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                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
  [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
 
             OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
 
                  For the fiscal year ended December 31, 1993
 
                                       OR
 
  [_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 
               SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
            For the transition period from  _________to __________

                         COMMISSION FILE NUMBER 1-8625
 
                            -----------------------
 
                          CITADEL HOLDING CORPORATION
 
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                               95-3885184
    (STATE OR OTHER JURISDICTION OF     (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
     INCORPORATION OR ORGANIZATION)
 
       600 NORTH BRAND BOULEVARD                          91203
          GLENDALE, CALIFORNIA                         (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 956-7100
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                 NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                     ON WHICH REGISTERED
             ------------                          ---------------
 COMMON STOCK, $.01 PAR VALUE PER SHARE         AMERICAN STOCK EXCHANGE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      NONE
 
  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  .
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]
 
  The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of March 15, 1994 was $20,034,000.
 
  The number of shares of common stock, par value $.01 per share, of Registrant
outstanding as of March 15, 1994 was 6,595,624 shares.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Company's 1994 Proxy Statement, which will be filed with the
Securities and Exchange Commission in connection with the Company's 1994 Annual
Meeting of Stockholders, are incorporated by reference in Part III hereof.
 
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                          CITADEL HOLDING CORPORATION
 
                           ANNUAL REPORT ON FORM 10-K
 
                      FOR THE YEAR ENDED DECEMBER 31, 1993

                                                                            PAGE
                                                                            ----

                                     PART I

                                                                      
 Item 1. Business........................................................      1
           General.......................................................      1
           Recent Developments...........................................      3
           Retail Financial Services Group...............................      7
           Mortgage Banking Group Operations.............................      8
           Credit Administration.........................................     17
           Credit Loss Experience........................................     24
           Foreclosure Policies..........................................     27
           Real Estate Acquired in Settlement of Loans...................     27
           Investment Activities.........................................     30
           Sources of Funds..............................................     32
           Interest Rate Risk Management.................................     36
           Competition...................................................     39
           Employees.....................................................     40
           Taxation......................................................     40
           Regulation and Supervision....................................     41
 Item 2. Properties......................................................     55
 Item 3. Legal Proceedings...............................................     55
 Item 4. Submission of Matters to a Vote of Security Holders.............     55
 
                                    PART II
 
 Item 5. Market for the Registrant's Common Stock and Related Stockholder
          Matters........................................................     56
 Item 6. Selected Financial Data.........................................     57
 Item 7. Management's Discussion and Analysis of Financial Condition and
         Results of Operations ("MD&A")..................................     58
         Net Earnings....................................................     58
         Net Interest Income.............................................     59
         Noninterest Income..............................................     62
         Operating Expense...............................................     64
         Efficiency Ratio................................................     65
         Capital Resources and Liquidity.................................     66
         Asset Quality...................................................     73
         Impact of Inflation.............................................     83
         Interest Rate Risk Management...................................     84
         Other Factors Affecting Earnings ...............................     87
 Item 8. Financial Statements and Supplementary Data.....................    F-1
 Item 9. Change in and Disagreements with Accountants on Accounting and
          Financial Disclosure...........................................   II-1

 
                                       i

                                    PART III

                    
 Item 10. Directors and Executive Officers of the Registrant.............. II-1
 Item 11. Executive Compensation.......................................... II-1 
 Item 12. Security Ownership of Certain Beneficial Owners and Management.. II-1
 Item 13. Certain Relationships and Related Transactions.................. II-1

                                    PART IV

                                                                      
 Item 14. Exhibits, Financial Statement Schedules, and Reports on 
           Form 8-K......................................................   II-1
          Signatures.....................................................   II-4

 
                                       ii

                                    PART I
 
ITEM 1. BUSINESS
 
                          CITADEL HOLDING CORPORATION
 
GENERAL
 
  Citadel Holding Corporation ("Citadel"), incorporated in Delaware in 1983,
is a financial services holding company engaged primarily in the savings bank
business through its wholly owned subsidiary, Fidelity Federal Bank, a Federal
Savings Bank ("Fidelity" or the "Bank"). Citadel is also engaged in the
securities brokerage business through its wholly owned subsidiary, Gateway
Investment Services, Inc. ("Gateway"). Citadel currently has no significant
business or operations other than serving as the holding company for Fidelity
and Gateway. Citadel is actively pursuing a significant internal restructuring
plan described below in "Recent Developments." Unless otherwise indicated,
references to the "Company" include Citadel, Fidelity, and all subsidiaries of
Fidelity and Citadel. The principal executive offices of Citadel and Fidelity
are located at 600 North Brand Boulevard, Glendale, California 91203,
telephone number (818) 956-7100.
 
  Fidelity operates through 42 branches, all of which are located in Southern
California, principally in Los Angeles and Orange counties. At December 31,
1993, Fidelity's mortgage loan portfolio (including loans held for sale)
aggregated approximately $3.8 billion, of which approximately 71% was secured
by residential properties containing 2 or more apartment units, 21% was
secured by single family residences and 8% was secured by commercial property.
At that same date, 96% of Fidelity's loans consisted of adjustable rate
mortgages.
 
  Fidelity funds its portfolio lending operations principally with deposits.
At December 31, 1993, Fidelity had deposits of approximately $2.8 billion,
exclusive of $593 million in certificates of deposit of $100,000 or more.
Other borrowings on that date included $326.4 million in Federal Home Loan
Bank ("FHLB") Advances, $100.0 million in mortgage-backed borrowings, $304.0
million in commercial paper backed by a letter of credit issued by the FHLB of
San Francisco and $60.0 million in subordinated debt that qualifies as
supplementary Tier 2 regulatory capital.
 
  Fidelity's deposit accounts are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through the Savings Association Insurance Fund (the
"SAIF"). Citadel and Fidelity are subject to the examination, supervision and
reporting requirements of the Office of Thrift Supervision (the "OTS"), their
primary federal banking regulator. Fidelity is also subject to examination and
supervision by the FDIC. See "Regulation and Supervision."
 
  Gateway became a National Association of Securities Dealers, Inc. ("NASD")
registered broker/dealer in October 1993. Through Gateway, the Company
currently provides customers of the Bank with investment products including a
number of mutual funds, annuities and unit investment trusts. Fidelity is
implementing a new business strategy that integrates traditional banking
functions (mortgage originations and deposit services) with the sale of
investment services and products by Gateway. See "Retail Financial Services
Group."
 
  The Southern California economy and real estate markets further declined
during 1993, adversely affecting the Bank's loan and real estate portfolios.
The Company reported a net loss of $67.2 million for the year ended
December 31, 1993, as compared to net earnings of $2.0 million and $2.7
million for the years ended December 31, 1992 and 1991, respectively. Pre-tax
loss for the Company increased by $99.8 million from a loss of $3.8 million in
1992 to a loss of $103.6 million in 1993. Operating expenses increased $27.4
million in 1993 to $105.3 million from $77.9 million in 1992. The increase in
1993 expenses was attributable in part to increased staffing levels required
to manage rising problem assets, strengthen internal asset review, handle
increased financial services offered at the retail branch network and expand
originations and sales of residential mortgages in the mortgage banking
network. The increase in expenses is also attributable to certain nonrecurring
charges incurred in connection with the Company's valuation of its intangible
assets and further development of the internal reorganization and
restructuring plan discussed below, including the write-off of $8.8 million of
goodwill and $5.2 million in core deposit intangibles, and an increase of $5.9
million in professional fees, of which approximately $3.3 million was
attributable to analysis and development of the Company's restructuring plan
and to the related asset valuation process.
 
  At December 31, 1993, the Bank had nonperforming assets ("NPAs") totaling
$235.6 million and a general valuation allowance ("GVA") totaling $80.0
million. NPAs include nonaccruing loans, in-substance foreclosed real estate
("ISF") and real estate acquired in settlement of loans by foreclosure or
otherwise, but do not include troubled debt restructurings ("TDRs") unless the
TDRs would otherwise fall into nonaccruing loans or ISF. At year-end 1993, the
Bank's GVA equaled 2.03% of total loans and real estate owned (including ISF,
"REO") and 32.8% of NPAs.
 
                                       1

  The following table sets forth selected financial and other data for the
Company at or for the periods indicated:

                               AT OR FOR THE YEAR ENDED DECEMBER 31,
                         ------------------------------------------------------
                           1993        1992       1991       1990       1989
                         ---------   ---------  ---------  ---------  ---------
                          (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                       
BALANCE SHEET DATA:
 Total assets...........    $4,390      $4,698     $5,127     $5,698     $4,981
 Total loans, net.......     3,713       3,992      4,551      5,085      4,437
 Deposits...............     3,369       3,458      3,885      3,967      3,317
 FHLB Advances..........       326         581        325        755        725
 Other borrowings.......       408         327        546        594        622
 Subordinated notes.....        60          60         60         60         --
 Stockholders'
  equity(2).............       187         223        221        218        195
 Stockholders' equity
  per share(2)..........     28.41       67.68      67.06      66.25      59.20
 Common shares
 outstanding(1)(2)...... 6,595,624   3,297,812  3,297,812  3,297,812  3,295,562
OPERATING DATA:
 Net interest income....    $  101      $  131     $  142     $  115     $   76
 Net earnings (loss)....       (67)          2          3         23          8
 Net earnings (loss) per
  share.................    (11.56)        .62        .81       7.07       2.47
 Average common and
 common equivalent
  shares outstand-
  ing(1)(2)............. 5,809,570   3,297,812  3,297,812  3,298,140  3,296,919
SELECTED OPERATING
 RATIOS:
 Return on average
  assets................     (1.47)%      0.04%      0.05%      0.44%      0.17%
 Return on average
  equity................    (28.92)%      0.91%      1.20%     11.21%      4.24%
 Average equity divided
  by average assets.....      5.07%       4.66%      4.01%      3.94%      3.97%
 Ending equity divided
  by ending assets......      4.27%       4.75%      4.31%      3.84%      3.92%
 Operating expenses to
  average assets........      2.30%       1.61%      1.43%      1.26%      1.33%
 Efficiency ratio(3)....     77.55%      53.16%     51.18%     55.35%     74.31%
ASSET QUALITY DATA--
 FIDELITY:
 NPAs(4)................    $  236      $  234     $  125     $   48     $   21
 NPAs to total assets...      5.37%       4.99%      2.43%      0.85%      0.42%
 Nonaccruing loans......    $   93      $  112     $   69     $   30     $   12
 Nonaccruing loans to
  total loans...........      2.52%       2.83%      1.53%      0.61%      0.27%
 GVA....................    $   80      $   76     $   52     $   17     $    8
 GVA to NPAs(5).........     32.79%      30.49%     41.99%     34.14%     38.38%
 GVA to loans and REO
  (including ISF)(6)....      2.03%       1.82%      1.13%      0.32%      0.18%
 Loan GVA to nonaccruing
  loans and ISF.........     58.75%      38.15%     55.44%     56.67%     66.67%
OTHER DATA:
 Number of:
  Real estate loan
   accounts (in
   thousands)...........        16          18         21         28         27
  Deposit accounts (in
   thousands)...........       241         233        238        234        203
  Retail branch
   offices(7)...........        42          43         43         44         34

- --------
(1) Net of treasury shares, where applicable.

(2) 1993 data includes 3,297,812 shares issued in March 1993 in connection with
    a stock rights offering which produced net proceeds to the Company of $31.4
    million.

(3) The efficiency ratio is computed by dividing total operating expense by net
    interest income and noninterest income, excluding nonrecurring items,
    provisions for estimated loan and real estate losses, direct costs of real
    estate operations and gains/losses on the sale of securities.

                                       2

(4) NPAs include nonaccruing loans, foreclosed real estate and ISF (net of REO
    GVA), but do not include TDRs, unless they fall into one of the foregoing
    categories.
 
(5) NPAs in this ratio are calculated prior to the reduction for REO GVA.
 
(6) Loans and REO in the ratio are calculated prior to the reduction for loan
    and REO GVA, but are net of specific reserves.
 
(7) All retail branch offices are located in Southern California.
 
  For additional information, see Item 6. "Selected Financial Data," Item 7.
"MD&A" and Item 8. "Financial Statements and Supplementary Data."
 
RECENT DEVELOPMENTS
 
Internal Reorganization and Restructuring
 
  In mid-1992, the Company commenced a series of steps to internally reorganize
in order to strengthen the Bank's internal operations and meet the needs of its
customer base. First, a new Chief Executive Officer and certain additional
senior management personnel were hired to strengthen key areas of future
potential growth, such as mortgage banking, residential loan originations,
credit administration and retail financial services. The Company broadened the
product line of loans originated by the Bank and increased its emphasis on
mortgage banking, in particular developing its loan pipeline hedging
capability. It also reorganized the retail branch system to integrate the
provision of traditional banking services with the provision through Gateway of
a broader range of nontraditional financial services and uninsured investment
products. Additionally, Fidelity upgraded its systems management capabilities
by converting to new computer systems in its retail banking and loan
administration operations and by adding state-of-the-art software capability to
the asset/liability management function. Fidelity also enhanced its real estate
management operations by adding experienced real estate professionals to that
department.
 
  In October 1992, the Company hired outside financial advisors to identify and
assess strategic alternatives for the Company to pursue with a view to
maximizing value for stockholders. In mid-1993, as an outgrowth of the
reorganization effort, management evaluated the strategic alternatives
available to it and subsequently determined that the proposed restructuring
plan described below had the greatest potential to maximize stockholder value
in the foreseeable future.
 
  The Company is actively pursuing a restructuring plan that would include both
the transfer to a newly-formed Citadel subsidiary or division of certain
problem assets of the Bank and a sale of the Bank and Gateway (the
"Restructuring"; discussions of the sale of the Bank in the context of the
Restructuring include the sale of Gateway). The Company is currently seeking
another financial institution (a "strategic buyer") or a new core set of equity
investors for the Bank. Any such sale of the Bank will be subject to the
approval of Citadel's Board of Directors (the "Board") and stockholders as well
as the OTS. Following the proposed sale of the Bank, Citadel would become a
real estate company and focus on the servicing and enhancement of its loan and
real estate portfolio.
 
  The Restructuring calls for the Bank's disposition of substantially all of
its problem assets, together with a small amount of its performing assets, so
as to improve the attractiveness of the Bank to potential acquisition or
investment candidates. Most of the Bank's problem assets would be transferred
to the new Citadel real estate subsidiary or division using securitized debt
financing. These assets would consist of commercial and large multifamily loans
and real estate owned properties with a current net book value of approximately
$401 million. The impact of the January 1994 Northridge Earthquake on the
assets to be transferred is not expected to alter significantly the value of
such assets. The Restructuring also calls for the Bank's disposition of a
smaller group of problem assets, consisting primarily of smaller multifamily
loans with a current net book value of approximately $81 million, in a bulk
sale to a third-party purchaser or Citadel.
 
  While the Board will fully explore the market values of this Restructuring
before making any final decisions, the Board views this approach as having the
greatest potential to maximize stockholder value in the foreseeable future. In
formulating the proposed Restructuring, the Company believes that the value of
 
                                       3

Fidelity to a purchaser or investor would be heavily, and perhaps excessively,
discounted due to its problem assets. Thus, it was determined that the Bank's
attractiveness to an acquisition or investment candidate would be enhanced if
the Bank disposed of these problem assets. However, management also believes
that these assets, if managed outside the environment of a federally regulated
institution, may present the potential for Citadel stockholders to realize
future values that would not be reflected in the bulk sale price of those
assets to a third party today. Accordingly, the Restructuring was designed to
retain in a Citadel subsidiary or division approximately $401 million of
primarily problem assets after a sale of the Bank. Management believes that an
asset disposition is critical to a successful major recapitalization program
for Fidelity. Citadel has commenced efforts to raise the financing necessary
to consummate its problem asset purchase from Fidelity.
 
  Because of the significant conditions to and uncertainty in accomplishing a
successful Restructuring, the Company expects that the losses associated with
the Restructuring would only be incurred upon the sale of the Bank, at which
time the effects of the losses on capital should be offset by either a new
infusion of capital from investors, who would purchase ownership of the Bank,
or a merger with another financial institution.
 
  The following discussion focuses on certain financial consequences of the
Restructuring and is not indicative of the loss content of the Bank's assets
in the absence of the Restructuring or other bulk asset dispositions.
 
  To consummate the bulk transfers of assets to a Citadel subsidiary or
division and obtain debt financing in the capital markets for the larger
transfer, Fidelity would be required to write down these assets to their bulk
sale values. These losses would be offset in part by the reduction in the
Bank's GVA (reflecting the healthier remaining asset pool) and possible tax
benefits. If the restructuring were to be consummated in mid-1994,
management's latest estimate is that the Bank's core capital, after giving
effect to the writedowns on the asset transfers, tax benefits associated
therewith, use of relevant reserves and extraordinary charges relating to the
Restructuring, but before giving effect to any new capital infusion into the
Bank by the acquiror or new investors, would be approximately $102 million.
This estimate will be subject to ongoing adjustment in view of changing
variables such as future earnings or losses, changes in the composition and
size of the problem assets and other factors.
 
  The Bank does not intend to implement the above-described bulk problem asset
dispositions, or to incur the consequent losses, in the absence of an
acquisition of the Bank by another financial institution or financial
investors who are able to infuse additional core capital into the Bank. Any
such acquisition will also require the approval of Citadel's Board and
stockholders, as well as the OTS, which will condition its approval in part on
the adequacy of the capital of the Bank after the Restructuring.
 
  No assurances can be given that the proposed Restructuring can be
successfully implemented.
 
  On March 4, 1994, The Chase Manhattan Bank, N.A. ("Chase"), one of four
lenders under Fidelity's $60 million subordinated loan agreement of 1990 (the
"Subordinated Loan Agreement"), sued Fidelity, Citadel and Citadel's Chairman
of the Board, alleging, among other things, that the transfer of assets
pursuant to the Restructuring would constitute a breach of the Subordinated
Loan Agreement, and seeking to enjoin the Restructuring and to recover damages
in unspecified amounts. In addition, the lawsuit alleges that past responses
of Citadel and Fidelity to requests by Chase for information regarding the
Restructuring violate certain provisions of the Subordinated Loan Agreement
and that such alleged violations, with the passage of time, have become
current defaults under the Subordinated Loan Agreement. While the other three
lenders under the Subordinated Loan Agreement hold $25 million of the
subordinated notes (the "Notes"), none of them has joined Chase in this
lawsuit. The Company is evaluating the lawsuit and, based on its current
assessment, the Company does not believe that the allegations have merit. See
Item 7. "MD&A--Capital Resources and Liquidity" for additional considerations
relating to the Subordinated Loan Agreement.
 
OTS Examinations
 
  In January 1994, Citadel and the Bank received reports of the various
regular examinations conducted by the OTS in 1993. As a result of the findings
of the OTS in its safety and soundness examination of the Bank, Fidelity will
be subject to higher examination assessments and is subject to additional
regulatory restrictions
 
                                       4

including, but not limited to, (a) a prohibition, absent prior OTS approval,
on increases in total assets during any quarter in excess of an amount equal
to net interest credited on deposit liabilities during the quarter; (b) a
requirement that the Bank submit to the OTS for prior review and approval the
names of proposed new directors and executive officers and proposed employment
contracts with any director or senior officer; (c) a requirement that the Bank
submit to the OTS for prior review and approval any third-party contract
outside the normal course of business; and (d) the OTS would have the ability,
in its discretion, to require 30 days' prior notice of all transactions
between Fidelity and its affiliates (including Citadel and Gateway).
 
  The OTS also expressed concern in a number of specific areas principally
relating to asset quality, asset review administration and the resulting
negative impact on capital levels and earnings, as well as management
effectiveness in certain areas. Management believes that the proposed
Restructuring, if accomplished, would be responsive to most of the OTS'
concerns.
 
Capital and Liquidity
 
  Despite the negative impact of losses and provisions to GVA on the Bank's
earnings and thus its capital, at December 31, 1993 and to date, the Bank was
and is classified as "adequately capitalized" for purposes of the prompt
corrective action regulations promulgated by the OTS. An institution is
"adequately capitalized" if its ratio of core capital to adjusted total assets
("core capital ratio") is at least 4.0%, its ratio of core capital to risk-
weighted assets is at least 4.0% and its ratio of total capital to risk-
weighted assets is at least 8.0%. At December 31, 1993, Fidelity's ratios were
4.15%, 6.27% and 9.32%, respectively. See "Regulation and Supervision--FDICIA
Prompt Corrective Action Requirements" and Item 7. "MD&A--Capital Resources
and Liquidity." However, Citadel supplemented the Bank's capital in 1993 with
two capital infusions totaling $28.0 million, without which the Bank would
have had to significantly reduce its assets or at December 31, 1993 the Bank
would not have met the 4% core capital requirement of the "adequately
capitalized" category, and thus the Bank would have been classified as
"undercapitalized" for purposes of the OTS' prompt corrective action
regulations. See "Regulation and Supervision--FDICIA Prompt Corrective Action
Requirements".
 
  Citadel, with only $2.3 million in liquid assets at December 31, 1993, and
ongoing expenses in connection with the contemplated Restructuring, is not in
a position to make further capital contributions to the Bank, nor does Citadel
have ready access to additional funds under current circumstances. See Item 7.
"MD&A--Capital Resources and Liquidity." Management anticipates that the Bank
will incur losses in the first and second quarters of 1994. The losses will,
in the absence of a new capital infusion or a reduction in the Bank's total
assets, reduce the Bank's core capital ratio to less than 4%. In an effort to
maintain the Bank's core capital ratio above 4% at March 31, 1994 by
downsizing its balance sheet, the Bank has entered into an agreement to sell
approximately $160 million of single family and multifamily (2 to 4 units)
performing loans in the first quarter of 1994. Additionally, in order to
maintain the Bank's capital above the regulatory minimums necessary to
continue to be designated "adequately capitalized" while the Restructuring is
pursued, management continues to explore possibilities for increasing the
Bank's capital, either through the issuance of new equity or the sale of
assets. Management may also consider further downsizings in the Bank's balance
sheet through additional loan sales, although such dispositions of income-
producing assets would reduce the Bank's future income. Downsizing options
will be limited due to the relative illiquidity of the commercial and
multifamily loan portfolio.
 
  Because of Fidelity's current capital levels, dividends and distributions
from Fidelity will not be available to Citadel for the foreseeable future.
Thus, Citadel's current cash balances, together with future dividends from
Gateway, are the only sources of cash to Citadel. Gateway's ability to pay
dividends to Citadel may be restricted by certain regulatory net capital
rules. See "Regulation and Supervision--Gateway." Management believes that
Citadel's cash resources will only be sufficient to meet Citadel expenditures
through mid-1994. If the Restructuring is not completed at such time, Citadel
will be required to raise additional cash to fund its expenditures, and no
assurances can be given that Citadel will be able to raise any such funds.
 
  The defaults alleged by Chase under the Subordinated Loan Agreement and
possible resulting cross defaults under other debt instruments could also
adversely affect the liquidity of the Company. See Item 7. "MD&A--Capital
Resources and Liquidity."
 
                                       5

Impact of Not Accomplishing the Restructuring
 
  If the Restructuring is not accomplished, the Bank will be required to take
other actions to maintain its capital ratios, including the further downsizing
of the Bank and the raising of additional equity. If such actions are not
successful, the Bank would likely become "undercapitalized" for purposes of the
prompt corrective action regulations of the OTS. The consequences of becoming
undercapitalized would include, but would not be limited to, (a) the obligation
of Fidelity to file a capital restoration plan that is accompanied by an
acceptable Citadel guarantee; (b) restrictions on asset growth, branch
acquisitions and new activities; (c) a prohibition on dividends and capital
distributions by Fidelity (subject to certain limited exceptions); and (d)
increased monitoring by the OTS. An acceptable capital restoration plan
guarantee would require Citadel to demonstrate appropriate assurances of its
ability to perform on the guarantee. Given Citadel's current capital resources
and liquidity position, no assurance can be given that such a Citadel guarantee
would be found acceptable by the OTS. Failure to provide an acceptable capital
restoration plan could result in additional OTS sanctions typically reserved
for "significantly undercapitalized" institutions. These discretionary
sanctions include, but are not limited to, (a) OTS authority to require the
recapitalization, merger or sale of the Bank; (b) divestiture of subsidiaries
of the Bank or a holding company divestiture of the Bank; (c) more stringent
asset growth restrictions than applicable to "undercapitalized" institutions;
and(d) management changes, including election of new directors, and dismissal
of directors or senior officers who have held office for more than 180 days,
among other things.
 
  If the Restructuring is not successful and if the Bank has no viable problem
asset disposition alternative, the Bank anticipates that it may be required to
increase its GVA to higher levels that cannot currently be determined. Further,
should the Restructuring not be accomplished and the Bank's financial condition
continue to deteriorate, the future viability of the Bank and Citadel may be
significantly threatened unless the Company is able to raise substantial
additional capital.
 
Northridge Earthquake
 
  The Northridge Earthquake of January 17, 1994, and subsequent aftershocks
will adversely affect the Bank's loan and real estate portfolios. The Bank's
portfolio includes loans and REO with a net book value of approximately $937
million secured by or comprised of 1,414 multifamily (5 units or more), 15
commercial, and 2,313 single family and multifamily (2 to 4 units) collateral
properties in the primary earthquake areas. After the earthquake, the Bank's
appraisers surveyed all the multifamily (5 units or more) and commercial
properties located in these areas which secured the Bank's loans or constitute
REO of the Bank. The Bank also made selected inspections at more remote
locations where damage has been reported. In total, approximately 1,450
properties have been inspected. Of such inspected properties, 231 properties,
representing loans and REO with a net book value of $140 million, have been
identified as having sustained more than "cosmetic" damage. Of such 231
properties, 204 properties related to the Bank's loans and REO with a net book
value of $124 million were identified as having "possible serious damage" and
an additional 27 properties with a net book value of $16 million were
identified as "actually or potentially condemned". The Bank commissioned
structural and building engineers or building inspectors to estimate the cost
of repairs to properties in these two categories. The cost of repairs has been
preliminarily estimated to be $5.7 million and $11.1 million, respectively. Of
this total $16.8 million, approximately $6.0 million of seismic damage exceeds
the net book value of the related loans and REO. Accordingly, the Bank
currently would not expect its losses due to the earthquake to exceed $10.8
million with respect to its commercial and multifamily loans and REO. The Bank
expects the actual losses payable by the Bank to be lower because many repair
costs may be borne by the borrowers, who in addition to their own funds, may
have access to government assistance and/or earthquake insurance proceeds. As
part of its normal internal asset review process, the Bank will adjust its
reserves as its losses become quantifiable.
 
  In addition to the multifamily and commercial assets referenced above, the
Bank has identified 2,313 single family and multifamily (2 to 4 units) assets
in the affected areas. 173 borrowers with unpaid principal balances totaling
$29.4 million called in to report damages through February 8, 1994. The Bank
has commenced inspection of these properties and continues to assess damages
and potential earnings and loss impact with respect to these properties.
 
                                       6

  The earthquake will also have some adverse affect on loan originations and
the sale of financial services in the retail branch network in the near term.
 
RETAIL FINANCIAL SERVICES GROUP
 
  Fidelity operates 42 branches in Los Angeles, Orange, San Bernardino,
Riverside and Ventura counties. In 1993, Fidelity reorganized internally to
provide at each of its branch locations, either directly or through Gateway, a
broad array of mortgage products, financial services and investment products to
current and potential customers.
 
  Fidelity's deposits are highly concentrated in Los Angeles and Orange
counties. Each of Fidelity's branches generally has between $40 million and
$100 million in deposits. Seventeen of the branches are in the $40 million to
$59 million range.
 
  Total deposits at Fidelity have decreased since December 1991. Management
believes that depositors have reacted to current low interest rates by placing
short-term fixed income investments into mutual funds and other uninsured
product alternatives.
 
  Management believes that, given the highly competitive nature of the Bank's
historical business and the regulatory constraints it faces in competing with
unregulated companies, the Bank must expand from its historical business focus
and adopt a broader product line business strategy. Specifically, management
believes that the Bank's existing customers provide a ready market for the sale
of nontraditional financial services and investment products. This belief
prompted the implementation of a new business strategy for the retail financial
services group that integrated its traditional functions (mortgage origination,
deposit services, checking, savings, etc.) with the sale of investment services
and products by Gateway. Management's objective is to build a "relationship
bank" that works with clients to determine their financial needs and offers a
broad array of more customized products and services.
 
  Through this new strategy of targeting retail and mortgage customers and
offering a variety of new investment products and services, Fidelity and
Gateway hope to attract more of the Bank customers' deposits, investment
accounts and mortgage business. Management believes that this new strategy has
been successful, as evidenced by the increase of 22% in total checking accounts
at December 31, 1993 over the level a year earlier. As a result of this
strategy, fee income should become a growing portion, and net interest income a
declining portion, of the Company's total income.
 
  Gateway currently sells a combination of investment products including mutual
funds, annuities and unit investment trusts. Gateway offers mutual funds of a
number of well-known sponsors. The fixed and variable annuities that are
offered are issued by insurance companies all of which maintain a rating of A+
or better by A.M. Best. These product offerings are continually under review
and change from time to time depending on market demand, management's judgment
and product availability.
 
  During 1993, Fidelity reorganized the personnel structure of its branches to
further its strategy of integrating investment services with its traditional
deposit activities. Most branches are now individual profit centers reporting
to a branch business manager who has responsibility for determining the sales
focus and resource allocation within the branch area. On average, branch
staffing consists of eight individuals who are divided into administrative
personnel and sales personnel, with a branch operations manager and a financial
sales manager reporting to the business manager. The sales group merges the
responsibilities of the broker/dealer specialists and the traditional deposit
products personnel into the role of a "relationship banker", responsible for
selling all deposit and nondeposit product offerings. Relationship bankers will
eventually be located at each branch.
 
  In connection with its strategy of integrating investment services with its
traditional deposit activities, Fidelity conducts its activities in compliance
with the February 1994 interagency guidance of the federal bank and thrift
regulators on retail sales of uninsured, nondeposit investment products by
federally insured financial institutions. In order to minimize customer
confusion, Fidelity endeavors to ensure that customers are fully informed that
such investment products are not insured, are not deposits of or guaranteed by
the Bank and involve investment risk, including the potential loss of
principal.
 
                                       7

  Also during 1993, Fidelity and Gateway retrained sales personnel as
"relationship bankers." The training program lasted four to eight weeks and
covered professional topics from accounting to sales management. The focus of
this program was to educate the managers about product offerings,
identification of customer needs and profitable operation of a business unit.
Appropriate personnel are licensed to sell securities and insurance products.
This retail strategy is being reinforced through revised incentive and
performance measurements based in part on customer satisfaction levels. Such
measurements were implemented during 1993.
 
  To support this new marketing effort, Fidelity is upgrading its computer and
reporting systems for tracking customer profiles and investment activities,
for monitoring demographic data for marketing purposes, and for updating new
financial products being offered. Fidelity is also employing customer surveys,
focus groups and private interviews to determine actual and potential customer
needs and desires and thereby to tailor its financial services and investment
products.
 
  Management also intends to offer a wider range of loan types than the Bank
currently originates. While continuing to offer adjustable rate mortgages and
to maintain an expertise in originating and servicing multifamily mortgages,
the Bank plans to increase its mortgage banking capabilities and to originate
mortgages that, while not appropriate for inclusion in the Bank's portfolio in
significant quantities, are attractive to borrowers and to the secondary
market.
 
MORTGAGE BANKING GROUP OPERATIONS
 
  The Bank conducts its residential real estate lending activities through its
Mortgage Banking Group. Operating as a Fidelity division, the Mortgage Banking
Group is responsible for originating single family and multifamily residential
real estate loans for retention in the Company's loan portfolio or sale to
secondary market investors and conduits. After receiving completed loan
applications, the Bank reviews applicant credit history, obtains verification
of employment and other pertinent financial information, confirms property
value through appraisal and completes a transaction evaluation and loan
underwriting. Approved loans are then submitted to the Bank's loan funding
staff. Payment processing, collection and related loan functions are performed
by the Bank's servicing employees. The extent of Fidelity's direct
responsibility for applicant information collection and verification may
depend on whether business is sourced entirely through its own employees
(retail origination) or third parties (as in wholesale or correspondent
business).
 
  The Mortgage Banking Group has adopted an operating strategy more similiar
to that of a mortgage bank than a thrift or savings and loan institution. In
the second quarter of 1993, the Bank adopted a requirement that substantially
all loan originations meet secondary market standards, to enable the Bank to
sell or securitize more loans and thereby enhance its financial liquidity and
operating flexibility. The Bank also enhanced its single family loan program
features and gave borrowers more competitive interest rate lock-in options for
its fixed-rate loan product offerings. The associated increase in the
Company's interest rate risk was addressed through modifications of its
secondary market capabilities and operations.
 
