA for an institution to be considered well capitalized and the Bank's regulatory capital at June 30, 1996 as compared to such ratios.
TANGIBLE CAPITAL CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO TO ADJUSTED ADJUSTED RISK-WEIGHTED RISK-WEIGHTED TOTAL ASSETS TOTAL ASSETS ASSETS ASSETS --------------------- --------------------- ---------------------- ---------------------- BALANCE % BALANCE % BALANCE % BALANCE % ----------- ------- ----------- ------- ----------- -------- ----------- -------- (DOLLARS IN THOUSANDS) Fidelity's regulatory capital... $ 225,600 6.85% $ 225,900 6.86% $ 225,900 11.32% $ 250,900 12.58% Well capitalized requirement.... 98,800 3.00% 164,700 5.00% 119,700 6.00% 199,600 10.00% ---------- ----- ---------- ---- ---------- ------ ---------- ----- Excess capital.................. 126,800 3.85% $ 61,200 1.86% $ 106,200 5.32% $ 51,300 2.58% ========== ===== ========== ==== ========== ====== ========== ===== Adjusted assets (1)............. $3,293,200 $3,293,500 $1,995,500 $1,995,500 ========== ========== ========== ==========
- ---------------- (1) The term "adjusted assets" refers to the term "adjusted total assets" as defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core capital requirements, and refers to the term "risk-weighted assets" as defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital requirements. 23 The proposed changes discussed in "Recent Developments--Insurance Premium Assessments" would also have an impact on the Bank's capital ratios. As of June 30, 1996, after giving effect to the payment and deduction of an 80 basis point SAIF deposit assessment, the Bank's core and risk-based capital ratios would have been approximately 6.23% and 11.49%, respectively, and the Bank would have continued to meet the minimum numerical requirements to remain well-capitalized under the PCA Regulations. FDICIA also required the OTS and the federal bank regulatory agencies to revise their risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities. Effective January 1, 1994, the OTS incorporated an interest rate risk component into its regulatory capital rule. Under the revised rule, savings institutions with "above-normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. An institution's interest rate risk is measured by the decline in the net present value ("NPV") of its assets that would result from a hypothetical 200-basis point increase or decrease in market interest rates divided by the estimated economic value of a bank's assets, as calculated in accordance with guidelines set forth by the OTS. An institution whose measured interest rate risk exposure exceeds 2% would be required to deduct an interest rate component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of a bank's assets. That dollar amount would be deducted from a bank's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. However, the OTS has temporarily postponed the implementation of the new rule until the OTS has collected sufficient data to determine whether the rule is effective in monitoring and managing interest rate risk. No interest rate risk component would have been required to be added to the Bank's risk-based capital requirement at March 31, 1996, the latest date for which this information is available, had the rule been in effect at that time. Effective in January 1995, the OTS amended the risk- based capital standards by explicitly identifying concentration of credit risk and the risks arising from nontraditional activities, as well as an institution's ability to manage those risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. 24 The Bank is also subject to OTS capital regulations under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). These regulations require the Bank to maintain: (a) tangible capital of at least 1.5% of adjusted total assets (as defined in the regulations), (b) core capital of at least 3% of adjusted total assets (as defined in the regulations) and (c) total capital of at least 8.0% of risk-weighted assets (as defined in the regulations).
RISK-BASED TANGIBLE CAPITAL CORE CAPITAL CAPITAL --------------------- --------------------- ------------------------- BALANCE % BALANCE % BALANCE % ---------- -------- ----------- ------ ---------- ------- (DOLLARS IN THOUSANDS) Stockholders' equity (1).................... $ 224,000 $ 224,000 $ 224,000 Unrealized losses on securities............. 2,100 2,100 2,100 Adjustments Intangible assets......................... (300) -- -- Nonqualifying mortgage servicing rights... (100) (100) (100) Nonincludable subsidiaries................ (100) (100) (100) General valuation reserves................ -- -- 25,000 ---------- ---------- ---------- Regulatory capital (2)...................... 225,600 6.85% 225,900 6.86% 250,900 12.58% Required minimum............................ 49,400 1.50% 98,800 3.00% 159,600 8.00% ---------- ---- ---------- ---- ---------- ----- Excess capital.............................. $ 176,200 5.35% $ 127,100 3.86% $ 91,300 4.58% ========== ==== ========== ==== ========== ===== Adjusted assets (3)......................... $3,293,200 $3,293,500 $1,995,500 ========== ========== ==========
(1) The Bank's total stockholders' equity, in accordance with generally accepted accounting principles, was 6.80% of its total assets at June 30, 1996. (2) Both the OTS and the FDIC may examine the Bank as part of their legally prescribed oversight of the industry. Based on their examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. (3) The term "adjusted assets" refers to the term "adjusted total assets" as defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core capital requirements, and refers to the term "risk-weighted assets" as defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital requirements. CAPITAL RESOURCES AND LIQUIDITY Sales of Loans: There were no sales of loans from the held for sale portfolio in the six months ended June 30, 1996 compared to $46.4 million for the six months ended June 30, 1995. Sales of loans are dependent upon various factors, including volume of loans originated, interest rate movements, investor demand for loan products, deposit flows, the availability and attractiveness of other sources of funds, loan demand by borrowers, desired asset size and evolving capital and liquidity requirements. Due to the volatility and unpredictability of these factors, the volume of the Company's sales of loans has fluctuated significantly and no estimate of future sales can be made at this time. At June 30, 1996, the Company had no loans held for sale. Sales of loans from the held for investment portfolio would be caused by unusual events. The level of future sales, if any, is difficult to predict. During the first and second quarters of 1995, the Bank securitized $46.4 million and $66.4 million, respectively, of single-family adjustable rate mortgages through a swap of whole loans for mortgage-backed securities which are held in the Bank's available for sale portfolio. FHLB Advances: The Company had net repayments of FHLB advances of $60.0 million for the six months ended June 30, 1996. This compares to net repayments of $40.0 million for the six months ended June 30, 1995. Commercial paper: Commercial paper outstanding was increased by $49.0 million for the six months ended June 30, 1996 from December 31, 1995 and reduced by $241.4 million for the six months ended June 30, 1995 from December 31, 1994. 25 Loan payments and payoffs: Loan principal payments, including prepayments and payoffs, provided $125.0 million for the six months ended June 30, 1996 compared to $87.8 million for the same period in 1995. The Company expects that loan payments and prepayments will remain a significant funding source. Sales of securities: The sale of investment securities and MBS provided $20.2 million for the six months ended June 30, 1996 compared to $264.4 million in sales during the same period in 1995. The Company held $268.1 million in its available for sale portfolio as of June 30, 1996, compared to $126.0 million at December 31, 1995, and $144.6 million at June 30, 1995. Undrawn sources: The Company maintains other sources of liquidity to draw upon, which at June 30, 1996 include (a) a line of credit with the FHLB with $137.9 million available (assuming all of the $500.0 million commercial paper capacity is used); (b) unused commercial paper facility capacity of $401.0 million; (c) $180.0 million in unpledged securities available to be placed in reverse repurchase agreements or sold; and (d) $684.0 million of unpledged loans, some of which would be available to collateralize additional FHLB or private borrowings, or be securitized. Deposits: At June 30, 1996, the Company had deposits of $2.6 billion. The following table presents the distribution of the Company's deposit accounts:
JUNE 30, 1996 DECEMBER 31, 1995 ------------------------- ------------------------ PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL ----------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Money market savings accounts............................. $ 76,184 3.0% $ 93,901 3.6% Checking accounts......................................... 294,839 11.5 309,065 11.8 Passbook accounts......................................... 59,807 2.4 62,934 2.4 ---------- ----- ---------- ----- Total transaction accounts.............................. 430,830 16.9 465,900 17.8 ---------- ----- ---------- ----- Certificates of Deposit $100,000 and over................. 538,743 21.1 528,320 20.3 Certificates of deposit less than $100,000................ 1,583,373 62.0 1,606,649 61.9 ---------- ----- ---------- ----- Total certificates of deposit........................... 2,122,116 83.1 2,134,969 82.2 ---------- ----- ---------- ----- Total deposits......................................... $2,552,946 100.0% $2,600,869 100.0% ========== ===== ========== =====
