Bank Plus Corporation and its subsidiaries, which include Fidelity Federal Bank, FSB reported that for the fourth quarter of 1999 the Company incurred a net loss of $8.9 million, or $0.45 per diluted share, compared to a net loss of $2.4 million, or $0.12 per diluted share, for the 1999 third quarter, which included a $5.9 million gain from sale of deposits, and net income of $1.1 million, or $0.06 per share for the 1998 fourth quarter.
For the year ended December 31, 1999 the Company incurred a net loss of $24.9 million, or $1.28 per diluted share, compared to a net loss of $56.3 million, or $2.90 per diluted share, for the year ended December 31, 1998. The net losses for 1998 and 1999 were related to the Bank’s credit card operations.
Mark K. Mason, President and Chief Executive Officer, said: “While we continue to make progress in reducing the losses from our credit card operations, the net earnings from the core bank operations, which increased by more than 75% over the prior year, remain insufficient to absorb all of the losses in the credit card operations. Accordingly, to accelerate our return to overall profitability, the Board of Directors has adopted a business plan which provides for selling approximately one fourth of our deposit base and utilizing the capital raised from these deposit sales to mitigate the impact of credit card operating losses on the Company’s future results of operations. In this regard, management and the Board of Directors are exploring transactions involving the disposition of the credit card portfolio and servicing operations. While we regret the adverse impact that deposit sales have on the value of our retail franchise and future earnings, these potential transactions would have obvious benefits and the deposit premiums we expect to receive are strong evidence of the value the market places on our retail branch franchise.”
Mr. Mason continued, “Our overall goal remains to clean-up the credit card problems, resolve outstanding litigation, return the Company to overall profitability and continue to seek a sale of the Company on terms favorable to shareholders.”
Results of Operations
The following tables show the results of operations for the core bank and credit card operations for the periods indicated. In computing net interest income, funding costs are allocated based on a rolling twelve month average of the one year, fixed rate, Federal Home Loan Bank (“FHLB”) advances. All indirect general and administrative expense not specifically identifiable with either of the two business segments is allocated on the basis of direct operating expenses.
Fourth Quarter 1999 Results of Operations
Net Estimated Non (Loss)
Interest Loan Interest Operating from
Income Losses Income ExpenseOperations
(Dollars in thousands)
December 31, 1999:
Core Bank operations $16,525 $(2,824) $3,393 $17,635 $5,107
Credit card operations 7,755 19,324 4,430 6,814 (13,953)
Total $24,280 $16,500 $7,823 $24,449 $(8,846)
September 30, 1999:
Core Bank operations $17,548 $(3,452) $9,222(a) $16,617 $13,605
Credit card operations 9,008 20,952 5,161 9,215 (15,998)
Total $26,556 $17,500 $14,383 $25,832 $(2,393)
December 31, 1998:
Core Bank operations $16,063 $(3,327) $4,781 $19,390 $4,781
Credit card operations 10,507 18,327 13,770 9,626 (3,676)
Total $26,570 $15,000 $18,551 $29,016 $1,105
(a) Includes $5.9 million gain on sale of deposits
Fourth Quarter 1999 Results — Core Bank Operations
Net interest income was $16.5 million in the 1999 fourth quarter as compared to $17.5 million in the 1999 third quarter and $16.1 million in the 1998 fourth quarter. The changes in quarterly interest income are primarily due to decreases in average interest earning assets, which fell from $3.7 billion at the 1998 year-end to $2.8 billion at September 30, 1999 and then to $2.5 billion at the 1999 year-end, offset by improvements in the interest margin. The decrease in average assets was a result of the Bank’s efforts to achieve well capitalized status for regulatory purposes. The improvements in the interest margin were due to the Bank’s deposit repricing strategy and to decreases in wholesale borrowings.
The net yield on interest earning assets was 2.50% in the 1999 fourth quarter as compared to 2.20% in the 1999 third quarter and 1.79% for the 1998 fourth quarter. The average cost of deposits was 4.22% during the 1999 fourth quarter compared to 4.17% in the 1999 third quarter and 4.71% in the 1998 fourth quarter. Despite increasing interest rates in recent months, the Bank’s cost of funds has risen slower than that of the FHLB Eleventh District Cost of Funds Index (“COFI”) as a result of the Bank’s deposit pricing strategy and reductions in borrowings. For the month of December 1999 the Bank’s overall cost of funds of 4.45% was 40 basis points below COFI. Notwithstanding the Bank’s current deposit pricing strategy, total deposits increased $20.8 million during the 1999 fourth quarter.