  From 1986 to mid-1992, the Bank had emphasized the origination and retention
of loans secured by multifamily property (2 or more units). From mid-1992 to
present, emphasis has been redirected toward originating single family
residential loans. At December 31, 1993, 71% of Fidelity's loan portfolio was
secured by residential properties containing two or more apartment units, 21%
by single family residential properties and 8% by other properties. OTS
capital regulations established generally lower risk-based capital
requirements for loans secured by single family and multifamily properties
with 36 or fewer units, than for commercial and consumer loans. See
"Regulation and Supervision--FIRREA Capital Requirements."
 
  In the first quarter of 1993, the Bank completed a reorganization of its
real estate lending operations. The loan origination function was separated
into two divisions: a Residential Production Division, focused on increasing
the volume of single family mortgages and two to four unit loan products; and
a Major Loan Production Division, responsible for the Bank's five or more unit
residential lending. The Bank also
 
                                       8

consolidated all "retail" mortgage application processing and underwriting in
one business unit located in its administration center. All single family loan
production personnel were relocated from regional lending offices and assigned
to key branch locations, furthering the integration of mortgage products into
the Bank's retail financial services delivery system. These actions resulted
in the closure of two of the Bank's four existing regional lending offices as
well as the refocus of the remaining regional offices solely on five unit or
over loan originations. The Bank also started a new business effort designed
to increase single family and two to four unit origination from third party
loan brokers. A number of staff additions were made in 1993 to implement this
operational plan. Fidelity's overall goal is to reposition itself in the
residential lending business as a secondary market, mortgage banking-oriented
loan originator.
 
  In retail loan origination, the Bank's employees have direct control over
verification of necessary applicant income, deposit and credit information as
well as other important elements of the application process. This is in
contrast to third party mortgage origination or wholesale business, where
approved loan brokers assemble key application material and verifications and
submit these completed information packages to the Bank for underwriting,
approval and funding. Wholesale mortgage origination offers the opportunity
for increased loan funding volume at lower fixed operational expense than
would be possible through retail mortgage origination. However, since a
greater portion of the application processing and information verification is
performed by the third-party loan brokers, wholesale business poses greater
credit risk than retail loan originations. The Bank has addressed this
potential credit quality issue through qualification standards for approval of
new loan broker accounts as well as underwriting practices and quality control
procedures.
 
  In addition to the structural reorganization of its multifamily loan
origination function discussed above, the Bank took severe measures in 1993 to
reposition its multifamily lending business orientation and to revise its
multifamily lending criteria. From January to April 1993, the Bank sharply
curtailed new multifamily loan generation by limiting new transactions to
purchase money funding or the refinancing of existing loans and reassigning
key major loan production staff to internal multifamily loan due diligence and
property inspection teams. Significantly reduced multifamily business
origination and lower funding levels resulted from these actions.
 
  Over the January to April interval, the Company reevaluated its multifamily
loan approval guidelines and operational practices, resulting in new
underwriting procedures and more conservative qualifying standards. When
multifamily business origination was resumed in May, the Major Loan Production
Division instituted a new multifamily property scoring system that establishes
a numerical score and corresponding letter grade for each multifamily loan
request. The score and grade then determine qualifying loan-to-value ratios
and debt service coverage requirements, with higher-graded properties eligible
for more favorable underwriting guidelines. Transaction review procedures were
also modified so that multifamily transactions now require, at a minimum, two
loan officer signatures for final loan approval. The Bank believes these
operational enhancements and evaluation measures provide adequate business
credit quality and are appropriate due to current adverse multifamily property
operating economics and market values in the geographic areas where the Bank's
loan portfolio is concentrated. While the Bank is aware that certain of its
underwriting guidelines and standards may be more conservative than other
local market competitors, and thus may decrease new business volume, the Bank
believes that the multifamily origination effort remains competitive and
increases the Bank's ability to securitize the multifamily loan product.
 
  Until the third quarter of 1993, almost all loans funded were generated
through employee loan personnel and outside loan agents. Outside loan agents
are independent real estate brokers who are compensated on a commission basis
upon funding of their loans. Beginning in the third quarter of 1993, however,
Fidelity's single family origination volume increasingly came from third party
loan brokers, reflecting the Bank's conscious decision to develop and expand
this residential mortgage origination channel as discussed above. In July
1993, the Bank opened and staffed two loan origination offices devoted
exclusively to processing single family and two to four unit residential loan
applications from third party loan brokers or "wholesale" mortgage business. A
third wholesale office became fully operational in October. The Bank plans to
open additional wholesale operations in 1994, including one or more offices in
Northern California.
 
                                       9

  Fidelity made significant enhancements in its internal computer systems and
reporting capabilities in 1993. In October, the Bank converted its loan
servicing operation to a new computer system which is expected to result in
systems expense reduction in 1994. The Bank also installed a new automated loan
application processing and tracking computer system which will further its
mortgage banking and secondary marketing capabilities.
 
Multifamily Residential Loans
 
  The Company offers adjustable rate mortgage ("ARM") loans secured by
apartment buildings with 2 or more units with a maximum amortized loan term of
30 years, with some loans having balloon payments due in 15 years. A majority
of Fidelity's ARM loans adjust with the FHLB Eleventh District Cost of Funds
Index ("COFI"), with a monthly interest rate adjustment commencing after an
initial introduction period of up to six months. Since the borrower's monthly
payment amount adjusts only annually, if COFI increases, these loans can
negatively amortize if the monthly payment is not sufficient to pay in full the
additional interest accruing on the loan. Although multifamily loans in the
Company's loan portfolio contain a due-on-sale clause, by their terms they are
generally transferable to a purchaser of the property if the purchaser meets
the Company's credit standards.
 
  Multifamily real estate lending entails certain risks different from those
posed by single family residential lending. Multifamily and commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience
on loans secured by multifamily and commercial real estate is typically
dependent on the successful operation of the related real estate project and
thus may be subject, to a greater extent, to adverse conditions in the real
estate market or in the economy in general than are loans secured by single
family properties. Multifamily ARM loans may have greater vulnerability to
default than fixed rate loans during times of increasing interest rates due to
the potential for increase in the amount of a borrower's payment obligations,
while the borrower's income from the property may not increase. See "ARM
Loans."
 
  The Company is concerned about the elevated delinquency rates and loan
restructuring requests being experienced in certain parts of its multifamily
portfolio. Among other things, with respect to its multifamily loan portfolio,
the Company is also concerned about: (a) increasing vacancy rates which
diminish the ability of the property to service the underlying loan; (b)
decreasing apartment rental rates; (c) the potentially greater willingness of
investors to abandon such properties or seek bankruptcy protection,
particularly where such properties are experiencing negative cash flow and the
loans are not cross-collateralized by other performing properties; (d) the
substantial decreases in the market value of multifamily properties experienced
in recent periods (resulting, in many cases, in appraised or resale values less
than the outstanding loan balances) and the general illiquidity of such
properties at the current time in Southern California; (e) the comparative
illiquidity of multifamily residential mortgages, given the limited secondary
market for such mortgages; and (f) potential losses resulting from the January
1994 Northridge Earthquake.
 
  On March 18, 1994, the OTS published a final regulation effective on that
date that permits a loan secured by multifamily residential property,
regardless of the number of units, to be risk-weighted at 50% for purposes of
the risk-based capital standards if the loan meets specified criteria relating
to term of the loan, timely payments of interest and principal, loan-to-value
ratio and ratio of net operating income to debt service requirements. Under the
prior rule, loans secured by multifamily residential properties with more than
36 units were required to be risk-weighted at 100%.
 
  As of December 31, 1993, Fidelity held $406.3 million in loans secured by
multifamily residential properties with 37 or more units and therefore risk-
weighted at 100%, some of which qualify for 50% risk-weighting under the
criteria of the new regulation. Thus, Fidelity's risk-based capital ratio could
increase. However, the additional criteria of the new rule could cause some of
Fidelity's existing loans secured by 5 to 36 unit residential properties to
increase in risk-weighting from 50% to 100%. See "Regulation and Supervision--
FIRREA Capital Requirements." The ultimate impact on Fidelity of the new
regulation has not been determined.
 
                                       10

Single Family Residential Loans
 
  The Bank offers single family residential mortgage loans with fixed interest
rates having maximum amortization loan terms of up to 30 years. Some single
family loan programs have maturities of only 15 years or balloon payments due
in 5 or 7 years. Due to the interest rate risk presented by the holding of
fixed rate loans combined with variable cost sources of funding, the Bank sells
substantially all originations of fixed rate residential 1 to 4 unit loans to
secondary market investors. While this reduces the interest rate exposure from
a portfolio investor standpoint, there remains the risk associated with adverse
movements in interest rates from the date of loan application to approval,
investor settlement and final delivery. In the second quarter of 1993, Fidelity
modified and augmented internal policies to provide for greater management
control of loan pipeline interest rate risk exposure. During the same quarter,
the Bank also entered into a consulting arrangement with a nationally
recognized organization for daily pipeline valuation services, hedging
strategies and trading execution. This agreement provided Fidelity with state-
of-the-art computer-based valuation methodology for application tracking and
securities commitments necessary for mortgage pipeline hedging management until
these capabilities were developed internally. In October 1993, the Bank reduced
the consulting arrangement to an advisory service, with hedging management
being performed internally. The Bank will assess on a regular basis the
continuation of this pipeline tracking and valuation advisory service
arrangement over in-house alternatives. Management anticipates that secondary
market practices and pipeline interest rate risk management techniques will
continue to be enhanced in 1994 to provide higher quality data transmission and
more efficient product pricing and delivery to secondary market investors.
 
  The Bank also offers ARM loans secured by owner and non-owner occupied single
family residences with a maximum amortized loan term of 30 years. ARM loans
adjust with the one-year U.S. Treasury index or COFI with a monthly interest
rate adjustment commencing after an initial introduction period of up to six
months. Since the borrower's payment amount adjusts annually for the loans
indexed to COFI, if COFI increases these loans can negatively amortize if the
monthly payment is not sufficient to pay in full the additional interest
accruing on the loan. Although single family ARM loans in the Bank's loan
portfolio contain a due-on-sale clause, by their terms they are transferable to
a purchaser of the property if the purchaser meets the Bank's credit standards.
See "ARM Loans" for further discussion of the Bank's asset/liability strategy.
 
Home Equity Loans
 
  The Bank offers home equity credit lines. The maximum term of the credit
lines offered is 15 years. All of the credit lines provide for variable
interest rates based on a prime rate. These loans are generally underwritten
using a maximum loan-to-value ratio of between 70% and 75%. The total of
undrawn credit lines plus outstanding balances at December 31, 1993, 1992 and
1991 was $108 million, $129 million and $138 million, respectively.
 
  The decline in undrawn credit lines plus outstanding balances was due to a
slowdown in new credit facility growth over the 1992 to 1993 period. New home
equity credit lines originated during 1993, 1992 and 1991 totaled approximately
$13.6 million, $26.9 million and $42.5 million, respectively. In 1993, new home
equity credit line originations declined 49% from 1992 levels as a function,
the Bank believes, of borrowers accessing equity in their homes through
refinancings of their mortgage loans, as well as lower homeowner equity, as
single family housing appraisals fell from higher values of prior years. In
addition, in May 1993, management implemented a new $300 home equity
application fee which also contributed to the home equity volume reduction from
1992 levels.
 
                                       11

 Portfolio statistics
 
  All presentations of the Company's total loan portfolio include loans
receivable and loans held for sale unless stated otherwise.
 
  The following table sets forth the composition of the Company's total loans
receivable by type of security at the dates indicated:

                                                                  DECEMBER 31,
                         --------------------------------------------------------------------------------------------------
                                1993                1992                1991                1990                1989
                         ------------------  ------------------  ------------------  ------------------  ------------------
                                    PERCENT             PERCENT             PERCENT             PERCENT             PERCENT
                                      OF                  OF                  OF                  OF                  OF
LOANS BY TYPE OF                     TOTAL               TOTAL               TOTAL               TOTAL               TOTAL
SECURITY                   AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS
- ----------------         ---------- -------  ---------- -------  ---------- -------  ---------- -------  ---------- -------
                                                             (DOLLARS IN THOUSANDS)
                                                                                      
Residential loans:
 Single family.........  $  792,054  20.80%  $  857,631  21.08%  $1,083,652  23.46%  $1,671,332  32.53%  $1,705,569  38.00%
 Multifamily:
   2 to 4 units........     505,219  13.26      526,826  12.96      566,452  12.27      583,474  11.36      462,972  10.32
   5 to 36 units.......   1,795,374  47.14    1,880,589  46.23    1,991,089  43.11    1,847,215  35.96    1,317,346  29.35
   37 units and over...     406,330  10.67      444,576  10.93      572,285  12.39      600,288  11.68      543,403  12.11
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
    Total multifamily..   2,706,923  71.07    2,851,991  70.12    3,129,826  67.77    3,030,977  59.00    2,323,721  51.78
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
     Total residential
      loans............   3,498,977  91.87    3,709,622  91.20    4,213,478  91.23    4,702,309  91.53    4,029,290  89.78
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
Other real estate
 loans:
   Commercial and
    industrial.........     295,761   7.76      343,270   8.44      385,960   8.36      417,299   8.12      440,951   9.83
   Land and land
    improvements.......       4,828   0.13        6,445   0.16       10,926   0.24        9,123   0.18        7,210   0.16
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
 Total other real
  estate loans.........     300,589   7.89      349,715   8.60      396,886   8.60      426,422   8.30      448,161   9.99
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
Gross mortgage loans...   3,799,566  99.76    4,059,337  99.80    4,610,364  99.83    5,128,731  99.83    4,477,451  99.77
Loans secured by
 savings accounts and
 other non-real estate
 loans.................       8,998   0.24        8,278   0.20        7,815   0.17        8,748   0.17       10,343   0.23
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
Gross loans receivable.   3,808,564 100.00%   4,067,615 100.00%   4,618,179 100.00%   5,137,479 100.00%   4,487,794 100.00%
                         ---------- ======   ---------- ======   ---------- ======   ---------- ======   ---------- ======
Less:
 Undisbursed loan
  funds................          --                 301               2,706              24,992              38,073
 Unearned discounts....         210                 104                 120                 101               1,280
 Deferred loan fees....      11,139              11,152              12,131              10,621               3,906
 Allowance for esti-
  mated losses.........      83,832              64,277              52,374              16,552               7,336
                         ----------          ----------          ----------          ----------          ----------
                             95,181              75,834              67,331              52,266              50,595
                         ----------          ----------          ----------          ----------          ----------
 Total loans
  receivable...........  $3,713,383          $3,991,781          $4,550,848          $5,085,213          $4,437,199
                         ==========          ==========          ==========          ==========          ==========

  The following table sets forth the composition of the Company's loans held for
sale, which are included in the table above, by type of security at the dates
indicated:

                                                                  DECEMBER 31,
                         --------------------------------------------------------------------------------------------------
                                1993                1992                1991                1990                1989
                         ------------------  ------------------  ------------------  ------------------  ------------------
                                    PERCENT             PERCENT             PERCENT             PERCENT             PERCENT
LOANS BY TYPE OF                      OF                  OF                  OF                  OF                  OF
SECURITY                   AMOUNT    TOTAL     AMOUNT    TOTAL     AMOUNT    TOTAL     AMOUNT    TOTAL     AMOUNT    TOTAL
- ----------------         ---------- -------  ---------- -------  ---------- -------  ---------- -------  ---------- -------
                                                             (DOLLARS IN THOUSANDS)
                                                                                      
Residential loans:
 Single family.........    $239,371  65.10%     $25,043  94.57%     $37,497 100.00%    $199,500 100.00%          --     --
 Multifamily 2 to 4
  units................     128,317  34.90        1,439   5.43           --     --           --     --           --     --
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
     Total loans held
      for sale.........    $367,688 100.00%     $26,482 100.00%     $37,497 100.00%    $199,500 100.00%          --     --
                         ========== ======   ========== ======   ========== ======   ========== ======   ========== ======

                                       12

  The following table presents the Company's gross mortgage loans by type and
location as of December 31, 1993:

                                                                           COMMERCIAL AND
                                           MULTIFAMILY                       INDUSTRIAL
                                   ----------------------------           ----------------
                           SINGLE   2 TO 4   5 TO 36   37 UNITS   HOME    HOTEL/   OTHER
                           FAMILY   UNITS     UNITS    AND OVER EQUITY(1)  MOTEL   C & I     TOTAL
                          -------- -------- ---------- -------- --------- ------- -------- ----------
                                                    (DOLLARS IN THOUSANDS)
                                                                   
California:
 Southern California
  Counties:
    Los Angeles.........  $379,688 $178,016 $1,328,497 $281,714  $39,018  $20,740 $120,639 $2,348,312
    Orange..............   137,398  199,942    185,262   50,657   12,893   26,742   58,309    671,203
    San Diego...........    24,235   18,251     93,927   16,220      210    1,409    8,158    162,410
    San Bernardino......    18,050   31,471     43,194   24,173    1,476       --    4,639    123,003
    Riverside...........    24,590   17,287     29,187   10,832      978       --   18,793    101,667
    Ventura.............    24,144    8,693     30,398    2,546      921    2,593    1,211     70,506
    Other...............    25,668   12,949     25,508    7,573       87    2,655    5,297     79,737
                          -------- -------- ---------- --------  -------  ------- -------- ----------
                           633,773  466,609  1,735,973  393,715   55,583   54,139  217,046  3,556,838
 Northern California
  Counties:
    Santa Clara.........    56,769   25,506     39,612      147      530       --    2,252    124,816
    Other...............    45,289   11,818     19,789    5,197      233    2,251   16,170    100,747
                          -------- -------- ---------- --------  -------  ------- -------- ----------
      Total California..   735,831  503,933  1,795,374  399,059   56,346   56,390  235,468  3,782,401
                          -------- -------- ---------- --------  -------  ------- -------- ----------
Hawaii..................       255       --         --       --       --       --       --        255
Arizona.................        73       --         --    1,554       --       --    4,708      6,335
Washington..............       325       --         --    2,282       --       --      543      3,150
Oregon..................        --       --         --    3,435       --       --      254      3,689
Maryland................        --       --         --       --       --    2,713       --      2,713
Colorado................        21       --         --       --       --      513       --        534
Texas...................       410       --         --       --       --       --       --        410
New York................        59       --         --       --       --       --       --         59
Nevada..................        20       --         --       --       --       --       --         20
                          -------- -------- ---------- --------  -------  ------- -------- ----------
      Total out-of-state     1,163       --         --    7,271       --    3,226    5,505     17,165
                          -------- -------- ---------- --------  -------  ------- -------- ----------
Gross mortgage loans....  $736,994 $503,933 $1,795,374 $406,330  $56,346  $59,616 $240,973 $3,799,566
                          ======== ======== ========== ========  =======  ======= ======== ==========

- --------
(1) Includes home equity loans of $55,060 and $1,286 on single family and
    multifamily (2 to 4 units) properties, respectively. Therefore, including
    the home equity loans, loans on single family and multifamily (2 to 4
    units) properties total $792,054 and $505,219, respectively.
 
                                       13

  The following table sets forth the types of loans by repricing attribute,
held by the Company at the dates indicated:

                                                                  DECEMBER 31,
                         --------------------------------------------------------------------------------------------------
                                1993                1992                1991                1990                1989
                         ------------------  ------------------  ------------------  ------------------  ------------------
                                    PERCENT             PERCENT             PERCENT             PERCENT             PERCENT
                                      OF                  OF                  OF                  OF                  OF
                                     TOTAL               TOTAL               TOTAL               TOTAL               TOTAL
                           AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS
                         ---------- -------  ---------- -------  ---------- -------  ---------- -------  ---------- -------
                                                             (DOLLARS IN THOUSANDS)
                                                                                      
Adjustable rate loans... $3,649,714  95.83%  $3,924,093  96.47%  $4,447,838  96.31%  $4,551,857  88.60%  $4,069,508  90.68%
Fixed rate loans........    158,850   4.17      143,522   3.53      170,341   3.69      585,622  11.40      418,286   9.32
                         ---------- ------   ---------- ------   ---------- ------   ---------- ------   ---------- ------
 Gross loans receivable.  3,808,564 100.00%   4,067,615 100.00%   4,618,179 100.00%   5,137,479 100.00%   4,487,794 100.00%
                                    ======              ======              ======              ======              ======
Less:
 Undisbursed loan funds.         --                 301               2,706              24,992              38,073
 Unearned discounts             210                 104                 120                 101               1,280
 Deferred loan fees.....     11,139              11,152              12,131              10,621               3,906
 Allowance for estimated
  losses................     83,832              64,277              52,374              16,552               7,336
                         ----------          ----------          ----------          ----------          ----------
                             95,181              75,834              67,331              52,266              50,595
                         ----------          ----------          ----------          ----------          ----------
 Loans receivable, net.. $3,713,383          $3,991,781          $4,550,848          $5,085,213          $4,437,199
                         ==========          ==========          ==========          ==========          ==========

  The following table sets forth by contractual maturity and interest rate, the
Company's fixed rate and adjustable rate real estate loan portfolio at December
31, 1993. The table does not consider the prepayment experience of the loan
portfolio when scheduling the maturities of loans. See Item 7. "MD&A--Interest
Rate Risk Management."

                                                                     DECEMBER 31, 1993
                                   -------------------------------------------------------------------------------------
                                                         SUBTOTAL
                                                        MATURITIES                      MATURES IN
                                      TOTAL              GREATER   -----------------------------------------------------
                                      LOANS    MATURES   THAN ONE                   1997-    1999-    2004-     AFTER
                                   RECEIVABLE  IN 1994     YEAR     1995    1996     1998     2003     2008      2008
                                   ----------- -------- ---------- ------- ------- -------- -------- -------- ----------
                                                                  (DOLLARS IN THOUSANDS)
                                                                                
 Adjustable rate loans:
  Under    5.00%.................  $    22,572 $     -- $   22,572 $    -- $    -- $     -- $     90 $    560 $   21,922
  5.00%--  6.99%.................    3,086,684       --  3,086,684   1,404     486   11,585  187,424  505,770  2,380,015
  7.00%--  8.99%.................      385,295    7,380    377,915   4,897   5,184    9,506   67,539  162,752    128,037
  9.00%--  10.99%................      146,214   21,333    124,881   3,435     186      300   82,744   22,870     15,346
  11.00%-- 12.99%................        8,413      970      7,443   5,212      --       --       --      587      1,644
  Over     13.00%................          536       --        536      --      --       --      536       --         --
                                   ----------- -------- ---------- ------- ------- -------- -------- -------- ----------
   Total adjustable rate loans....   3,649,714   29,683  3,620,031  14,948   5,856   21,391  338,333  692,539  2,546,964
                                   ----------- ======== ========== ======= ======= ======== ======== ======== ==========
 Fixed rate loans:
  Under    5.00%.................  $       240 $     -- $      240 $   240 $    -- $     -- $     -- $     -- $       --
  5.00%--  6.99%.................       32,844    7,989     24,855      96     203    5,549      791    5,500     12,716
  7.00%--  8.99%.................       56,323        1     56,322     781     695    3,060    9,951    8,177     33,658
  9.00%--  10.99%................       52,881       39     52,842     249   1,006    2,767    2,641   27,901     18,278
  11.00%-- 12.99%................       11,198    4,653      6,545     862     717       --      115      418      4,433
  Over     13.00%................        5,364    3,016      2,348      --      --      502       33      120      1,693
                                   ----------- -------- ---------- ------- ------- -------- -------- -------- ----------
   Total fixed rate loans......... $   158,850 $ 15,698 $  143,152 $ 2,228 $ 2,621 $ 11,878 $ 13,531 $ 42,116 $   70,778
                                   ----------- ======== ========== ======= ======= ======== ======== ======== ==========
 Less:
  Undisbursed loan funds..........          --
  Unearned discounts..............         210
  Deferred loan fees..............      11,139
  Allowance for estimated losses..      83,832
                                   -----------
                                        95,181
                                   -----------
   Loans receivable, net.......... $ 3,713,383
                                   ===========

                                       14

  The following table details the activity in the Company's loan portfolio for
the periods indicated:

                                         YEAR ENDED DECEMBER 31,
                          ----------------------------------------------------------
                             1993        1992        1991        1990        1989
                          ----------  ----------  ----------  ----------  ----------
                                          (DOLLARS IN THOUSANDS)
                                                           
Principal balance at
 beginning of period....  $3,991,781  $4,550,848  $5,085,213  $4,437,199  $4,058,886
Real estate loans
 originated:
 Conventional:
  Single family.........     271,316     261,563     186,320     248,849     248,932
  Multifamily:
   2 to 4 units.........      42,931      29,931      63,146     179,515     121,648
   5 to 36 units........      89,935     121,940     239,165     640,621     288,549
   37 units and over....      12,887      19,588      15,785     104,864     115,376
                          ----------  ----------  ----------  ----------  ----------
    Total multifamily...     145,753     171,459     318,096     925,000     525,573
 Commercial and indus-
  trial.................       1,335         993       1,910      16,390      70,659
 Construction...........          --          --          --      21,091      52,415
                          ----------  ----------  ----------  ----------  ----------
  Total real estate
   loans originated(1)..     418,404     434,015     506,326   1,211,330     897,579
                          ----------  ----------  ----------  ----------  ----------
Real estate loans
 purchased:
 Single family..........          --          --          --     195,157         555
 Multifamily:
  2 to 4 units..........          --          --          --          --          --
  5 to 36 units.........       3,741         241          --         500          --
  37 units and over.....          --       1,434       1,080         473          --
                          ----------  ----------  ----------  ----------  ----------
   Total multifamily....       3,741       1,675       1,080         973          --
 Commercial and
  industrial............         210          --       1,859          62          --
 Construction...........          --          --          --          --          --
                          ----------  ----------  ----------  ----------  ----------
  Total real estate
   loans purchased......       3,951       1,675       2,939     196,192         555
                          ----------  ----------  ----------  ----------  ----------
   Total real estate
    loans funded........     422,355     435,690     509,265   1,407,522     898,134
                          ----------  ----------  ----------  ----------  ----------
Payments and refinances.    (575,348)   (674,261)   (517,880)   (507,942)   (484,738)
Increase (decrease) in
 non real estate loans..         720         463        (928)       (465)        855
(Increase) decrease in
 reserves for loan loss-
 es.....................     (19,555)    (11,903)    (35,822)     (9,216)     (4,791)
Other increases (de-
 crease) in total loans,
 net....................       8,433       9,656      29,486       9,146     (19,114)
Loans sold or
 securitized:
 Whole loans(2).........    (115,003)   (318,712)   (486,413)   (239,260)     (1,824)
 Participations.........          --          --     (32,073)    (11,771)    (10,209)
                          ----------  ----------  ----------  ----------  ----------
  Total loans sold or
   securitized..........    (115,003)   (318,712)   (518,486)   (251,031)    (12,033)
                          ----------  ----------  ----------  ----------  ----------
Net increase (decrease)
 in loans receivable....    (278,398)   (559,067)   (534,365)    648,014     378,313
                          ----------  ----------  ----------  ----------  ----------
Principal balance at end
 of period..............  $3,713,383  $3,991,781  $4,550,848  $5,085,213  $4,437,199
                          ==========  ==========  ==========  ==========  ==========
Loans serviced for
 others.................  $  888,362  $  982,698  $  925,368  $  676,101  $  505,297

- -------
(1) Includes loans originated to finance sales of REO of $51.6 million, $11.2
    million and $1.6 million, for the years ended December 31, 1993, 1992 and
    1991, respectively. In 1990 and 1989 loans originated to finance sales of
    REO were insignificant.
 
(2) Net of repurchases.
 
                                      15

  Declines in total real estate loans originated in 1993 and 1992 were due
primarily to the curtailment of multifamily origination during the
reorganization of the Mortgage Banking Group and the imposition of more
stringent multifamily loan underwriting criteria. Declines in loan
originations in 1991 were due primarily to the Company's decision to reduce
assets to strengthen its capital ratios.
 
Sale of Loans
 
  Over the past several years, the Company has sold most of its current
production of fixed rate single family residential loans in the secondary
mortgage market and has retained its ARM production. Loan sales totaled
approximately $138.4 million, $204.4 million and $282.7 million for the years
ended December 31, 1993, 1992 and 1991, respectively. In addition, sales of
mortgage-backed securities totaled $522.1 million, $0 and $273.1 million,
respectively, in the three years. Fidelity is an approved originator and
servicer for the Federal National Mortgage Association (the "FNMA"), the
Federal Home Loan Mortgage Corporation (the "FHLMC"), the Federal Housing
Administration (the "FHA") and the Veterans Administration (the "VA"). As
Fidelity's single family lending volumes increase, sales of loans in the
secondary mortgage market will increase.
 
  In the beginning of 1993, Fidelity concentrated on selling all fixed rate
loans it originated into the secondary market to maximize liquidity and reduce
interest rate risk. During 1993, the Company approved a policy of more active
management of its loans and investment portfolio with a view toward
disposition of securities with unfavorable risk/return profiles and to allow
more asset/liability management and asset size flexibility to facilitate
further downsizing of the Bank. To this end, the Company designated $321
million of certain adjustable rate mortgage loans meeting specific criteria as
held for sale as of December 31, 1993.
 
  In connection with loan sales, Fidelity is required to make representations
and warranties with respect to the loans and their underwriting criteria.
These representations and warranties create a contingent liability to
repurchase the loans to the extent they are subsequently found to be untrue.
 
ARM Loans
 
  To assist in reducing the sensitivity of its earnings to interest rate
fluctuations, Fidelity has emphasized the origination of ARMs for its
portfolio. ARMs help to improve the matching of interest rate repricing
between Fidelity's asset and liability portfolios. ARMs reduce the interest
rate risk inherent in a portfolio of long-term mortgages by repricing each
individual asset at regular intervals over the life of the asset. The initial
period before the first adjustment varies between one month and five years.
ARM loans represented 52% of all loans funded in 1993 and 96% of the total
loan portfolio at December 31, 1993. Fidelity's ARMs generally bear an
interest rate which periodically adjusts at a stated margin (the "contractual
spread") above COFI, which is the index which most closely matches Fidelity's
liability base. The risk of different asset and liability repricing can be
reduced by diversifying the ARM portfolio. Other ARMs originated are generally
indexed to U.S. Treasury indices, which more closely match the repricing speed
of deposits, but are more volatile than a COFI index.
 
  ARMs may have greater vulnerability to default than fixed rate loans during
times of increasing interest rates due to the potential for substantial
increase in the amount of a borrower's payments or, to the extent payments do
not increase, erosion of a borrower's equity in the underlying property. Risks
of default are reduced by caps on both the maximum interest that can be
charged and the amount by which a borrower's payments can be periodically
increased. However, during periods of significant interest rate increases,
interest rate caps can adversely affect interest rate margins and payment caps
can increase borrower exposure to negative amortization, unless the loan
contains a prohibition on negative amortization. When the borrower's payment
is not sufficient to cover the computed interest amount, negative amortization
occurs and the difference then increases the principal balance of the loan.
Fidelity uses a combination of interest rate caps and payment caps to reduce
risk of default, and to date, negative amortization has not adversely affected
 
                                      16

Fidelity's default ratios. At December 31, 1993, the total negative
amortization included in the loan portfolio was $0.7 million compared to $3.7
million at December 31, 1992.
 
  During periods of declining interest rates, ARMs with high interest rate caps
relative to market are vulnerable to prepayment as borrowers refinance into
ARMs with lower caps or into fixed rate loans. Fidelity has also attempted to
minimize the risk of default associated with all ARMs by using the COFI (a
relatively stable index) for adjustment, thereby limiting interest rate
volatility over short periods, and utilizing loan-to-value ratios generally not
in excess of 80% unless private mortgage insurance is obtained. During periods
of declining interest rates, ARMs with negative amortization potential will
experience accelerated amortization, thereby offsetting, in whole or in part,
previously incurred negative amortization, if any, or reducing the principal
balance ahead of the original schedule.
 
  Most of Fidelity's ARMs provide for a lifetime interest rate cap (currently
ranging from 1.875% to 6.250% above the initial rate). A limited number of
Fidelity's ARMs also provide for an annual interest rate cap. In addition, for
competitive reasons, ARMs are often offered at an initial reduced interest rate
(the "introductory rate") for a period of time (one, three, or six months).
Fidelity's ARMs are underwritten for credit purposes based on the pro forma
payment which would be required at the fully-indexed rate or at the time of the
first interest rate adjustment, depending on the type of property.
 
  Fidelity currently offers primarily three types of ARMs. One type has a
lifetime interest rate cap and payment cap on the amount by which monthly
payments can increase from one annual or semiannual payment adjustment to the
next; another type provides for a lifetime interest rate cap but includes
payment adjustments concurrent with interest rate adjustments without a cap on
the payment increase; and the last type provides for an initial five-year fixed
rate of interest after which it reverts to the type of ARM first described
above.
 
CREDIT ADMINISTRATION
 
Appraisal and Underwriting Standards
 
  All properties taken as collateral are appraised utilizing either an outside
appraiser or a Fidelity staff appraiser. Fidelity requires that loans secured
by real estate be approved at various levels of management, depending upon the
size of the loan. Until 1991, Fidelity had a low delinquency rate on all of its
single family and multifamily loans as well as its commercial properties
located in California. However, with worsening economic conditions and declines
in the real estate values in Southern California, delinquency rates have been
steadily increasing. Fidelity has reassessed its underwriting practices and, in
light of current conditions, has taken steps to increase qualifying ratios
including debt service coverage minimums and loan-to-value maximums.
 