Repurchase Agreements: From time to time the Company enters into reverse repurchase agreements by which it sells securities with an agreement to repurchase the same securities at a specific future date (overnight to 30 days). The Company deals only with dealers perceived by management to be financially strong and who are recognized as primary dealers in U.S. Treasury securities by the Federal Reserve Board. Repurchase agreements outstanding at June 30, 1996, totaled $53.4 million with no comparable amount at June 30, 1995. In the six months ended June 30, 1996, the Company borrowed net funds from repurchase agreements of $53.4 million compared to $43.6 million of funds borrowed and repaid during the six months ended June 30, 1995. Loan Fundings: The Company funded $1.4 million of gross loans (excluding the Company's refinancings) in the six months ended June 30, 1996 compared to $15.4 million in the same period of 1995. The closing of the Company's wholesale and correspondent lending operations in the fourth quarter of 1994 resulted in reduced loan fundings in 1995 and a significant decrease in loan fundings during the first six months of 1996. Contingent or potential uses of funds: The Company had no unfunded loans at June 30, 1996, compared to $2.2 million at June 30, 1995. Liquidity: OTS regulations require the maintenance of an average regulatory liquidity ratio of at least 5% of deposits and short-term borrowings. the Bank's average regulatory liquidity ratio was 6.36% and 5.28% for the six months ended June 30, 1996 and 1995, respectively. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bank was named as a defendant in a purported class action lawsuit alleging violations of federal securities laws in connection with the offering of common stock by the Bank in 1994 as part of the Bank's previously reported 1994 Restructuring and Recapitalization. The suit was filed by Harbor Finance Partners ("Harbor") in an alleged class action complaint in the United States District Court-Central District of California on July 28, 1995 and originally named as defendants the Bank, Citadel Holding Co., Richard M. Greenwood (the Bank's chief executive officer and Citadel's former chief executive officer), J. P. Morgan Securities, Inc., and Deloitte & Touche. The suit alleged that false or misleading information was provided by the defendants in connection with the Bank's 1994 Restructuring and Recapitalization and stock offering and that the defendants knew and failed to disclose negative information concerning the Bank. A motion to dismiss the original complaint was filed by the Bank, and was granted without opposition. The amended complaint did not include J. P. Morgan Securities, Inc. and Deloitte & Touche as defendants and contained some factual and legal contentions which were different from those set forth originally. On May 21, 1996, the court granted the Bank's motion to dismiss the first amended complaint, but granted leave to amend. Following the filing of a second amended complaint, the Bank filed a motion to dismiss. At a hearing on July 22, 1996, the court ruled that the case should be dismissed with prejudice and a formal order to that effect was submitted to the court for execution. Harbor lodged certain objections to the proposed order, including objections that the state law claims in the second amended complaint should not be dismissed with prejudice. The court's Order of Dismissal was entered on August 5, 1996 and provided that all claims asserted in the second amended complaint under federal law were dismissed with prejudice and those under state law were dismissed without prejudice to their renewal in state court pursuant to 28 U.S.C. (S)1367(b)(3). Both the original complaint filed by Harbor and the amended complaints raised certain issues previously pleaded in a wrongful termination and defamation action brought by William Strocco against the Bank and Citadel, which was filed in Los Angeles County Superior Court on March 9, 1995 although the nature and use of the same varies in the three pleadings. Plaintiff in the Strocco case is a former manager of the Bank's REO department who alleged, among other things, that his employment was terminated in violation of public policy and was a result of breaches of his implied employment contract and the implied covenant of good faith and fair dealing based on the notion that he objected to various aspects of the Bank's 1994 Restructuring and Recapitalization, including the selling of REO properties in bulk sales, as not in the best interests of the Bank, and that he asserted that the same were not fully disclosed to potential investors and to the OTS. Plaintiff also seeks damages for defamation and interference with contractual relationship. In July 1996, the Los Angeles Superior Court granted Citadel's motion for summary judgment to dismiss it as a defendant in the Strocco litigation. A motion for summary adjudication of issues, which is directed at the major issues of the case, has been filed by the Bank and is set for hearing on September 4, 1996. The William Strocco complaint seeks damages, including punitive damages, in an unspecified amount. The Bank believes that Mr. Strocco's claims are meritless and plans to vigorously contest them. In addition, the Bank is a defendant in several individual and purported class actions brought by several borrowers which raise similar 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 actions have been filed between July 1, 1992 and February of 1995. In one case the Bank won a summary judgement in Federal District Court. This judgment was appealed. On July 25, 1996, the Ninth Circuit Court of Appeals filed its opinion which affirmed in part, reversed in part and remanded back to the Federal District Court for further hearing. In three Los Angeles Superior Court cases, judgment in favor of the Bank was recently entered. Plaintiff has appealed in all three cases. Two other cases are pending in the Los Angeles Superior Court. The plaintiffs' principal claim is that the Bank selected an inappropriate review date to consult the index upon which the rate adjustment is based that was one or two months earlier than what was required under the terms of the notes. In a declining interest rate environment, the lag effect of an earlier review period defers the benefit to the borrower of such decline, and the reverse would be true in a rising interest rate environment. The Bank strongly disputes these contentions and is 27 vigorously defending these suits. The legal responsibility and financial exposure of these claims presently cannot be reasonably ascertained and, accordingly, there is a risk that the final outcome of one or more of these claims could result in the payment of monetary damages which could be material in relation to the financial condition or primarily results of operations of the Bank. At this point, the Bank does not believe the likelihood of such a result is probable and has not established any specific litigation reserves with respect to such lawsuits. The Bank has settled an aggregate of $18.3 million of claims asserted by a purchaser of assets from the Bank in a 1994 bulk sale transaction. Pursuant to the terms of the settlement, the Bank received $0.4 million and the parties executed mutual releases with respect to all claims arising out of that particular bulk sale transaction. In the normal course of business, the Company and certain of its subsidiaries have a number of other lawsuits or claims pending. The Company's management and its counsel believe that none of the lawsuits or claims pending will have a materially adverse impact on the financial condition or business of the Company. An adverse outcome with respect to the foregoing claims could have a material adverse effect on the Company's financial condition, results of operations and the Bank's regulatory capital. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At an annual meeting of shareholders held on April 24, 1996, the shareholders reelected George Gibbs, Jr., Lilly V. Lee, Mark K. Mason, Gordon V. Smith and W. Pendleton Tudor, to the Board of Directors of Fidelity to serve for one to three year terms, approved an Agreement and Plan of Reorganization under which all of the outstanding common stock of the Bank will be converted automatically, on a one-for-one basis, into all of the outstanding common stock of a newly formed Delaware corporation, Bank Plus, with Bank Plus becoming the holding company for the Bank, and ratified the appointment of Deloitte & Touche LLP as Fidelity's independent public accountants for 1996. Of the 18,242,465 shares of Class A Common Stock outstanding as of the record date, March 26, 1996, the following indicates the number of votes cast for and against, as well as the number of votes abstaining and broker non-votes, with respect to each of the five directors, the formation of Bank Plus as the holding company for the Bank and the ratification of Deloitte & Touche LLP:
NUMBER OF VOTES ---------------------------------------------------- BROKER FOR AGAINST ABSTAIN NON-VOTES ---------- ------- ------- --------- Proposal 1 - Election of Directors: George Gibbs, Jr. ....................................... 16,343,125 6,300 -- N/A Lilly V. Lee............................................. 16,343,025 6,400 -- N/A Mark K. Mason............................................ 16,342,925 6,500 -- N/A Gordon V. Smith.......................................... 16,343,125 6,300 -- N/A V. Pendleton Tudor....................................... 16,343,125 6,300 -- N/A Proposal 2 - Agreement and Plan of Reorganization............. 11,363,165 94,537 552 4,891,171 Proposal 3 - Ratification of Independent Public Accountants... 16,195,514 89,362 952 63,597
ITEM 5. OTHER INFORMATION Not applicable. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Sequential No. Description Page Number - ------- ----------- ----------- 2.1 Agreement and Plan of Reorganization, dated as of March 27, * 1996, among Fidelity, Bank Plus Corporation and Fidelity Interim Bank. 3.1 Amended and Restated Charter S of the Bank (incorporated by * reference to Exhibit 4.1 to the Form 10-K filed with the OTS for the fiscal year ended December 31, 1994 (Docket No. 5770)(the "1994 Form 10-K")). 3.2 Amended and Restated Bylaws of the Bank, as amended * (incorporated by reference to Exhibit 3.2 of the Form OC of which the Offering Circular dated November 9, 1995 is a part (Docket No. 5770)(the "1995 Form OC")). 3.3 Form of Certificate of Resolutions adopting the First * Supplemental Section to Section 5(B) of the Amended and Restated Charter S of the Bank relating to Series A Preferred Stock (incorporated by reference to Exhibit 3.3 to the 1995 Form OC). 4.1 Specimen of Class A Common Stock Certificate (incorporated * by reference to Exhibit 4.1 to the Form OC of which the Offering Circular dated July 12, 1994 is a part (Docket No. 5770)(the "1994 Form OC")). 4.2 Specimen of Class C Common Stock Certificate (incorporated * by reference to Exhibit 4.3 to the 1994 Form OC). 4.3 Specimen of Right to purchase Class A and Class C Common * Stock (incorporated by reference to Exhibit 4.3 of the 1995 Form OC). 4.4 Registration Rights Agreement dated as of June 30, 1994, * between Fidelity, Citadel and certain holders of Class C Common Stock of Fidelity Federal Bank (incorporated by reference to Exhibit 4.3 to the Form 10-Q filed with the OTS for the quarterly period ended on June 30, 1994 (Docket No. 5770)(the "Form 10-Q")). 4.5 Stockholders Agreement, dated as of June 30, 1994, between * Citadel and Fidelity (incorporated by reference to Exhibit 4.4 to the Form 10-Q). 4.6 Form of Indenture relating to senior notes (incorporated by * reference to Exhibit 4.6 of the 1995 Form OC). 10.1 Settlement Agreement between Fidelity, Citadel and certain * lenders, dated as of June 3, 1994 (the "Letter Agreement") (incorporated by reference to Exhibit 10.18 to the 1994 Form OC). 10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, * 1994 (incorporated by reference to Exhibit 10.2 to the Form 10-Q). 10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 * (incorporated by reference to Exhibit 10.3 to the Form 10-Q). 10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 * (incorporated by reference to Exhibit 10.4 to the Form 10-Q). 10.5 Mutual Release, dated as of August 4, 1994, between Fidelity, * Citadel and certain lenders (incorporated by reference to Exhibit 10.5 to the Form 10-Q). 10.6 Mutual Release between Fidelity, Citadel and The Chase * Manhattan Bank, NA, dated June 17, 1994, (incorporated by reference to Exhibit 10.6 to the Form 10-Q). 10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13, * 1994, between Fidelity and Colony Capital, Inc. (incorporated by reference to Exhibit 10.7 to the Form 10-Q). 10.8 Real Estate Purchase Agreement, dated as of August 3, 1994, * between Fidelity and CRI (incorporated by reference to Exhibit 10.8 to the Form 10-Q).