The negative provisions for loan losses in the quarter represent net recoveries of specific valuation reserves and reduced estimates of future loan losses resulting from continuing improvements in the asset quality of the Bank’s mortgage loan portfolio.
Net noninterest income for the quarter was $3.4 million as compared to $9.2 million and $4.8 million for the 1999 third quarter and 1998 fourth quarter, respectively. In the 1999 third quarter the Bank completed the sale of two of its branches and recorded a gain of $5.9 million. The 1998 fourth quarter net noninterest income included $1.1 million of ATM cash services fees from the Americash program which was discontinued in the first quarter of 1999.
Operating expenses for the 1999 fourth quarter were $1.0 million higher than the 1999 third quarter primarily due to increased security costs related to Y2K concerns, severance costs related to the restructuring of the residential lending division and a nonrecurring recovery of legal expenses recognized in the 1999 third quarter. Operating expenses for the 1999 fourth quarter were $1.8 million lower than the 1998 fourth quarter primarily due to severance and other costs related to the termination of certain business initiatives and higher Y2K related costs incurred in the 1998 fourth quarter.
Fourth Quarter 1999 Results — Credit Card Operations
Net interest income was $7.8 million in the 1999 fourth quarter as compared to $9.0 million in the 1999 third quarter and $10.5 million in the 1998 fourth quarter. The decline in net interest income reflects the ongoing reductions in outstanding balances in the credit card portfolio, primarily as a result of chargeoffs, and the sale of a 100% participation in the outstanding receivables under the Bank’s program with Direct Furniture, Inc. in the 1999 fourth quarter.
The provision for estimated loan losses was $19.3 million in the 1999 fourth quarter as compared to $21.0 million in the 1999 third quarter and $18.3 million in the 1998 fourth quarter. The decrease from the 1999 third quarter was the result of decreases in total balances outstanding and improving delinquency trends in the portfolio.
Credit card fees decreased to $4.4 million in the 1999 fourth quarter from $5.2 million in the 1999 third quarter and $13.8 million in the 1998 fourth quarter, primarily due to decreases in recurring fees resulting from a declining number of accounts in the portfolio and the decrease in deferred origination fees associated with the cessation of new originations in the MMG Direct, Inc. (“MMG”) portfolio in 1998.
Operating expenses decreased to $6.8 million in the fourth quarter of 1999 from $9.2 million in the 1999 third quarter and $9.6 million in the 1998 fourth quarter, primarily due to a combination of lower volumes, a reduction in contractual servicing costs associated with a change in servicers and lower litigation expenses.
Fiscal Year 1999 Results of Operations
Net Estimated Non (Loss)
Interest Loan Interest Operating from
Income Losses Income ExpenseOperations
(Dollars in thousands)
December 31, 1999:
Core Bank operations $69,931 $(14,300)$19,667(a) $69,101 $34,797
Credit card operations 36,787 93,100 29,693 33,039 (59,659)
Total $106,718 $78,800 $49,360 $102,140 $(24,862)
December 31, 1998:
Core Bank operations $73,253 $(13,413) $13,003 $83,490(b) $16,179
Credit card operations 17,890 86,445 21,415 25,339 (72,479)
Total $91,143 $73,032 $34,418 $108,829 $(56,300)
(a) Includes $5.9 million gain on sale of deposits
(b) Includes income taxes of $3.9 million
Fiscal Year 1999 Results — Core Bank Operations
Net interest income for 1999 was $69.9 million as compared to $73.3 million for 1998. Decreases in average interest earning assets of 29% were for the most part offset by improvements in the interest margin produced by the Bank’s deposit repricing strategy and decreases in wholesale borrowings, which increased the net yield on interest earning assets to 2.26% for 1999 from 1.81% for 1998.
The negative provisions for loan losses of $14.3 million and $13.4 million in 1999 and 1998, respectively, represent net recoveries of specific valuation reserves and reduced estimates of future loan losses resulting from the continuing improvement in the asset quality of the Bank’s mortgage loan portfolio.
Net noninterest income for 1999 increased to $19.7 million from $13.0 million in the prior year primarily due to the sale in 1999 of two branches at a gain of $5.9 million.