  During the underwriting process for single family loans, Fidelity obtains
information regarding the applicant's income, financial condition, employment
and credit history to determine the applicant's ability to service the debt
obligations. Fidelity underwrites loans pursuant to internal underwriting
criteria as well as to the requirements of the secondary market for such loans
or special investor needs. Increasing third party generation of single family
loans will require Fidelity to maintain strict underwriting and quality control
standards.
 
  Fidelity's underwriting standards for multifamily and commercial real estate
lending require the underwriter to review an applicant's experience in owning
and operating such type of income-producing property to determine if the
applicant is qualified to manage such property. At the time of origination,
Fidelity reviews the borrower's financial resources, credit history and income-
producing capacity, verifies employment, reviews an appraisal of the security
property, analyzes the anticipated occupancy, operating expenses and cash flow
of income-producing properties, and performs other underwriting procedures. In
accordance with its underwriting guidelines Fidelity generally requires a
minimum debt coverage ratio (net
 
                                       17

operating income divided by debt service payment) of from 112% to 130%,
depending on the rated quality of the property, whether the loan involves the
arms-length market sale of the property or is a refinancing and if it is a
refinancing whether there is "cash out" or "no cash out." The debt service
coverage ratio is calculated on actual occupancy figures typically utilizing a
10% vacancy factor and using a payment which is the greater of a fully indexed
rate, start rate or (typically higher) qualifying rate. The Bank also limits
its loans to a maximum of 50% to 75% of the appraised value of the property,
again depending on the rated quality of the property and other circumstances
outlined above with respect to debt service coverage.
 
Loan Portfolio Risk Elements
 
  Fidelity's loan portfolio risk elements and credit loss experience may be
more clearly understood when the following sections are read in conjunction
with Item 7. "MD&A--Asset Quality."
 
  Fidelity originates loans with the expectation that borrowers will honor
their repayment obligations. In an attempt to reduce credit risk, Fidelity
maintained the underwriting criteria described above. As is the case with other
lenders, however, some of Fidelity's borrowers have or will become unable or
unwilling to pay interest or principal when due. The reasons for such defaults
include, without limitation, (a) adverse conditions in the regional or national
economy; (b) unemployment; (c) an oversupply of apartments for lease; (d) an
increase in vacancies; (e) a decline in real estate values; (f) declines in
rents; and (g) loss of equity. If the borrower is unable to meet his obligation
but is willing to make an additional financial commitment to the property
securing the loan, Fidelity may restructure the loan to more closely match the
reduced cash flow and value of the collateral. In other circumstances, Fidelity
commences proceedings to foreclose upon the property securing the loan. Such
proceedings may be delayed by litigation or bankruptcy initiated by the
borrower. Fidelity's risk of loss relates both to the frequency of such
defaults and to the severity of loss, namely, the excess, if any, of the
outstanding principal balance of the loan plus accrued interest over the amount
realized upon ultimate disposition of the collateral. In rare instances,
Fidelity may be able to recover all or some of the loss it incurs from other
assets of the borrower. Fidelity also is exposed to loss if the value of the
collateral declines between the time of foreclosure and the time of resale.
Fidelity is also exposed to loss to the extent that it is required to invest
significant funds to foreclose on and sell its collateral, which may include
rehabilitating dilapidated or distressed collateral.
 
Loan Monitoring
 
  Fidelity has established a monitoring system for its loan portfolio to
attempt to identify potential problem loans. Loans that are currently
performing but have met certain criteria requiring further scrutiny are placed
on a "watch list". These criteria include, but are not limited to, a large
outstanding balance, collateral performing in an inadequate manner, origination
for the purpose of facilitating the sale of real estate owned by Fidelity, and
other high risk characteristics identified through the internal asset review
process that warrant further analysis. Fidelity's relationship management group
actively gathers updated operating information on large multifamily loans.

                                       18

  The following table details Fidelity's net loans which are 30 to 89 days
delinquent at the dates indicated:

                                                     DECEMBER 31,
                                        --------------------------------------
                                         1993    1992    1991    1990   1989
                                        ------- ------- ------- ------ -------
                                                (DOLLARS IN THOUSANDS)
                                                        
Loans 60 to 89 days contractually
 delinquent:
   Single family....................... $ 2,497 $ 3,665 $ 3,370 $  824 $ 1,532
   Multifamily:
    2 to 4 units.......................   1,707   1,180   1,841     --       1
    5 to 36 units......................  12,770   9,241   7,811     --      --
    37 units and over..................   5,035   1,223      --     --      --
                                        ------- ------- ------- ------ -------
      Total multifamily................  19,512  11,644   9,652     --       1
 Commercial and industrial.............   1,723      --   7,869  3,612     719
                                        ------- ------- ------- ------ -------
  Total................................ $23,732 $15,309 $20,891 $4,436 $ 2,252
                                        ======= ======= ======= ====== =======
Loans 30 to 59 days contractually
 delinquent:
   Single family....................... $ 7,480 $ 7,939 $ 6,627 $3,063 $ 2,556
   Multifamily:
    2 to 4 units.......................   3,599   1,432     416     94     190
    5 to 36 units......................  16,948  15,927   6,515  1,587     415
    37 units and over..................   4,114   5,623  19,453     --   2,783
                                        ------- ------- ------- ------ -------
      Total multifamily................  24,661  22,982  26,384  1,681   3,388
 Commercial and industrial.............   2,048   1,807   3,040    139   4,409
                                        ------- ------- ------- ------ -------
  Total................................ $34,189 $32,728 $36,051 $4,883 $10,353
                                        ======= ======= ======= ====== =======

  The following table presents net delinquent loans at December 31, 1993,
including those detailed above (30 to 89 days delinquent) as well as those 90
days or more delinquent:

                                                              COMMERCIAL AND
                                        MULTIFAMILY             INDUSTRIAL
                                  ------------------------ --------------------
                          SINGLE  2 TO 4  5 TO 36 37 UNITS
                          FAMILY   UNITS   UNITS  AND OVER CONSTRUCTION  OTHER   TOTAL
                          ------- ------- ------- -------- ------------ ------- --------
                                              (DOLLARS IN THOUSANDS)
                                                           
California:
 Southern California
  Counties:
   Los Angeles..........  $14,011 $ 5,224 $49,876 $11,442     $1,483    $ 6,079 $ 88,115
   Orange...............    3,576   4,559   5,115      --         --      1,495   14,745
   San Bernardino.......      419   8,301   2,335      --         --         --   11,055
   Riverside............      754     940   1,896      --         --         --    3,590
   San Diego............      814   1,248   3,114   3,473         --         --    8,649
   Ventura..............      628     225     546      --         --         --    1,399
   Other................      717     238      --      --         --        682    1,637
                          ------- ------- ------- -------     ------    ------- --------
                           20,919  20,735  62,882  14,915      1,483      8,256  129,190
                          ------- ------- ------- -------     ------    ------- --------
 Northern California
  Counties:
   Santa Clara..........      807     224   1,309      --         --        651    2,991
   Sacramento...........       --      --      --      --         --      4,416    4,416
   Other................      906      --     273      --         --         --    1,179
                          ------- ------- ------- -------     ------    ------- --------
                            1,713     224   1,582      --         --      5,067    8,586
                          ------- ------- ------- -------     ------    ------- --------
    Total California....   22,632  20,959  64,464  14,915      1,483     13,323  137,776
                          ------- ------- ------- -------     ------    ------- --------
Arizona.................        5      --      --      --         --         --        5
                          ------- ------- ------- -------     ------    ------- --------
                          $22,637 $20,959 $64,464 $14,915     $1,483    $13,323 $137,781
                          ======= ======= ======= =======     ======    ======= ========

                                       19

Nonaccrual Loans
 
  The Bank generally places a loan on nonaccrual status whenever the payment of
interest is 90 or more days delinquent, or earlier if a loan exhibits
materially deficient characteristics. At December 31, 1993, $13.6 million of
loans were less than 90 days delinquent but had been placed on nonaccrual
status. Loans on nonaccrual status are resolved by the borrower bringing the
loan current, by the Company and the borrower agreeing to modify the terms of
the loan or by foreclosure upon the collateral securing the loan. See
"Restructured Loans" and "Foreclosure Policies."
 
  The following table presents Fidelity's net nonaccrual loans by type of
collateral at the dates indicated:

                                                     DECEMBER 31,
                                       ----------------------------------------
                                        1993     1992    1991    1990    1989
                                       ------- -------- ------- ------- -------
                                                (DOLLARS IN THOUSANDS)
PROPERTY TYPE
- -------------
                                                         
Single family......................... $12,661 $ 14,064 $ 8,100 $ 3,631 $ 1,543
Multifamily:
 2 to 4 units.........................  15,652    6,372   1,256     628   1,000
 5 to 36 units........................  34,745   37,501  12,620     376     218
 37 units and over....................  18,112   35,357  26,123  19,629   2,325
                                       ------- -------- ------- ------- -------
  Total multifamily...................  68,509   79,230  39,999  20,633   3,543
Commercial and industrial.............  12,305   18,747  20,883   5,897   7,001
                                       ------- -------- ------- ------- -------
  Total nonaccrual loans(1)........... $93,475 $112,041 $68,982 $30,161 $12,087
                                       ======= ======== ======= ======= =======

- --------
(1) Includes loans over 90 days contractually delinquent and other nonaccrual
    loans.
 
  It is the Company's policy to reserve all earned but unpaid interest on loans
placed on nonaccrual status. The reduction in income related to nonaccrual
loans upon which interest was not paid was $8.7 million, $13.6 million, and
$7.6 million in 1993, 1992 and 1991, respectively.
 
  The following table presents net nonaccrual loans by property type and
location at December 31, 1993:

                                                              COMMERCIAL
                                       MULTIFAMILY          AND INDUSTRIAL
                                 ----------------------- --------------------
                                                   37
                                                  UNITS
                         SINGLE  2 TO 4  5 TO 36   AND
                         FAMILY   UNITS   UNITS   OVER   CONSTRUCTION  OTHER   TOTAL
                         ------- ------- ------- ------- ------------ ------- -------
                                            (DOLLARS IN THOUSANDS)
                                                         
California:
 Southern California
  Counties:
  Los Angeles........... $ 7,654 $ 3,780 $28,594 $18,112    $1,344    $ 4,909 $64,393
  Orange................   1,694   2,253   2,015      --        --        303   6,265
  San Bernardino........      83   7,766   1,284      --        --         --   9,133
  Riverside.............     362     766     687      --        --         --   1,815
  San Diego.............     606     638   1,346      --        --         --   2,590
  Ventura...............     398     225     546      --        --         --   1,169
  Other.................     706      --      --      --        --        682   1,388
                         ------- ------- ------- -------    ------    ------- -------
                          11,503  15,428  34,472  18,112     1,344      5,894  86,753
                         ------- ------- ------- -------    ------    ------- -------
 Northern California
  Counties:
  Santa Clara...........     807     224      --      --        --        651   1,682
  Sacramento............      --      --      --      --        --      4,416   4,416
  Other.................     346      --     273      --        --         --     619
                         ------- ------- ------- -------    ------    ------- -------
                           1,153     224     273      --        --      5,067   6,717
                         ------- ------- ------- -------    ------    ------- -------
    Total California....  12,656  15,652  34,745  18,112     1,344     10,961  93,470
Arizona.................       5      --      --      --        --         --       5
                         ------- ------- ------- -------    ------    ------- -------
 Total nonaccrual loans. $12,661 $15,652 $34,745 $18,112    $1,344    $10,961 $93,475
                         ======= ======= ======= =======    ======    ======= =======

                                       20

Restructured Loans
 
  The Bank has modified the terms of a number of its loans. In some cases, the
modifications have taken the form of "early recasts" in which the amortizing
payments are revised (or recalculated) earlier than scheduled to reflect
current lower interest rates. In other cases, the Bank has agreed to accept
interest only payments for a limited time at current interest rates. In still
other cases, the Bank has reduced the loan balance in exchange for a paydown of
the loan or otherwise modified loans at terms that are less favorable to the
Bank than the current market. These loans have interest rates that may be less
than current market rates or may contain other concessions. Modified loans are
categorized as TDRs by the Bank when the modification contains concessions to
the borrower that the Bank would not otherwise consider except for the
borrower's poor financial condition.
 
  The following table presents TDRs by property type at December 31, 1993 and
1992:

                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1993    1992
                                                                ------- -------
PROPERTY TYPE                                                     (DOLLARS IN
- -------------                                                     THOUSANDS)
                                                                  
Single family.................................................. $   633 $ 3,160
Multifamily:
 2 to 4 units..................................................   3,171   4,065
 5 to 36 units.................................................  13,648  20,404
 37 units and over.............................................  11,090  54,108
                                                                ------- -------
  Total multifamily............................................  27,909  78,577
Commercial and industrial......................................      --   5,567
Land...........................................................     171      --
                                                                ------- -------
  Total TDRs................................................... $28,713 $87,304
                                                                ======= =======

  Of the total $87.3 million of TDRs at December 31, 1992, during 1993, the
terms of the modification expired on $39.8 million which are performing in
accordance with their original terms (of which $19.6 million are classified as
Substandard, $6.2 million are categorized as Special Mention and $14.0 million
are Pass assets), $20.4 million became nonperforming loans, $9.8 million
defaulted and were foreclosed, $3.5 million became ISF, $0.5 million was paid,
and $13.3 million continued to be categorized as TDRs at December 31, 1993.
 
  The following table presents TDRs at December 31, 1993, by property type and
location:

                                                  MULTIFAMILY
                                            -----------------------
                                     SINGLE  2-4    5-36   37 UNITS
                                     FAMILY UNITS   UNITS  AND OVER LAND  TOTAL
                                     ------ ------ ------- -------- ---- -------
                                               (DOLLARS IN THOUSANDS)
                                                       
California:
 Southern California Counties:
  Los Angeles.......................  $633  $1,222 $ 7,122 $ 1,872  $ 95 $10,944
  Orange............................    --     323   3,573   3,997    --   7,893
  San Bernardino....................    --     177   2,337   1,786    76   4,376
  Riverside.........................    --   1,098     616      --    --   1,714
  Other.............................    --     351      --      --    --     351
                                      ----  ------ ------- -------  ---- -------
 Total California...................   633   3,171  13,648   7,655   171  25,278
Oregon..............................    --      --      --   3,435    --   3,435
                                      ----  ------ ------- -------  ---- -------
 Total TDRs.........................  $633  $3,171 $13,648 $11,090  $171 $28,713
                                      ====  ====== ======= =======  ==== =======

 
                                       21

  The following table presents the loan balances of the TDRs at the dates
indicated by the type of modification:

                                          DECEMBER 31,
                           -------------------------------------------
                                   1993                  1992
                           --------------------- ---------------------
                                    PERCENT OF            PERCENT OF
                           AMOUNT RESTRUCTURINGS AMOUNT RESTRUCTURINGs
                           ------ -------------- ------ --------------
                                      (DOLLARS IN MILLIONS)
LOANS MODIFIED BY:
- ------------------
                                            
Early recast of scheduled
 payments................  $12.0       41.9%     $29.3       33.6%
Interest only payments...    8.6       29.8       28.0       32.1
Deferral of one or more
 payments................    1.3        4.5       21.4       24.5
Fixed rate reduced to
 market..................    3.4       12.0        4.4        5.0
Extension of maturity
 date....................    0.1        0.3        3.8        4.4
Reduction in rate to
 below market............     --         --        0.4        0.4
Principal forgiveness(1).    3.3       11.5         --         --
                           -----      -----      -----      -----
 Total TDRs..............  $28.7      100.0%     $87.3      100.0%
                           =====      =====      =====      =====

- --------
(1) $1.0 million in actual principal forgiveness in 1993 on $3.3 million of
    outstanding loans.
 
  During 1993, interest income of $8.3 million was recorded on TDRs, $0.1
million less than would have been recorded had the loans performed according
to their original terms. In 1992, the amounts were $10.0 million and $0.3
million, respectively. During 1991, $0.7 million of interest income was
recorded on TDRs, which consisted of one loan of $6.9 million at year-end
1991. The modification of this loan did not result in any reduction of
interest income in 1991. The Bank did not have any TDRs at December 31, 1990
or 1989.
 
  Please refer to Item 7. "MD&A--Asset Quality" for further information on
nonperforming assets during 1993 and 1992.
 
Internal Asset Classifications
 
  The OTS has promulgated a regulation and issued other regulatory guidance
requiring savings institutions to utilize an internal asset classification
system as a means of reporting problem and potential problem assets for
regulatory supervision purposes. The Bank has incorporated the OTS' internal
asset classifications as a part of its credit monitoring system. The Bank
currently designates its assets as Pass, Special Mention, Substandard,
Doubtful, or Loss. A brief description of these categories follows:
 
    A Pass asset is considered of sufficient quality to preclude designation
  as Special Mention or an adverse classification. Pass assets generally are
  protected by the current net worth and paying capacity of the obligor or by
  the value of the asset or underlying collateral.
 
    An asset designated as Special Mention does not currently expose an
  institution to a sufficient degree of risk to warrant an adverse
  classification. However, it does possess credit deficiencies or potential
  weaknesses deserving management's close attention. If uncorrected, such
  weaknesses or deficiencies may expose an institution to an increased risk
  of loss in the future.
 
    An asset classified as Substandard is inadequately protected by the
  current net worth and paying capacity of the obligor or of the collateral
  pledged, if any. Assets so classified have a well-defined weakness or
  weaknesses. They are characterized by the distinct possibility that the
  insured institution will sustain some loss if the deficiencies are not
  corrected.
 
    Assets classified as Doubtful have all the weaknesses inherent in those
  classified as Substandard. In addition, these weaknesses make collection or
  liquidation in full, on the basis of currently existing facts,
 
                                      22

  conditions and values, highly questionable or improbable. The Bank views
  the Doubtful classification as a temporary category. The Bank will
  generally classify assets as Doubtful when inadequate data is available or
  when such uncertainty exists as to preclude a Substandard classification.
  Therefore, the Bank will normally tend to have a minimal amount of assets
  classified in this category.
 
    Assets classified as Loss are considered uncollectible and of such little
  value that their continuance as assets without establishment of a specific
  reserve is not warranted. A Loss classification does not mean that an asset
  has absolutely no recovery or salvage value; rather it means that it is not
  practical or desirable to defer establishing a specific allowance for a
  basically worthless asset even though partial recovery may be effected in
  the future. The Bank will generally classify as Loss the portion of assets
  identified as exceeding the asset's fair market value and a specific
  reserve is established for such excess.
 
  A "classified asset" is one that has been designated a Substandard, Doubtful
or Loss. Classified assets do not include Special Mention or Pass assets. All
of the foregoing standards require the application of considerable subjective
judgments by the Bank.
 
  The following table summarizes Fidelity's net classified assets at the dates
indicated:

                                              DECEMBER 31,
                             --------------------------------------------------
                               1993       1992       1991       1990     1989
                             ---------  ---------  ---------  --------  -------
                                         (DOLLARS IN THOUSANDS)
                                                         
Nonperforming assets:
 Nonaccrual loans..........  $  93,475  $ 112,041  $  68,982  $ 30,161  $12,087
 REO(1)....................    142,146    122,364     55,743    18,307    8,625
                             ---------  ---------  ---------  --------  -------
  Total nonperforming as-
   sets....................    235,621    234,405    124,725    48,468   20,712
Performing loans with in-
 creased risk:
 Single family.............      5,749      6,808      6,963     2,930    3,833
 Multifamily:
  2 to 4 units.............      7,616      3,648      3,390        --       --
  5 to 36 units............     56,485     38,589     22,757       990       --
  Over 37 units............     51,965     49,566     36,405    11,207    2,751
                             ---------  ---------  ---------  --------  -------
   Total multifamily.......    116,066     91,803     62,552    12,197    2,751
 Commercial and industrial.      3,905      9,831     19,584    16,773    6,640
                             ---------  ---------  ---------  --------  -------
 Total performing loans
  with increased risk......    125,720    108,442     89,099    31,900   13,224
                             ---------  ---------  ---------  --------  -------
Other classified assets:
 Real estate held for in-
  vestment, net............     11,161     10,891     14,516    14,367   14,911
 Investment in subsidiar-
  ies......................         --         --         --       247      508
 Other assets..............         --         --         63        91      660
                             ---------  ---------  ---------  --------  -------
  Total classified assets..  $ 372,502  $ 353,738  $ 228,403  $ 95,073  $50,015
                             =========  =========  =========  ========  =======
Nonperforming assets to
 total assets..............       5.37%      4.99%      2.43%     0.85%    0.42%
                                  ====       ====       ====      ====     ====
Classified assets to total        8.49%      7.53%      4.46%     1.67%    1.00%
 assets....................       ====       ====       ====      ====     ====

- --------
(1) For presentation purposes, NPAs include REO net of REO GVA.
 
                                       23

  The following tables present the quarterly data for 1993 and 1992 of
Fidelity's net classified assets:

                          MARCH 31, 1993 JUNE 30, 1993 SEPTEMBER 30, 1993 DECEMBER 31, 1993
                          -------------- ------------- ------------------ -----------------
                                               (DOLLARS IN THOUSANDS)
                                                              
Nonperforming assets:
 Nonaccruing loans......     $126,349      $ 96,419         $ 88,412          $ 93,475
 REO....................      145,349       157,466          151,574           142,146
                             --------      --------         --------          --------
  Total nonperforming
   assets...............      271,698       253,885          239,986           235,621
                             --------      --------         --------          --------
Performing loans with
 increased risk.........      117,478        95,975          103,769           125,720
Other classified assets:
 Real estate held for
  investment............       10,803        10,702           11,371            11,161
 Other assets...........           --            --               --                --
                             --------      --------         --------          --------
  Total classified
   assets...............     $399,979      $360,562         $355,126          $372,502
                             ========      ========         ========          ========
  Nonperforming assets
   to total assets......         5.72%         5.61%            5.40%             5.37%
                             ========      ========         ========          ========
  Classified assets to
   total assets.........         8.43%         7.97%            7.99%             8.49%
                             ========      ========         ========          ========

 

                          MARCH 31, 1992 JUNE 30, 1992 SEPTEMBER 30, 1992 DECEMBER 31, 1992
                          -------------- ------------- ------------------ -----------------
                                               (DOLLARS IN THOUSANDS)
                                                              
Nonperforming assets:
 Nonaccruing loans......     $116,774      $108,264         $118,832          $112,041
 REO....................       60,814        81,547          117,421           122,364
                             --------      --------         --------          --------
  Total nonperforming
   assets...............      177,588       189,811          236,253           234,405
                             --------      --------         --------          --------
Performing loans with
 increased risk.........       58,127        73,380          133,218           108,442
Other classified assets:
 Real estate held for
  investment............       12,428        12,341           12,253            10,891
 Other assets...........           --            --               --                --
                             --------      --------         --------          --------
  Total classified
   assets...............     $248,143      $275,532         $381,724          $353,738
                             ========      ========         ========          ========
  Nonperforming assets
   to total assets......         3.53%         3.94%            4.93%             4.99%
                             ========      ========         ========          ========
  Classified assets to
   total assets.........         4.93%         5.71%            7.96%             7.53%
                             ========      ========         ========          ========

  Loans meeting certain criteria are accounted for as ISFs. These
substantially foreclosed assets are recorded at the lower of the loan's book
value or at the estimated fair value of the collateral at the date the loan
was determined to be in-substance foreclosed. These assets are reported as
"real estate owned" as if they were formally foreclosed real estate. The
estimated fair value is based on the net amount that the Bank could reasonably
expect to receive for the asset in a current sale between a willing buyer and
a willing seller, that is, other than in a forced or liquidation sale.
Inherent in the estimated fair value of these properties are assumptions about
the length of time the Bank may have to hold the property before disposition.
The holding costs through the expected date of sale and estimated disposition
costs are considered in the valuations.
 
CREDIT LOSS EXPERIENCE
 
  Credit losses are inherent in the business of originating and retaining real
estate loans. As previously discussed, the Bank, in an effort to identify and
mitigate the risk of credit losses in a timely manner, performs periodic
reviews of any asset that has been identified as having potential excess
credit risk. The Bank maintains specific departments with responsibility for
resolving problem loans and selling real estate acquired through foreclosure
to facilitate this process. Valuation allowances for estimated potential
future losses are established on a specific and general basis for loans and
real estate owned. Specific reserves for individual
 
                                      24

assets are determined by the excess of the recorded investment over the fair
market value of the collateral or property when it is probable that the asset
has been impaired. General valuation allowances are provided for losses
inherent in the loan and real estate portfolios which have yet to be
specifically identified. The GVA is based upon a number of factors, including
historical loss experience, composition of the loan and real estate portfolios,
loan delinquency experience patterns, loan classifications, prevailing and
forecasted economic conditions and management's judgment. A more detailed
discussion of the Bank's policies for determining valuation allowances is
presented in Item 7. "MD&A--Asset Quality" and in Note 6 to the consolidated
financial statements. See also "Real Estate Acquired in Settlement of Loans."
 
  The following table sets forth Fidelity's GVA and specific reserves by loan
or real estate portfolio as of December 31, 1993:

                                                         LOANS    REO    TOTAL
                                                        ------- ------- --------
                                                         (DOLLARS IN THOUSANDS)
                                                               
GVA.................................................... $71,578 $ 8,442 $ 80,020
Specific reserves......................................  12,254   9,273   21,527
                                                        ------- ------- --------
                                                        $83,832 $17,715 $101,547
                                                        ======= ======= ========

  The following summarizes Fidelity's GVA to total loans and real estate owned
and GVA to NPAs for the period indicated:

                                                YEAR ENDED DECEMBER 31,
                                             ---------------------------------
                                             1993   1992   1991   1990   1989
                                             -----  -----  -----  -----  -----
                                                          
GVA to total loans and REO (including
 ISFs)(1)...................................  2.03%  1.82%  1.13%  0.32%  0.18%
                                             =====  =====  =====  =====  =====
GVA to NPAs (2)............................. 32.79% 30.49% 41.99% 34.14% 38.38%
                                             =====  =====  =====  =====  =====

- --------
(1) Loans and REO in this ratio are calculated prior to the reduction for loan
    and REO GVA, but are net of specific reserves.
 
(2) NPAs in this ratio are calculated prior to the reduction for REO GVA.
 
  The following summarizes the activity in Fidelity's allowance for estimated
loan losses for the periods indicated:

                                          YEAR ENDED DECEMBER 31,
                                 ----------------------------------------------
                                   1993      1992      1991     1990     1989
                                 --------  --------  --------  -------  -------
                                           (DOLLARS IN THOUSANDS)
                                                         
Balance at beginning of period.  $ 64,277  $ 52,374  $ 16,552  $ 7,336  $ 2,545
 Provision for estimated loan
  losses.......................    65,100    51,180    49,843   11,039    8,359
 Transfer to real estate GVA...        --   (12,400)       --       --       --
 Charge-offs...................   (50,504)  (27,350)  (17,005)  (1,841)  (3,680)
 Recoveries and other..........     4,959       473     2,984       18      112
                                 --------  --------  --------  -------  -------
Balance at end of period.......  $ 83,832  $ 64,277  $ 52,374  $16,552  $ 7,336
                                 ========  ========  ========  =======  =======
Charge-offs to average loans         1.28%     0.61%     0.36%    0.04%    0.09%
 outstanding...................      ====      ====      ====     ====     ====

                                       25

  The following table presents loan and REO charge-offs by property type and
year of loan origination for the year ended December 31, 1993:

                                               YEAR OF ORIGINATION
                                  ----------------------------------------------
                                  TOTAL 1992 1991 1990  1989  1988  1979 TO 1987
                                  ----- ---- ---- ----- ----- ----- ------------
                                              (DOLLARS IN MILLIONS)
                                               
PROPERTY TYPE:
 Single family................... $ 3.5 $ -- $0.3 $ 2.1 $ 0.8 $ 0.3    $  --
 Multifamily:
  2 to 4 units...................   5.0   --  0.1   3.6   0.8   0.4      0.1
  5 to 36 units..................  44.0  0.1  6.0  21.7   7.4   4.5      4.3
  37 units and over..............  21.8   --  0.8   9.1   0.9   5.0      6.0
                                  ----- ---- ---- ----- ----- -----    -----
   Total multifamily.............  70.8  0.1  6.9  34.4   9.1   9.9     10.4
 Commercial and industrial.......   5.1   --   --    --   0.5   1.1      3.5
                                  ----- ---- ---- ----- ----- -----    -----
   Total charge-offs............. $79.4 $0.1 $7.2 $36.5 $10.4 $11.3    $13.9
                                  ===== ==== ==== ===== ===== =====    =====

  The following table presents loan and REO charge-offs by property type and
year of loan origination for the year ended December 31, 1992:

                                                 YEAR OF ORIGINATION
                                     -------------------------------------------
                                     TOTAL 1991 1990  1989 1988 1977 TO 1987
                                     ----- ---- ----- ---- ---- ------------
                                              (DOLLARS IN MILLIONS)
                                                        
PROPERTY TYPE:
 Single Family...................... $ 1.7 $0.2 $ 1.1 $0.3 $ --    $ 0.1
 Multifamily:
  2 to 4 units......................   2.2   --   1.9  0.3   --
  5 to 36 units.....................  12.4  0.2   7.7  2.1  0.3      2.1
  37 units and over.................  13.2  0.7   1.6  3.5  4.0      3.4
                                     ----- ---- ----- ---- ----    -----
   Total multifamily................  27.8  0.9  11.2  5.9  4.3      5.5
 Commercial and industrial..........  11.7   --   0.7   --  0.7     10.3
                                     ----- ---- ----- ---- ----    -----
   Total charge-offs................ $41.2 $1.1 $13.0 $6.2 $5.0    $15.9
                                     ===== ==== ===== ==== ====    =====

  The following table presents Fidelity's real estate loan portfolio (including
loans held for sale) as of December 31, 1993 by year of origination and type of
security:

                                               YEAR OF ORIGINATION
                         ----------------------------------------------------------------
                                                                                           1987 AND
                           TOTAL      1993     1992     1991     1990     1989     1988     PRIOR
                         ---------- -------- -------- -------- -------- -------- -------- ----------
                                              (DOLLARS IN THOUSANDS)
                                                                  
Property type:
 Single family.......... $  792,054 $118,802 $ 54,035 $ 40,417 $105,854 $ 73,466 $149,435 $  250,045
 Multifamily:
   2 to 4 units.........    505,219   36,822   23,892   50,069  139,430   77,837  100,182     76,987
   5 to 36 units........  1,795,374   92,798  118,176  205,279  479,998  216,091  273,376    409,656
   37 units and over....    406,330   12,861   15,753    8,049   59,566   75,111   62,990    172,000
                         ---------- -------- -------- -------- -------- -------- -------- ----------
     Total multifamily..  2,706,923  142,481  157,821  263,397  678,994  369,039  436,548    658,643
 Commercial and
  industrial............    300,589    1,332      815    1,821   11,532   53,936   65,239    165,914
                         ---------- -------- -------- -------- -------- -------- -------- ----------
     Total mortgage
      loans receivable.. $3,799,566 $262,615 $212,671 $305,635 $796,380 $496,441 $651,222 $1,074,602
                         ========== ======== ======== ======== ======== ======== ======== ==========
Loans by year of
 origination to total...     100.0%     6.9%     5.6%     8.0%    21.0%    13.1%    17.1%      28.3%
                         ========== ======== ======== ======== ======== ======== ======== ==========

                                       26

  During the years 1990, 1989 and 1988, Fidelity originated loans at peak
levels totaling $1,211.3 million, $897.6 million and $1,467.1 million,
respectively. During 1993, the Bank reserved and/or charged off amounts
corresponding to these peak origination years totaling $36.5 million, $10.4
million and $11.3 million, respectively. These losses were due primarily to the
decline of the California economy and real estate market. Multifamily (5 or
more units) and commercial loans accounted for a substantial percentage of such
losses, and as a result, the Bank has reduced recent loan origination
activities in these areas. However, continued downward pressure on the economy
and real estate market could lead to additional losses in these portfolios.
 
  The high level of provisions for loss and charge-offs during 1993, 1992 and
1991 is primarily due to a depressed market for real estate in Southern
California. If recent economic trends do not abate, it is likely that
additional charge-offs and reserves will be required and if future declines in
the Southern California economy and real estate market are substantial, it is
likely that the future corresponding charge-offs and reserves will also be
significant.
 