29
Exhibit Sequential No. Description Page Number - ------- ----------- ----------- 10.9 Loan and REO Purchase Agreement (Secondary), dated as of July 12, * 1994, between Fidelity and EMC Mortgage Corporation (incorporated by reference to Exhibit 10.9 to the Form 10-Q). 10.10 Loan and REO Purchase Agreement (Secondary), dated as of July 21, * 1994, between Fidelity and International Nederlanden (US) Capital Corporation, Farallon Capital Partners, L.P., Tinicum Partners, L.P. and Essex Management Corporation (incorporated by reference to Exhibit 10.10 to the Form 10-Q). 10.11 Purchase of Assets and Liability Assumption Agreement by and * between Home Savings of America, FSB and Fidelity, dated as of July 19, 1994 (incorporated by reference to Exhibit 10.11 to the Form 10-Q). 10.12 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity * and related loan documents (3943 Veselich Avenue)(incorporated by reference to Exhibit 10.12 to the Form 10-Q). 10.13 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity * and related loan documents (23200 Western Avenue)(incorporated by reference to Exhibit 10.13 to the Form 10-Q). 10.14 Promissory Note, dated August 3, 1994, by CRI in favor of Fidelity * and related loan documents (1661 Camelback Road)(incorporated by reference to Exhibit 10.14 to the Form 10-Q). 10.15 Guaranty Agreement, dated August 3, 1994, by Citadel in favor of * Fidelity (incorporated by reference to Exhibit 10.15 to the Form 10-Q). 10.16 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and * between Citadel and Fidelity (incorporated by reference to Exhibit 10.16 to the Form 10-Q). 10.17 Option Agreement, dated as of August 4, 1994, by and between * Fidelity and Citadel (incorporated by reference to Exhibit 10.17 to the Form 10-Q). 10.18 Executive Employment Agreement, dated as of June 2, 1995, between * Richard M. Greenwood and Fidelity (incorporated by reference to Exhibit 10.18 to the 1995 Form OC). 10.19 Amended Service Agreement between Fidelity and Citadel dated as * of August 1, 1994 (incorporated by reference to Exhibit 10.19 to the Form 10-Q). 10.20 Side letter, dated August 3, 1994, between Fidelity and CRI * (incorporated by reference to Exhibit 10.20 to the Form 10-Q). 10.21 Placement Agency Agreement, dated July 12, 1994, between Fidelity, * Citadel and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit 10.21 to the Form 10-Q). 10.22 Stock Purchase Agreement, dated as of August 3, 1994, between * Fidelity and Citadel (incorporated by reference to Exhibit 10.22 to the Form 10-Q). 10.23 Litigation and Judgement Assignment and Assumption Agreement, * dated as of August 3, 1994, between Fidelity and Citadel (incorporated by reference to Exhibit 10.23 to the Form 10-Q). 10.24 1996 Equity Incentive Plan. * 10.25 Retirement Plan for Non-Employee Directors (incorporated by * reference to Exhibit 10.26 to the 1994 Form 10-K). 10.26 Form of Severance Agreement between the Bank and each of Messrs. * Johnson and Osborne (incorporated by reference to Exhibit 10.27 to the Form 1994 10-K). 10.27 Form of Severance Agreement between the Bank and each of Messrs. * Condon, Evans, Mason, Stutz and Taylor (incorporated by reference to Exhibit 10.27 to the 1995 Form OC). 10.28 Form of Severance Agreement between the Bank and each of Messrs. * Michel and Renstrom (incorporated by reference to Exhibit 10.28 to the 1995 Form OC). 10.29 Form of Incentive Stock Option Agreement between the Bank and * certain officers (incorporated by reference to Exhibit 10.28 to the 1994 Form 10-K).
30
Exhibit Sequential No. Description Page Number - ------- ----------- ----------- 10.30 Form of Non-Employee Director Stock Option Agreement between the * Bank and certain directors (incorporated by reference to Exhibit 10.29 to the 1994 Form 10-K). 10.31 Loan and REO Purchase Agreement, dated as of December 15, 1994 * between Fidelity and Berkeley Federal Bank & Trust FSB (incor- porated by reference to Exhibit 10.30 to the 1994 Form 10-K). 10.32 Standard Office Lease-Net, dated July 15, 1994, between the * Bank and 14455 Ventura Blvd., Inc. (incorporated by reference to Exhibit 10.31 to the 1994 Form 10-K). 10.33 Loan Servicing Purchase and Sale Agreement dated March 31, 1995 * between the Bank and Western Financial Savings Bank, FSB (incorporated by reference to Exhibit 10.32 to the Form 10-Q filed with the OTS for the quarterly period ended March 31, 1995). 10.34 Supervisory Agreement dated June 28, 1995 between Fidelity and * the OTS (incorporated by reference to Exhibit 10.33 to the Form 10-Q filed with the OTS for the quarterly period ended June 30, 1995). 10.35 Form of Indemnity Agreement between the Bank and its directors * and senior officers (incorporated by reference to Exhibit 10.35 to the 1995 Form OC). 10.36 Letter from the OTS to the Bank dated December 8, 1995, termin- * ating the Supervisory Agreement as of the date of the letter (incorporated by reference to Exhibit 10.36 to the Form 10-K filed with the OTS for the fiscal year ended December 31, 1995 (Docket No. 5770)). 10.37 Loan Servicing Purchase and Sale Agreement dated May 15, 1996 between Fidelity and Western Financial Savings Bank. 27. Financial Data Schedule.