Operating expenses decreased to $69.1 million in 1999 from $83.5 million in 1998 primarily due to changes in the Bank’s strategic plan in 1998 which resulted in the discontinuance of a number of business initiatives including electronic commerce activities, as well as other expense reduction efforts.
Fiscal Year 1999 Results — Credit Card Operations
Cards issued and balances outstanding under the Company’s credit card programs grew rapidly in the second and third quarters of 1998 after which the Bank curtailed the origination of new accounts due to the very disappointing performance of the credit card portfolio. Since that time the Company has concentrated on reducing the operating losses from the credit card operations, which decreased to $59.7 million in 1999 from $72.5 million in 1998.
Net interest income for 1999 increased to $36.8 million from $17.9 million in 1998 primarily due to higher average earning asset balances of $283 million in 1999 compared to $189 million in the prior year, and an increase in the interest margin to 13.0% in 1999 from 8.7% in 1998. As a result of the termination of the agreement with American Direct Credit Inc. (“ADC”) in November 1998, the Bank became entitled to all of the interest from the related portfolio which increased the gross yield for that portfolio. This change along with a change in the composition of the balances of the respective credit card programs resulted in the increase in net yield in 1999.
The increase in the provision for estimated loan losses to $93.1 million for 1999 from $86.4 million in 1998 was primarily a result of an increase in delinquencies in the ADC portfolio in the second quarter of 1999, the impact of which more than offset both the decrease in total balances outstanding and the improving delinquency trends in the other programs in the portfolio.
Credit card fees increased to $29.7 million in 1999 from $21.4 million in the prior year due to an increase in the average number of accounts outstanding.
Operating expenses increased to $33.0 million in 1999 from $25.3 million in 1998, primarily reflecting higher servicing costs due to the higher average number of accounts outstanding in 1999.
Asset Quality — Core Bank Operations
Asset quality in the mortgage loan portfolio continues to be favorable with slightly lower delinquencies at December 31, 1999 of 0.70% for the overall portfolio and 0.34% for the multifamily portfolio compared to levels of 0.74% and 0.38%, respectively, as of September 30, 1999.
Classified mortgage loans were $58.0 million at December 31, 1999 as compared to $57.5 million at September 30, 1999. Real estate owned decreased to an historically low level of $2.4 million as compared to $5.7 million at September 30, 1999.
Asset Quality — Credit Card Operations
As of December 31, 1999 total outstanding balances in the credit card portfolio were $210.6 million, a net decrease of $40.2 million or 16% from the September 30, 1999 balances and total delinquencies decreased to 19.1% from 20.5% at September 30, 1999. Delinquencies under the MMG and ADC programs decreased to 18.1% and 20.6%, respectively, at December 31, 1999 from 19.7% and 23.8% at September 30, 1999.
The Company’s Board of Directors has adopted a business plan for 2000 containing the following main elements:
(1) proactive pursuit of the resolution of outstanding litigation
(2) the sale of approximately $600 million in deposits
(3) utilization of the capital created from the deposit sales to mitigate future credit card operating losses
(4) development of the commercial and residential lending platforms
(5) enhancing the value of the Bank’s retail deposit franchise
(6) return of the Company to profitability on an overall basis
The Company created its business plan with guidance from the Office of Thrift Supervision (“OTS”) regarding the extent of deposit sales which would be approved by the OTS to facilitate the mitigation of future credit card operating losses. The OTS has initially expressed no objection to the plan, but the plan and the individual transactions have not yet been formally submitted to the OTS for approval.
While the Company believes that it can achieve the objectives of the business plan adopted, there are significant execution risks related to the various transactions comprising the business plan. Accordingly there can be no assurance that these objectives will be achieved.
(1) Proactive Pursuit of the Resolution of Outstanding Litigation
The business plan calls for management to aggressively defend outstanding consumer and other litigation while at the same time proactively seeking to resolve such matters on a basis consistent with the objective of increasing shareholder value through the accelerated resolution of such litigation. The Company continues to pursue settlement discussions with plaintiff’s counsel in its consumer litigation in the hope of settling such claims at a cost which is attractive relative to the contingencies and in a structure that will limit the assertion of future similar claims. There can be no assurances that such a resolution will be reached.