FORECLOSURE POLICIES
 
  The Bank typically initiates foreclosure proceedings between 30 and 90 days
after a borrower defaults on a loan. The proceedings take at least four months
before the collateral for the loan can be sold at "foreclosure" auction, and
this period can be extended under certain circumstances, such as, if the
borrower files bankruptcy or if the Bank enters into negotiations with the
borrower to restructure the loan. In California, foreclosure proceedings almost
always take the form of a nonjudicial foreclosure, upon the completion of which
the lender is left without recourse against the borrower for any deficiency or
shortfall from the difference between the value of the collateral and the
amount of the loan, and in most cases the Bank ends up with title to the
property. In some cases, while the foreclosure proceedings are under way, the
borrower requests forbearance from collection efforts, more time to cure the
default, or a restructuring of the loan. The Bank agrees to such a request if
it determines that the loan, as modified, is likely to result in a greater
ultimate recovery than taking title to the property. Among the factors the Bank
considers in granting the borrower a concession is the extent to which the
borrower pays down the loan, furnishes more collateral or makes a further
investment in the property by way of repairs or refurbishment, and demonstrates
an awareness and ability to manage the property according to a reasonable
operating plan.
 
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
 
  Real estate acquired in settlement of loans results when property
collateralizing a loan is foreclosed upon or otherwise acquired in satisfaction
of the loan and the Bank takes title to the property. This property owned by
the Bank is included in REO. The Bank experiences foreclosures as part of the
normal process of conducting its primary business activity, real estate
lending. Certain loans are also included in REO when they exhibit
characteristics more closely associated with the risk of real estate ownership
than with loans. These loans are designated in-substance foreclosures if they
meet the following criteria: (a) the borrower currently has little or no equity
at fair market value in the underlying collateral; (b) the only source of
repayment is the property securing the loan; and (c) the borrower has abandoned
the property or will not be able to rebuild equity in the foreseeable future.
Collateral that has been categorized as ISF is reported in the same manner as
property that is owned by the Bank. ISFs and property owned by the Bank differ
in one key respect: the Bank can only sell or dispose of property it owns. As
with any loan, it must complete foreclosure of an ISF before it can sell the
underlying collateral.
 
  As a result of the adoption of SFAS No. 114, beginning January 1, 1994, loans
that meet the criteria for ISF designation will no longer be reported as REO,
although they will continue to be valued based on the fair value of the
collateral and will generally continue to be included in NPAs.
 
                                       27

  The following table presents Fidelity's net REO, including ISF, by property
type at the dates indicated:

                                                   DECEMBER 31,
                                     ------------------------------------------
                                       1993      1992     1991    1990    1989
                                     --------  --------  ------- ------- ------
                                              (DOLLARS IN THOUSANDS)
                                                          
Property Type:
 Single family...................... $  6,942  $  7,014  $ 3,032 $ 1,202 $1,276
 Multifamily:
  2 to 4 units......................   10,345     4,129      695      --     --
  5 to 36 units.....................   41,177    32,535    8,674     253    253
  37 units and over.................   47,565    40,924   15,040   1,518  1,606
                                     --------  --------  ------- ------- ------
   Total Multifamily................   99,087    77,588   24,409   1,771  1,859
 Commercial and industrial..........   44,559    51,381   28,302  15,334  5,490
 REO GVA............................   (8,442)  (13,619)      --      --     --
                                     --------  --------  ------- ------- ------
  Total REO(1)...................... $142,146  $122,364  $55,743 $18,307 $8,625
                                     ========  ========  ======= ======= ======
 Total ISFs included above.......... $ 28,362  $ 47,324  $25,490 $    -- $   --
                                     ========  ========  ======= ======= ======

- --------
(1) Foreclosed real estate is shown net of first trust deed loans to others,
    where applicable.
 
                                       28

  The following table presents the Bank's real estate acquired in settlement of
loans (ISF is excluded) by location and property type at December 31, 1993:

                                       MULTIFAMILY          COMMERCIAL AND INDUSTRIAL
                                 ------------------------ -----------------------------
                          SINGLE 2 TO 4  5 TO 36 37 UNITS HOTEL/   OFFICE
                          FAMILY  UNITS   UNITS  AND OVER  MOTEL  BUILDING CONSTRUCTION OTHER   TOTAL
                          ------ ------- ------- -------- ------- -------- ------------ ------ --------
                                                     (DOLLARS IN THOUSANDS)
                                                                    
California:
 Southern California
  Counties:
   Los Angeles..........  $3,703 $ 5,895 $19,621 $21,638  $ 6,585  $1,603     $2,351    $2,200 $ 63,596
   Orange...............     502   1,410   4,677   5,484       --   5,490         --       222   17,785
   San Bernardino.......      --   1,228   2,308  13,837       --      --         --       600   17,973
   Riverside............     326   1,069   2,794      --       --      --         --       826    5,015
   San Diego............     830     211     250   1,249    1,885      --         --        --    4,425
   Ventura..............     606      --      --      --       --     363         --        --      969
   Other................      --     532      --      --       --      --         --        --      532
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
                           5,967  10,345  29,650  42,208    8,470   7,456      2,351     3,848  110,295
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
 Northern California
  Counties:
   Santa Clara..........     209      --      --      --       --   2,498         --        --    2,707
   Other................      54      --      --      --       --      --         --        --       54
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
                             263      --      --      --       --   2,498         --        --    2,761
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
 Total California.......   6,230  10,345  29,650  42,208    8,470   9,954      2,351     3,848  113,056
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
Hawaii..................     712      --      --      --       --      --         --        --      712
Florida.................      --      --      --      --    7,823      --         --        --    7,823
Washington..............      --      --      --      --       --      --         --       635      635
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
  Total out-of-state....     712      --      --      --    7,823      --         --       635    9,170
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
Total REO...............  $6,942 $10,345 $29,650 $42,208  $16,293  $9,954     $2,351    $4,483 $122,226
                          ====== ======= ======= =======  =======  ======     ======    ====== ========

  The following table presents the Bank's ISF by location and property type at
December 31, 1993:

                                       MULTIFAMILY          COMMERCIAL AND INDUSTRIAL
                                 ------------------------ -----------------------------
                          SINGLE 2 TO 4  5 TO 36 37 UNITS HOTEL/   OFFICE
                          FAMILY  UNITS   UNITS  AND OVER  MOTEL  BUILDING CONSTRUCTION OTHER   TOTAL
                          ------ ------- ------- -------- ------- -------- ------------ ------ --------
                                                     (DOLLARS IN THOUSANDS)
                                                                    
California:
 Southern California
  Counties:
   Los Angeles..........  $   -- $    -- $ 9,078 $ 5,357  $    --  $   --     $   --    $  133 $ 14,568
   Orange...............      --      --   2,155      --       --      --         --        --    2,155
   San Diego............      --      --     294      --       --      --         --        --      294
   San Bernardino.......      --      --      --      --       --      --         --       509      509
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
 Total California.......      --      --  11,527   5,357       --      --         --       642   17,526
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
Hawaii..................      --      --      --      --   10,388      --         --        --   10,388
Pennsylvania............      --      --      --      --      448      --         --        --      448
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
  Total out-of-state....      --      --      --      --   10,836      --         --        --   10,836
                          ------ ------- ------- -------  -------  ------     ------    ------ --------
Total ISFs..............  $   -- $    -- $11,527 $ 5,357  $10,836  $   --     $   --    $  642 $ 28,362
                          ====== ======= ======= =======  =======  ======     ======    ====== ========

  In the current market, the Bank rarely sells REO for a price equal to or
greater than the loan balance, and the losses suffered are impacted by the
market factors discussed elsewhere in this report. REO is recorded at
acquisition at the lower of the recorded investment in the subject loan or the
fair market value of the assets received. The fair market value of the assets
received is based upon a current appraisal adjusted for estimated carrying,
rehabilitation and selling costs. Income-producing properties acquired by the
Bank through foreclosure are managed by third party contract managers, under
the supervision of Bank personnel. During 1993 and 1992, the Bank's policy has
been generally to proceed promptly to market the properties acquired through
foreclosure, and the Bank often makes financing terms available to buyers of
such properties.
 
                                       29

Generally, the Bank experiences higher losses on sale of REO properties for all
cash, as opposed to financing the sale, although when it finances the sale, the
Bank incurs the risk that the loan may not be repaid in full. During 1993, the
Bank sold 210 REO properties for net sales proceeds of $83.5 million, with a
gross book and net book value totaling $138.5 million and $89.8 million,
respectively. This compares to 43 properties sold in 1992 for net sales
proceeds of $25.6 million, with a gross book and net book value of $34.9
million and $27.6 million, respectively. The Bank made 107 loans in connection
with the sale of REO for the year ended December 31, 1993 for a total of
$51.6 million. Of these, $10.9 million contained terms favorable to the
borrower that were not available for the purchase of non-REO property. The
comparable data for 1992 were 15 loans for $11.2 million, of which $10.7
million were made with favorable terms.
 
  The following table shows real estate sold by property type during the years
indicated:

                                     1993                       1992
                          -------------------------- --------------------------
                            NO. OF   NET BOOK VALUE    NO. OF   NET BOOK VALUE
                          PROPERTIES AT DATE OF SALE PROPERTIES AT DATE OF SALE
                          ---------- --------------- ---------- ---------------
                                         (DOLLARS IN THOUSANDS)
                                                    
Single family............     61         $12,932         20         $ 3,546
Multifamily:
  2 to 4 units...........     21           4,248          6             529
  5 to 36 units..........    109          53,496          9           6,386
  37 units and over......     14          17,919          4          11,773
                             ---         -------        ---         -------
   Total multifamily.....    144          75,663         19          18,688
Commercial & industrial..      5           1,227          4           5,401
                             ---         -------        ---         -------
                             210         $89,822         43         $27,635
                             ===         =======        ===         =======

  Direct costs of foreclosed real estate operations totaled $18.8 million, $3.6
million and $1.1 million for the years ended December 31, 1993, 1992 and 1991
respectively. The large increase in 1993 over 1992 is due primarily to an
increase in the number of properties foreclosed in 1993 over 1992. During 1993,
the Bank foreclosed on 282 properties with a gross book value of $204.7 million
compared to 139 properties with a gross book value of $112.9 million, during
1992. The average number of REOs held during 1993 was 205 compared to 117
during 1992. Property tax expense on foreclosed property for the year ended
1993 was $5.1 million (at the time of foreclosure, a typical property was
delinquent for three property tax payments). Due to the deterioration in the
real estate market in Southern California, property tax assessments are
generally higher than the appraised value of REO properties at the time of
foreclosure. The Bank's policy is to appeal all property tax valuations on REO
property at the time of acquisition.
 
INVESTMENT ACTIVITIES
 
  As a matter of prudent business practice, Fidelity maintains assets that are
easily liquidated or otherwise saleable to meet unexpected funding
requirements.
 
  Fidelity also is required by federal regulations to maintain a minimum level
of liquid assets which may be invested in certain government and other
specified securities. See "Regulation and Supervision--Required Liquidity."
Investment decisions are made within guidelines approved by Fidelity's Board of
Directors. Such investments are managed in an effort to produce a yield
consistent with maintaining safety of principal and compliance with applicable
regulations.
 
                                       30

  The Company's securities portfolio consisted of the following at the dates
indicated:

                                               DECEMBER 31,
                           -----------------------------------------------------
                                 1993              1992              1991
                           ----------------- ----------------- -----------------
                                    WEIGHTED          WEIGHTED          WEIGHTED
                            AMOUNT   YIELD    AMOUNT   YIELD    AMOUNT   YIELD
                           -------- -------- -------- -------- -------- --------
                                          (DOLLARS IN THOUSANDS)
                                                      
Federal funds sold.......  $ 60,000   3.00%  $     --     --%  $     --     --%
                           --------          --------          --------
Investment securities:
 Held for sale:
   U.S. Government and
    agency obligations...    87,385   4.59         --     --         --     --
   Other investments.....     4,874   5.07         --     --         --     --
                           --------          --------          --------
                             92,259   4.65         --     --         --     --
                           --------          --------          --------
 Held for investment:
   U.S. Government
    obligations..........        --     --     24,950   8.54     32,916   8.55
   Commercial paper......        --     --     29,986   3.92        980   5.15
   Other investments.....        --     --     12,401   4.65         --     --
                           --------          --------          --------
                                 --     --     67,337   5.77     33,896   8.45
                           --------          --------          --------
   Total investment
     securities..........    92,259   4.65     67,337   5.77     33,896   8.45
                           --------          --------          --------
Mortgage-backed
 securities:
 Held for sale:
   FHLMC.................    34,184   5.13         --     --         --     --
   FNMA..................    14,853   4.67         --     --         --     --
   Participation
    Certificates.........    38,223   5.87         --     --         --     --
   CMO...................     3,848   4.39         --     --         --     --
                           --------          --------          --------
                             91,108   5.33         --     --         --     --
                           --------          --------          --------
 Held for investment:
   FHLMC.................        --     --    102,476   5.89     15,733   8.63
   GNMA..................        --     --     14,466   8.24     16,941   8.17
   FNMA..................        --     --    113,442   6.54         --     --
                           --------          --------          --------
                                 --     --    230,384   6.36     32,674   8.39
                           --------          --------          --------
   Total mortgage-backed
     securities..........    91,108   5.33    230,384   6.36     32,674   8.39
                           --------          --------          --------
FHLB and FRB stock.......    52,151   3.20     50,574   1.47     49,245   6.16
                           --------          --------          --------
                           $295,518   4.27%  $348,295   5.54%  $115,815   7.46%
                           ========          ========          ========

                                       31

  The following table summarizes the maturity and weighted average yield of the
Company's investment securities at December 31, 1993:

                                                                         MATURES IN
                                            --------------------------------------------------------------------
                                                                                 1999 THROUGH       2003 AND
                                TOTAL             1994        1995 THROUGH 1998      2003          THEREAFTER
                          ----------------- ----------------- ----------------- --------------- ----------------
                                   WEIGHTED          WEIGHTED          WEIGHTED        WEIGHTED         WEIGHTED
                           AMOUNT   YIELD    AMOUNT   YIELD    AMOUNT   YIELD   AMOUNT  YIELD   AMOUNT   YIELD
                          -------- -------- -------- -------- -------- -------- ------ -------- ------- --------
                                                          (DOLLARS IN THOUSANDS)
                                                                          
Federal funds sold......  $ 60,000   3.00%  $ 60,000   3.00%  $     --     --%   $ --      --%  $    --     --%
Investment securities
 held for sale:
 U.S. Government and
  agency obligations....    87,385   4.59        145   3.52     87,240   4.59      --      --        --     --
 Other investments......     4,874   5.07      1,156   3.91      3,446   5.91     272    6.19        --     --
                          --------          --------          --------           ----           -------
 Total investment
  securities............    92,259   4.65      1,301   3.87     90,686   4.65     272    6.19        --     --
Mortgage-backed
 securities held for
 sale...................    91,108   5.33         --     --     48,832   5.05      --      --    42,276   5.66
FHLB and FRB Stock......    52,151   3.20     52,151   3.20         --     --      --      --        --     --
                          --------          --------          --------           ----           -------
                          $295,518   4.27%  $113,452   3.10%  $139,518   4.79%   $272    6.19%  $42,276   5.66%
                          ========          ========          ========           ====           =======

  Interest income from the investment portfolio contributed 6.5%, 3.9% and 4.3%
of the Company's total revenue not including the impact of real estate loss
provisions and direct costs of real estate operations, for the years ended
December 31, 1993, 1992 and 1991, respectively.
 
SOURCES OF FUNDS
 
  The Company derives funds from deposits, FHLB Advances, securities sold under
agreements to repurchase, and other short-term and long-term borrowings. In
addition, funds are generated from loan payments and payoffs as well as from
the sale of loans and investments.
 
Deposits
 
  The largest source of funds for the Company is deposits. Customer deposits
are insured by the FDIC up to $100,000 per account. The Company has several
types of deposit accounts designed to attract both short-term and long-term
deposits. The following table sets forth the weighted average interest rates
paid by the Company and the amounts of deposits held by the Company at the
dates indicated:

                            WEIGHTED AVERAGE
                          RATES AT DECEMBER 31,                  DECEMBER 31,
                          ---------------------        --------------------------------
                          1993      1992      1991        1993       1992       1991
                         -------   -------   -------   ---------- ---------- ----------
                                                            (DOLLARS IN THOUSANDS)
                                                           
Checking--no minimum
 term:
 NOW....................     1.0%      1.6%      3.0%  $  263,192 $  257,575 $  204,454
 Money market checking..     1.8       1.8       3.8       50,840     49,289     62,837
 Noninterest bearing....      --        --        --       52,936     31,632     14,091
Savings--no minimum
 term:
 Passbook...............     2.0       2.5       4.0       82,168     74,738     58,817
 Money market savings...     2.4       2.8       4.6      280,474    427,978    414,482
Certificate accounts:
 Original term:
  Less than 3 months....     2.8       3.0       5.1      118,697    108,399     99,525
  3 months to 5 months..     3.4       3.2       5.3      601,419    230,396    282,741
  6 months to 11 months.     3.3       3.4       6.1      740,741  1,009,970  1,691,551
  12 months to 23
   months...............     4.2       4.7       6.4      601,382    614,581    621,625
  24 months to 59
   months...............     5.3       6.6       7.2      228,194    325,764    287,752
  60 months and over....     6.9       7.1       7.7      348,600    327,596    146,832
                                                       ---------- ---------- ----------
                             3.6%      4.0%      5.9%  $3,368,643 $3,457,918 $3,884,707
                                                       ========== ========== ==========

                                       32

  The following table provides additional deposit information by remaining
maturity at December 31, 1993:

                                                             REMAINING MATURITY
                          -----------------------------------------------------------------------------------------
                                                      OVER       OVER       OVER       OVER
                                                    3 MONTHS   6 MONTHS  12 MONTHS  24 MONTHS
                          INDETERMINATE  3 MONTHS  BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN   OVER
                            MATURITY     OR LESS    6 MONTHS  12 MONTHS  24 MONTHS  36 MONTHS  36 MONTHS   TOTAL
                          ------------- ---------- ---------- ---------- ---------- ---------- --------- ----------
                                                           (DOLLARS IN THOUSANDS)
                                                                                 
Passbook, 2.00% and
 2.50% at December 31,
 1993 and 1992..........    $ 82,168    $       --  $     --   $     --   $     --   $    --   $     --  $   82,168
Checking and money
 market checking, 0.96%
 and 1.48% at December
 31, 1993 and 1992......     366,968            --        --         --         --        --         --     366,968
Money market passbook,
 2.37% and 2.79% at
 December 31, 1993 and
 1992...................     280,474            --        --         --         --        --         --     280,474
Certificate Accounts:
 Under 3.00%............          --       290,813   127,298        121         65         8         21     418,326
 3.01--4.00%............          --       623,389   556,413    123,412     23,050       185         --   1,326,449
 4.01--5.00%............          --        87,639    74,716     48,148    171,365    10,049      3,212     395,129
 5.01--6.00%............          --        53,840    36,897      4,833      9,870       232     32,038     137,710
 6.01--7.00%............          --           739     8,518     11,587      1,103    34,955    168,133     225,035
 7.01--8.00%............          --         1,018     4,900     21,764      3,979    45,709     12,910      90,280
 Over 8.01%.............          --         4,549     8,053      8,827     11,359       473     12,843      46,104
                            --------    ----------  --------   --------   --------   -------   --------  ----------
   Total deposits.......    $729,610    $1,061,987  $816,795   $218,692   $220,791   $91,611   $229,157  $3,368,643
                            ========    ==========  ========   ========   ========   =======   ========  ==========

  Certificates of deposits of $100,000 or more accounted for $592.7 million and
represented 17.6% of all deposits at December 31, 1993; $549.5 million or 15.9%
of all deposits at December 31, 1992 and $628.5 million or 16.2% of all
deposits at December 31, 1991. Fidelity intends to continue to use such
certificates of deposit as a source of funds to manage its liquidity. However,
a significant increase is not currently expected.
 
  The following table summarizes certificates of deposit of $100,000 or more by
remaining maturity and weighted average rate at December 31, 1993:

                                                      PERCENT OF     WEIGHTED
      REMAINING TERM TO MATURITY            AMOUNT  TOTAL DEPOSITS AVERAGE RATE
      --------------------------           -------- -------------- ------------
        (IN MONTHS)                               (DOLLARS IN THOUSANDS)
                                                          
      Three or less....................... $242,949       7.2%         3.56%
      Over three to six...................  155,795       4.6          3.82
      Over six to twelve..................   75,677       2.3          4.56
      Over twelve.........................  118,307       3.5          5.92
                                           --------      ----
                                           $592,728      17.6%         4.23%
                                           ========      ====

                                       33

  The distribution of certificate accounts by date of maturity is an important
indicator of the relative stability of a major source of lendable funds. Longer
term certificate accounts generally provide greater stability as a source of
lendable funds, but currently entail greater interest costs than passbook
accounts. The following table summarizes certificate accounts by maturity, as a
percentage of total deposits and weighted average rate at December 31, 1993:

        CERTIFICATE ACCOUNTS                               PERCENT OF     WEIGHTED
     MATURING IN QUARTER ENDING           AMOUNT         TOTAL DEPOSITS AVERAGE RATE
     --------------------------   ---------------------- -------------- ------------
                                  (DOLLARS IN THOUSANDS)
                                                               
   March 31, 1994...........            $1,061,987            31.5%         3.55%
   June 30, 1994............               816,795            24.2          3.71
   September 30, 1994.......               119,672             3.6          4.50
   December 31, 1994........                99,020             2.9          4.51
   March 31, 1995...........                79,247             2.4          4.38
   June 30, 1995............                67,399             2.0          4.56
   September 30, 1995.......                40,687             1.2          4.95
   December 31, 1995........                33,458             1.0          4.67
   March 31, 1996...........                 5,349             0.2          6.16
   June 30, 1996............                21,394             0.6          6.84
   September 30, 1996.......                36,075             1.1          6.98
   December 31, 1996........                28,793             0.9          6.65
   After December 31, 1996..               229,157             6.8          6.60
                                        ----------            ----
                                        $2,639,033            78.4%         4.14%
                                        ==========            ====

  The Bank also utilizes brokered deposits as a short-term means of funding.
These deposits are obtained or placed by or through a deposit broker and are
subject to certain regulatory limitations. Should the Bank become
undercapitalized, it would be prohibited from accepting, renewing or rolling
over deposits obtained through a deposit broker. See "Regulation and
Supervision--FDICIA Prompt Corrective Action Requirements." The following table
summarizes the Bank's outstanding balance of brokered deposits at the dates
indicated:

                                                                      PERCENT
                                                                     OF TOTAL
      DECEMBER 31,                                       AMOUNT      DEPOSITS
      ------------                                     ------------ ------------
                                                       (DOLLARS IN THOUSANDS)
                                                              
      1993............................................      $92,196       2.74%
      1992............................................      $12,850       0.37%
      1991............................................           --          --

Borrowings
 
  The Company utilizes borrowings from the FHLB System ("FHLB Advances") as a
source of funds for operations. The FHLB System functions as a source of credit
to savings institutions which are members of a Federal Home Loan Bank. See
"Regulation and Supervision--Federal Home Loan Bank System." Fidelity may apply
for advances from the FHLB secured by the capital stock of the FHLB owned by
Fidelity and certain of Fidelity's mortgages and other assets (principally
obligations issued or guaranteed by the United States Government or agencies
thereof). Advances can be requested for any business purpose in which Fidelity
is authorized to engage, except that advances with a term greater than 5 years
can be granted only for the purpose of providing funds for residential housing
finance. In granting advances, the FHLB considers a member's creditworthiness
and other relevant factors. FHLB Advances to Fidelity totaled $326.4 million,
$581.4 million, and $325.0 million at December 31, 1993, 1992 and 1991,
respectively. The decreased use of FHLB Advances in 1993 as a source of funds
results primarily from the use of commercial paper, which is less costly, as an
alternate source of funds. Fidelity's available FHLB line of credit is based
primarily on a portion of Fidelity's residential loan portfolio pledged for
such purpose, up to a maximum 25% of total assets.
 
                                       34

At December 31, 1993, Fidelity's remaining available line of credit was $297.7
million, after deducting outstanding advances and a $304.0 million backup
letter of credit for outstanding commercial paper, as described below.
 
  The Company also utilizes the capital markets to obtain funds for its lending
operations. This source has been used for long-term borrowings in the past and
can be utilized in the future. Details on borrowings on the Company's books for
all or part of 1993 are as follows:
 
  .  Mortgage-backed medium-term notes, Series A, with a fixed interest rate
     of 8 7/8%. These notes had a balance of $100 million, matured and were
     paid off on May 15, 1993.
 
  .  Commercial mortgage-backed bonds, with a fixed interest rate of 9 3/4%.
     These bonds had a balance of $62 million, matured and were paid off on
     September 15, 1993.
 
  .  8 1/2% Mortgage-backed medium-term notes, Series A, due April 15, 1997
     (the "1997 MTNs"). At December 31, 1993, the 1997 MTNs had a balance of
     $100 million. The 1997 MTNs are secured by mortgage loans and U.S.
     Treasury notes with a combined principal balance of $255.7 million at
     December 31, 1993.
 
  During 1992, the Bank started issuing commercial paper, backed by a $400
million letter of credit from the FHLB of San Francisco to ensure a high
quality investment grade rating. The letter of credit commitment varies with
the level of commercial paper outstanding, and the FHLB line of credit for
advances described above increases or decreases accordingly. Commercial paper
outstanding totaled $304 million and $65 million at December 31, 1993 and 1992,
respectively. All commercial paper outstanding at December 31, 1993 matures
within 120 days with an average interest rate of 3.38%.
 
  From time to time, Fidelity 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). Fidelity 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.
Reverse repurchase agreements outstanding totaled $3.8 million at December 31,
1993.
 
  In May 1990, Fidelity issued the Notes which were approved by the OTS as
additional regulatory risk-based capital. The Notes were issued to
institutional investors in the amount of $60 million, with interest payable
semiannually at 11.68% per annum and are repayable in five equal annual
installments commencing May 15, 1996. See "Recent Developments--Internal
Reorganization and Restructuring," Item 3. "Legal Proceedings and Item 7.
"MD&A--Capital Resources and Liquidity" for a description of certain litigation
relating to the Notes and certain circumstances that may result in the Notes
and outstanding FHLB Advances being declared due and payable and/or the
unavailability of funds under the Bank's commercial paper program and the FHLB
credit line.
 
                                       35

  The following table sets forth certain information as to the Company's FHLB
Advances, other borrowings and subordinated notes at the dates indicated:

                                    DECEMBER 31,
                             ----------------------------
                               1993      1992      1991
                             --------  --------  --------
                               (DOLLARS IN THOUSANDS)
                                        
FHLB Advances:
 Fixed rate advances........ $110,000  $ 40,000  $ 20,000
 Floating rate advances.....  216,400   541,400   305,000
                             --------  --------  --------
                              326,400   581,400   325,000
                             --------  --------  --------
Borrowings:
 Mortgage-backed
  notes/bonds:
  Fixed rate bonds..........       --    62,000    62,000
  Fixed rate notes..........  100,000   200,000   200,000
  Floating rate bonds.......       --        --    65,950
  Floating rate notes.......       --        --   200,000
                             --------  --------  --------
                              100,000   262,000   527,950
 Commercial paper...........  304,000    65,000        --
 Securities sold under
  agreements to repurchase..    3,830        --        --
 Other......................       --        --     3,200
                             --------  --------  --------
                              407,830   327,000   531,150
 Related party loan.........       --        --    15,000
 Subordinated notes.........   60,000    60,000    60,000
                             --------  --------  --------
    Total borrowings........ $794,230  $968,400  $931,150
                             ========  ========  ========
Weighted average interest        5.12%     5.91%     7.47%
 rate on all borrowings.....     ====      ====      ====

  For more information on the Company's borrowings see Notes 9 and 10 to the
consolidated financial statements.
 
Loan Repayments and Loan Sales
 
   Another important source of funds for the Company is the repayment of loans
it has made and sales of loans. Receipts from loan repayments (scheduled and
unscheduled) and sales of loans, net of repurchases, were approximately $690
million, $878 million, and $926 million for the years ended December 31, 1993,
1992 and 1991, respectively. See "Mortgage Banking Group Operations."
 
INTEREST RATE RISK MANAGEMENT
 
  Net interest income is the difference between interest earned on the
Company's loans and investment securities and interest paid on its deposits and
borrowings. Net interest income is affected by the interest rate spread, which
is the difference between the rates earned on its interest-earning assets and
rates paid on its interest-bearing liabilities, as well as the relative amounts
of its interest-earning assets and interest-bearing liabilities. When interest-
earning assets exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Company's average interest rate
margin for the years ended December 31, 1993, 1992 and 1991 was 2.28%, 2.67%
and 2.54%, respectively. Excluding the writedown of core deposit intangibles of
$5.2 million, the average interest rate margin for the year ended December 31,
1993 would have been 2.39%. See Item 7. "MD&A" and Note 7 to the consolidated
financial statements.
 
  The objective of interest rate risk management is to manage interest rate
risk in a prudent manner to maximize the net income of the Bank. Banks and
savings institutions are subject to interest rate risk when assets and
liabilities mature or reprice at different times (duration risk), against
different indices (basis risk)
 
                                       36

or for different terms (yield curve risk). The decision to control or accept
interest rate risk can only be made with an understanding of the probability of
various scenarios occurring. Having liabilities that reprice more quickly than
assets is beneficial when interest rates fall, but may be detrimental when
interest rates rise.
 
  Since 1985, the Company has shifted its portfolio toward adjustable rate
mortgage loans that reprice more closely with its interest-bearing liabilities.
ARM loans comprised 96% of the total loan portfolio at December 31, 1993, 1992
and 1991. The percentage of monthly adjustable ARMs to total loans was 74.7% at
December 31, 1993 compared to 74.4% and 71.6% at December 31, 1992 and 1991,
respectively. Interest sensitive assets provide the Company with a degree of
long-term protection from rising interest rates. At December 31, 1993,
approximately 96% of Fidelity's total loan portfolio consisted of loans which
mature or reprice within one year, compared with approximately 95% at December
31, 1992 and approximately 97% at December 31, 1991. Fidelity has in recent
periods benefited from the fact that decreases in the interest rates accruing
on Fidelity's ARMs lagged the decreases in interest rates accruing on its
deposits, primarily due to the lagging effects of the COFI, the index to which
most of Fidelity's ARMs reprice. Fidelity benefited in 1992 and 1991 from the
fact that decreases in its asset yield lagged decreases in its liability cost.
During 1993, short and intermediate term rates to which most of Fidelity's
liabilities reprice, remained essentially constant. As COFI continued to
decline, the Company's interest rate spread narrowed. If market rates fall, the
Company's spread will initially improve. If market rates increase, the
Company's spread will deteriorate initially until a catch up in lag in the COFI
index. See "ARM Loans."
 
  The Company took steps in 1993 to reduce the impact of its declining spread.
These steps include the decision not to replace expired interest rate cap
agreements, and the decision to enter into interest rate swap contracts. The
Company continues to monitor and control its interest rate risk exposure within
approved guidelines and in such a way as to avoid the need to hold extra
capital because of interest rate risk.
 
  See Item 7. "MD&A--Interest Rate Risk Management" for a table of projected
maturities and repricing details of major financial asset and liability
categories of the Company as of December 31, 1993, for further information
regarding the Company's off-balance sheet hedging activities and a discussion
of interest rate risk capital requirements.
 
                                       37

  The following table presents, for the periods indicated, the Company's total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities and the resultant costs, expressed both in dollars and rates. The
table also sets forth the net interest income and the net earnings balance for
the periods indicated. Average balances are computed using an average of the
daily balances during the year. Certain reclassifications have been made to
prior periods to conform to the 1993 presentation.