(b) Reports on Form 8-K None * Previously filed 31 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 8, 1996 /s/ Richard M. Greenwood --------------------------------------- Richard M. Greenwood President and Chief Executive Officer; Vice Chairman of the Board Date: August 8, 1996 /s/ William L. Sanders --------------------------------------- William L. Sanders Executive Vice President and Chief Financial Officer 32 EX-10.37 2 LOAN SERVICING PURCHASE AND SALE AGRMNT EXHIBIT 10.37 LOAN SERVICING PURCHASE AND SALE AGREEMENT This Loan Servicing Purchase and Sale Agreement for the purchase and sale of mortgage loan servicing rights (the "Agreement") is made and entered into as of this 15th day May, 1996 by and between Western Financial Savings Bank F.S.B., a federally chartered savings institution("Buyer"), having a place of business at 23 Pasteur, Irvine, California, 92718, and Fidelity Federal Bank F.S.B., a federally chartered bank savings institution, ("Seller"), having its principal place of business at 4565 Colorado Boulevard, Los Angeles, California 90039. W I T N E S S E T H: WHEREAS, Buyer desires to buy and Seller desires to sell the Servicing Rights Seller has in certain Mortgage Loans secured by first or second liens on real estate; WHEREAS, the Seller has (i) originated, (ii) purchased and underwritten or (iii) purchased the Servicing Rights to the Mortgage Loans and serviced the Mortgage Loans which are the subject of this Agreement and herein makes certain representations relative thereto; and WHEREAS, Buyer and Seller have agreed upon the terms set forth herein; 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 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. Section 1.01. Accounts Receivable means, including but without limitation, principal and interest Advances with respect to the Mortgage Loans, escrow account receivables and foreclosure account receivables net of escrow Advances. Section 1.02. 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. Section 1.03. Agreement means this Loan Servicing Purchase and Sale Agreement and any written, executed and delivered amendments or modifications thereto. Section 1.04. Borrower means the obligor on a mortgage note. Section 1.05. Business Day means any day of the week other than Saturday, Sunday or a legal holiday or a day or portion thereof during which the Purchaser or the Seller is not open for business. Section 1.06. Custodian is an entity acting as a Mortgage Loan document Custodian under any custodial agreement or pursuant to Agency requirements, or any successor in interest to the Custodian. Section 1.07. Cut-off 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 proceeding accounting cycle. Section 1.08. Defect means any untruth, omission or incorrectness, in any material and adverse respect, of any representation or warranty contained herein. Section 1.09. Eligible Mortgage Loan is defined in Section 2.02.01. Section 1.10. Escrows or Escrow Accounts means all escrow, impound and custodial accounts maintained under the Servicing Agreements or otherwise relating to the Mortgage Loans including, without limitation, all buydown accounts and all accounts 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. Section 1.11. Estimated Purchase Price means the amount calculated as described in Section 2.03.01 as of the Sale Date. Section 1.12. FHLMC means the Federal Home Loan Mortgage Corporation, or any successor thereto. Section 1.13. FNMA means the Federal National Mortgage Association, or any successor thereto. Section 1.14. Foreclosure Mortgages means all loans which have been either recommended to the Investor for foreclosure by Seller, or are 90 days or more past due as of the Sale Date, or are actually in foreclosure. 2 Section 1.15. Interim Period is the period between the Sale Date and the Transfer Date. Section 1.16. Investor means FNMA (Federal National Mortgage Association), or FHLMC (Federal Home Loan Mortgage Corporation), or any other person, party or entity that owns in whole or in part the Mortgage Loans. Section 1.17. Liquidate means, with reference to a Mortgage Loan, to remit to Buyer all funds necessary to remove the Mortgage Loan from the Pool and to cover out-of-pocket costs and expenses for such removal paid by Buyer with respect to such Mortgage Loan. Section 1.18. Loan Servicing Purchase and Sale Agreement means this Agreement between Buyer and Seller whereby Buyer agrees to buy from Seller and Seller agrees to sell, transfer and assign to Buyer all right, title and interest of Seller in the Servicing Rights. Section 1.19. Mortgage means a mortgage, Deed of Trust or other instrument pledging property as security for payment of a Mortgage Note. Section 1.20. Mortgage Documents means all documents specified in the Transfer Procedures set forth in Exhibit C and by reference made a part hereof, pertaining to a particular Mortgage Loan. Section 1.21. Mortgage Loan means an individual Mortgage Loan the Servicing Rights of which are sold by Seller to Buyer under this Agreement as more fully identified in Exhibit A, attached hereto and incorporated herein by reference. -- This term includes Eligible Mortgage Loans and Non-Eligible Mortgage Loans, but excludes Foreclosure Mortgages, even if the latter are identified on Exhibit A. -- Section 1.22. Mortgage Loan File means all documents relating to the 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 C. - Section 1.23. Mortgage Note means a promissory note secured by a Mortgage. Section 1.24. Mortgagor means any pledgor of the real estate encumbered as security for a Mortgage Note. Section 1.25. Non-Eligible Mortgage Loan means a loan that is not an Eligible Mortgage Loan as defined in Section 2.02.01. Section 1.26. Original Mortgage Loan Files means all documents relating to the Mortgage Loan that are necessary or customary for servicing in accordance with Investor guidelines and procedures, 3 applicable law and regulatory requirements, including, but not limited to those documents described in Exhibit C. - Section 1.27. P & I means principal and interest. Section 1.28. PMI means private mortgage insurance and refers to the companies providing such insurance. Section 1.29. Pool means a group of Mortgage Loans that collateralized a mortgage-backed security issue. Section 1.30. Private Investor means any investor, including the Seller, other than FHLMC and FNMA. Section 1.31. Purchase Price is defined in Section 2.03. Section 1.32. Records means Mortgage Loan Files, insurance files, tax records, collection records, 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. Section 1.33. Loan Repurchase or Repurchase means that Buyer shall return to Seller all Servicing Rights related to the applicable Mortgage Loan(s) and Seller shall refund to Buyer the Purchase Price of such Servicing Rights to include the following: For the first five years, after the Sale Date, Seller shall reimburse Buyer the then current unpaid principal balance times 1.142%, (or .85% if the ----- ---- loan is from Exhibit G), plus the unpaid principal balance and any premium for Mortgage Loans requested and paid for by the Investor, accrued unpaid interest paid by Buyer to Investor, plus any unpaid advances. Subsequent to the end of the five year period after the Sale Date, repurchases shall be consummated by payment of all unpaid advances then in existence, reimbursements of any premiums to Investor, the unpaid principal balance and accrued, unpaid interest paid by Buyer to Investor. Any loan repurchase shall be completed by the parties according to Investor requirements or at the latest, within 30 days after any valid written Investor repurchase demand is made by Buyer or Investor, and after Seller has exhausted any appeal processes with Investor as provided for herein. If there is no Investor on a Mortgage Loan being repurchased, the loan repurchase shall be completed within 30 days after any demand by Buyer. Section 1.34. Sale Date is defined in Section 2.04. Section 1.35. Subservicing Fee is defined in Section 3.01. Section 1.36. Servicing Rights means all of Seller's right to receive the servicing fee income and any and all ancillary or other 4 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 identified on Exhibit A, -- attached hereto and incorporated herein by reference, as of the Sale Date. Section 1.37. Settlement Date shall be defined as five (5) Business Days after Transfer Date. Section 1.38. T & I means taxes and insurance. Section 1.39. Transfer means, Buyer receives from Seller originals or copies, as applicable, of all documents as outlined on Exhibit C. Seller will insure an - orderly transfer of servicing and comply with Buyer's transfer Instructions, (Exhibit E attached hereto and incorporated herein by reference) and such other - reasonable requirements pertaining to the processing and shipping of the loan files, insurance files, tax records, collection records and any other records, including tapes and disks, that Buyer reasonably deems proper and necessary to transfer records in order to service the Mortgage Loans. Section 1.40. Transfer Date is defined in Section 2.05. ARTICLE II. Terms and Conditions Section 2.01. Purchase and Sale Buyer hereby agrees to buy from Seller and Seller hereby agrees to sell, transfer and assign to Buyer all right, title and interest of Seller in and to the Servicing Rights. Section 2.02. Eligible Mortgage Loans 2.02.01. Eligible Mortgage Loans are limited to Mortgage Loans, as of the Sale Date, which are not (i) two monthly installments or more past due, (ii) Foreclosure Mortgages, (iii) in bankruptcy, or (iv) in litigation, (except disclosed ARM litigation, Exhibit F). Any Mortgage Loan, the facts of which place it within the situation described in (i), (ii), (iii), and/or (iv) above, shall be deemed a Non-Eligible Mortgage Loan for purposes of this Agreement. Buyer shall have no obligation on the Sale Date or at any date subsequent thereto, to pay for the Servicing Rights to any Non-Eligible Mortgage Loans; however, Non-Eligible Mortgage Loans may be transferred to and accepted at Buyer's option under and subject to all terms of this Agreement. For any Mortgage Loan for which a payoff statement was issued on or prior to the Sale Date and subsequently pays off within 30 days after the Sale Date, the loan becomes ineligible and Seller will refund any Purchase 5 Price paid less servicing income earned to the Purchaser. Foreclosure Mortgages, as of the Sale Date, and the Servicing Rights to such Foreclosure Mortgages, shall not be transferred to or purchased by the Buyer, as contemplated herein or if not repurchased prior to the Transfer Dates, Seller agrees to pay Buyer the sum of $500 for each Foreclosure Mortgage transferred. Seller will exercise its best reasonable efforts to see that Foreclosure Mortgages and the Servicing rights thereto are not included in Mortgage Loans identified for transfer to Buyer. 