(2) Sale of Deposits
Fidelity has signed definitive agreements with First Federal Bank of California and Jackson Federal Bank to sell a total of five of Fidelity’s branch offices with approximately $350 million in deposits. The branches to be purchased by First Federal are located in Culver City and West Hollywood and those to be purchased by Jackson Federal are located in Big Bear, Blue Jay and Fullerton. The Company expects to fund the deposit sales with approximately $250 million in multifamily loans and the remainder in cash. The Bank anticipates that these transactions will be completed in the 2000 first and second quarters.
Fidelity is in the process of negotiating the sales of additional branches with up to $250 million in deposits.
(3) Utilization of Capital to Mitigate Future Credit Card Operating Losses
The Company continues to evaluate options and negotiate potential transactions to mitigate future credit card operating losses. It is anticipated that, without a change in strategy, losses from the credit card operations would continue to result in the Company reporting quarterly net losses on a consolidated basis throughout 2000.
The business plan adopted by the Board contemplates the possibility of the sale of the MMG portfolio and the designation of the ADC portfolio as held for sale. Based upon indications from interested parties, the Company believes that the ADC portfolio may not be saleable until the outstanding consumer litigation related to that portfolio is satisfactorily resolved. The adoption of this strategy would require the writedown of these portfolios to their estimated liquidation value which, based on indications of value received by the Company, would require a significant charge against earnings.
The business plan anticipates that as a result of the proposed deposit sale and credit card portfolio sale strategy, the Bank would become categorized as “adequately capitalized” for regulatory capital purposes in 2000 as compared to “well capitalized” as of the 1999 year-end, returning to the “well capitalized” category in 2001.
(4) Development of the Commercial and Residential Lending Platforms
In 2000 the recently established commercial loan division will offer both multifamily and commercial mortgage loans. The Company expects the majority of originations will be held in portfolio to offset the ongoing run-off from the existing mortgage portfolio and the balance will be sold into the secondary market.
In addition to conforming loans, the residential loan division will offer A minus and jumbo loans. In order to provide a full product line to its customers, subprime mortgage loans, which will exclusively be originated for sale into the secondary market, will also be offered. Subprime mortgage loans will be originated and sold subject to a maximum warehouse of loans pending sale of $10 million.
The existing non-conforming mortgage portfolio, a substantial portion of which is subprime, had an outstanding principal balance of $96 million at December 31, 1999. The average remaining life of that portfolio is anticipated to be approximately three years. The 2.5% delinquency rate of this portfolio at December 31, 1999 was well below both expected levels and industry averages. While the Company is satisfied with the performance of this portfolio, additions of subprime mortgage loans to the portfolio have been discontinued due to the possibility of increased regulatory capital requirements for these assets and the uncertainty of interest in these assets by potential future acquirors of the Company.
(5) Enhancing the Value of the Bank’s Retail Deposit Franchise
The value of the Bank’s core retail deposit franchise is derived from its customer base, its location in the Los Angeles and Orange County markets, the cost of its deposits, the existing and potential revenue streams and its operating cost structure.
The business plan provides for the enhancement of the value of this franchise through:
— Continued emphasis on quality customer service to retain current customers and attract new customers who have either recently moved into the Bank’s market area or are dissatisfied with the service provided by other institutions.
— Continuance of the current deposit pricing strategy which is expected to maintain a differential between the Bank’s cost of funds and COFI.
— Providing a broad array of lending products to customers while maintaining investment product sales penetration rates that are among the highest in the nation.
— Implementing new core bank information systems and restructuring back office functions. At the maturity of the Bank’s current facilities management agreement covering its banking information systems, the Bank will convert to systems provided by Electronic Data Systems Corporation (“EDS”). This conversion, which will cost approximately $2 million, is expected to result in annual savings of approximately $4 million beginning in the third quarter.
(6) Return of the Company to Profitability on an Overall Basis
The mitigation of future credit card operating losses and the improvement in operating efficiency discussed above contribute to a business plan that, while it projects a significant overall loss for the 2000 fiscal year, does anticipate a return to overall profitability starting in the third quarter of 2000 with significantly reduced overall credit risk.
In addition to the consumer lawsuits previously reported, a small number of new individual plaintiff consumer lawsuits have been filed in connection with the ADC credit card program. The lawsuits generally allege that misrepresentations were made by third-party sales people to the plaintiffs in connection with the purchase of various consumer items, including misrepresentations regarding the nature and cost of financing such purchases through credit cards issued by the Bank. The Bank believes it has substantial legal and factual defenses against these claims.