                                                        YEAR ENDED DECEMBER 31,
                          --------------------------------------------------------------------------------------
                                     1993                           1992                        1991
                          ---------------------------    --------------------------- ---------------------------
                                              AVERAGE                        AVERAGE                     AVERAGE
                           AVERAGE            YIELD/      AVERAGE            YIELD/   AVERAGE            YIELD/
                           BALANCE   INTEREST  RATE       BALANCE   INTEREST  RATE    BALANCE   INTEREST  RATE
                          ---------- -------- -------    ---------- -------- ------- ---------- -------- -------
                                                        (DOLLARS IN THOUSANDS)
                                                                              
Interest-earning assets:
 Loans and mortgage-
  backed securities(1)..  $4,136,044 $280,763  6.79%     $4,421,798 $361,191  8.17%  $5,034,392 $503,021  9.99%
 Investment securities
  and cash equivalents..     170,504    7,189  4.22         197,873    8,791  4.44      221,117   14,032  6.35
 Investment in FHLB
  stock.................      51,210    1,640  3.20          50,219      740  1.47       49,891    3,071  6.16
                          ---------- --------            ---------- --------         ---------- --------
 Total interest-earning
  assets................   4,357,758  289,592  6.65       4,669,890  370,722  7.94    5,305,400  520,124  9.80
                                     --------                       --------                    --------
Noninterest-earning
 assets.................     220,725                        182,291                     232,333
                          ----------                     ----------                  ----------
 Total assets...........  $4,578,483                     $4,852,181                  $5,537,733
                          ==========                     ==========                  ==========
Interest-earning
 liabilities:
 Deposits:
  Demand deposits.......  $  303,206    4,781  1.58      $  282,572    6,959  2.46   $  259,464   12,195  4.70
  Savings deposits......     451,590   19,215  4.26         497,070   24,911  5.01      430,163   30,106  7.00
  Time deposits.........   2,499,076  107,622  4.31       2,853,393  143,154  5.02    3,330,847  236,316  7.09
                          ---------- --------            ---------- --------         ---------- --------
 Total deposits.........   3,253,872  131,618  4.04       3,633,035  175,024  4.82    4,020,474  278,617  6.93
 Borrowings.............   1,049,291   56,773  5.41         916,836   64,917  7.04    1,188,759   99,400  8.36
                          ---------- --------            ---------- --------         ---------- --------
 Total interest-bearing
  liabilities...........   4,303,163  188,391  4.37       4,549,871  239,941  5.27    5,209,233  378,017  7.26
                                     --------                       --------                    --------
Noninterest-bearing
 liabilities............      43,078                         76,342                     106,166
Stockholders' equity....     232,242                        225,968                     222,334
                          ----------                     ----------                  ----------
 Total liabilities and
  stockholders' equity..  $4,578,483                     $4,852,181                  $5,537,733
                          ==========                     ==========                  ==========
Net interest income;
 Interest rate spread...             $101,201  2.28%(4)             $130,781  2.67%             $142,107  2.54%
                                     ========                       ========                    ========
Net earning balance(2);
 Net yield on interest-
 earning assets(3)......  $   54,595           2.33%(4)  $  120,019           2.81%  $   96,167           2.68%
                          ==========                     ==========                  ==========

- -------
(1) Nonaccrual loans are included in the average balance column, however, only
    collected interest on such loans is included in the interest column.
(2) The "net earning balance" equals the difference between the average balance
    of interest-earning assets and the average balance of interest-bearing
    liabilities.
(3) The net yield on interest-earning assets during the period equals (a) the
    difference between the interest income on interest-earning assets and
    interest expense on interest-bearing liabilities, divided by (b) average
    interest-earning assets for the period.
(4) Excluding the writedown of core deposit intangibles of $5.2 million, the
    interest rate spread and the net yield on interest-earning assets for the
    year ended December 31, 1993, would have been 2.39% and 2.44%,
    respectively.
 
                                       38

  The following table presents 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. The net change
attributable to changes in both volume and rate, which cannot be segregated,
has been allocated proportionately to the change due to volume and the change
due to rate. Interest-bearing asset and liability balances in the calculations
are computed using the average of the daily balances during the periods.
Certain reclassifications have been made to prior periods to conform to the
1993 presentation.

                                                             YEAR ENDED DECEMBER 31,
                                                                      1992
                          YEAR ENDED DECEMBER 31, 1993      COMPARED TO DECEMBER 31,
                          COMPARED TO DECEMBER 31, 1992               1991
                             FAVORABLE (UNFAVORABLE)         FAVORABLE (UNFAVORABLE)
                          -------------------------------  -----------------------------
                           VOLUME      RATE        NET      VOLUME     RATE       NET
                          --------------------  ---------  --------  --------  ---------
                                           (DOLLARS IN THOUSANDS)
                                                             
Interest income on loans
 and mortgage-backed
 securities.............  $ (22,256) $ (58,172) $ (80,428) $(56,795) $(85,035) $(141,830)
Interest income on
 investment securities
 and cash equivalent....     (1,180)      (422)    (1,602)   (1,357)   (3,884)    (5,241)
Investment in FHLB
 stock..................         15        885        900        20    (2,351)    (2,331)
                          ---------  ---------  ---------  --------  --------  ---------
 Total interest income
  on interest-earning
  assets................    (23,421)   (57,709)   (81,130)  (58,132)  (91,270)  (149,402)
Interest expense on
 deposits:
 Demand deposits........       (442)     2,479      2,037      (469)    5,479      5,010
 Savings deposits.......      1,983      3,716      5,699    (2,768)    8,064      5,296
 Time deposits..........     15,477     20,193     35,670    28,142    65,145     93,287
                          ---------  ---------  ---------  --------  --------  ---------
 Total interest expense
  on deposits...........     17,018     26,388     43,406    24,905    78,688    103,593
Interest expense on
 borrowings.............     (8,355)    16,499      8,144    20,401    14,082     34,483
                          ---------  ---------  ---------  --------  --------  ---------
 Total interest on
  interest-bearing
  liabilities...........      8,663     42,887     51,550    45,306    92,770    138,076
                          ---------  ---------  ---------  --------  --------  ---------
Increase (decrease) in
 net interest income....  $ (14,758) $ (14,822) $ (29,580) $(12,826) $  1,500  $ (11,326)
                          =========  =========  =========  ========  ========  =========

COMPETITION
 
  The Company believes that the traditional role of thrift institutions, such
as Fidelity, as the nation's primary housing lenders has diminished, and that
thrift institutions are subject to increasing competition from commercial
banks, mortgage bankers and others for both depositor funds and lending
opportunities. In addition, with assets of approximately $4.4 billion, the
Company faces competition from a number of substantially larger institutions.
The ability of thrift institutions, such as Fidelity, to compete by
diversifying into lending activities other than real estate lending (and
residential real estate lending in particular) and by offering investments
other than deposit-like investments is limited by law and by these
institutions' relative lack of experience in such other activities. However,
the Company believes these nontraditional activities and the related fee income
is vital for future success. See "Retail Financial Services Group."
 
  The Company faces intense competition in attracting savings deposits and in
making real estate loans as many of the nation's largest depository and other
financial institutions are headquartered or have a significant number of
branches in the areas where Fidelity conducts its business. Competition for
depositors' funds comes principally from other savings institutions, commercial
banks, money market mutual funds, credit unions, other thrift institutions,
corporate and government debt securities, insurance companies, pension funds
and money market mutual funds offered through investment banking firms. The
principal basis of competition for deposits is the interest rate paid, the
perceived credit risk and the quality and types of services offered. In
 
                                       39

addition to offering competitive rates and terms, the Company attracts
deposits through advertising, readily accessible office locations and the
quality of its customer service.
 
EMPLOYEES
 
  At January 31, 1994, the Company had 1,007 active employees (this includes
both full-time and part-time employees with full-time equivalents of 940),
none of whom were represented by a collective bargaining group. Management
believes that it maintains good relations with its employees. Employees are
provided with retirement, 401(k) and other benefits, including life, medical,
dental, vision insurance and short and long-term disability insurance.
However, the Company is exploring various alternatives to the existing plans
to reduce the total cost, which may include reducing future benefits accruing
to employees.
 
  Employees severely affected by the January 1994 Northridge Earthquake were
provided with access to additional time off, salary advances, favorable short-
term loans and alternate living arrangements. The total cost of these programs
is not expected to be material.
 
TAXATION
 
  The Company files a consolidated federal income tax return on a calendar
year basis. For federal income tax purposes, the maximum rate of tax
applicable to savings institutions is currently 35% for taxable income over
$10 million.
 
  Savings institutions are generally subject to federal taxation in the same
manner as other types of corporations. However, under applicable provisions of
the Internal Revenue Code, savings institutions that meet certain definitional
and other tests ("qualifying institutions") can, unlike most other
corporations, use the reserve (versus specific charge-off) method to compute
their deduction for bad debt losses.
 
  Under the reserve method, qualifying associations are generally allowed to
use either of two alternative computations. Under the "percentage of taxable
income method" computation, qualifying institutions can claim a bad debt
deduction computed as a percentage of taxable income before such deduction.
Alternatively, a qualifying association may elect to utilize its own bad debt
loss experience to compute its annual addition to its bad debt reserves (the
"experience method").
 
  Prior to the enactment of the Tax Reform Act of 1986 ("1986 Act"), many
qualifying institutions, including the Bank, used the percentage of taxable
income method which generally resulted in a lower effective federal income tax
rate than that applicable to other types of corporations. However, the 1986
Act reduced the maximum percent that could be deducted under the percentage of
taxable income method from 40% to 8% for tax years beginning after December
31, 1986; thus many qualifying institutions, including the Bank, began to use
the experience method beginning in 1987. The amount by which a qualifying
institution's total bad debt reserves exceed the amount computed under the
experience method ("excess tax bad debt reserves") may be subject to recapture
tax as noted below.
 
  On December 31, 1993, the bad debt reserves of the Bank for federal income
tax purposes included $14.0 million representing excess tax bad debt reserves.
If, in the future, amounts appropriated to these excess tax bad debt reserves
are used for the payment of dividends or other distributions by the Bank
(including distributions in dissolution, liquidation or redemption of stock),
an amount equal to the distribution plus the tax attributable thereto, but not
exceeding the aggregate amount of excess tax bad debt reserves, will generally
be included in the Bank's taxable income and be subject to tax. In addition,
if in the future the Bank fails to meet the definitional or other tests of a
qualifying association, the entire tax bad debt reserves of $52.5 million will
have to be recaptured and included in taxable income. It is not contemplated
that the accumulated reserves will be used in a manner that will create such
liabilities.
 
  The Company's tax returns have been audited by the Internal Revenue Service
through December 31, 1987 and by the California Franchise Tax Board through
December 31, 1985. The tax returns filed for 1986,
 
                                      40

1987 and 1988 are currently under audit by the California Franchise Tax Board.
The tax returns for years ended 1988 and 1989 are currently in the appeals
process with the Internal Revenue Service. In addition, the Internal Revenue
Service is currently auditing the tax returns filed for 1990 and 1991. For
additional information regarding the federal income and California franchise
taxes payable by the Company, see Note 12 to the consolidated financial
statements.
 
  For California franchise tax purposes, savings institutions are taxed as
"financial corporations" at a higher rate than that applicable to nonfinancial
corporations because of exemptions from certain state and local taxes. The
California franchise tax rate applicable to financial corporations is
approximately 11%.
 
REGULATION AND SUPERVISION
 
General
 
  Citadel is a savings and loan holding company subject to regulation by the
OTS. Fidelity is a federally-chartered savings bank, a member of the Federal
Home Loan Bank of San Francisco, and is subject to regulation by the OTS and
the FDIC. Fidelity's deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF"). As described in more detail below,
statutes and regulations applicable to Citadel govern such matters as changes
of control of Citadel and transactions between Fidelity and Citadel. Statutes
and regulations applicable to Fidelity govern such matters as the amount of
capital Fidelity must hold; dividends, mergers and changes of control;
establishment and closing of branch offices; and the investments and
activities in which Fidelity can engage.
 
  Citadel and Fidelity are subject to the examination, supervision and
reporting requirements of the OTS, their primary federal regulator, including
a requirement for Fidelity of at least one full scope, on-site examination
every year. The Director of the OTS is authorized to impose assessments on
Fidelity to fund OTS operations, including the cost of examinations. Fidelity
is also subject to examination and supervision by the FDIC, and the FDIC has
"back-up" authority to take enforcement action against Fidelity if the OTS
fails to take such action after a recommendation by the FDIC. The FDIC may
impose assessments on Fidelity to cover the cost of FDIC examinations. In
addition, Fidelity is subject to regulation by the Board of Governors of the
Federal Reserve System ("FRB") with respect to certain aspects of its
business.
 
FIRREA Capital Requirements
 
  The OTS's capital regulations, as required by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), include three
separate minimum capital requirements for the savings institution industry--a
"tangible capital requirement," a "leverage limit" and a "risk-based capital
requirement." These capital standards must be no less stringent than the
capital standards applicable to national banks. The OTS also has the
authority, after giving the affected institution notice and an opportunity to
respond, to establish individual minimum capital requirements ("IMCR") for a
savings institution which are higher than the industry minimum requirements,
upon a determination that an IMCR is necessary or appropriate in light of the
institution's particular circumstances, such as if the institution is expected
to have losses resulting in capital inadequacy, has a high degree of exposure
to credit risk, or has a high amount of nonperforming loans. The OTS has
proposed a regulation that would add to the list of circumstances in which an
IMCR may be appropriate for a savings association the following: a high degree
of exposure to concentration of credit risk or risks arising from
nontraditional activities, or failure to adequately monitor and control the
risks presented by concentration of credit and nontraditional activities.
 
  The industry minimum capital requirements are as follows:
 
  Tangible capital of at least 1.5% of adjusted total assets. Tangible capital
is composed of (1) an institution's common stock, perpetual noncumulative
preferred stock, and related earnings, and (2) the amount, if any, of equity
investment by others in the institution's subsidiaries, after deducting (a)
intangible assets other than purchased mortgage servicing rights, and (b) the
institution's investments in and extensions
 
                                      41

of credit to subsidiaries engaged as principal in activities not permissible
for national banks, net of any reserves established against such investments,
subject to a phase-out ending July 1, 1996 rather than a deduction for the
amount of investments made or committed to be made prior to April 12, 1989. In
general, adjusted total assets equal the institution's consolidated total
assets, minus any assets that are deducted in calculating capital.
 
  Core capital of at least 3% of adjusted total assets (the "leverage limit").
Core capital consists of tangible capital plus (1) goodwill resulting from pre-
April 12, 1989 acquisitions of troubled savings institutions, subject to a
phase-out ending December 31, 1994; and (2) certain marketable intangible
assets, such as core deposit premium (the premium paid for acquisition of
deposits from other institutions). Deferred tax assets whose realization
depends on the institution's future taxable income (exclusive of income
attributable to reversing taxable temporary differences and carry forwards) or
on the institution's tax-planning strategies must be deducted from core capital
to the extent that such assets exceed the lesser of (1) 10% of core capital, or
(2) the amount of such assets that can be realized within one year, unless such
assets were reportable as of December 31, 1992, in which case no deduction is
required.
 
  The OTS has recently adopted a regulation effective March 4, 1994 with
respect to the inclusion of intangible assets in regulatory capital. Under this
regulation, purchased mortgage servicing rights will generally be includible in
tangible and core capital, and purchase credit card relationships will
generally be includible in core capital, as long as they do not exceed 50% of
core capital in the aggregate, with a separate sublimit of 25% for purchased
credit card relationships. All other intangible assets, including, core deposit
premium, will generally have to be deducted. Core deposit intangible in
existence on March 4, 1994, however, may continue to be included in core
capital to the extent permitted by the OTS, as long as the premium is valued in
accordance with GAAP, supported by credible assumptions, and its amortization
is adjusted at least annually. At December 31, 1993, Fidelity included $2.1
million of core deposit premium in core capital. Fidelity anticipates that such
$2.1 million in core deposit premium will continue to be includible in core
capital after March 4, 1994.
 
  Total capital of at least 8% of risk-weighted assets (the "risk-based capital
requirement"). Total capital includes both core capital and "supplementary"
capital items deemed less permanent than core capital, such as subordinated
debt and general loan loss allowances (subject to certain limits), but equity
investments (with the exception of investments in subsidiaries and investments
permissible for national banks) and portions of certain high-risk land loans
and nonresidential construction loans must be deducted from total capital,
subject to a phase-out rather than a deduction until July 1, 1994. At least
half of total capital must consist of core capital.
 
  Risk-weighted assets are determined by multiplying each category of an
institution's assets, including off balance sheet asset equivalents, by an
assigned risk weight based on the credit risk associated with those assets, and
adding the resulting sums. The four risk weight categories range from zero
percent for cash and government securities to 100% for assets (including past-
due loans and real estate owned) that do not qualify for preferential risk-
weighting.
 
  Effective September 30, 1994, institutions that are deemed to have above-
normal exposure to interest-rate risk, based on their assets and liabilities as
of the end of the third quarter prior to the measuring date, will be required
to deduct from their total capital an amount equal to 50% of the excess risk.
If this requirement had been in effect at December 31, 1993, based on its
assets and liabilities as of March 31, 1993, Fidelity would not have been
deemed to have above-normal exposure to interest-rate risk.
 
  On March 18, 1994, the OTS published a final regulation effective on that
date that permits a loan secured by multifamily residential property,
regardless of the number of units, to be risk-weighted at 50% for purposes of
the risk-based capital standards if the loan meets specified criteria relating
to the term of the loan, timely payments of interest and principal, loan-to-
value ratio and ratio of net operating income to debt service requirements.
Under the prior regulation, only loans secured by multifamily residential
properties consisting of 5 to 36 units were eligible for risk-weighting at 50%,
and then only if such loans had a
loan-to-value ratio at origination of not more than 80% and the collateral
property had an average annual
 
                                       42

occupancy rate of at least 80% for a year or more. Based upon the results of
Fidelity's annual survey, management believes that at December 31, 1993, at
which time the prior rule was still in effect, approximately 85% of Fidelity's
portfolio of loans secured by multifamily residences with 5 to 36 units
qualified for 50% risk-weighting.
 
  Any loans that qualified for risk-weighting under the prior regulation as of
March 18, 1994 will be "grandfathered" and will continue to be risk-weighted at
50% as long as they continue to meet the criteria of the prior regulation. Thus
occupancy rates, which recently have been decreasing generally, will continue
to affect the risk-weighting of such grandfathered multifamily loans unless
such loans qualify for 50% risk-weighting under the criteria of the new rule,
which criteria do not include an occupancy requirement.
 
  Under the prior rule, loans secured by multifamily residential properties
with more than 36 units were required to be risk-weighted at 100% even if they
met the loan-to-value and occupancy criteria applicable to loans secured by 5
to 36 unit properties. As of December 31, 1993, Fidelity held $406.3 million in
loans secured by multifamily residential properties with 37 or more units, some
of which qualify under the criteria of the new regulation for 50% risk-
weighting. Therefore, Fidelity's risk-based capital ratio could increase.
However, some of Fidelity's existing loans secured by 5 to 36 unit residential
properties could increase in risk-weighting from 50% to 100% if they fail to
qualify for grandfathering and if they do not meet the additional criteria of
the new rule, which would have a negative effect on Fidelity's risk-based
capital ratio. The ultimate impact on Fidelity of the new regulation has not
been determined.

  Fidelity exceeded all three of the industry minimum capital requirements at
December 31, 1993, with a tangible capital ratio of 4.10%, a core capital ratio
of 4.15%, and a risk-based capital ratio of 9.32%. A discussion of Fidelity's
compliance with the industry minimum requirements appears in Item 7. "MD&A--
Capital Resources and Liquidity." Savings institutions that do not meet the
industry minimum capital requirements are subject to a number of sanctions
similar to but less restrictive than the sanctions under the FDICIA Prompt
Corrective Action system described below, and to a requirement that the OTS be
notified of any changes in Fidelity's directors or senior executive officers.
 
FDICIA Prompt Corrective Action Requirements
 
  The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the OTS to implement a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS was required to and
has established specific capital ratios for five separate capital categories:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
 
  Under the OTS regulations implementing FDICIA, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is at
least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to adjusted total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. An institution will be adequately capitalized if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to adjusted total assets (leverage ratio) is at least 4.0% (3.0% if the
institution receives the highest rating on the MACRO financial institutions
rating system). The OTS has stated that it intends to lower the leverage ratio
requirement to 3.0% for all savings institutions after September 30, 1994, when
the interest rate risk component of its capital regulations goes into effect.
The OTS' reduction of the leverage ratio requirement may depend on obtaining
agreement of the other federal banking agencies to such a reduction, and no
assurances can be given that the reduction will occur.
 
  An institution whose capital does not meet the amounts required in order to
be adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0%, 3.0%, or 3.0%
respectively, it will be treated as significantly undercapitalized. Finally, an
institution will be treated as critically undercapitalized if its ratio of
"tangible equity" (core capital plus cumulative preferred stock
 
                                       43

minus intangible assets other than supervisory goodwill and purchased mortgage
servicing rights) to adjusted total assets is equal to or less than 2.0%.
 
  At December 31, 1993 and to date, the Bank was and is classified as
adequately capitalized. However, Citadel supplemented the Bank's capital in
1993 with two capital infusions totaling $28 million, without which the Bank
would have had to significantly reduce its assets or the Bank's core capital
ratio at December 31, 1993 would have fallen below 4% and the Bank would have
been classified as undercapitalized. Management anticipates that the Bank will
incur losses in the first and second quarters of 1994. These losses will, in
the absence of a new capital infusion or a further reduction in the Bank's
total assets, reduce the Bank's core capital ratio to less than 4% at June 30,
1994 and thereby render it undercapitalized. See "Recent Developments--Capital
and Liquidity." Fidelity's capital category under the prompt corrective action
system may not be an accurate representation of Fidelity's overall financial
condition or prospects. A discussion of Fidelity's compliance with the industry
minimum capital requirements and the standards of the prompt corrective action
capital categories appears in Item 7. "MD&A--Capital Resources and Liquidity."
 
  An institution's capital category is based on its capital levels as of the
most recent of the following dates: (1) the date the institution's most recent
quarterly Thrift Financial Report ("TFR") was required to be filed with the
OTS; (2) the date the institution received from the OTS its most recent final
report of examination; or (3) the date the institution received written notice
from the OTS of the institution's capital category. If subsequent to the most
recent TFR or report of examination a material event has occurred that would
cause the institution to be placed in a lower capital category, the institution
must provide written notice to the OTS within 15 days, and the OTS shall
determine whether to change the association's capital category.
 
Mandatory Sanctions Tied to Prompt Corrective Action Capital Categories
 
  Capital Restoration Plan. An institution that is undercapitalized must submit
a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels
of activities the institution will conduct, and such other information as the
OTS may require. The OTS must act on the capital restoration plan
expeditiously, and generally not later than 60 days after the plan is
submitted.
 
  The OTS may approve a capital restoration plan only if the OTS determines
that the plan is likely to succeed in restoring the institution's capital and
will not appreciably increase the risks to which the institution is exposed. In
addition, the OTS may approve a capital restoration plan only if the
institution's performance under the plan is guaranteed by every company that
controls the institution, up to the lesser of (a) 5% of the institution's total
assets at the time the institution became undercapitalized, or (b) the amount
necessary to bring the institution into compliance with all capital standards
as of the time the institution fails to comply with its capital restoration
plan. Such guarantee must remain in effect until the institution has been
adequately capitalized for four consecutive quarters, and the controlling
company or companies must provide the OTS with appropriate assurances of their
ability to perform the guarantee. If the controlling company guarantee is not
acceptable, the OTS may treat the "undercapitalized" institution as
"significantly undercapitalized." There are additional restrictions which are
applicable to "significantly undercapitalized" institutions which are described
below.
 
  Limits on Expansion. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
 
  Capital Distributions. With one exception, an undercapitalized savings
institution generally may not pay any dividends or make other capital
distributions. Under the exception, the OTS may permit, after consultation with
the FDIC, repurchases or redemptions of the institution's shares that are made
in
 
                                       44

connection with the issuance of additional shares to improve the institution's
financial condition. Undercapitalized institutions also may not pay management
fees to any company or individual that controls the institution. Similarly, an
adequately capitalized institution may not make a capital distribution or pay
a management fee to a controlling person if such payment would cause the
institution to become undercapitalized.
 
  Brokered Deposits and Benefit Plan Deposits. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that
are more than 75 basis points higher than market rates. Savings institutions
that are adequately capitalized but not well capitalized must obtain a waiver
from the FDIC in order to accept, renew, or rollover brokered deposits, and
even if a waiver is granted may not solicit deposits, through a broker or
otherwise, by offering interest rates that exceed market rates by more than 75
basis points.
 
  Institutions that are ineligible to accept brokered deposits can only offer
FDIC insurance coverage for employee benefit plan deposits up to $100,000 per
plan, rather than $100,000 per plan participant, unless, at the time such
deposits are accepted, the institution meets all applicable capital standards
and certifies to the benefit plan depositor that its deposits are eligible for
coverage on a per-participant basis.
 
  Restrictions on Significantly and Critically Undercapitalized Institutions.
In addition to the above mandatory restrictions which apply to all
undercapitalized savings institutions, institutions that are significantly
undercapitalized may not without the OTS's prior approval (a) pay a bonus to
any senior executive officer, or (b) increase any senior executive officer's
compensation over the average rate of compensation (excluding bonuses, options
and profit-sharing) during the 12 months preceding the month in which the
institution became undercapitalized. The same restriction applies to
undercapitalized institutions that fail to submit or implement an acceptable
capital restoration plan.
 
  If a savings institution is critically undercapitalized, the institution is
also prohibited from making payments of principal or interest on subordinated
debt beginning sixty days after the institution becomes critically
undercapitalized, unless the FDIC permits such payments or the subordinated
debt was outstanding on July 15, 1991 and has not subsequently been extended
or renegotiated. In addition, the institution cannot without prior FDIC
approval enter into any material transaction outside the ordinary course of
business. Critically undercapitalized savings institutions must be placed in
receivership or conservatorship within 90 days of becoming critically
undercapitalized unless the OTS, with the concurrence of the FDIC, determines
that some other action would better resolve the problems of the institution at
the least possible long-term loss to the insurance fund, and documents the
reasons for its determination. A determination by the OTS not to place a
critically undercapitalized institution in conservatorship or receivership
must be reviewed every 90 days. If the institution remains critically
undercapitalized on average during the calendar quarter beginning 270 days
after it became critically undercapitalized, the findings which the OTS must
make regarding the viability of the institution in order to avoid the
appointment of a conservator or receiver become more stringent.
 
Discretionary Sanctions Tied to Prompt Corrective Action Capital Categories
 
  Operating Restrictions. With respect to an undercapitalized institution, the
OTS will, if it deems such actions necessary to resolve the institution's
problems at the least possible loss to the insurance fund, have the explicit
authority to: (a) order the institution to recapitalize by selling shares of
capital stock or other securities; (b) order the institution to agree to be
acquired by another depository institution holding company or combine with
another depository institution; (c) restrict transactions with affiliates; (d)
restrict the interest rates paid by the institution on new deposits to the
prevailing rates of interest in the region where the institution is located;
(e) require reduction of the institution's assets; (f) restrict any activities
that the OTS determines pose excessive risk to the institution; (g) order a
new election of directors; (h) order the institution to dismiss any director
or senior executive officer who held office for more than 180 days before the
institution became undercapitalized, subject to the director's or officer's
right to obtain administrative review of the dismissal; (i) order the
institution to employ qualified senior executive officers subject to the OTS's
approval;
 
                                      45

(j) prohibit the acceptance of deposits from correspondent depository
institutions; (k) require the institution to divest any subsidiary or the
institution's holding company to divest the institution or any other
subsidiary; or (l) take any other action that the OTS determines will better
resolve the institution's problems at the least possible loss to the deposit
insurance fund.
 
  If an institution is significantly undercapitalized, or if it is
undercapitalized and its capital restoration plan is not approved or
implemented within the required time periods, the OTS must take one or more of
the above actions, and must take the actions described in clauses (a) or (b),
(c) and (d) above unless it finds that such actions would not resolve the
institution's problems at the least possible loss to the deposit insurance
fund. The OTS also may prohibit the institution from making payments on any
outstanding subordinated debt or entering into material transactions outside
the ordinary course of business without the OTS's prior approval.
 
  The OTS' determination to order one or more of the above discretionary
actions will be evidenced by a written directive to the institution, and the
OTS will generally issue a directive only after giving the institution prior
notice and an opportunity to respond. The period for response shall be at
least 14 days unless the OTS determines that a shorter period is appropriate
based on the circumstances. The OTS, however, may issue a directive without
providing any prior notice if the OTS determines that such action is necessary
to resolve the institution's problems at the least possible loss to the
deposit insurance fund. In such a case, the directive will be effective
immediately, but the institution may appeal the directive to the OTS within 14
days.
 
  Receivership or Conservatorship. In addition to the mandatory appointment of
a conservator or receiver for critically undercapitalized institutions,
described above, the OTS or FDIC may appoint a receiver or conservator for an
institution if the institution is undercapitalized and (a) has no reasonable
prospect of becoming adequately capitalized, (b) fails to submit a capital
restoration plan within the required time period, or (c) materially fails to
implement its capital restoration plan. FDICIA provides that directors of an
FDIC-insured depository institution will have no liability to the
institution's stockholders or creditors if they consent in good faith to the
appointment of a conservator or receiver or to an FDIC-assisted sale of the
institution.
 
  Down-grading to Lower Capital Category. The OTS can apply to an institution
in a particular capital category the sanctions that apply to the next lower
capital category, if the OTS determines, after providing the institution
notice and opportunity for a hearing, that (a) the institution is in an unsafe
or unsound condition, or (b) the institution received, in its most recent
report of examination, a less-than-satisfactory rating for asset quality,
management, earnings or liquidity, and the deficiency has not been corrected.
The OTS cannot, however, use this authority to require an adequately
capitalized institution to file a capital restoration plan, or to subject a
significantly undercapitalized institution to the sanctions applicable to
critically undercapitalized institutions.
 
Expanded Regulatory Authority Under FDICIA
 
  In addition to the prompt corrective action provisions discussed above based
on an institution's regulatory capital ratios, FDICIA contains several
measures intended to promote early identification of management problems at
depository institutions and to ensure that regulators intervene promptly to
require corrective action by institutions with inadequate operational and
managerial standards.
 
  Safety and Soundness Standards. FDICIA requires the OTS to prescribe minimum
acceptable operational and managerial standards, and standards for asset
quality, earnings, and valuation of publicly traded shares, for savings
institutions and their holding companies. Such standards were to be effective
no later than December 1, 1993, but have not yet been finalized. The
operational standards must cover internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and employee compensation.
The asset quality and earnings standards must specify a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses,
and minimum ratio of market value to book value for publicly traded shares.
 
                                      46

  Any institution or holding company that fails to meet the standards must
submit a plan for corrective action within 30 days. If a savings institution
fails to submit or implement an acceptable plan, the OTS must order it to
correct the safety and soundness deficiency, and may restrict its rate of
asset growth, prohibit asset growth entirely, require the institution to
increase its ratio of tangible equity to assets, restrict the interest rate
paid on deposits to the prevailing rates of interest on deposits of comparable
amounts and maturities, or require the institution to take any other action
that the OTS determines will better carry out the purpose of prompt corrective
action. Imposition of these sanctions is within the discretion of the OTS in
most cases but is mandatory if the savings institution commenced operations or
experienced a change in control during the 24 months preceding the
institution's failure to meet the safety and soundness standards, or underwent
extraordinary growth during the preceding 18 months.
 
  The OTS and the other federal banking agencies have jointly published a
proposed regulation prescribing the required safety and soundness standards.
Among other things, the proposed regulation would set out asset quality
standards which specify that the ratio of a depository institution's
classified assets to the sum of(a) its total capital and (b) any allowances
for loan losses not included in total capital should not exceed 100%. Minimum
earnings standards would require that institutions be able to demonstrate pro
forma compliance with capital requirements if net earnings or losses over the
preceding four quarters continue over the next four quarters. If the proposed
safety and soundness standards had been in effect at December 31, 1993,
Fidelity would not have been in compliance with the minimum earnings standard
or the maximum ratio of classified assets to capital standard and would have
been required to submit a plan for corrective action.
 
  Under the proposed regulation, the safety and soundness standards would
apply primarily at the savings institution level, and savings and loan holding
companies such as Citadel would only be required (a) to ensure that their
transactions with a subsidiary savings institution are not detrimental to the
institution, (b) to avoid creating a serious risk that the holding company's
liabilities would be imposed on the institution, (c) not to take any action
that would impede the institution's compliance with the safety and soundness
standards, and (d) if the subsidiary institution is required to submit a plan
for corrective action, to take any corporate actions necessary to enable the
subsidiary to take the actions required by the plan.
 
  Expanded Requirements Relating to Internal Controls. Each depository
institution with assets above a specified threshold (which the FDIC has set at
$500 million and which therefore includes Fidelity) must prepare an annual
report, signed by the chief executive officer and chief financial officer, on
the effectiveness of the institution's internal control structures and
procedures for financial reporting, and on the institution's compliance with
laws and regulations relating to safety and soundness. The institution's
independent public accountant must attest to, and report separately on,
management's assertions in the annual report. The report and the attestation,
along with financial statements and such other disclosure requirements as the
FDIC and the OTS may prescribe, must be submitted to the FDIC and OTS and will
be available to the public.
 
  Every institution with assets above the $500 million threshold must also
have an audit committee of its Board of Directors made up entirely of
directors who are independent of the management of the institution. Fidelity
is in compliance with this requirement. Audit committees of "large"
institutions (defined by the FDIC as an institution with more than $3 billion
in assets, which includes Fidelity) must include members with banking or
financial management expertise, may not include members who are large
customers of the institution, and must have access to independent counsel.
 
Activities Restrictions Not Related to Capital Compliance
 
  Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a limited list of
qualified thrift investments, primarily investments related to housing loans.
If Fidelity fails to satisfy the QTL test and does not requalify as a QTL
within one year, Citadel must register and be regulated as a bank holding
company, and Fidelity must either convert to a commercial bank charter or
become subject to restrictions on branching, business activities and dividends
as if it were a national bank.
 
                                      47

  Portfolio assets consist of tangible assets minus (a) assets used to satisfy
liquidity requirements, and(b) property used by the institution to conduct its
business. Assets that may be counted as qualified thrift investments without
limit include residential mortgage and construction loans; home improvement and
repair loans; mortgage-backed securities; home equity loans; Federal Savings
and Loan Insurance Corporation ("FSLIC"), FDIC, Resolution Funding Corporation
and Resolution Trust Corporation obligations; and FHLB stock.
 