2.02.02. Buyer reserves the right to reject, prior to the Sale Date, any Mortgage Loans where properties, based on the sole discretion of the Buyer, are delinquent or require substantial repairs due to natural disasters (including but not limited to earthquakes and floods). Section 2.03. Purchase Price and Terms of Payments 2.03.01. Purchase Price. The Purchase Price shall be the result of multiplying 1.142% by the unpaid principal balance of all Eligible Mortgage ----- Loans as defined in Section 2.02., with the exception of that group of loans identified in Exhibit G and by reference made a part hereof, totalling 687 loans for approximately $63 million which shall be priced by multiplying .85% by the ---- unpaid principal balance. Notwithstanding anything to the contrary, should any Mortgage Loan(s), the Servicing Rights of which are sold hereunder, be removed from this Agreement prior to the Sale Date, pursuant to applicable provisions of the Agreement, then, in such event, the Purchase Price shall be adjusted accordingly by Buyer using the same pricing methodology used by Buyer to calculate the original Purchase Price. 2.03.02. Terms of Payment. The payment of the Purchase Price shall be as follows: (A) 20% of the Purchase Price ("Initial Deposit") will be paid to Seller as a credit against the Purchase Price, within three (3) business days after the execution of the Purchase and Sale Agreement, by wire transfer of immediately available funds. The Initial Deposit shall be refunded to Buyer together with accrued interest at the average Federal Funds Rate as published in the Wall Street Journal during the period from payment by Buyer through refund to Buyer, in the event that the Buyer declines to consummate the transaction prior to the transfer pursuant to its rights as set forth herein. The refund shall be paid within three business days from the notice by Buyer that it is declining to consummate the transaction. The Servicing fees remitted to Buyer during the Interim Period (Sale Date through Transfer Date) shall be refunded to Seller and the Subservicing fees paid to Seller during the Interim Period shall be refunded to Buyer. 6 (B) 70% of the Purchase Price shall be paid to Seller by wire transfer of immediately available funds, at the later of five (5) business days after the Transfer Date or upon receipt of materially all records related to the servicing of the Mortgage Loans by Buyer or Buyer's designated Custodian. The respective Transfer Dates will be the dates on which the Servicing functions are actually assumed by the Buyer and is anticipated to be June 1, 1996 for the FNMA and Private Investor loans, and June 16, 1996 for the FHLMC loans. (C) The balance of the Purchase Price shall be paid to Seller by wire transfer of immediately available funds, at the later of 30 days after the Transfer Date or upon receipt of all remaining records and loan documents related to the servicing of the Mortgage Loans by Buyer or Buyer's custodian as directed in Section 3.03. If all documentation, other than recorded assignments from Seller to Buyer, has not been received within ten (10) business days after the Transfer Date, Purchaser shall be entitled to retain and pay upon receipt of such documentation, the pro-rata portion of the remaining Purchase Price as specified in the Agreement with respect to such Mortgage Loans for which not all documentation has been delivered to Buyer. Section 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 Non-Eligible 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 within ten (10) Business Days of receipt thereof. Section 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 Transfer Date, Seller shall determine with respect to the Mortgage Loans as of the Cutoff Date immediately preceding the 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 Non-Eligible 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 Transfer Date. Upon receipt of the above, Buyer 7 shall notify Seller of any discrepancies within ten (10) Business Days. Section 2.04. Sale Date The Sale Date shall be May 31, 1996, for the FNMA and FHLMC and Private ------------- Investor Servicing Rights as described in Exhibit A. Ownership of all the Servicing Rights shall be transferred to Buyer on the 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 Transfer Date. Section 2.05. Transfer Date The Transfer Date shall be the date on which the Buyer assumes the physical servicing administration of the Mortgage Loans. The transfer date shall be June ---- 1, 1996 for the FNMA and Private Investor loans and June 16, 1996 for the FHLMC - ------- ------------- loans assuming that the conditions to such transfer have been met. On the Transfer Date, Buyer shall relieve Seller of its subservicing responsibilities for the Mortgage Loans transferred. The latest date for the posting of transactions by the Seller shall be the close of business May 31, 1996 for the ------------ FNMA and Private Investor loans and June 15, 1996 for the FHLMC loans. ------------- Section 2.06. Conditions of Sale 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 Investor's written approval of the transfer of Servicing Rights and responsibilities to Buyer prior to Transfer Date. (B) The material accuracy of all Seller representations and warranties as of the Sale Date and Transfer Date. (C) Material compliance by Seller with all its obligations hereunder as of the Transfer Dates. (D) Except as disclosed in Exhibit "F", Seller has no knowledge of any litigation, legal or regulatory proceeding pending, threatened or contemplated against the Seller which would have a material adverse effect, in the Buyer's reasonable opinion, 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. 8 (E) Prior to Sale Date, Buyer's receipt of the resolution of the Board of Directors of the Seller approving the execution of the delivery and performance of this Agreement certified by the Secretary or an Assistant Secretary of the Seller (Exhibit D). - 2.06.02. In the event of the failure of any condition set forth in Section 2.06.01 prior to the Transfer Date, after notice and a thirty (30) day period during which Seller shall have the right to cure such failure, Buyer may elect to cancel and terminate this Agreement and forthwith receive refund of all sums paid to Seller including but not limited to the any deposits together 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. 2.06.03 The obligations of Seller hereunder shall be subject to the satisfaction of each of the following conditions or Seller's written waiver thereof: (A) Prior to Sale Date, Seller's receipt of the resolutions of the Board of Directors of Buyer approving the execution, delivery and performance of this Agreement certified by the Secretary or Assistant Secretary of Buyer. (B) The material accuracy of all of Buyer's representations and warranties as of the Sale Date and Transfer Date. (C) Compliance by Buyer with all of its obligations hereunder. (D) Approval by Investor to transfer the Servicing Rights to the Buyer as contemplated herein. (E) Execution of a mutually acceptable Servicing Agreement with respect to Seller's Mortgage Loans. Section 2.07. Division of Costs 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 and broker, Countrywide Servicing Exchange. 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 9 applicable and as required by Investor guidelines, regulations or requirements, or state or federal law. Seller shall record all such assignments, except those from Buyer to Investor, and deliver all unrecorded assignments to Buyer, within five (5) business days after Transfer Date, at its own expense. Prior to the Settlement 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 are to be prepared and recorded on each individual loan, in each respective county at Seller's expense. On Seller 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. 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, computer services, and related costs. Section 2.07.01 Transportation Costs 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. ARTICLE III. Covenants of Servicer Section 3.01. Servicing Duties Prior to and Subsequent to Transfer Date Seller shall subservice for Buyer, during the Interim Period, the Mortgage Loans in accordance with all applicable Investor regulations and procedures, laws and regulations, and generally accepted prudent servicing standards. During the Interim Period, Seller shall not accept, with respect to any Mortgage Loan, any payment insufficient to maintain or restore the Mortgage Loan to a state of current status, including partial payments and short payments of full P.I.T.I. except as required by applicable law or regulation, existing agreements, or Investor requirements. During the Interim Period, Buyer shall be entitled to receive all (100%) of the Servicing Fees net of the sum of curtailment interest expense on FHLMC loans less the Subservicing Fee of $5.50 ----- per loan plus ancillary income including but not limited to late charges, 10 assumption fees, and miscellaneous fees. The Servicing Fees are to be calculated and reported to the Buyer no later than the third (3rd) Business Day after the Investor cutoff. All service fees shall be paid to the Buyer and shall be paid within five (5) business days after the Investor's cutoff date. The Seller will retain all escrow balances and any benefit derived therefrom including, but not limited to, late charges collected during the Interim Period. Seller shall prepare and deliver such reports as reasonably requested by the Buyer during the Interim Period. Examples of such reports are described in 3.01.02 below. Within two (2) Business Days after the Transfer Date, Seller shall deliver to Buyer, Seller's trial balance or a substitute acceptable to Buyer of Mortgage Loans as of the Cutoff Date immediately preceding the Transfer Date and all other Records described herein if not previously delivered to Buyer as required hereunder. 3.01.01 Except as required by applicable law or regulation, Seller shall not waive any individual escrow requirements on the Mortgage Loans during the Interim Period without the express written consent of the Buyer. 3.01.02 The Seller's possession of any portion of the Mortgage Documents and Mortgage Loan Files after the Sale Date shall be at the will of the Buyer for the sole purpose of facilitating Servicing of the Mortgage Loans during the Interim Period, and such retention and possession by the Seller is in a custodial capacity only. During the Interim Period, on the terms set forth in Section 3.01 above, Seller shall deliver to Buyer, on a monthly basis for each month commencing on the Sale Date, the reports specified as investor reporting documentation requirements in Exhibit B. - Section 3.02. Investor reporting documentation and remittance requirements are specified in Exhibit B. - 1. The T&I and buydown custodial account balances shall be based on the positive escrow balance plus accrued escrow interest through the Transfer Date, less escrow advances. Seller shall deliver such funds to Buyer within five (5) business Days after the Transfer Date. 2. The P&I funds shall be paid to Buyer five (5) Business Days after the Cutoff Date immediately preceding the Transfer Date via wire transfer of immediately available funds. 