During the fourth quarter of 1999 the Company was successful in its efforts to remove one of the two purported shareholder class action suits filed against it (the Feldman complaint) from California State Court to the Federal Court. In Federal Court the Company asserted its preemption arguments under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The plaintiffs voluntarily dismissed their complaint in the face of a motion to dismiss the complaint made by the Company. The Company believes that the claims asserted in the remaining lawsuit (the Gunty Retirement Plan complaint) are not maintainable as a class action and are legally deficient and that none of the claims asserted have merit.
First Alliance Real Estate Secured Credit Card Program
The agreements pertaining to the real estate secured affinity credit card program between Fidelity and First Alliance Corporation and its affiliates (collectively “First Alliance”) include a provision that, following the termination of the program, an affiliate of First Alliance is obligated to purchase, or cause its designee to purchase, all of the then outstanding accounts and receivables generated under the program.
The term of the agreements will expire on February 24, 2000 and Fidelity has notified First Alliance that Fidelity will require First Alliance’s affiliate or its designee to perform the purchase obligation when due.
First Alliance has asserted that it has no obligation to purchase the outstanding accounts and receivables from Fidelity on February 24, 2000, citing various reasons.
Fidelity strongly disagrees with First Alliance’s position. Fidelity has made and expects to continue to make efforts to reach an amicable resolution of this disagreement. But if its efforts are not successful, Fidelity may demand arbitration to interpret and enforce the rights and obligations of the parties under the agreements, and to seek appropriate relief for any breach under the agreements. There is no assurance that First Alliance or its designee will perform the purchase obligation on February 24, 2000 or at any later date or that any claim in arbitration, if asserted, will be successful.
As of December 31, 1999, outstanding balances and delinquent accounts under the First Alliance program were $18.3 million and 15.7%, respectively.
The Board of Directors is in the process of considering candidates for nomination to the Board of Directors to fill seats up for election at the annual stockholders meeting. In this regard, the Board has identified candidates and certain outside shareholders have been contacted who in the past have indicated an interest in proposing candidates for nomination to the Board. Upon the completion of the nomination process, the Company expects to hold a conference call to discuss these and other strategic matters.
The annual meeting of stockholders of Bank Plus Corporation will be held on Wednesday, April 26, 2000 at 11:00 a.m. at the corporate headquarters of the Company at 4565 Colorado Boulevard, Los Angeles, California 90039. The Board of Directors has set the close of business on March 24, 2000 as the record date to determine the stockholders entitled to notice of and to vote at the Annual Meeting.
The Bank’s core and risk-based capital ratios as of December 31, 1999 exceeded the minimum regulatory capital requirements for classification as a “well-capitalized” institution. Due to the expectation of continuing losses in the credit card operations, or a significant write-down in the carrying value of the credit card portfolios as a result of the adoption of alternative strategies discussed above, the Bank does not expect to remain well capitalized in 2000.
Common stockholders’ equity of the Company totaled $96.2 million at December 31, 1999, with a tangible book value per common share outstanding of $4.31.
Senior Note Debt Service
During the quarter, the Company made its scheduled interest payment on its Senior Notes. The liquidity for the interest payments in 2000 is expected to be provided by preferred stock dividends from the Bank and currently projected liquidity at the holding company. The Bank has an understanding with the OTS which permits the payment of dividends on the Bank’s preferred stock so long as the Bank remains at least adequately capitalized for regulatory purposes. The understanding with the OTS does not constrain the OTS from restricting future dividend payments based on safety and soundness considerations or future examination findings, and no assurance can therefore be given that the OTS will permit future dividend payments by Fidelity to Bank Plus. The Bank has received no indication from the OTS that it will object to the continued payment of preferred dividends.
Bank Plus Corporation is the holding company for Fidelity Federal Bank, FSB, which offers a broad range of consumer financial services, including demand and time deposits and mortgage loans. In addition, through its affiliate Gateway Investment Services, Inc., a NASD-registered broker/dealer, Fidelity provides customers of the Bank with investment products, including mutual funds, annuities and insurance. Fidelity operates through 36 full-service branches, 35 of which are located in Southern California, principally in Los Angeles and Orange counties.
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