  Assets includable subject to an aggregate maximum of 20% of portfolio assets
include Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation stock; investments in residential housing-oriented subsidiaries;
consumer and education loans up to a maximum of 10% of portfolio assets; 200%
of loans for development of low-income housing; 200% of certain community
development loans; loans to construct, purchase or maintain churches, schools,
nursing homes and hospitals; and 50% of any residential mortgage loans
originated by the institution and sold during the month for which the QTL
calculation is made, if such loans were sold within 90 days of origination. At
December 31, 1993, 89.8% of Fidelity's portfolio assets constituted qualified
thrift investments.
 
  Investments and Loans. In general, federal savings institutions such as
Fidelity may not invest directly in equity securities, noninvestment grade debt
securities, or real estate, other than real estate used for the institution's
offices and related facilities. Indirect equity investment in real estate
through a subsidiary is permissible, but subject to limitations based on the
amount of the institution's assets, and the institution's investment in such a
subsidiary must be deducted from regulatory capital in full or (for certain
subsidiaries owned by the institution prior to April 12, 1989) phased out of
capital by no later than July 1, 1996.
 
  Loans by a savings institution to a single borrower are generally limited to
15% of the institution's "unimpaired capital and unimpaired surplus," which is
similar but not identical to total capital. At December 31, 1993, the largest
Fidelity borrower had a total outstanding balance of $31.5 million or 10.1% of
unimpaired capital and unimpaired surplus. Aggregate loans secured by
nonresidential real property are generally limited to 400% of the institution's
total capital. Commercial loans may not exceed 10% of Fidelity's total assets,
and consumer loans may not exceed 35% of Fidelity's total assets. At December
31, 1993, Fidelity was in compliance with the above investment limits.
 
  Activities of Subsidiaries. A savings institution seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC
and OTS. A subsidiary of Fidelity may be able to engage in activities that are
not permissible for Fidelity directly, if the OTS determines that such
activities are reasonably related to Fidelity's business, but Fidelity may be
required to deduct its investment in such a subsidiary from capital. The OTS
has the power to require a savings institution to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS determines to be
a serious threat to the financial safety, soundness or stability of such
savings institution or to be otherwise inconsistent with sound banking
practices.
 
  Real Estate Lending Standards. The OTS and the other federal banking agencies
have adopted regulations, effective March 19, 1993, which require institutions
to adopt and at least annually review written real estate lending policies. The
lending policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and
procedures for monitoring compliance with the policies. The policies must
reflect consideration of guidelines adopted by the banking agencies. Among the
guidelines adopted by the agencies are maximum loan-to-value ratios for land
loans (65%); development loans (75%); construction loans (80%-85%); loans on
owner-occupied 1 to 4 family property, including home equity loans (no limit,
but loans at or above 90% require private mortgage insurance); and loans on
other improved property (85%).
 
  The guidelines permit institutions to make loans in excess of the supervisory
loan-to-value limits if such loans are supported by other credit factors, but
the aggregate of such nonconforming loans should not exceed the institution's
risk-based capital, and the aggregate of nonconforming loans secured by real
estate other than 1 to 4 family property should not exceed 30% of risk-based
capital. Fidelity believes that its current lending policies and practices are
consistent with the guidelines.
 
                                       48

  Additional Regulatory Restrictions. As a result of its findings in a recent
examination of Fidelity, the OTS has taken action that will result in
Fidelity's being subjected to higher examination assessments and subjects
Fidelity to additional regulatory restrictions including, but not limited to
(a) a requirement that Fidelity submit to the OTS for prior approval any
changes in its board of directors or senior executive officers and any proposed
employment contracts with a director or senior officer; (b) a prohibition,
absent prior OTS approval, on increases in Fidelity's total assets during any
quarter in excess of an amount equal to the net interest credited on deposit
liabilities during the quarter; (c) a requirement that Fidelity submit to the
OTS for prior review and approval any third party contracts outside the normal
course of business; and (d) the OTS would have the ability, in its discretion,
to require 30 days' prior notice of all transactions between Fidelity and its
affiliates (including Citadel and Gateway). See "Recent Developments--OTS
Examinations."
 
Deposit Insurance
 
  General. Fidelity's deposits are insured by the FDIC to a maximum of $100,000
for each insured depositor. Under FIRREA, the FDIC administers two separate
deposit insurance funds: the Bank Insurance Fund (the "BIF") which insures the
deposits of institutions that were insured by the FDIC prior to FIRREA, and the
SAIF which maintains a fund to insure the deposits of institutions, such as
Fidelity, that were insured by the FSLIC prior to FIRREA.
 
  Insurance Premium Assessments. The Federal Deposit Insurance Corporation
Improvement Act of 1991 directed the FDIC to establish by January 1, 1994, a
risk-based system for setting deposit insurance assessments. The FDIC has
implemented such a system, under which an institution's insurance assessments
will 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. Under the
FDIC's system, the assessment rate for both BIF deposits and SAIF deposits
varies from 0.23% of covered deposits for well-capitalized institutions that
are deemed to have no more than a few minor weaknesses, to 0.31% of covered
deposits for less than adequately capitalized institutions that pose
substantial supervisory concern. The FDIC in the future may determine to change
the assessment rates, or the parity of BIF and SAIF rates, based on the
condition of the BIF and the SAIF.
 
  Under current law, the SAIF has three major obligations: beginning in 1995,
to fund losses associated with the failure of institutions with SAIF-insured
deposits; to increase its reserves to 1.25% of insured deposits over a
reasonable period of time; and to make interest payments on debt incurred to
provide funds to the former Federal Savings and Loan Insurance Corporation
("FICO debt"). The reserves of the SAIF are currently lower than the reserves
of the BIF, and the BIF does not have an obligation to pay interest on FICO
debt. Recent legislation authorizes the United States Treasury to provide up to
$8 billion to the SAIF, but use of such funds would require additional
Congressional action, and the funds could be used only to cover SAIF losses and
only under limited circumstances. Therefore, in the future premiums assessed on
deposits insured by the SAIF may be higher than premiums on deposits insured by
the BIF. Such a premium structure could provide institutions whose deposits are
exclusively or primarily BIF-insured (such as almost all commercial banks)
certain competitive advantages over institutions whose deposits are SAIF-
insured (such as Fidelity) in the pricing of loans and deposits and in lower
operating costs. Such a competitive disadvantage could have an adverse effect
on Fidelity's results of operations.
 
  Termination of Deposit Insurance. The FDIC may initiate a proceeding to
terminate an institution's deposit insurance if, among other things, the
institution is in an unsafe or unsound condition to continue operations. It is
the policy of the FDIC to deem an insured institution to be in an unsafe or
unsound condition if its ratio of Tier 1 capital to total assets is less than
2%. Tier 1 capital is similar to core capital but includes certain investments
in and extensions of credit to subsidiaries engaged in activities not permitted
for national banks.
 
  Conversion of Deposit Insurance. Generally, savings institutions may not
convert from SAIF membership to BIF membership until SAIF has increased its
reserves to 1.25% of insured deposits. However, a savings institution may
convert to a bank charter, if the resulting bank remains a SAIF member, and may
merge
 
                                       49

with a BIF member institution as long as deposits attributable to the savings
institution remain subject to assessment by the SAIF. Institutions that
convert from SAIF to BIF membership, either under an exception during the
moratorium or after expiration of the moratorium, must pay exit fees to SAIF
and entrance fees to BIF.
 
Savings and Loan Holding Company Regulation
 
  Affiliate and Insider Transactions. The ability of Citadel and its non-
depository subsidiaries to deal with Fidelity is limited by the affiliate
transaction rules, including Sections 23A and 23B of the Federal Reserve Act
which also govern BIF-insured banks. With very limited exceptions, these rules
require that all transactions between Fidelity and an affiliate must be on
arms' length terms. The term "affiliate" covers any company that controls or
is under common control with Fidelity, but does not include individuals and
generally does not include Fidelity's subsidiaries.
 
  Under Section 23A and section 11 of the Home Owners' Loan Act, specific
restrictions apply to transactions in which Fidelity provides funding to its
affiliates: Fidelity may not purchase the securities of an affiliate, make a
loan to any affiliate that is engaged in activities not permissible for a bank
holding company, or acquire from an affiliate any asset that has been
classified, a nonaccrual loan, a restructured loan, or a loan that is more
than 30 days past due. As to affiliates engaged in bank holding company-
permissible activities, the aggregate of (a) loans, guarantees, and letters of
credit provided by the savings bank for the benefit of any one affiliate, and
(b) purchases of assets by the savings bank from the affiliate, may not exceed
10% of the savings bank's capital stock and surplus (20% for the aggregate of
permissible transactions with all affiliates). All loans to affiliates must be
secured by collateral equal to at least 100% of the amount of the loan (130%
if the collateral consists of equity securities, leases or real property).
 
  In addition, OTS regulations on affiliate transactions require, among other
things, that savings institutions retain records of their affiliate
transactions that reflect such transactions in reasonable detail. If a savings
institution has been the subject of a change of control application or notice
within the preceding two-year period, does not meet its minimum capital
requirements, has entered into a supervisory agreement, is subject to a formal
enforcement proceeding, or is determined by the OTS to be the subject of
supervisory concern, the institution may be required to provide the OTS with
30 days' prior notice of any affiliate transaction.
 
  Loans by Fidelity to its directors, executive officers, and 10% stockholders
of Fidelity, Citadel, or Citadel's subsidiaries (collectively, "insiders"), or
to a corporation or partnership that is at least 10% owned by an insider (a
"related interest") are subject to limits separate from the affiliate
transaction rules. However, a company (such as Citadel) that controls a
savings institution is excluded from the coverage of the insider lending rules
even if it owns 10% or more of the stock of the institution, and is subject
only to the affiliate transaction rules. All loans to insiders and their
related interests must be underwritten and made on non-preferential terms;
loans in excess of $500,000 must be approved in advance by Fidelity's Board of
Directors; and Fidelity's total of such loans may not exceed 100% of
Fidelity's capital. Loans by Fidelity to its executive officers are subject to
additional limits which are even more stringent. Fidelity has adopted a policy
which requires prior approval of its Board of Directors for any loans to
insiders or their related interests.
 
  Payment of Dividends and Other Capital Distributions. The payment of
dividends, stock repurchases, and other capital distributions by Fidelity to
Citadel is subject to regulation by the OTS. Currently, 30 days prior notice
to the OTS of any capital distribution is required. The OTS has promulgated a
regulation that measures a savings institution's ability to make a capital
distribution according to the institution's capital position. The rule
establishes "safe-harbor" amounts of capital distributions that institutions
can make after providing notice to the OTS, but without needing prior
approval. Institutions can distribute amounts in excess of the safe harbor
only with the prior approval of the OTS.
 
  For institutions ("Tier 1 institutions") that meet their fully phased-in
capital requirements (the requirements that will apply when the phase-out of
supervisory goodwill and investments in certain subsidiaries from capital is
complete), the safe harbor amount is the greater of (a) 75% of net income for
the prior four quarters, or (b) the sum of (1) the current year's net income
and (2) the amount that would reduce
 
                                      50

the excess of the institution's total capital to risk-weighted assets ratio
over 8% to one-half of such excess at the beginning of the year in which the
dividend is paid. For institutions that meet their current minimum capital
requirements but do not meet their fully phased-in requirements ("Tier 2
institutions"), the safe harbor distribution is 75% of net income for the prior
four quarters. As a function of the prompt corrective action provisions
discussed above and the OTS regulation regarding capital distributions, savings
institutions that do not meet their current minimum capital requirements ("Tier
3 institutions") may not make any capital distributions, with the exception of
repurchases or redemptions of the institution's shares permitted by the OTS,
after consultation with the FDIC, that are made in connection with the issuance
of additional shares and that will improve the institution's financial
condition.
 
  The OTS retains the authority to prohibit any capital distribution otherwise
authorized under the regulation if the OTS determines that the distribution
would constitute an unsafe or unsound practice. The OTS also may reclassify a
Tier 1 institution as a Tier 2 or Tier 3 institution by notifying the
institution that it is in need of more than normal supervision. While Fidelity
was a Tier 1 institution at December 31, 1993, the OTS has taken action that
could cause Fidelity to be reclassified as a Tier 2 or Tier 3 institution.
Further, while Fidelity is currently classified as adequately capitalized for
purposes of the prompt corrective action system, an adequately capitalized
institution may not make a capital distribution if such payment would cause the
institution to become undercapitalized. Because of Fidelity's current capital
levels, dividends and distributions from Fidelity will not be available to
Citadel for the foreseeable future.
 
  On December 31, 1993, the bad debt reserves of the Bank for federal income
tax purposes included $14.0 million representing excess tax bad debt reserves.
If, in the future, amounts appropriated to these excess tax bad debt reserves
are used for the payment of dividends or other distributions by the Bank
(including distributions in dissolution, liquidation or redemption of stock),
an amount equal to the distribution plus the tax attributable thereto, but not
exceeding the aggregate amount of excess tax bad debt reserves, will generally
be included in the Bank's taxable income and be subject to tax. In addition, if
in the future the Bank fails to meet the definitional or other tests of a
qualifying association, the entire tax bad debt reserves of $52.5 million will
have to be recaptured and included in taxable income. It is not contemplated
that the accumulated reserves will be used in a manner that will create such
liabilities.
 
  Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or
opportunity for a hearing, which directive may (a) limit the payment of
dividends by the savings institution, (b) limit transactions between the
savings institution and its holding company or its affiliates, and (c) limit
any activity of the association that creates a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.
 
  In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or
loss of voting rights in the event such party took any action for or toward
causing, bringing about, participating in, counseling, or aiding and abetting a
violation of law or unsafe or unsound practice by a savings institution.
 
  Limits on Change of Control. Subject to certain limited exceptions, control
of Fidelity or Citadel may only be obtained with the approval (or in the case
of an acquisition of control by an individual, the nondisapproval) of the OTS,
after a public comment and application review process. Under OTS regulations
defining "control," a rebuttable presumption of control arises if an acquiring
party acquires more than 10% of any class of voting stock of Fidelity or
Citadel (or more than 25% of any class of stock, whether voting or
 
                                       51

non-voting) and is subject to any "control factors" as defined in the
regulation. Control is conclusively deemed to exist if an acquirer holds more
than 25% of any class of voting stock of Fidelity or Citadel, or has the power
to control in any manner the election of a majority of directors.
 
  Any company acquiring control of Fidelity or Citadel becomes a savings and
loan holding company, must register and file periodic reports with the OTS, and
is subject to OTS examination. With limited exceptions, a savings and loan
holding company may not directly or indirectly acquire more than 5% of the
voting stock of another savings and loan holding company or savings institution
without prior OTS approval.
 
  Notification of New Officers and Directors. A savings and loan holding
company that has undergone a change in control in the preceding two years, is
subject to a supervisory agreement with the OTS, or is deemed to be in
"troubled condition" by the OTS, must give the OTS 30 days' notice of any
change to its Board of Directors or its senior executive officers. The OTS must
disapprove such change if the competence, experience or integrity of the
affected individual indicates that it would not be in the best interests of the
public to permit the appointment. The OTS has taken action as a result of which
Fidelity is deemed to be in "troubled condition" for this purpose.
 
Classification of Assets
 
  Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses and report the results of
such classification quarterly to the OTS. A savings institution is also
required to set aside adequate valuation allowances to the extent that an
affiliate possesses assets posing a risk to the institution, and to establish
liabilities for off-balance sheet items, such as letters of credit, when loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether and to what
extent (a) additional assets must be classified, and (b) the institution's
valuation allowances must be increased. See Item 7. "MD&A--Asset Quality."
 
  Troubled assets are classified into one of three categories as follows:
 
    SUBSTANDARD ASSETS. Prudent general valuation allowances are required to
  be established for such assets.
 
    DOUBTFUL ASSETS. Prudent GVAs are required to be established for such
  assets.
 
    LOSS ASSETS. 100% of the amount classified as loss must be charged off,
  or a specific allowance of 100% of the amount classified as loss must be
  established.
 
  GVAs for loan and lease losses are included within regulatory capital for
certain purposes and up to certain limits, while specific allowances and other
general allowances are not included at all.
 
  The OTS and the other federal banking agencies have adopted a statement of
policy regarding the appropriate levels of GVA for loan and lease losses that
institutions should maintain. Under the policy statement, examiners will
generally accept management's evaluation of adequacy of GVAs for loans and
lease losses if the institution has maintained effective systems and controls
for identifying and addressing asset quality problems, analyzed in a reasonable
manner all significant factors that affect the collectability of the portfolio,
and established an acceptable process for evaluating the adequacy of GVAs.
However, the policy statement also provides that OTS examiners will review
management's analysis more closely if GVAs for loan and lease losses do not
equal at least the sum of (a) 15% of assets classified as substandard, (b) 50%
of assets classified as doubtful, and (c) for the portfolio of unclassified
loans and leases, an estimate of credit losses over the upcoming twelve months
based on the institution's average rate of net charge-offs over the previous
two or three years on similar loans, adjusted for current trends and
conditions. The GVA policy statement has had no material impact on Fidelity's
results of operations or financial condition.
 
                                       52

Community Reinvestment Act
 
  The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within such communities. The CRA also requires the OTS to assess the
performance of the institution in meeting the credit needs of its community and
to take such assessment into consideration in reviewing applications for
mergers, acquisitions, and other transactions. An unsatisfactory CRA rating may
be the basis for denying such an application.
 
  In connection with its assessment of CRA performance, the OTS assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based on an examination conducted during 1993, Fidelity was
rated satisfactory. The OTS and the other federal banking agencies have jointly
proposed amendments to their CRA regulations that would replace the current
assessment system, which is based on the adequacy of the processes an
institution has established to comply with the CRA, with a new system based on
the institution's performance in making loans and investments and maintaining
branches in low- and moderate-income areas.
 
Federal Home Loan Bank System
 
  The Federal Home Loan Banks provide a credit facility for member
institutions. As a member of the FHLB of San Francisco, Fidelity is required to
own capital stock in the FHLB of San Francisco in an amount at least equal to
the greater of 1% of the aggregate principal amount of its unpaid home loans,
home purchase contracts and similar obligations at the end of each calendar
year, assuming for such purposes that at least 30% of its assets were home
mortgage loans, or 5% of its advances from the FHLB of San Francisco. At
December 31, 1993, Fidelity was in compliance with this requirement with an
investment in the stock of the FHLB of San Francisco of $52.0 million. Long-
term FHLB advances may be obtained only for the purpose of providing funds for
residential housing finance and all FHLB advances must be secured by specific
types of collateral.
 
Required Liquidity
 
  OTS regulations require savings institutions to maintain, for each calendar
month, an average daily balance of liquid assets (including cash, certain time
deposits, bankers' acceptances, specified United States government, state and
federal agency obligations, and balances maintained in satisfaction of the FRB
reserve requirements described below) equal to at least 5% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during the
preceding calendar month. The OTS may change this liquidity requirement from
time to time to an amount within a range of 4% to 10% of such accounts and
borrowings depending upon economic conditions and the deposit flows of member
institutions, and may exclude from the definition of liquid assets any item
other than cash and the balances maintained in satisfaction of FRB reserve
requirements. Fidelity's average regulatory liquidity ratio for the month of
December 1993 was 8.79%, and accordingly Fidelity was in compliance with the
liquidity requirement. Monetary penalties may be imposed for failure to meet
liquidity ratio requirements.
 
  OTS regulations also require each member institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets (generally
those having maturities of 12 months or less) equal to at least 1% of the
average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. The average short-term
liquidity ratio of Fidelity for the month of December 1993 was 5.70%.
 
Federal Reserve System
 
  The FRB requires savings institutions to maintain noninterest-earning
reserves against certain of their transaction accounts (primarily deposit
accounts that may be accessed by writing unlimited checks) and non-personal
time deposits. For the calculation period including December 31, 1993, Fidelity
was required to maintain $28.6 million in noninterest-earning reserves and was
in compliance with this requirement. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy Fidelity's
liquidity requirements discussed above.
 
                                       53

  As a creditor and a financial institution, Fidelity is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation B
(Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including Fidelity, may be subject to
potential liability under various statute and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property.
 
Gateway
 
  Gateway became an NASD-registered broker/dealer in October 1993 and offers
securities products, such as mutual funds and variable annuities, to customers
of the Bank. All securities transactions are executed and cleared by another
broker/dealer. Gateway does not maintain security accounts for customers or
perform custodial functions relating to customer securities.
 
  The securities business is subject to regulation by the Securities and
Exchange Commission ("SEC"), the NASD and other federal and state agencies.
Regulatory violations can result in the revocation of broker/dealer licenses,
the imposition of censures or fines and the suspension or expulsion from the
securities business of a firm, its officers or employees. With the enactment of
the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC and
the securities exchanges have intensified their regulation of broker/dealers,
emphasizing in particular the need for supervision and control by
broker/dealers of their own employees.
 
  As a broker/dealer registered with the NASD, Gateway is subject to the SEC's
uniform net capital rules, designed to measure the general financial condition
and liquidity of a broker/dealer. These rules require Gateway to maintain
minimum net capital of $100,000 as of January 1, 1994 and do not permit
Gateway's aggregate indebtedness to exceed eight times its net capital during
its first twelve months of operations. At December 31, 1993, Gateway's net
capital and required net capital were $579,929 and $52,000, respectively, and
its ratio of aggregate indebtedness to net capital was .72 to 1. Under certain
circumstances, these rules limit the ability of Citadel to make withdrawals of
capital from Gateway. In addition, Gateway is required to file monthly reports
with the NASD and quarterly and annual reports with the NASD and SEC containing
detailed financial information with respect to its broker/dealer operations.
 
                                       54

ITEM 2. PROPERTIES
 
  The executive offices of Citadel and Fidelity are located at 600 N. Brand
Boulevard, Glendale, California 91203. This facility contains approximately
90,000 square feet of office space including a branch banking facility of
approximately 12,000 square feet. Fidelity also owns an approximately 130,000
square feet facility located at 4565 Colorado Boulevard, Los Angeles,
California 90039, which houses most of the administrative operations of Citadel
and Fidelity. Present local zoning entitlements will allow for the construction
of an additional approximately 300,000 square feet of office space plus parking
on this 7.75-acre parcel. The potential for increasing the amount of office
space at this Los Angeles site would satisfy Fidelity's anticipated facilities
requirements for future years.
 
  The aggregate net book value of all owned administrative facilities was
approximately $26.0 million as of December 31, 1993. On December 31, 1993,
Fidelity owned 16 of its branch and/or loan office facilities having an
aggregate net book value of approximately $9.4 million, and leased the
remaining 26 of its branch and/or loan office facilities under leases with
terms (including optional extension periods) expiring from 1994 through 2050.
The aggregate annual rent under those leases as of December 31, 1993 was
approximately$2.6 million and the aggregate net book value of Fidelity's
leasehold improvements associated with those leased premises was approximately
$1.9 million. At December 31, 1993, Fidelity owned furniture, fixtures and
equipment, related to both owned and leased facilities, having a net book value
of approximately$11.7 million.
 
  As a result of the January 1994 Northridge Earthquake, physical damage was
sustained at some of the Bank administrative and branch office facilities
located in the Los Angeles area, however, only one Bank-owned building in the
San Fernando Valley region of Los Angeles sustained major damage. It is
estimated that necessary repairs to all affected facilities, net of anticipated
insurance reimbursement, shall not exceed $0.5 million.
 
  All owned office facilities are located in Southern California.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company has lawsuits pending against it in the ordinary course of
business. As of December 31, 1993, the Company's management and its counsel
believe that none of the pending lawsuits or claims taken separately or
together will have a materially adverse impact on the financial condition or
business of the Company.
 
  On March 4, 1994, Chase, one of four lenders under Fidelity's $60 million
Subordinated Loan Agreement, sued Fidelity, Citadel and Citadel's Chairman of
the Board alleging, among other things, that the transfer of assets pursuant to
the Restructuring would constitute a breach of the Subordinated Loan Agreement,
and seeking to enjoin the Restructuring and to recover damages in unspecified
amounts. In addition, the lawsuit alleges that past responses of Citadel and
Fidelity to requests by Chase for information regarding the Restructuring
violate certain provisions of the Subordinated Loan Agreement and that such
alleged violations, with the passage of time, have become current defaults
under the Subordinated Loan Agreement. While the other three lenders under the
Subordinated Loan Agreement hold $25 million of the subordinated debt, none of
them has joined Chase in this lawsuit. The Company is evaluating the lawsuit
and, based on its current assessment, the Company does not believe that the
allegations have merit. See Item 7. "MD&A"--Capital Resources and Liquidity"
for additional considerations relating to the Subordinated Loan Agreement.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1993.
 
                                       55

                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION
 
  The Company's common stock is listed and quoted on the American Stock
Exchange ("AMEX"). The following table sets forth the high and low closing bid
prices of the common stock of the Company as reported by AMEX for each of the
following quarters:

                                                                HIGH      LOW
                                                                ----      ----
                                                                  
      1994:
       First quarter through March 15, 1994(1)................. $12 1/4 $ 4 1/4
      1993:
       Fourth quarter..........................................  19 1/2   9 3/8
       Third quarter...........................................  18 5/8  14 1/4
       Second quarter..........................................  21 7/8  12 5/8
       First quarter(2)........................................  23 7/8   16
      1992:
       Fourth quarter..........................................  20 7/8  13 7/8
       Third quarter...........................................  25 5/8   13
       Second quarter..........................................  29 1/2  23 1/2
       First quarter...........................................  32 7/8  14 5/8
      1991:
       Fourth quarter..........................................  28       8 7/8
       Third quarter...........................................  37 1/8  28 5/8
       Second quarter..........................................  34 1/8  28 1/2
       First quarter...........................................  34 1/4  17 1/4

- --------
(1) The closing price of the Company's common stock on March 15, 1994 was $4.25
    per share.
(2) The closing price of the Company's common stock on March 29, 1993 was
    $22.13 per share. This price reflects the sale of 3,297,812 newly issued
    shares of common stock on March 29, 1993 for $10 per share.
 
HOLDERS OF RECORD
 
  The number of holders of record of the Company's common stock at February 28,
1994 was 259.
 
DIVIDENDS
 
  While Citadel has never declared a dividend and has no current plan to
declare a dividend, it is Citadel's policy to review this matter on an ongoing
basis.
 
  Regulatory restrictions applicable to Fidelity and certain provisions of the
Company's Subordinated Loan Agreement currently limit the ability of the
Company to declare or pay dividends. These limitations include: (a) a statutory
prohibition on Fidelity making capital distributions that would cause it to
become undercapitalized for purposes of the prompt corrective action system and
other potentially applicable restrictions under OTS regulations; (b)
limitations in the Subordinated Loan Agreement as to the aggregate amount
declared and paid as a proportion of the Company's consolidated net earnings
and (c) the absence of any default by the Company in its obligations as
specified in the Subordinated Loan Agreement. See Item 1. "Business--Regulation
and Supervision--Savings and Loan Holding Company Regulation--Payment of
Dividends and Other Capital Distributions." See also Item 3. "Legal
Proceedings" and Item 7. "MD&A--Capital Resources and Liquidity" for additional
information regarding the Subordinated Loan Agreement.
 
  At December 31, 1993, Fidelity had accumulated earnings and profits for
federal income tax purposes. Any dividend paid by Fidelity in excess of current
or accumulated earnings and profits for federal income tax purposes would be
treated as made out of the tax bad debt reserve and will increase income for
federal income tax purposes. Currently Fidelity's accumulated earnings and
profits for federal income tax purposes is of such an amount that it would be
highly unlikely that any dividend, if such dividend were payable by Fidelity,
would be treated as made out of the tax bad debt reserve. See Item 1.
"Business--Taxation."
 
                                       56

ITEM 6. SELECTED FINANCIAL DATA
 
                       FIVE-YEAR SELECTED FINANCIAL DATA
 
  The tables below set forth certain historical financial data regarding the
Company. This information is derived in part from, and should be read in
conjunction with, the consolidated financial statements of the Company. None of
the data in the tables have been adjusted for effects of the Citadel rights
offering in March 1993.

                                 AT OR FOR THE YEAR ENDED DECEMBER 31,
                         -------------------------------------------------------------
                            1993           1992        1991        1990        1989
                         ----------     ----------  ----------  ----------  ----------
                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                             
INCOME STATEMENT
 SUMMARY:
 Interest income........ $  289,592     $  370,722  $  520,124  $  525,906  $  471,469
 Interest expense.......    188,391        239,941     378,017     411,256     395,241
                         ----------     ----------  ----------  ----------  ----------
  Net interest income...    101,201        130,781     142,107     114,650      76,228
 Provision for estimated
  loan losses...........     65,100         51,180      49,843      11,039       8,359
                         ----------     ----------  ----------  ----------  ----------
  Net interest income
   after provision for
   estimated loan
   losses...............     36,101         79,601      92,264     103,611      67,869
 Gains (losses) on sales
  of loans, net.........        194          1,117       2,118      (1,408)          1
 Gains (losses) on sales
  of mortgage-backed
  securities, net.......      1,342             --       8,993        (165)         --
 Gains (losses) on sales
  of investment
  securities............        (54)            --           1          32        (234)
 Other income (expense).    (35,870)        (6,602)     (5,616)      5,510       9,846
 Operating expense......    105,341         77,911      79,446      66,527      64,411
                         ----------     ----------  ----------  ----------  ----------
 Earnings (loss) before
  income taxes..........   (103,628)        (3,795)     18,314      41,053      13,071
 Income tax expense
  (benefit).............    (36,467)        (5,841)     15,651      17,734       4,931
                         ----------     ----------  ----------  ----------  ----------
 Net earnings (loss).... $  (67,161)    $    2,046  $    2,663  $   23,319  $    8,140
                         ==========     ==========  ==========  ==========  ==========
 Net earnings (loss) per
  share................. $   (11.56)    $     0.62  $     0.81  $     7.07  $     2.47
                         ==========     ==========  ==========  ==========  ==========
 Average common and
  common equivalent
  shares outstand-
  ing(1)(2).............  5,809,570      3,297,812   3,297,812   3,298,140   3,296,919
BALANCE SHEET DATA:
 Total assets........... $4,389,519     $4,698,326  $5,126,525  $5,697,664  $4,980,593
 Cash and investments...    238,220        177,599     289,150     309,814     312,785
 Total loans, net.......  3,713,383      3,991,781   4,550,848   5,085,213   4,437,199
 Deposits...............  3,368,643      3,457,918   3,884,707   3,967,488   3,317,044
 Borrowings.............    734,230        908,400     871,150   1,349,166   1,347,219
 Subordinated notes.....     60,000         60,000      60,000      60,000          --
 Stockholders' equity...    187,403        223,186     221,140     218,477     195,084
 Stockholders' equity
  per share.............      28.41          67.68       67.06       66.25       59.20
 Common shares outstand-
  ing(1)(2).............  6,595,624      3,297,812   3,297,812   3,297,812   3,295,562
OTHER DATA:
 Real estate loans
  funded................ $  422,355     $  435,690  $  509,265  $1,407,522  $  898,134
 Average interest rate
  on new loans..........       6.75%          7.77%       9.07%       9.31%       9.44%
 Loans sold............. $  137,870     $  204,435  $  282,728  $  158,691  $   12,033
 Nonperforming assets to
  total assets..........       5.37%          4.99%       2.43%        .85%        .42%
 Number of deposit
  accounts..............    241,093        233,037     238,187     233,546     203,015
 Interest rate margin at
  the end of the 
  period................       2.19%(3)       2.68%       3.20%       2.33%       2.16%
 Interest rate margin
  for the period........       2.28%(3)       2.67%       2.54%       2.11%       1.49%
 Retail branch
  offices(4)............         42             43          43          44          34

- -------
(1) Net of treasury shares, where applicable.
(2) 1993 data includes 3,297,812 shares issued in March 1993 in connection with
    a stock rights offering, which produced net proceeds to the Company of
    $31.4 million.
(3) Excluding the writedown of core deposit intangibles of $5.2 million,
    interest rate margins at and for the year ended December 31, 1993, would
    have been 2.32% and 2.39%, respectively.
(4) All retail branch offices are located in Southern California.
 
                                       57

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
NET EARNINGS
 
  Citadel Holding Corporation ("Citadel") reported a net loss of $67.2
million, or $11.56 per share (average outstanding shares of 5,809,570) in 1993
compared to net earnings of $2.0 million, or $0.62 per share (average
outstanding shares of 3,297,812) in 1992 and $2.7 million, or $0.81 per share
(average outstanding shares of 3,297,812) in 1991. Unless otherwise indicated,
references to the "Company" include Citadel, Fidelity Federal Bank, a Federal
Savings Bank ("Fidelity" or the "Bank") and all subsidiaries of Fidelity and
Citadel.
 