3. No adjustments are to be made to the Pools and the Mortgage Loans in the Pools between the Sale Date and the Transfer Date without Buyer's written consent and Investor approval unless such adjustments are normal and customary and are made in accordance with Investor guidelines. 11 Buyer will verify the P&I, T&I and Buydown Custodial Account balances within five (5) Business Days after receipt of the supporting documentation. Any discrepancies between Buyer and Seller will be resolved within ten (10) Business Days. 4. Seller will complete all investor reporting and remitting for the activity up to and including the Transfer Date. Section 3.03. Transfer of Records. 3.03.01. At its sole expense, Seller shall deliver to Buyer all documents, files, reports and similar items as set forth in Exhibit B and Exhibit C - - attached hereto and by reference made a part hereof. All Original Mortgage Loan Files and Microfiche Jackets must be delivered to Buyer's office no later than the fifth (5th) Business Day after the respective Investor Transfer Date. Mortgage Loan Files shall be delivered to: Western Financial Savings Bank, F.S.B. 23 Pasteur Irvine, CA 92718 Attn: Paul Mattheson, 3rd Floor, Loan Service 3.03.02. 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. Custodial files for FNMA shall be delivered to: Same 3.03.03. Payments and Notices received After Transfer Date Seller and Buyer acknowledge that, during the sixty (60) day period after the 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 service fees and other servicing related income on all such payments. During the first thirty (30) 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 the next Business Day delivery, at the address for notice to Buyer. During the second thirty (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 sixty (60) day period, all such funds and 12 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 The Seller and Buyer will cause their respective service bureaus and/or EDP departments to cooperate with each other. Seller shall deliver a test tape, trial tape and an accurate conversion tape at the request of the Buyer. Seller will provide 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 respective FNMA Private Investor and FHLMC Transfer Dates, Seller shall have secured and delivered to the Buyer, the written Investor 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 Investor requirements to transfer effectively the Servicing Rights from Seller to Buyer and pay and bear any and all reasonable fees imposed by the Investor to effect the transfer. Section 3.06. Year-end Reporting Seller shall be responsible for all government and regulatory reporting pertaining to servicing activities prior to the Transfer Date including but not limited to all 1996 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 Transfer Date. Section 3.07. Interest on Escrow 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 up to the Sale Date. Within five (5) business days after the Transfer Date, Seller shall remit to Buyer a sum equal to the interest accrued on impounds as of the Sale Date along with reports 13 separately detailing the accrued but unpaid interest as of the Sale Date and as of the Transfer Date. Section 3.08. Notification to Mortgagors No later than fifteen (15) days prior to the Transfer Date, Seller shall mail to all Mortgagors, at Seller's cost and expense, a notice advising them of the occurrence of the sale contemplated hereby and when and where to make payments on and after the 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 Seller shall mail a notice to all appropriate insurance companies, with respect to the property securing each Mortgage Loan of the occurrence of the sale contemplated hereby and request the following: 3.09.01. The fire and extended coverage policy with respect to the property securing each Mortgage Loan, shall name Buyer, its successors and assigns as mortgagee. 3.09.02. The Private Mortgage Insurance companies and optional insurance companies Records reflect Buyer as servicer of the Mortgage Loans. 3.09.03. Any flood insurance policy and the catastrophe 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 Seller shall pay, or cause to be paid, prior to the Transfer Dates, all property and mortgage insurance premiums due prior to and including the Transfer Date and those due 30 days after the Transfer Date. On the 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) 14 Business Days of receipt all such insurance bills received by Seller. 3.11. Payment of Property Taxes 3.11.01. Seller shall pay or cause to be paid, on all impounded loans, prior to the 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 prior to the Transfer Date. All delinquent taxes will be advanced on those non-impounded loans with the exception of those tax installments due April 10, 1996 and December 10, 1996 and those tax installments due December 10, 1995 and April 10, 1996 for the Seller owned loans. Seller agrees to forward to Buyer within three (3) Business Days of receipt thereof of all tax bills received by the Seller. Mortgage Loans with five year pay plans for delinquent taxes are not acceptable. Mortgage Loans for which Seller is the Investor and for which Seller has entered into agreements for the repayment of advances, and five year payment plans for delinquent taxes are acceptable. 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 Transfer Dates. 3.11.03. For the first sixty (60) days following the 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 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 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 Transfer Date. 3.11.07. Seller, prior to Transfer Date, shall correctly code all conventional insured loans on its system to allow the automated transfer of such data on the 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 Transfer Date. 15 3.11.09. Seller shall cause Lereta Tax Service to perform an audit of all ------------------ loans to determine if there are any unpaid taxes outstanding as of the 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. Buyer has the option to decline to accept any Mortgage Loan that has outstanding taxes owed. 3.11.10. On the 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. Section 3.12. Assumptions Simultaneously with the delivery of the Mortgage Loan Files after the 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. No Solicitation Rights of Buyer and Seller Solicitation Prohibition From and after the Sale Date, Buyer and any of its affiliates, has the unconditional right to directly or indirectly solicit, by means of direct mail, telephonic or personal solicitation, or otherwise, the Borrowers/Mortgagors of 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. From and after the Sale Date, Seller, its agents and affiliates, shall not directly or indirectly, solicit, 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 Mortgagors/Borrowers of 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 prohibition on Seller, it is understood and agreed that promotions undertaken by Seller or any affiliate or agent 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 16 television advertisements, shall not constitute solicitation under this section. In spite of the above, Seller does not grant Buyer the right to send a solicitation that solely solicits the borrower for prepayment, refinance or modification of a Mortgage Loan which is owned by the Seller. Buyer may, however, make a solicitation that includes a solicitation for prepayment, refinance or modification on any and all Mortgage Loans owned by Seller that are subject to this Agreement, so long as such solicitation includes other types of products, services, and/or insurance offered by Buyer or any of its affiliates. Section 3.14. Powers of Attorney 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 Powers of Attorney shall expire on December 30, 1996. ----------------- Section 3.15. Escrow and Escrow Analysis 3.15.01 Seller shall refund any escrow overages (surpluses) in excess of $50 as a result of escrow analysis prior to the Transfer Date. All negative balances will be researched and analyzed prior to transfer. ARTICLE IV. Representations and Warranties Section 4.01. General Representation and Warranties of Seller Seller hereby represents and warrants that as of the Sale Date and as the Transfer Date: 4.01.01. Seller is a duly organized and validly existing federally chartered savings institution. 4.01.02. This Agreement has been duly authorized on behalf of Seller by all requisite corporate action as a valid and existing obligation of Seller, enforceable against Seller in accordance with its terms, subject to laws respecting bankruptcy, receivership, insolvency and other laws affecting creditor's rights generally. 4.01.03. Seller has good and marketable title to all the Servicing Rights, 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 17 to any other party. Neither the Mortgage Loans nor the Servicing Rights are hypothecated, assigned or pledged as collateral for any obligations of Seller, provided, however, loans for which Seller is the Investor, (exclusive of the Servicing Rights, therefor) may be hypothecated, assigned or pledged as collateral. 4.01.04. Neither the execution of this Agreement nor the consummation of this transaction results in a violation of Seller's articles of incorporation or bylaws, is a breach of or constitutes an event of default under 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. 4.01.05. 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. 4.01.06. The Seller's capital level exceeds the minimum regulatory requirements for a "well capitalized" institution as of the Sale Date. Section 4.02. Representations and Warranties of Seller Relating to the Pools and Servicing Rights: Seller represents and warrants that as of the Sale Date: 4.02.01. Seller has been duly and validly authorized to sell, assign and transfer the Servicing Rights, and the sale will be in compliance with all laws, regulations and guidelines under which Seller operates, subject to approval of such transfer by the Investors. 4.02.02. Except for the relevant servicing contracts, 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: 4.03.01. (i) The unpaid balances of the Mortgage Loans are as stated in the Mortgage Documents and Mortgage Loan Files to be delivered to Buyer. All payments received by Seller with respect 18 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 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. Except as disclosed in Exhibit "F", and by reference made a part hereof, there are no actions, claims, litigation, lawsuit 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. 