  The following table summarizes these results:

                                               YEAR ENDED DECEMBER 31,
                                           -----------------------------------
                                              1993         1992        1991
                                           ----------   ----------  ----------
                                            (DOLLARS IN THOUSANDS, EXCEPT
                                                  PER SHARE AMOUNTS)
                                                           
Earnings (loss) before income taxes....... $ (103,628)  $   (3,795) $   18,314
Net earnings (loss)....................... $  (67,161)  $    2,046  $    2,663
Net earnings (loss) per share............. $   (11.56)  $     0.62  $     0.81
Average common and common equivalent
 shares outstanding(1)....................  5,809,570    3,297,812   3,297,812
Return on average equity..................     (28.92)%       0.91%       1.20%
Return on average assets..................      (1.47)%       0.04%       0.05%

- --------
(1) 1993 data includes 3,297,812 shares issued in March 1993 in connection
    with a stock rights offering.

  The components of the changes in earnings/loss before income taxes are shown
below:

                                         FAVORABLE (UNFAVORABLE) VARIANCE
                                         ------------------------------------
                                           1993 VS 1992        1992 VS 1991
                                         ----------------    ----------------
                                              (DOLLARS IN THOUSANDS)
                                                       
Net interest income....................  $(29,580)           $(11,326)
Provision for loan losses..............   (13,920)             (1,337)
                                         ----------------    ----------------
 Net interest income after loan loss
  provision............................   (43,500)            (12,663)
Fee income and other income............    (3,609)              9,652
Provision for real estate losses.......   (12,380)             (9,258)
Direct costs of real estate operations,
 net...................................   (14,202)             (2,381)
Gains on sales of securities...........     1,288              (8,994)
                                         ----------------    ----------------
 Noninterest income....................   (28,903)            (10,981)
Operating expense......................   (27,430)              1,535
                                         ----------------    ----------------
Earnings/loss before income taxes......   (99,833)            (22,109)
Income tax expense/benefit.............    30,626              21,492
                                         ----------------    ----------------
Net earnings/loss......................  $(69,207)           $   (617)
                                         ================    ================

  The $99.8 million change in earnings/loss before income taxes between 1992
and 1993 is primarily due to (a) decreased net interest income of $29.6
million, (b) increased operating expense of $27.4 million, (c) a $26.3 million
increase in the provision for loan and real estate losses, (d) a $14.2 million
increase in direct costs related to real estate operations, and (e) decreased
fee income and other income of $3.6 million. This was partially offset by a
$1.3 million increase in gains on sales of securities. The $27.4 million
increase in expenses from 1992 to 1993 was attributable in part to increased
staffing levels required to manage rising problem assets,
 
                                      58

strengthen internal asset review, handle increased financial services offered
at the retail branch network and expand originations and sales of residential
mortgages in the mortgage banking network. The increase is also attributable
to certain nonrecurring charges incurred in connection with the Company's
valuation of its intangible assets and further development of the internal
reorganization and restructuring plan discussed below, including the write-off
$8.8 million of goodwill and $5.2 million in core deposit intangibles, and an
increase of $5.6 million in professional fees, of which approximately $3.3
million was attributable to analysis and development of the Company's
restructuring plan and related asset valuation process.
 
  In 1993, Fidelity reassessed the valuation of its intangible assets. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its core deposit intangible assets, Fidelity wrote down the
carrying value of its core deposit intangible assets in the amount of $5.2
million (which writedown is included in interest expense). In addition, an
analysis was performed of the recoverability of the goodwill related to the
acquisition of Mariners Savings and Loan ("Mariners") in 1978. These analyses
indicated that the net expected future earnings from the branches or assets
acquired did not support the carrying value of the goodwill. As a result,
Fidelity wrote down the remaining $8.8 million balance of goodwill related to
the Mariners acquisition (which writedown is included in operating expense).
 
  The $22.1 million change in earnings/loss before income taxes between 1991
and 1992 was mainly due to (a) an $11.3 million decrease in net interest
income, (b) an increase in the provision for loan and real estate operations
of $10.6 million, (c) a $9.0 million decrease in gains on sales of securities,
and (d) a $2.4 million increase in direct costs related to real estate
operations. These were partially offset by increased fee income and other
income of $9.7 million and decreased operating expenses of $1.5 million.
 
  The following table summarizes certain regulatory capital and asset quality
information for Fidelity as of the dates indicated:

                                                          DECEMBER 31,
                                                   ----------------------------
                                                     1993      1992      1991
                                                   --------  --------  --------
                                                     (DOLLARS IN THOUSANDS)
                                                              
Core Capital(1)................................... $182,100  $203,400  $205,300
Core Capital Ratio(1).............................     4.15%     4.35%     4.02%
NPAs to Total Assets..............................     5.37%     4.99%     2.43%
Nonaccruing Loans to NPAs.........................    39.67%    47.80%    55.31%
REO (including ISF) to NPAs.......................    60.33%    52.20%    44.69%
GVA............................................... $ 80,020  $ 75,621  $ 52,374
GVA to Loans and REO (including ISF)..............     2.03%     1.82%     1.13%
GVA to NPAs.......................................    32.79%    30.49%    41.99%

- --------
(1) 1993 capital includes capital contributions from Citadel of $28.0 million.
    See "Capital Requirements."
 
  See "Asset Quality" for more information.
 
NET INTEREST INCOME
 
  Net interest income is the difference between interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities. Stated differently, the level of net interest income is the sum
of (a) the interest rate margin (the difference between the yield earned on
the interest-earning assets and the rate paid on the interest-bearing
liabilities) multiplied by the amount of interest-earning assets; plus (b) the
excess balance of interest-earning assets over interest-bearing liabilities
multiplied by the rate paid on interest-bearing liabilities. Therefore, the
higher the yield on interest-earning assets relative to the rate paid on
interest-bearing liabilities, the higher the net interest income. Conversely,
the lower the yield on interest-earning assets relative to the rate paid on
interest-bearing liabilities, the lower the net interest income. Similarly,
the smaller the level of interest-earning assets relative to the level of
interest-bearing liabilities, the smaller the net interest income. As a
result, net interest income between two periods will decline if the interest
rate margin declines, the excess
 
                                      59

of interest-earning assets over interest-bearing liabilities declines,
interest-earning accounts decline and the rate paid on interest-bearing
liabilities increases. The converse also holds true.
 
  In a period of increased loan defaults, interest-earning assets tend to
decline faster than interest-bearing liabilities, which in turn tends to
depress net interest income. As a result, a higher interest rate margin would
be needed to maintain a constant level of net interest income. In a period of
declining interest rates, prepayments on mortgages tend to increase and as a
result, the level of interest earning-assets will decline if the volume of new
loan originations held in the portfolio does not increase to offset the
increased level of prepayments. The decline in net interest income is
partially offset by the decline in the rate paid on interest-bearing
liabilities.
 
  The change in net interest income is a result of: (a) the change in
interest-earning assets multiplied by the current interest rate margin, plus
(b) the change in the interest rate margin multiplied by prior interest-
earning assets, plus (c) the change in the rate paid on interest-bearing
liabilities multiplied by the current excess balance of interest-earning
assets over interest-bearing liabilities, plus (d) the change in the excess
balance of interest-earning assets over interest-bearing liabilities
multiplied by the prior rate paid on interest-bearing liabilities.
 
  In addition, net interest income is affected by the level of nonperforming
loans. The Bank generally places loans on nonaccrual status whenever the
payment of interest is 90 or more days delinquent or when the Bank believes
they exhibit materially deficient characteristics. The reduction in income
related to these nonaccruing loans was approximately $8.7 million in 1993
compared to $13.6 million in 1992 and $7.6 million in 1991.
 
  As previously discussed, net interest income was also reduced by a $5.2
million writedown of core deposit intangibles ("CDI") in 1993. The remaining
net unamortized balance of core deposit intangibles at December 31, 1993 was
$2.1 million which is being amortized over the average remaining life of the
deposits acquired, generally 1 to 3 years.
 
  Net interest income for 1993 of $101.2 million decreased by $29.6 million or
22.6% from $130.8 million for 1992. This decrease resulted from the combined
impacts of (a) a 6.7% decrease in average interest-earning assets, reducing
net interest income by $14.7 million, and (b) a 48 basis point decrease in the
effective yield on interest-earning assets, decreasing net interest income by
$14.9 million, caused in part by the impact of the CDI write-off discussed
above.
 
  Net interest income for 1992 of $130.8 million decreased by $11.3 million or
8.0% from $142.1 million for 1991. This $11.3 million decrease resulted from
the offsetting impacts of (a) a 12.0% decrease in average interest-earning
assets, reducing net interest income by $12.8 million, and (b) a 13 basis
point increase in the effective yield on interest-earning assets, increasing
net interest income by $1.5 million.

                                      60

  The following table displays the components of the Company's interest rate
margin at the end of, and for each period, as well as the effective yield for
each period:

                                                AT OR FOR THE YEAR ENDED
                                                      DECEMBER 31,
                                               -------------------------------
                                                 1993         1992      1991
                                               --------     --------  --------
                                                             
Rate at the end of the period:
 Weighted average yield on combined loans and
  investments.................................     6.37%        7.21%     9.41%
 Weighted average cost of funds...............     4.18         4.53      6.21
                                               --------     --------  --------
  Interest rate margin at the end of the
   period.....................................     2.19%(1)     2.68%     3.20%
                                               ========     ========  ========
Rate for the period:
 Weighted average yield on combined loans and
  investments.................................     6.65%        7.94%     9.80%
 Weighted average cost of funds...............     4.37         5.27      7.26
                                               --------     --------  --------
  Interest rate margin for the period.........     2.28%(1)     2.67%     2.54%
                                               ========     ========  ========
  Effective yield for the period..............     2.33%(1)     2.81%     2.68%
                                               ========     ========  ========

- --------
(1) Excluding the writedown of core deposit intangibles of $5.2 million, the
    interest rate margins at and for the year ended December 31, 1993 and the
    effective yield on interest-earning assets for the year ended December 31,
    1993, would have been 2.32%, 2.39% and 2.44%, respectively.
 
  The reduction in the interest rate margin in 1993 from 1992 can be attributed
to the lagging relationship between the repricing of assets and liabilities as
market interest rates stabilize. The average rate paid on interest-bearing
liabilities adjusts to market rates faster than the average rate earned on
interest-earning assets. This difference in the speed of adjustment to changes
in market interest rates is primarily due to the nature of the Federal Home
Loan Bank ("FHLB") of San Francisco Eleventh District Cost of Funds Index (the
"COFI") to which most of the Bank's loans are tied, the contractual repricing
terms of the loans held in the portfolio, the advance notification requirements
to borrowers for any rate change, the time lag in the availability of the
actual index, as well as the amount of the lifetime interest rate caps. As a
result of these factors, changes in the yield on COFI-based loans lag changes
in market interest rates.
 
  The interest rate margin of the Company increases in a period of steady
decline in interest rates, since the yield on interest-bearing assets drops
more slowly than the rates paid on interest-bearing liabilities. Conversely, as
market interest rates stabilize and then increase, the interest rate margin of
the Company will shrink, other conditions being equal. This factor, together
with the timing of asset repricing and the increase in nonperforming assets,
resulted in a reduction of 132 basis points in the yield on loans in 1993 from
1992 average levels, while the decrease in market interest rates resulted in a
reduction in the cost of funds of only 90 basis points for the comparable
period. The Federal Reserve Board ("FRB") increased the federal funds rate by
0.25% in February 1994 and another 0.25% in March 1994, which may be indicative
of future reductions to the Company's interest rate margin.
 
  The increase in the Company's interest margin for 1992 compared to 1991 was
primarily caused by the continued downward trend in market interest rates
during 1992 which resulted in a decrease in the cost of funds of 199 basis
points. The effect of the reduced cost of funds on the interest margin was
partially offset by a decrease of 179 basis points in the yield on loans from
1991 due to declines in the COFI.
 
  Since 1990, the Company has continued its strategy to more closely match the
repricing periods of its interest-bearing liability and interest-earning asset
portfolios by concentrating on the origination and retention of ARM loans. In
1993, 1992 and 1991, the Bank retained substantially all of the ARM loans it
originated. The percentage of monthly adjustable ARMs outstanding to the total
ARM portfolio was 78%, 77% and 74% at December 31, 1993, 1992 and 1991,
respectively, while the percentage of semiannual adjustable ARMs was 19% at
December 31, 1993 compared to 21% in 1992 and 24% in 1991. This trend of
increasing the monthly adjustable ARM portfolio in relation to the decreasing
semiannual adjustable ARM portfolio will reduce, but not eliminate, the risk
created by the mismatch of the assets' repricing index and the
 
                                       61

liabilities' repricing indices. However, certain ARMs meeting specific
criteria have been identified as held for sale and transferred to the held for
sale portfolio as part of the asset/liability strategy and the possible need
to increase regulatory capital in the future. See "Interest Rate Risk
Management" for further discussion.
 
NONINTEREST INCOME
 
  Noninterest income has three major components: (a) gains and losses on the
sale of loans and fee income associated with other on-going operations, such
as fees earned on the sale of securities and annuities, loan origination fees
and service charges on deposit accounts, (b) income/expenses associated with
owned real estate, which includes both the provision for real estate losses as
well as income/expenses experienced by the Bank related to the operations of
its owned real estate properties (e.g., maintenance expenses, capital
expenditures and payment of current and delinquent property taxes), and (c)
gains and losses on the sale of investment securities and mortgage-backed
securities. The last two items can fluctuate widely, and could therefore mask
the underlying fee generating performance of the Company on an ongoing basis.
Noninterest income declined from a loss of $5.5 million in 1992 to a loss of
$34.4 million in 1993.
 
  The following table details the noninterest income/expense:

                                             YEAR ENDED DECEMBER 31,
                                             ------------------------
                                                1993         1992      VARIANCE
                                             -----------  -----------  --------
                                                  (DOLLARS IN THOUSANDS)
                                                              
Loan and other fee income..................  $     5,389  $     7,885  $ (2,496)
Gains on sales of loans, net...............          194        1,117      (923)
Fee income from investment products........        4,313        3,368       945
Fee income from deposits and other income..        3,271        4,406    (1,135)
                                             -----------  -----------  --------
                                                  13,167       16,776    (3,609)
                                             -----------  -----------  --------
Provision for estimated real estate losses.      (30,200)     (17,820)  (12,380)
Direct costs of real estate operations,
 net.......................................      (18,643)      (4,441)  (14,202)
                                             -----------  -----------  --------
                                                 (48,843)     (22,261)  (26,582)
                                             -----------  -----------  --------
Gains on sales of mortgage-backed securi-
 ties, net.................................        1,342           --     1,342
Gains (losses) on sales of investment secu-
 rities, net...............................          (54)          --       (54)
                                             -----------  -----------  --------
                                                   1,288           --     1,288
                                             -----------  -----------  --------
                                             $   (34,388) $    (5,485) $(28,903)
                                             ===========  ===========  ========

  Noninterest income from ongoing operations decreased by $3.6 million, to
$13.2 million during 1993 from $16.8 million during 1992 partly due to the
Company's retooling and refocusing efforts during 1993 (see "Operating
Expense"). An increase in fee income from investment products of $0.9 million
to $4.3 million was offset by decreases in loan and other fees, gains on sales
of loans and fee income from deposits.
 
  Foreclosure activities increased markedly from December 31, 1992 to December
31, 1993, resulting in an increase in real estate owned ("REO") both in terms
of numbers of properties and total dollars. REO consists of real estate
acquired in settlement of loans and in-substance foreclosures ("ISFs").
 
                                      62

  The following table summarizes certain components of Fidelity's real estate
operations:

                                                            1993        1992
                                                         COMPARED TO COMPARED TO
                                                            1992        1991
                                                         ----------- -----------
                                                         (DOLLARS IN THOUSANDS)
                                                               
Increase in:
 Provision for estimated real estate losses.............  $ 12,380    $  9,258
 Direct costs of real estate operations, net............    14,202       2,381
                                                          --------    --------
                                                          $ 26,582    $ 11,639
                                                          ========    ========
 
  The following table provides detail on the net book value and number of
properties owned at the given dates:

                                                         (DOLLARS IN THOUSANDS)
                                                               
Owned real estate, net book value:
 December 31, 1993......................................  $153,307
 December 31, 1992......................................   133,255    $133,255
 December 31, 1991......................................                70,259
                                                          --------    --------
  Increase..............................................  $ 20,052    $ 62,996
                                                          ========    ========
Number of real estate properties owned:
 December 31, 1993......................................       240
 December 31, 1992......................................       170         170
 December 31, 1991......................................                    63
                                                          --------    --------
  Increase..............................................        70         107
                                                          ========    ========

  The Bank has a policy of providing general valuation allowances for both
estimated loan and real estate losses, in addition to valuation allowances on
specific loans and REO, in response to the continuing deterioration of the
quality of the Bank's loan and REO portfolio. Provisions for real estate
losses increased by $12.4 million in the year ended December 31, 1993 as
compared to the same period in 1992, and provisions for loan losses increased
by $13.9 million over the same period. See "Asset Quality" for further detail.
 
  Noninterest income decreased by $11.7 million in 1992 compared to 1991. This
decrease was due to the combined effects of (a) an increase in net expense
from real estate operations of $11.6 million, inclusive of provisions for
estimated real estate losses, (b) a decrease in gains on sales of mortgage-
backed securities of $9.0 million as there were no such sales in 1992, and (c)
a decrease in other expense of $7.0 million due to the accrual for contingent
liabilities of $6.0 million in 1991 with a $1.0 million reduction in such
accrual in 1992.
 
                                      63

OPERATING EXPENSE
 
  Operating expense increased to $105.3 million in 1993 from $77.9 million in
1992 and $79.4 million in 1991. The following table details the operating
expenses for 1993 and 1992:

                                        YEAR ENDED DECEMBER 31,      FAVORABLE
                                        -------------------------  (UNFAVORABLE)
                                            1993         1992        VARIANCE
                                        ------------  -----------  -------------
                                                (DOLLARS IN THOUSANDS)
                                                          
Personnel and benefits................  $     48,822  $    39,305    $ (9,517)
Occupancy.............................        13,202       12,705        (497)
FDIC insurance........................         8,628        8,391        (237)
Professional services.................        11,970        6,119      (5,851)
Office-related expenses...............         6,785        5,031      (1,754)
Marketing.............................         3,080        2,548        (532)
Amortization of intangibles...........         9,246          596      (8,650)
Other general and administrative......         5,650        5,991         341
                                        ------------  -----------    --------
 Total before capitalized costs.......       107,383       80,686     (26,697)
Capitalized costs.....................        (2,042)      (2,775)       (733)
                                        ------------  -----------    --------
 Total operating expenses.............  $    105,341  $    77,911    $(27,430)
                                        ============  ===========    ========
Efficiency ratio(1)...................         77.55%       53.16%
                                        ============  ===========
Ratio of operating expenses to average
 assets(2)............................          2.30%        1.61%
                                        ============  ===========

- --------
(1) The efficiency ratio is computed by dividing total operating expense by net
    interest income and noninterest income, excluding nonrecurring items,
    provisions for estimated loan and real estate losses, direct costs of real
    estate operations and gains/losses on the sale of securities.
(2) The operating expense ratio is computed by dividing total operating expense
    by average total assets.
 
  A substantial portion of the increase from 1992 to 1993, as detailed below,
was due to the re-engineering of certain functions of the Bank, including the
related training and personnel costs. The associated improved operating results
are expected to be realized in later years.
 
  The increases in personnel and benefits are mainly due to increased staffing
levels during 1993 (with average full-time equivalent employees ("FTEs") of
882) over 1992 (with average FTEs of 828). The increased staffing levels are
due to (a) increased staffing required to manage the rising problem asset
portfolio and to strengthen the internal asset review function, (b) increased
staffing levels in the retail branch network to support the 1993 strategies of
customer orientation and retail financial services focus, and (c) increased
staffing levels in the mortgage banking network to expand the origination and
sale of residential mortgages. These increases were partially offset by the
reduction of data processing personnel in connection with the outsourcing of
substantially all of the information systems functions in May 1993. The Bank
has aggressively increased the staff of its real estate asset management
department by 27 FTEs during 1993, which handles foreclosures, loan
restructurings and REO sales. The Bank continues to increase the staff of its
internal asset review department, which continuously monitors asset quality and
adequacy of loss reserves.
 
  The staffing level in the retail network increased due to improved ability to
fill open positions and an increased emphasis on providing investment products
to customers. The staffing level in the mortgage banking network also increased
due to the increased emphasis on meeting a broader range of customer real
estate borrowing requirements. The general rise in office-related expenses is
due to the higher staffing levels.
 
  In addition to staffing increases, the Bank incurred higher personnel and
benefits costs related to (a) training costs associated with the data systems
conversions and reorganization of the retail financial services group, (b) the
adoption in 1993 of a new accounting pronouncement related to retiree health
and life insurance benefits (as discussed below), (c) increased costs of
employee insurance benefit and retirement plans,
 
                                       64

and (d) increased travel costs associated with data systems conversion training
and the exploration of strategic alternatives and restructuring of the Company.
 
  Effective January 1, 1993, the Bank adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" for its unfunded
postretirement health care and life insurance program. This statement requires
the cost of postretirement benefits to be accrued during the service lives of
employees. The Bank's previous practice was to expense these costs on a cash
basis. The net periodic postretirement benefit cost for 1993 totaled $0.6
million.
 
  However, in an effort to reduce operating expense, the Bank is exploring
various alternatives to all the existing benefit plans, which may include
reducing future benefits accruing to employees.
 
  The Bank's Federal Deposit Insurance Corporation ("FDIC") insurance premium
is based upon three factors: (a) the volume of deposits, (b) the rate at which
the FDIC assesses the deposits, and (c) any other adjustments or credits the
FDIC may allow. The increase in the FDIC insurance expense in 1993, from the
level of expense in 1992, was primarily due to an increase in the rate the FDIC
assessed to deposits in 1993, which was partially offset by a credit received
from the FDIC for the final distribution of the secondary reserve and from the
reduced level of deposits.
 
  Professional services increased in 1993 over 1992 primarily due to financial
advisory fees associated with (a) costs of approximately $3.3 million incurred
in reviewing the Company's strategic objectives and developing a restructuring
plan and in the related asset valuation process and (b) higher outside data
services costs of approximately $2.9 million relative to the outsourcing of the
primary information systems functions in May 1993, which costs were partially
offset by some savings in compensation expense of approximately $1.0 million.
 
  As previously discussed, amortization of intangibles included an $8.8 million
writedown of goodwill in 1993.
 
  Operating expense decreased by $1.5 million in 1992 from the level in 1991.
This decrease was caused principally due to (a) $0.3 million decrease in FDIC
insurance expense due to average deposit shrinkage during the assessment
period, (b) a $0.7 million decrease in professional services due to reduction
in consulting expense, (c) a $0.4 million decrease in other operating expense
due to reductions in marketing expense and level of amortization of intangible
assets, and (d) a $0.6 million increase in capitalized costs due to an increase
in the number of loan originations (although the total dollar amount of loan
originations decreased in 1992 over 1991). These decreases were partially
offset by a $0.9 million increase in personnel and benefits primarily due to
increases in personnel, severance and pension costs.
 
  The increase in operating expenses combined with the decrease in the total
average asset size of the Company (from $5.5 billion at December 31, 1991 to
$4.9 billion at December 31, 1992 and to $4.6 billion at December 31, 1993),
resulted in an increase in the operating expense ratio from 1.43% in 1991 to
1.61% in 1992 and 2.30% in 1993. The operating expense ratio would have been
2.04% for 1993 without the nonrecurring expenses directly related to the
Company's restructuring and the $8.8 million writedown of goodwill. 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
generated.
 
EFFICIENCY RATIO
 
  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 nonrecurring items, provisions for estimated loan
and real estate losses, costs of real estate operations on specific properties
and gains/losses on the sale of securities. This computation reflects a change
from the method of computation used in previous periods in that the impact of
 
                                       65

real estate operations on specific properties is now excluded from the
computation. The lower the efficiency ratio, the lower the amount of resources
being expended by the Company to generate a given level of revenues. As a
result, an increase in the efficiency ratio indicates that the Company is
expending more resources to generate revenues and the Company is thus becoming
less efficient in the use of its resources. A decrease in the efficiency ratio
indicates the opposite (i.e. an improvement). Changes in the efficiency ratio
are due to three factors: (a) changes in net interest income, (b) changes in
noninterest income, and (c) changes in operating expenses. A decline in net
interest income and/or noninterest income and/or a rise in operating expenses
will have an unfavorable impact on the ratio (i.e. will increase the ratio) and
the converse holds true. The Company's efficiency ratio worsened by 24.39
percentage points between the year ended December 31, 1992 and 1993 due to
unfavorable variances in all three components. Asset quality problems adversely
affected two of the components of the efficiency ratio; reduced net interest
income via an increase in nonperforming loans and mounting foreclosure
activities, which resulted in a decrease in interest-bearing assets and lower
asset yield; and higher operating expenses associated with the increased
staffing level described above. Additionally, the increased staffing levels in
the retail financial services network and mortgage banking network adversely
impacted the efficiency ratio. These increases should result in increased
expense in the short-term, but increased income in the long-term.
 
  In spite of lower operating expenses in 1992 compared to 1991 levels, the
Company's efficiency ratio worsened by approximately 1.98 percentage points
from 51.18% in 1991 to 53.16% in 1992, as a result of lower interest income due
to increases in nonperforming assets and a smaller balance sheet, partially
offset by increased noninterest income.
 
  An analysis of the change in the efficiency ratios during 1993 and 1992 is
shown below:

                                                YEAR ENDED        YEAR ENDED
                                             DECEMBER 31, 1993 DECEMBER 31, 1992
                                                COMPARED TO       COMPARED TO
                                             DECEMBER 31, 1992 DECEMBER 31, 1991
                                             ----------------- -----------------
                                                         
Change in efficiency ratio caused by:
 Decreased net interest income..............       15.87%             3.89%
 Decreased (increased) noninterest income...        1.25             (0.91)
 Increased (decreased) operating expense....        7.27             (1.00)
                                                   -----             -----
  Unfavorable variance......................       24.39%             1.98%
                                                   =====             =====

  Continued deterioration in the asset quality of the Bank, and/or stable or
higher short-term interest rates in the future (if they occur) would have an
adverse effect on net interest income and noninterest income, which would in
turn lead to an increase (or worsening) in the efficiency ratio, assuming
expenses remain constant.
 
CAPITAL RESOURCES AND LIQUIDITY
 
 Regulatory Capital Requirements
 
  The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and implementing capital regulations require Fidelity to maintain:
(1) Tangible Capital of at least 1.5% of Adjusted Total Assets (as defined in
the regulations); (2) Core Capital of at least 3% of Adjusted Total Assets (as
defined in the regulations); and (3) Total Risk-based Capital equal to 8.0% of
Total Risk-weighted Assets (as defined in the regulations). See Item 1.
"Business--Regulation and Supervision--FIRREA Capital Requirements."
 
  The following table summarizes the regulatory capital requirements for
Fidelity at December 31, 1993, but does not reflect the required future phasing
out of certain assets, including investments in, and loans to, subsidiaries
which may presently be engaged in activities not permitted for national banks
and, for risk-based capital, real estate held for investment (the impact of
which the Bank believes to be immaterial). As indicated in the table,
Fidelity's capital levels exceed all three of the currently applicable minimum
capital requirements. Fidelity's capital as shown below includes $28.0 million
of capital contributions from Citadel during 1993. Fidelity's capital levels
also exceeded all of the then applicable minimum capital requirements at
December 31, 1992 and 1991.
 
                                       66

                                            DECEMBER 31, 1993
                            ---------------------------------------------------
                                                                CURRENT RISK-
                            TANGIBLE CAPITAL    CORE CAPITAL     BASED CAPITAL
                            -----------------  ---------------  ---------------
                              BALANCE     %     BALANCE    %     BALANCE    %
                            ----------- -----  ---------- ----  ---------- ----
                                         (DOLLARS IN THOUSANDS)
                                                         
Regulatory capital......... $   180,000  4.10% $  182,100 4.15% $  270,600 9.32%
Required minimum...........      65,800  1.50     131,700 3.00     232,300 8.00
                            ----------- -----  ---------- ----  ---------- ----
Excess capital............. $   114,200  2.60% $   50,400 1.15% $   38,300 1.32%
                            =========== =====  ========== ====  ========== ====
Adjusted Assets(1).........  $4,386,300        $4,388,400       $2,903,600
                            ===========        ==========       ==========

- --------
(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 for purposes of risk-based capital requirements,
    refers to the term "risk-weighted assets" as defined in 12 C.F.R. section
    567.1(bb).
 
  At December 31, 1993, Fidelity met the fully phased-in capital requirements
for all three measurements based upon regulations currently in effect. However,
because of the regulatory advantages available to benefit well-capitalized
institutions, the Bank continues to have as its objective to increase its core
capital to at least 5%. At December 31, 1993, based on then current asset
levels, Fidelity would have been required to increase its core capital by
approximately $37.3 million to reach the 5% core capital level.
 
  The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires 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. The OTS added an interest rate risk capital component to its risk-
based capital requirement. This component is effective September 30, 1994,
based on the December 31, 1993 balance sheet. This capital component will
require institutions deemed to have above normal risk to hold additional
capital equal to 50% of the excess risk. As of December 31, 1993, the Bank's
internal risk measurement system showed a risk level less than half of the OTS
limit. The most recently available OTS report (September 30, 1993) shows an
even lower risk. Therefore, if the requirement had been in effect on December
31, 1993, using the year-end balance sheet, there would have been no interest
rate risk component required to be added to Fidelity's risk-based capital
requirement.
 
  In addition, FDICIA required the OTS to implement a system requiring
regulatory sanctions against institutions that are not adequately capitalized,
with the sanctions growing more severe, the lower the institution's capital.
Under FDICIA, the OTS issued regulations establishing specific capital ratios
for five separate capital categories. The five categories of ratios are:

                                                                       TOTAL
                                                                    CAPITAL  TO
                                 CORE CAPITAL TO    CORE CAPITAL TO    RISK-
                              ADJUSTED TOTAL ASSETS  RISK-WEIGHTED    WEIGHTED
                                (LEVERAGE) RATIO     ASSETS RATIO   ASSETS RATIO
                              --------------------- --------------- ------------
                                                           
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

 
                                       67

  The following table summarizes the capital ratios of the adequately
capitalized category and Fidelity's regulatory capital at December 31, 1993 as
compared to such ratios. As indicated in the table, Fidelity's capital levels
exceeded the three minimum capital ratios of the adequately capitalized
category.

                                                CORE CAPITAL TO  TOTAL CAPITAL TO
                            CORE CAPITAL TO          RISK-             RISK-
                         ADJUSTED TOTAL ASSETS  WEIGHTED ASSETS   WEIGHTED ASSETS
                         ---------------------  ---------------  -----------------
                             BALANCE      %      BALANCE    %      BALANCE     %
                         ------------- -------  ---------- ----  ----------- -----
                                         (DOLLARS IN THOUSANDS)
                                                           
Regulatory capital......    $  182,100   4.15%  $  182,100 6.27%  $  270,600  9.32%
Adequately capitalized
 requirement............       175,500   4.00      116,100 4.00      232,300  8.00
                            ----------  -----   ---------- ----   ---------- -----
Excess capital..........    $    6,600   0.15%  $   66,000 2.27%  $   38,300  1.32%
                            ==========  =====   ========== ====   ========== =====
Adjusted Assets(1)......    $4,388,400          $2,903,600        $2,903,600
                            ==========          ==========        ==========

- --------
(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 core capital
    requirements, and for purposes of risk-based capital requirements, refers
    to the term "risk-weighted assets" as defined in 12 C.F.R. section
    567.1(bb).

  Although the Bank was deemed adequately capitalized at December 31, 1993, at
such date, absent the $28 million in capital contributed to the Bank by Citadel
during the year, the Bank would have had to significantly reduce its assets or
the Bank would not have met the 4% core capital to adjusted total assets
requirement of the adequately capitalized category and thus would have been
classified as undercapitalized for purposes of the OTS' prompt corrective
action regulations.
 
  Citadel, with only $2.3 million in liquid assets at December 31, 1993 and
ongoing expenses in connection with the contemplated Restructuring of the
Company defined below, is not in a position to make further capital
contributions to the Bank, nor does Citadel have ready access to additional
funds under current circumstances. Management anticipates that the Bank will
incur losses in the first and second quarters of 1994 that will, in the absence
of a new capital infusion or a reduction in the Bank's total assets, reduce the
Bank's core capital ratio to less than 4%. In an effort to maintain the Bank's
core capital ratio above 4% at March 31, 1994 by downsizing its balance sheet,
the Bank has entered into an agreement to sell approximately $160 million of
single family and multifamily (2 to 4 units) performing loans in the first
quarter of 1994. Additionally, in order to maintain the Bank's capital above
the regulatory minimums necessary to continue to be designated "adequately
capitalized" while the Restructuring is pursued, management continues to
explore possibilities for increasing the Bank's capital, either through the
issuance of new equity or the sale of assets. Management may also consider
further downsizings in the Bank's balance sheet through additional loan sales,
although such dispositions of income-producing assets would reduce the Bank's
future income.
 