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 the 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. 4.03.05. Accounts Receivable: 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. Missing Social Security Number: Forms W-8 or W-9 The Seller will, at the 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 19 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 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: 4.04.01. The Mortgage Note and the related Mortgage (or Deed of Trust) are genuine and each is a legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms. All parties to the Mortgage Note and the Mortgage had 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. The full original principal amount of the Mortgage has been advanced to the Mortgagor or paid to third parties on his behalf in accordance with Investor guidelines, regulations and requirements. 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. 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. 20 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. Each Mortgage Loan was originated by Seller or purchased by Seller from an approved third party originator or correspondent in conformity with the requirements of all applicable federal and state laws, rules or regulations governing consumer credit and truth-in-lending and Investor guidelines and requirements. Each Mortgage Loan was made in compliance with all other laws, rules and regulations pertaining thereto and there occurred no fraud by the Borrower, Mortgagor or any other party or entity. 4.04.08. 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. 4.04.09. No Mortgage Loan has been originated and/or 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. 4.04.10. Seller shall have properly conducted an escrow analysis for each Mortgage Loan during the preceding twelve month period ending on the Transfer Date in compliance with Federal, 21 State and RESPA regulations. All books and conditions with respect to each Mortgage Loan shall be 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. 4.04.11. 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. 4.04.12. All documents submitted 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. 4.04.13. Seller represents that to the best of its knowledge as of the Transfer Dates 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. 4.04.14. All Mortgage Loans have been properly serviced in all material respects in accordance with Investor guidelines, regulations and requirements. 4.04.15. Where applicable law requires the payment of interest on Escrow Accounts, all such interest has been properly accrued and credited. 4.04.16. Left blank intentionally 4.04.17. 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. 4.04.18. Each Mortgage Loan has 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. 4.04.19. All interest rate adjustments with respect to adjustable rate mortgage loans, which have converted to fixed rate mortgage loans, including periodic adjustments and the conversion adjustment, have been calculated properly and made in accordance with the terms of the related Mortgage Note. 22 4.04.20. All interest rate adjustments with respect to adjustable rate mortgage loans, have been calculated properly and made in accordance with applicable law. Section 4.05. Representations and Warranties of Buyer Buyer hereby represents and warrants as follows: 4.05.01. Buyer is a duly organized federally chartered savings institution, and validly existing at 23 Pasteur, Irvine, California, 92718, in good standing. Buyer is in good standing in each jurisdiction in which the failure to be in such good standing would have a material adverse effect on the consummation of the transaction contemplated hereby or the Pools, Mortgage or Servicing Rights. 4.05.02. This Agreement has been duly authorized by all requisite corporate and regulatory action as deemed necessary and is a valid and existing obligation of Buyer and is enforceable against Buyer in accordance with its terms, subject to laws respecting bankruptcy, receivership, insolvency and other laws affecting creditors' rights generally. 4.05.03. The execution and consummation of this transaction do not result in a violation of Buyer's articles of incorporation or bylaws, and do not result in a breach of or constitute an event of default under any contract, loan agreement, indenture,mortgage or other undertaking to which Buyer is subject nor violate any outstanding judgment, order, injunction, law rule or regulation to which Buyer is subject or by which it or it's properties may be bound. 4.05.04. Buyer, is an approved Seller-Servicer, in good standing with the Investors and has requisite financial criteria and adequate resources necessary to complete this transaction. 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. The Buyer will service the Mortgage Loans in compliance with all applicable FNMA/FHLMC and PMI company guidelines and regulations and shall comply with all applicable state laws after the Transfer Date. 4.05.07. 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 23 connection with the execution and delivery of this Agreement or the performance by Buyer hereunder, except approval from the investor for the transfer of the Servicing Rights to Buyer. 4.05.08. The Buyer's capital level is in full compliance with all Regulatory and Investor requirements as of the Sale Date. Section 4.06. Survival 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. ARTICLE V. 5.01. Indemnification of Buyer by Seller 5.01.01. Seller hereby agrees to indemnify and hold Buyer 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 otherwise, resulting from any state of facts and or conditions existing on or before the Transfer Dates involving the Servicing Rights, Mortgage Loans and/or Pools 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 not Seller had reason to believe or know that such fraud occurred or existed. (B) Any and all Buyer's Claims involving misrepresentations, breach of warranty or nonfulfillment of any agreement or duty of Seller involving the Pools, Mortgage, Mortgage Loans, or this Agreement and based upon a state of facts existing on or before the Transfer Dates. (C) Any and all Buyer's Claims involving unfair collection practices, failure to disclose, deceptive acts or practices, breach 24 of contract, the collection of usurious interest and the like, pertaining to the subject matter of this Agreement, and based upon a state of fact existing on or before the Transfer Date. (D) 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 before the Transfer Date. (E) Any and all actions of prior owners or servicers of the Mortgage Loans and of Seller, its employees, representatives and agents, whether by omission, acts, or commission, pertaining to the subject matter of the Agreement and occurring prior to the Transfer Date which materially adversely affect the enforceability of the instruments securing a Mortgage Loan or the collectability of the Mortgage Notes. (F) Any misrepresentation made by Seller pursuant to this Agreement, or in any schedule, statement or certificate furnished by Seller pursuant to this Agreement. (G) 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. (H) 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. 5.01.02. Seller has disclosed to Buyer that it is a defendant in several individual and purported class actions concerning the manner in which Seller has adjusted the applicable interest rate or other terms on adjustable rate Mortgage Loans and that there is a potential for additional similar or different claims or actions to be made or brought with respect to other adjustable rate Mortgage Loans (collectively, the "ARM Claims"). Seller hereby agrees to indemnify, defend, and hold harmless Buyer and Buyer's parent companies, subsidiaries, affiliates, officers, directors, employees and agents from and against all ARM Claims and any and all losses, liabilities, damages, punitive damages, assessments, liabilities, judgments, settlements, fees, fines, court costs, attorneys' fees and other costs and expenses of any nature whatsoever associated herewith, including, without limitation, all ARM Claims that directly or indirectly arise from, are associated with or relate to (a) Seller's servicing of the adjustable rate Mortgage Loans on or before the Transfer Date(s) and (b) after the Transfer Date(s), Buyer continuing to service the adjustable rate Mortgage Loans substantially in the same manner as Seller did on or before the Transfer Date(s), provided that Buyer provides reasonably prompt notice of any such ARM Claims to Seller and provides reasonable 25 cooperation to Seller and its counsel in the conduct of any defense. Seller shall have the sole right and responsibility to select counsel to defend the ARM Claims and such counsel may jointly represent Seller and Buyer, provided that any such counsel shall be reasonably acceptable to Buyer. Buyer acknowledges at the present time that it does not object to the following law firms: Gibson, Dunn and Crutcher: Manatt, Phelps & Phillips and Sullivan & Cromwell. Anything herein to the contrary notwithstanding, Seller's obligation to indemnify, defend and hold harmless Buyer with respect to the ARM Claims shall include, without limitation, (i) any restitution amounts ordered or requested by any regulatory agency with authority over Seller or Buyer as well as any civil money penalties and other costs and expenses incurred by Buyer and (ii) all audit, adjustment and correction, documentation and other expenses and costs relating to the resolution of any ARM Claim. The parties acknowledge, recognize and agree that the Seller's manner of servicing of the adjustable rate Mortgage Loans on or before the Transfer Date(s) shall, as a practical matter, require the Buyer to service such Mortgage Loans in a similar fashion after the Transfer Date(s). Accordingly, the parties agree that the provisions of this section 5.01.02 shall apply notwithstanding the fact that Buyer continues, after the Transfer Date(s), to service the adjustable rate Mortgage Loans in substantially the same manner as Seller did on or before the Transfer Date(s). Seller's indemnification obligation under this Section 5.01.02 shall be a payment obligation and not merely a reimbursement obligation, it being understood that the parties have a "contrary intention" with respect to the provisions of paragraph 2 of Section 2778 of the California Civil Code as in effect on the date of this Agreement. 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. 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 proceedings 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, and 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 did not exist prior to the Transfer Date, involving the Servicing Rights, Mortgage Loans and/or Pools subject to this Agreement, whether or ont such Seller's Claims relate to the Servicing Rights, or this Agreement including but not limited to: 26 (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 Transfer Date, which did not exist prior to the Transfer Date. (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 Transfer Date, which did not exist prior to the Transfer Date, which materially adversely affect the enforceability of the instruments securing a Mortgage Loan or the collectability of the Mortgage Notes. 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 Buyer's and Seller's 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 27 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 which may give rise to any obligation of Buyer, and, at its election, to direct the defense thereof at its own expense. 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. 5.03.04 Should Seller fail to meet the requirements to qualify as an adequately capitalized institution under FDICIA, (Federal Deposit Insurance Corporation Improvement Act) or fail to meet any other minimum regulatory capital requirement to which it is subject, Buyer may offset against any amounts due to Seller hereunder with respect to any Mortgage Loans owned by Seller and serviced by Buyer after the Transfer Date(s) ("Seller Owned Mortgage Loans") such amounts as may be owed by Seller to Buyer under Section 5.01 of this Agreement. Seller hereby grants to Buyer a security interest in and to all amounts due to Seller hereunder with respect to the Seller Owned Mortgage Loans as further security for Seller's performance of all of Seller's obligations under Section 5.01 of this Agreement. In the event of any default by Seller in the performance of any of its obligations under Section 5.01 of this Agreement, Buyer may exercise any of the remedies provided to a secured creditor under the California Commercial Code. Buyer's right of offset under this Section 5.03.04 and the security interest created by this Section 5.03.04 shall survive any sale, transfer, pledge or other disposition of all or any interest in any Seller Owned Mortgage Loan, and Seller shall so notify, in writing, each purchaser of all or any such interest. Seller shall require each such purchaser and its 28 successors) to similarly notify subsequent purchasers. Seller shall require each such purchaser to assume, in writing, joint and several liability, for all of Seller's obligations under Section 5.01 of this Agreement. Seller shall require each such purchaser (and its successors) to similarly require subsequent purchasers to assume in writing, joint and several liability under Section 5.01 of this Agreement. No such assumption of liability shall release Seller or any subsequent purchaser from liability under section 5.01 of this Agreement. ARTICLE VI. Loan Repurchase Section 6.01. Seller's Repurchase After Sale Date. If Buyer should be required or demanded to repurchase any Mortgage Loan by any Investor after the Sale Date for reasons resulting from improper, incorrect, missing and or fraudulent documentation related to a Mortgage Loan, of a breach of a Seller's representation(s) and warranties hereunder or Seller's improper pooling, errors, omissions, origination or servicing of such Mortgage Loan prior to the Transfer Date or for reasons relating to the certification status of the pools, Seller, at the request of Buyer, shall provide Buyer with funds for the repurchase of said Mortgage Loan 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 for the first five years, after the Sale Date, be equal to the then current unpaid principal balance times 1.142% plus ------ the unpaid principal balance and any premium for the Mortgage Loan requested and paid for by the Investor, accrued unpaid interest paid by Buyer to Investor, plus any unpaid advances. Subsequent to the end of the five year period after the Sale Date, repurchases would be consummated by payment of all unpaid advances then in existence, reimbursement of any premiums to Investor, the unpaid principal balance and accrued, unpaid interest paid by Buyer to Investor. Section 6.02 Seller' Right to Contest Repurchase Seller shall have the right to contest any repurchase request of any Investor, pursuant to the Investor requirements and within the Investor time limits as they may be extended. However, if Buyer, pursuant to an Investor request, has to repurchase or 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' request. Section 6.03 Buyer's re-assignment of Mortgage Loan to Seller 29 Promptly upon any repurchase of a Mortgage Loan by Buyer using Seller funds pursuant to 6.01, Buyer shall take all appropriate actions, execute all necessary instruments and documents to re-assign such Mortgage Loan and related Servicing Rights to Seller and return all Mortgage Loan Files and Records to Seller. Section 6.04 Buyer's Repurchase 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 the repurchase of said Mortgage Loan. Section 6.05 Seller's Cure Rights Within 30 days of Seller's receipt of a notice from Buyer of a claim under Article V or a repurchase or indemnity request by an investor, Seller shall cure the condition or state of facts giving rise to such claim or if a cure cannot reasonably be completed such within such 30 days 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 days 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 This Agreement constitutes 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. 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 30 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. Severability If any portion of this Agreement is declared by a court of competent jurisdiction to be invalid or unenforceable, such declaration shall not affect the validity of the remaining provisions. Section 7.04. Successors This Agreement shall inure to the benefit of and be binding upon the heirs, representatives, successors and assigns of each party. Section 7.05. Governing Law 7.05.01. 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 7.06. Assignability Buyer shall have the right, without Seller's consent, to assign and transfer this Agreement and all rights, obligations, benefits, privileges and Agreements incident of Buyer provided, however, Buyer shall not be permitted to assign and transfer this Agreement without Seller's consent, such consent not to be unreasonably withheld, prior to the payment by Buyer to Seller of 100% of the purchase price, and provide further that the Servicing Rights for Mortgage Loans for which Seller is the Investor may not be assigned without Seller's consent, such approval not to be unreasonable withheld. Section 7.07. Notices Any notice provided for or permitted hereunder shall be in writing and sent by certified mail, return receipt requested, addressed to the parties at their respective addresses set forth in the preamble hereof. All such notices shall be addressed to the attention of the Senior Vice President of Seller and 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. Failure to conform to the requirement that mailing be done by certified mail shall not defeat the effectiveness of notice actually received by the addressees, but such notice shall 31 be deemed given only upon such actual receipt. Address for notices may be changed by giving notice hereunder. Section 7.08. Attorney Fees, Costs, etc. 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. Section 7.09. Independent Contractor 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 7.10. Broker's Fees 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. The parties acknowledge that a fee is due Countrywide Servicing Exchange and that Seller shall pay such fee. Section 7.11 Captions Section captions in this Agreement are for ease of reference only and shall be given no substantive or restrictive meaning or significance whatsoever. Section 7.12. Counterparts 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 7.13. Exhibits to the Agreement The exhibits to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement. Section 7.14. Transfer Standards 32 The parties each agree to use its best efforts to execute the transfer of the Servicing Rights contemplated in accordance with MBA's "Servicing Transfer Standards of Practice", applicable laws and regulations, and Federal guidelines. Transfer procedures required by Buyer and to be followed by Seller are attached hereto as Exhibit E and by reference made a part hereof. Section 7.15. Documentation 7.15.01. Prior to the 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 Transfer Date. 7.15.02. Not later than the 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 Transfer Date. 7.15.03. 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. 7.15.04. 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. 7.15.05. Seller shall provide Buyer a schedule indicating the location of all the original documents described in Addendum C for the Mortgage Loans not later than the Transfer Date. Section 7.16. Termination 33 In the event that, (i) the Seller is unable to obtain the necessary Investor approvals to transfer the Servicing Rights to the Buyer, and such Mortgage Loans that cannot be transferred, exceed 5% of the total, or (ii) the Seller is unable to transfer the Servicing Rights as a result of actions taken by regulatory authorities with appropriate jurisdiction, this Agreement shall terminate. Upon such termination, (i) all right, title and interest in the Servicing Rights 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 (iii) the Buyer shall return to the Seller all Mortgage Documents and Records previously delivered to Buyer by Seller at Seller's expense, (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 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. IN WITNESS WHEREOF, each of the undersigned parties to this Agreement has cause this Agreement to be duly executed by one of its duly authorized officers as of this 15th day of May, 1995. ---- --------- Fidelity Federal Bank SELLER: /s/ Julie Chacon -------------------------- Julie Chacon Senior Vice President ATTEST: Name: /s/ Robert Dalton --------------------------- Its: Asst Secretary ---------------------------- Western Financial Savings Bank, BUYER: /s/ Barbara J. Darling --------------------------- Barbara J. Darling Vice President Loan Administration ATTEST: Name: /s/ Tina Dunstan -------------------------- Its: Asst Vice President --------------------------- 34 EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 0 59,226 0 6,526 0 7,000 0 0 0 268,129 0 50,752 0 0 0 2,883,582 0 73,722 0 3,296,633 0 2,552,946 0 265,056 0 31,882 0 220,001 0 51,750 0 0 0 182 0 174,816 0 3,296,633 54,096 110,276 4,733 7,959 727 1,375 59,556 119,610 29,787 60,822 8,003 15,184 21,766 43,604 3,905 7,810 235 152 18,353 37,435 2,275 3,846 2,275 3,846 0 0 0 0 2,222 3,753 .04 .04 .04 .04 2.66 2.68 0 43,292 0 0 0 57,079 0 251,847 81,430 89,435 12,564 25,010 951 1,492 73,722 73,722 73,722 73,722 0 0 32,053 32,053
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