  If the Restructuring of the Company discussed below is not accomplished, the
Bank will be required to take other actions to maintain its capital ratios,
including further downsizing the Bank and raising of additional equity. If such
actions are not successful, the Bank would likely become "undercapitalized" for
purposes of the prompt corrective action regulations of the OTS. The
consequences of becoming undercapitalized would include, but would not be
limited to, (a) the obligation of Fidelity to file a capital restoration plan
that is accompanied by an acceptable Citadel guarantee; (b) restrictions on
asset growth, branch acquisitions and new activities; (c) a prohibition on
dividends and capital distributions by Fidelity (subject to certain
exceptions); and (d) increased monitoring by the OTS. An acceptable capital
restoration plan guarantee would require Citadel to demonstrate appropriate
assurances of its ability to perform on the guarantee. Given Citadel's current
capital resources and liquidity position, no assurance can be given that such a
Citadel guarantee would be found acceptable by the OTS. Failure to provide an
acceptable capital restoration plan could result in additional OTS sanctions
typically reserved for "significantly undercapitalized" institutions. These
discretionary sanctions include, but are not limited to, (a) OTS authority to
require the recapitalization, merger or sale of the Bank; (b) divestiture of
subsidiaries of the Bank or a
 
                                       68

holding company divestiture of the Bank; (c) more stringent asset growth
restrictions than applicable to "undercapitalized" institutions; and (d)
management changes, including election of new directors, and dismissal of
directors or senior officers who have held office for more than 180 days, among
other things.
 
  Economic trends in Southern California continue to adversely affect both the
delinquencies being experienced by thrifts such as Fidelity and the ability of
such institutions to recoup principal and accrued interest by realization upon
underlying collateral. No assurances can be given that such trends will not
continue in future periods creating increasing downward pressure on the capital
and earnings of thrift institutions.
 
  The OTS has the ability to fix specific capital-required levels for Fidelity
higher than those set forth above. Fidelity is under continuing regulatory
pressure to raise capital ratios.
 
  The Company is actively pursuing a restructuring plan that would include both
the transfer to a newly-formed Citadel subsidiary or division of certain
problem assets of the Bank and a sale of the Bank and Gateway (the
"Restructuring"; discussions of the sale of the Bank in the context of the
Restructuring include the sale of Gateway). The Company is currently seeking a
strategic buyer or a new core set of equity investors for the Bank. Any such
sale of the Bank will be subject to the approval of Citadel's Board of
Directors (the "Board") and stockholders, as well as the OTS. Following the
proposed sale of the Bank, Citadel would become a real estate company and focus
on the servicing and enhancement of its loan and real estate portfolio.
 
  The Restructuring calls for the Bank's disposition of substantially all of
its problem assets, together with a small amount of performing assets, so as to
improve the attractiveness of the Bank to potential acquisition or investment
candidates. Most of the Bank's problem assets would be transferred to the new
Citadel real estate subsidiary or division using securitized debt financing.
These assets would consist of commercial and large multifamily loans and real
estate owned properties with a current net book value of approximately $401
million. The impact of the January 1994 Northridge Earthquake on the assets to
be transferred is not expected to alter significantly the value of such assets.
The Restructuring plan also calls for the Bank's disposition of a smaller group
of problem assets, consisting primarily of smaller multifamily loans with a
current net book value of approximately $81 million, in a bulk sale to a third-
party purchaser or Citadel.
 
  While the Board will fully explore the market values of this Restructuring
before making any final decisions, the Board views this approach as having the
greatest potential to maximize stockholder values in the foreseeable future. In
formulating the proposed Restructuring, the Company believes that the value of
Fidelity to a purchaser or investor would be heavily, and perhaps excessively,
discounted due to its problem assets. Thus, it was determined that the Bank's
attractiveness to an acquisition or investment candidate would be enhanced if
the Bank disposed of these problem assets. However, management also believes
that these assets, if managed outside the environment of a federally regulated
institution, present the potential for Citadel stockholders to realize future
value that would not be reflected in the bulk sale price of those assets to a
third party today. Accordingly, the Restructuring was designed to retain in a
Citadel subsidiary or division approximately $401 million of primarily problem
assets after a sale of the Bank. Management believes that an asset disposition
is critical to a successful major recapitalization program for Fidelity.
Citadel has commenced efforts to raise the financing necessary to consummate
its problem asset purchase from Fidelity.
 
  Because of the significant conditions to and uncertainty in accomplishing a
successful Restructuring, the Company expects that the losses associated with
the Restructuring would only be incurred upon the sale of the Bank, at which
time the effects of the losses on capital should be offset by either a new
infusion of capital from investors, who would purchase ownership of the Bank,
or a merger with another financial institution.
 
  The following discussion focuses on certain financial consequences of the
Restructuring and is not indicative of the loss content of the Bank's assets in
the absence of the restructuring or other bulk asset dispositions.
 
  To consummate the bulk transfers of assets to a Citadel subsidiary or
division and obtain debt financing in the capital markets for the larger
transfer, Fidelity would be required to write down these assets to their bulk
sale values. These losses would be offset in part by the reduction in the
Bank's GVA (reflecting the
 
                                       69

healthier remaining asset pool) and possible tax benefits. If the
Restructuring were to be consummated in mid-1994, management's latest estimate
is that the Bank's core capital, after giving effect to the writedowns on the
asset transfers, tax benefits associated therewith, use of relevant reserves
and extraordinary charges relating to the Restructuring, but before giving
effect to any new capital infusion into the Bank by the acquiror or new
investors, would be approximately $102 million. This estimate will be subject
to ongoing adjustment in view of changing variables such as future earnings or
losses, changes in the composition and size of the problem assets and other
factors.
 
  The Bank does not intend to implement the above-described bulk problem asset
dispositions, or to incur the consequent losses, in the absence of an
acquisition of the Bank by another financial institution or financial
investors who are able to infuse additional core capital into the Bank. Any
such acquisition will also require the approval of Citadel's Board and
stockholders, as well as the OTS, which will condition its approval in part on
the adequacy of the capital of the Bank after the Restructuring.
 
  No assurances can be given that the proposed Restructuring can be
successfully implemented.
 
 Sources of Funds and Liquidity
 
  The Bank's primary sources of operating funds are deposits, borrowings, loan
payments and prepayments, loan sales and earnings.
 
  Deposit activity is an important factor in Fidelity's cash flow position. At
December 31, 1993, Fidelity had deposits of $3.4 billion, down from $3.5
billion at December 31, 1992 and $3.9 billion at December 31, 1991. This
reduction has been, in part, the natural result of the Company's determination
to reduce total assets and, in part, the result of the need on the part of its
depositors to withdraw funds to meet current living expenses and/or increase
yields through other investments.
 
  As a part of its strategy of preserving and enhancing the value of its
customer franchise, Fidelity has increasingly focused its efforts on
attracting and retaining a greater number of profitable, low-cost transaction
accounts, such as checking, passbook and money market accounts. In the year
ended December 31, 1993, Fidelity increased the number of checking accounts to
94,100 from 77,400 at year-end 1992 and 65,400 at year-end 1991. Similarly,
the number of passbook accounts increased from 19,700 at year-end 1991 to
24,300 at year-end 1992 and 28,100 at year-end 1993. The number of money
market savings accounts declined from 21,600 at year-end 1991 to 18,800 at
year-end 1992 and 15,200 at year-end 1993, primarily due to decreasing
interest rates during those periods.
 
  The Bank has also restructured its branch network with an emphasis on
providing retail financial services to its customers. In order to capture the
funds moving out of traditional bank products into higher yield investments,
sales of investment products have been integrated into the retail network, and
new positions and compensation systems have been developed and implemented. In
1993, the Company, through Gateway, sold investment and annuities products to
customers of the Bank totaling $96.4 million, compared with total sales of
$79.9 million in 1992 and $57.8 million in 1991.
 
  During 1993, the total balance of certificates of deposit increased by $22.3
million to $2.6 billion, while the total balance of retail transaction
accounts (checking, passbook and money market savings) and other lower-cost
accounts decreased by $111.6 million to $729.6 million. These reductions in
total balance have been influenced by lower rates of interest offered on
retail accounts, causing depositors to seek increased yields through other
investments. On December 31, 1993, certificates of deposit over $100,000
represented approximately 18% of total deposits compared to 16% at December
31, 1992 and 16% at December 31, 1991. Broker-originated deposits totaling
$92.2 million, $12.9 million and $0 were included in certificates of deposit
at the comparable periods.
 
  FHLB Advances are another major source of funds. At December 31, 1993, 1992
and 1991, the outstanding balances were $326.4 million, $581.4 million and
$325.0 million, respectively. The decreased use of FHLB Advances in 1993 as a
source of funds results primarily from the use of commercial paper, which is
less costly, as an alternative source of funds.
 
                                      70

  In an ongoing effort to diversify its funding source, the Bank started
issuing commercial paper during the third quarter of 1992. The commercial
paper is backed by a letter of credit from the FHLB to ensure a high quality
investment grade rating. Fidelity's obligation to reimburse the FHLB for any
amounts paid under the letter of credit is secured by a pledge of mortgage
loans by Fidelity to the FHLB. At December 31, 1993, $239.0 million of net
funds were provided by the issuance of commercial paper, compared to $65.0
million at December 31, 1992.
 
  The Bank also enters into reverse repurchase agreements ("repos") whereby
the Bank sells securities under agreements to repurchase the securities at a
specific price and date. The Bank deals only with dealers judged by management
to be financially strong or who are recognized as primary dealers in U.S.
Treasury securities by the FRB. In 1993, $3.8 million of net funds were
provided by repo activity.
 
  Loan principal payments including prepayments, were a major source of funds
in 1993, providing$290.0 million, compared to $469.0 million in 1992, and
$408.0 million in 1991. It is anticipated that loan payments and prepayments
will continue to be a major source of funds in the future.
 
  Another source of operating funds is the proceeds from the sale of loans
which totaled $138.4 million in 1993, compared to $204.4 million in 1992 and
$282.7 million in 1991. Sales of loans are dependent upon various factors,
including 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. In 1993, the Bank designated $321 million of adjustable rate
mortgage loans as held for sale to enhance asset/liability management and
liquidity. Due to the volatility and unpredictability of these factors, the
volume of Fidelity's sales of loans has fluctuated significantly and
therefore, an accurate estimate of future sales cannot be made at this time.
 
  The sale of investment and mortgage-backed securities ("MBS") also provides
operating funds to the Bank. During 1993, the Bank changed its investment
strategy and as a result moved its entire portfolio of its investment and
mortgage-backed securities securities from the investment portfolio to the
held for sale portfolio. Sales of investment securities totaled $351.8 million
for the year ended December 31, 1993, compared to no such sales in 1992 and
$1.5 million in 1991. Sales of MBS totaled $522.1 million in 1993 compared to
no such sales during 1992 and to $273.0 million in sales during 1991.
 
  Sales of loans and securities from the held for investment portfolio would
be caused by unusual events. The level of future sales, if any, is difficult
to predict. During 1993, the Bank approved a policy of more active management
of its investment portfolio with a view toward disposition of securities and
loans with unfavorable risk/return profiles. This policy may result in loans
being reclassified from held for investment to held for sale. Any subsequent
sale of such loans would not generally be expected to result in any material
gain or loss. The higher level of sales of loans and mortgage-backed
securities in 1993 was from the Bank's held for sale portfolio and the result
of efforts to reduce its asset size for capital planning purposes.
 
  At December 31, 1993 and 1992, the Bank had $367.7 million and $26.5
million, respectively, of loans in its held for sale portfolio.
 
  Fidelity's sources of cash are utilized in funding loans and investments,
for payment of its debt obligations and in maintaining a liquidity ratio in
compliance with regulatory requirements. Fidelity's total loans funded
(excluding Fidelity's refinances) in the year ended December 31, 1993 were
$383 million versus $386 million in the corresponding 1992 period. The Bank
had commitments outstanding to originate $37.9 million in loans at market
interest rates at December 31, 1993 compared to $37.5 million at December 31,
1992. In addition, the Bank had a total of $155.8 million at December 31, 1993
and $138.1 million at December 31, 1992 of unfunded loans in its pipeline.
 
  The overall decline in the loan pipeline resulted from: (a) a decision by
the Bank to limit multifamily loan originations in accordance with the Bank's
more rigorous view of multifamily loans as, in fact, business loans which
require considerably more scrutiny and continuous monitoring, (b) the
restructuring associated
 
                                      71

with the development and implementation of the Bank's strategy in building a
mortage banking division geared toward single family residential loan
originations, (c) the development of independent originators for multifamily
originations, and (d) a reduction in market demand for products Fidelity
desired for its portfolio.
 
  Fidelity also had $52.1 million in the unused balance of home equity credit
lines at December 31, 1993, compared to $66.2 million at December 31, 1992 and
$66.3 million at December 31, 1991. The decline in unused balances of home
equity credit lines was due to a slowdown in new credit facility growth over
the 1992 to 1993 period. New home equity credit lines totaled approximately
$13.6 million, $26.9 million and $42.5 million for the years 1993, 1992 and
1991, respectively. The 49% decline in 1993 new home equity lines reflected
significant levels of first trust deed refinancings as well as lower homeowner
equity as single family housing appraisals fell from higher values of prior
years. In May 1993, management implemented a new $300 home equity application
fee which also contributed to a home equity volume reduction over the third and
fourth quarters of 1992.
 
  The OTS regulations require the maintenance of an average regulatory
liquidity ratio of at least 5% of deposits and short-term borrowings.
Fidelity's monthly average regulatory liquidity ratio was 8.8% and 5.3% for
December 1993 and 1992, respectively. Fidelity's year-end liquidity ratios were
6.1% in 1993 and 5.7% in 1992. Both Fidelity's short-term and long-term cash
flow forecasts indicate an adequate liquidity margin to meet foreseeable
operational demands.
 
  Fidelity maintains other sources of liquidity to draw upon if unforeseen
circumstances should occur such as changes in regulatory liquidity, capital
requirements, sudden deposit outflows or pending tax legislation. At December
31, 1993, these sources of liquidity included: (a) presently available line of
credit from the FHLB of $201.7 million (assuming all of the $400 million
capacity of commercial paper is used); (b) unused commercial paper facility of
$96 million; (c) unpledged securities in the amount of $106.1 million available
to be placed in reverse repurchase agreements or sold; and (d) unpledged loans
of $1.4 billion, of which some portion would be available to collateralize
additional FHLB or private borrowings or which may be securitized. In 1993,
Fidelity received two capital contributions totaling $28.0 million from
Citadel. See "Citadel" below for further discussion.
 
  Citadel has limited cash assets and no material potential cash-producing
operations or assets other than its investment in Fidelity and in Gateway
Investment Services, Inc., its securities brokerage subsidiary ("Gateway"). In
March 1993, Citadel issued 3,297,812 shares of common stock through a rights
offering to stockholders and received net proceeds of approximately $31.4
million. Of this amount, Citadel contributed $18.0 million in March 1993 and
$10.0 million in December 1993 to the capital of Fidelity and retained the
balance for liquidity and working capital purposes. Gateway paid a dividend of
$1.0 million to Citadel in December 1993. Citadel had $2.3 million in cash and
cash equivalents at December 31, 1993. Because of Fidelity's current capital
levels, dividends and distributions from Fidelity will not be available to
Citadel for the foreseeable future. Thus, Citadel's current cash balances,
together with future dividends from Gateway, are the only sources of cash to
Citadel. Gateway's ability to pay dividends may be restricted by certain
regulatory net capital rules. See Item 1. "Business--Regulation and
Supervision--Gateway." Management believes that Citadel's cash resources will
only be sufficient to meet Citadel expenditures through mid-1994. If the
Restructuring is not completed at such time, Citadel will be required to raise
additional cash to fund its expenditures, and no assurances can be given that
Citadel will be able to raise any such funds.
 
  The Bank entered into a Subordinated Loan Agreement dated as of May 15, 1990
(the "Subordinated Loan Agreement") pursuant to which $60 million in
subordinated notes (the "Notes") are outstanding, which Notes are guaranteed by
Citadel. The Subordinated Loan Agreement, among other covenants, contains a
provision requiring Fidelity to maintain a consolidated tangible net worth at
least equal to the greater of (a) $170 million plus 50% of consolidated net
earnings since January 1, 1990, or (b) 3.25% of consolidated assets. As stated
above, management anticipates that additional losses are likely to be incurred
during 1994 and that, as a result, consolidated tangible net worth may be
reduced to less than $170 million during the first quarter of 1994. However,
management's projections for 1994 indicate that the Bank's consolidated
tangible net worth will remain above the net worth requirement under the
foregoing clause (a) through the first quarter of the year, assuming the
formula in clause (a) permits a reduction of the $170 million test if a
 
                                       72

consolidated net loss has been sustained since January 1, 1990. Under this
interpretation, the amount of consolidated tangible net worth necessary to meet
the requirement of clause (a) would be $153.9 million at December 31, 1993 and
would be further reduced by 50% of all losses during 1994. The amount of
consolidated tangible net worth necessary to meet the requirement of clause (b)
was less than $153.9 million at December 31, 1993. As of December 31, 1993, the
Bank's consolidated tangible net worth amounted to $180.2 million. Management's
projections for the balance of 1994 indicate that the Bank's consolidated
tangible net worth will remain above the net worth requirement under the test
of either clause (a) (assuming it is interpreted as described above) or clause
(b) only if the Restructuring is accomplished or other capital-raising efforts
are successful.
 
  The holders of the Notes could take the position that the amount under clause
(a) may not be reduced by losses to less than $170 million. Under that
position, Fidelity would be in violation of the covenant as soon as
consolidated tangible net worth were reduced to less than $170 million.
Management believes that such position is not correct; however, there can be no
assurance that such position would not prevail if the issue were ever tested in
court. If the above covenant were violated, the holders of 66 2/3% in aggregate
principal amount of the Notes would be entitled to declare the entire amount of
the Notes immediately due and payable. However, if such acceleration would
result in the Bank's failure to meet applicable regulatory capital
requirements, the holders would be prohibited from accelerating the Notes
without the prior approval of the OTS. If the Bank failed to make such payment,
Citadel would be required to make such payment under its guarantee of the
Notes. Management anticipates that Citadel's funds would be insufficient to
make such payment, unless additional funds were raised.
 
  The holders of the Notes have power of approval over certain matters,
including certain asset sales, and may require a repurchase of the Notes upon a
"Significant Event." Management believes that neither the approval of the
holders nor a Significant Event repurchase offer would be required for
consummation of the proposed Restructuring if an acquiror of the Bank has
outstanding, immediately prior to the closing of the Restructuring, unsecured
debt with a credit rating of BBB or better by Standard & Poor's Corporation or
Baa2 or better by Moody's Investors Service, Inc. and various financial tests
are satisfied after giving effect to the Restructuring. However, should the
Restructuring be found to trigger the Significant Event repurchase requirement,
Fidelity could be required to pay the principal balance of the Notes of $60
million plus accrued interest and a premium of approximately $12.8 million
(calculated as of December 31, 1993). Also, if the consent of the holders
should be required under any of the covenants of the Subordinated Loan
Agreement but not be obtained, an event of default would occur under the
Subordinated Loan Agreement (subject to grace or cure periods in the case of
certain covenants) if the Restructuring is completed.
 
  On March 4, 1994, Chase Manhattan Bank, N.A. ("Chase"), one of four lenders
under the Subordinated Loan Agreement, sued Fidelity, Citadel and Citadel's
Chairman of the Board, alleging, among other things, that the transfer of
assets pursuant to the Restructuring would constitute a breach of the
Subordinated Loan Agreement, including the tangible net worth and various other
financial tests contained therein, and seeking to enjoin the Restructuring and
to recover damages in unspecified amounts. In addition, the lawsuit alleges
that past responses of Citadel and Fidelity to requests by Chase for
information regarding the Restructuring violate certain provisions of the
Subordinated Loan Agreement and that such alleged violations, with the passage
of time, have become current defaults under the Subordinated Loan Agreement.
While the other three lenders under the Subordinated Loan Agreement hold $25
million of the Notes, none of them has joined Chase in this lawsuit. The
Company is evaluating the lawsuit and, based on its current assessment, the
Company does not believe that the allegations have merit.
 
  Any violation of the tangible net worth covenant or the occurrence of any
other event of default under the Subordinated Loan Agreement would also result
in a cross default under Fidelity's debt agreements with the FHLB (whether or
not the Notes are accelerated) and entitle the FHLB to declare all amounts
outstanding to become immediately due and payable. Also, the FHLB may elect not
to make further Advances to the Bank and may prevent the Bank from issuing
further commercial paper under its existing facility.
 
                                       73

ASSET QUALITY
 
  The Bank continues to be principally involved in the Southern California
single family and multifamily (2 units or more) residential lending businesses.
At December 31, 1993, 20.8% of Fidelity's total loan portfolio (including loans
held for sale) consisted of California single family residences while another
71.2% consisted of California multifamily dwellings. At December 31, 1992,
21.1% of Fidelity's loan portfolio consisted of California single family
residences and 70.2% consisted of California multifamily dwellings. Current
Southern California economic conditions have adversely impacted the credit risk
profile of the Bank's loan portfolio.
 
  The Company's performance continues to be adversely affected by increased
foreclosure activities of the Bank reflecting the continued weakness of the
Southern California economy and a depressed real estate market. Nonperforming
assets increased slightly to $235.6 million at December 31, 1993 from $234.4
million at December 31, 1992. Classified assets increased from $353.7 million
in 1992 to $372.5 million at December 31, 1993. Troubled debt restructuring
declined by $58.6 million in 1993 to $28.7 million as of December 31, 1993
compared to $87.3 million at December 31, 1992. Asset quality details of
Fidelity are as follows:

                                                               DECEMBER 31,
                                                             ------------------
                                                               1993      1992
                                                             --------  --------
                                                                (DOLLARS IN
                                                                THOUSANDS)
                                                                 
Nonperforming Assets ("NPAs"):
 Nonaccruing loans.......................................... $ 93,475  $112,041
 ISF........................................................   28,362    47,324
 Foreclosed real estate.....................................  122,226    88,659
 REO GVA....................................................   (8,442)  (13,619)
                                                             --------  --------
  Total NPAs................................................ $235,621  $234,405
                                                             ========  ========
  Nonaccruing loans to total assets.........................     2.13%     2.38%
                                                             ========  ========
  NPAs to total assets......................................     5.37%     4.99%
                                                             ========  ========
NPAs and Troubled Debt Restructuring ("TDR"):
 NPAs....................................................... $235,621  $234,405
 Classified TDRs............................................   23,650    44,308
 Nonclassified TDRs.........................................    5,062    42,996
                                                             --------  --------
  Total NPAs and TDRs....................................... $264,333  $321,709
                                                             ========  ========
  TDRs to total assets......................................     0.65%     1.86%
                                                             ========  ========
 NPAs and TDRs to total assets..............................     6.03%     6.85%
                                                             ========  ========
Classified Assets:
 NPAs....................................................... $235,621  $234,405
 Performing loans with increased risk.......................  125,720   108,442
 Real estate held for investment............................   11,161    10,891
                                                             --------  --------
  Total classified assets...................................  372,502   353,738
Criticized assets (Special Mention assets)..................  199,826   146,411
                                                             --------  --------
  Total classified and criticized assets.................... $572,328  $500,149
                                                             ========  ========
 Classified assets to total assets..........................     8.49%     7.53%
                                                             ========  ========
 Classified and criticized assets to total assets...........    13.05%    10.65%
                                                             ========  ========
Nonperforming Asset Ratios:
 REO (including ISF) to NPAs................................    60.33%    52.20%
 Foreclosed real estate to NPAs.............................    48.29%    32.01%
 Nonaccruing loans to NPAs..................................    39.67%    47.80%
 ISF to NPAs................................................    12.04%    20.19%

                                       74

  There was a marked shift in the composition of NPAs in 1993. Foreclosed real
estate increased from 32.0% of NPAs at December 31, 1992 to 48.3% at December
31, 1993 while nonaccruing loans and in-substance foreclosures declined from
68.0% to 51.7% in the same time period. This shift may be an indicator that the
problem assets are working their way through the system toward eventual
resolution. However, as stated previously, the Southern California economy
remains weak and no assurance can be made that problem assets will not increase
in the future.
 
  Loans are categorized as ISF based upon meeting all of the following three
criteria: (a) the borrower currently has little or no equity at fair market
value in the underlying collateral, (b) the only source of repayment is the
property securing the loan, and (c) the borrower has abandoned the property or
will not be able to rebuild equity in the foreseeable future. The Bank
generally places a loan on nonaccrual status whenever the payment of interest
is 90 or more days delinquent, or earlier if a loan exhibits materially
deficient characteristics.
 
  In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement prescribes the recognition criteria for
loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in TDRs. SFAS No. 114 defines a loan as impaired
when it is probable that a creditor will be unable to collect all principal and
interest amounts due according to the contracted terms of the loan agreement.
This statement also clarified the existing accounting for ISFs by stating that
a collateral dependent real estate loan would be reported as REO only if the
lender had taken possession of the collateral.
 
  Additionally, in June 1993, the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, Federal Reserve Board and Office of
Thrift Supervision issued a joint statement providing interagency guidance on
the reporting of ISFs. This joint statement clarified that losses must be
recognized on real estate loans that meet the existing ISF criteria based on
fair value of the collateral, but such loans need not be reported as REO unless
possession of the underlying collateral has been obtained. The Company intends
to adopt SFAS No. 114 as of January 1, 1994. As the Bank already measures
impairment based on the fair value of the collateral, the estimated impact of
such application will consist of a reclassification of ISFs on the statement of
financial condition from REO to loans. This reclassification will also result
in an increase in nonaccrual loans. As NPAs consist of nonaccrual loans plus
REO, this shift from ISF to nonaccrual loans will not affect the level of NPAs.
At December 31, 1993 and 1992, the amount of ISFs totaled $28.4 million, and
$47.3 million, respectively. This shift would not have had a material impact on
the results of operations had this standard been in effect at December 31,
1993.
 
  The Bank has modified the terms of certain loans that resulted in those loans
being defined as TDRs according to SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings". TDRs represent loans that are
current as to payment of principal and interest, but have had their terms
renegotiated to a more favorable position for the borrower due to an inability
to meet the original terms of the note. Troubled debt restructurings decreased
by $58.6 million during 1993 as a number of borrowers were either able to
return to the original payment terms at the expiration of the modification
period or the loans migrated to nonperforming loans or REO. The average loan
balance of loans being modified has also declined, further reducing TDRs.
 
  Classified assets consist of NPAs and all other assets classified for
internal and regulatory purposes, including other assets that are currently
performing, but exhibit deficiencies that indicate the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected
("performing loans with increased risk"). Classified assets are assigned to one
of the following three categories in the order of increasing credit risk: (a)
Substandard - an asset with well-defined weaknesses characterized by a distinct
possibility that some loss will be sustained if the weaknesses are not
corrected, (b) Doubtful - an asset which has all the weaknesses of a
Substandard asset with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly
 
                                       75

questionable and improbable, and (c) Loss - an asset, or portion thereof,
considered uncollectible and of such little value that a loss classification is
warranted; the amount identified as loss can be charged off or a specific
reserve established for the amount considered uncollectible. As of December 31,
1993, classified assets were $372.5 million (8.49% of total assets), increasing
from $353.7 million (7.53% of total assets) at December 31, 1992 and $228.4
million (4.46% of total assets) as of December 31, 1991. The increase in
classified assets in 1993 consisted primarily of a sharp increase in performing
loans with increased risk.
 
  The increase in classified assets in 1992 primarily consisted of the increase
in NPAs of $109.7 million and the increase of performing loans with increased
risk of $19.3 million (primarily attributed to 25 multifamily residential loans
in Southern California and two commercial and industrial complexes in Southern
California).
 
  In addition to classifying assets, the Bank also designates certain assets as
Special Mention which are considered criticized assets but not classified as
they do not currently expose the Bank to a sufficient degree of risk to warrant
an adverse classification. However, they do possess credit deficiencies or
potential weaknesses deserving management's close attention. If uncorrected,
such weaknesses or deficiencies may expose an institution to an increased risk
of loss in the future.
 
  Criticized assets consist of loans on 1 to 4 unit properties which are 60 to
89 days delinquent and on other multifamily properties (5 units and over) which
are 30 to 89 days delinquent, assets in bankruptcy less than 60 days
delinquent, and all other assets otherwise criticized for internal or
regulatory purposes. Total criticized assets increased by $53.4 million during
1993 due to an increase in delinquent loans and loans having delinquent
property taxes and as the result of increased internal review.
 
  Total loan delinquencies decreased by $3.8 million during 1993. This decrease
was due primarily to the migration of loans delinquent 90 days and over to REO.
 
                                       76

  The following table illustrates the trend of delinquencies of the respective
loan portfolios:
 
            NET LOAN DELINQUENCIES TO NET REAL ESTATE LOAN PORTFOLIO

                                                               DECEMBER 31,
                                                            -------------------
                                                              1993      1992
                                                            --------  ---------
                                                               (DOLLARS IN
                                                                THOUSANDS)
                                                                
Delinquencies by number of days:
 30 to 59 days.............................................     0.92%      0.82%
 60 to 89 days.............................................     0.64       0.39
 90 days and over..........................................     2.15       2.36
                                                            --------  ---------
 Loan delinquencies to net loan portfolio..................     3.71%      3.57%
                                                            ========  =========
Delinquencies by property type:
 Single family:
  30 to 59 days............................................ $  7,480  $   7,939
  60 to 89 days............................................    2,497      3,665
  90 days and over.........................................   12,661     14,064
                                                            --------  ---------
                                                              22,638     25,668
                                                            --------  ---------
 Percent to respective loan portfolio......................     2.85%      3.00%
 Multifamily (2 to 4 units):
  30 to 59 days............................................    3,599      1,432
  60 to 89 days............................................    1,707      1,180
  90 days and over.........................................   15,652      6,372
                                                            --------  ---------
                                                              20,958      8,984
                                                            --------  ---------
 Percent to respective loan portfolio......................     4.16%      1.70%
 Multifamily (5 to 36 units):
  30 to 59 days............................................   16,948     15,927
  60 to 89 days............................................   12,770      9,241
  90 days and over.........................................   34,746     33,627
                                                            --------  ---------
                                                              64,464     58,795
                                                            --------  ---------
 Percent to respective loan portfolio......................     3.60%      3.13%
 Multifamily (37 units and over):
  30 to 59 days............................................    4,114      5,623
  60 to 89 days............................................    5,035      1,223
  90 days and over.........................................    4,358     23,691
                                                            --------  ---------
                                                              13,507     30,537
                                                            --------  ---------
 Percent to respective loan portfolio......................     3.35%      6.89%
 Commercial & Industrial:
  30 to 59 days............................................    2,048      1,807
  60 to 89 days............................................    1,723         --
  90 days and over.........................................   12,443     15,772
                                                            --------  ---------
                                                              16,214     17,579
                                                            --------  ---------
 Percent to respective loan portfolio......................     5.45%      5.05%
 Total loan delinquencies, net............................. $137,781  $ 141,563
                                                            ========  =========

  California has been hit particularly hard by the current recession and
Southern California has experienced the brunt of the economic downturn in the
state. While the rest of the nation is experiencing a modest economic recovery,
the Southern California economy remains sluggish with higher unemployment than
elsewhere in the country and real estate values that continue to deteriorate.
There can be no assurances
 
                                       77

that these economic conditions will improve in the near future. Consequently,
rents and real estate values may continue to decline which may affect future
delinquency and foreclosure levels and may adversely impact the Bank's asset
quality, earnings performance and capital.
 
  The Bank recorded additions to its allowances for estimated loan losses and
real estate losses totaling $95.3 million during 1993 compared to $69.0 million
in 1992. The total allowances for such losses consist of the sum of the GVA for
both loans and real estate and all specific loss reserves for assets classified
as "Loss." These provisions have been made in response to continuing
deterioration of the Bank's loan portfolio. In the opinion of the Bank, this
deterioration is caused by the decline in apartment occupancy levels and of
rents available to apartment owners in Southern California; downward revisions
in projections as to inflation and rental income growth; the increased returns
currently being required by purchasers of multifamily income-producing
properties; announced cutbacks in public sector spending; the general
illiquidity in the Southern California market for multifamily income-producing
properties; and the continuing high level of unemployment in and migration of
skilled and white collar labor from Southern California. The Bank's combined
GVA for loan and real estate losses at December 31, 1993 was $80.0 million or
2.03% of total loans and real estate up from $75.6 million or 1.82% at December
31, 1992 and $52.4 million or 1.13% at December 31, 1991.
 
   The following table summarizes Fidelity's reserves, writedowns and certain
coverage ratios at the dates indicated:

                                                            DECEMBER 31,
                                                       ------------------------
                                                          1993         1992
                                                       -----------  -----------
                                                       (DOLLARS IN THOUSANDS)
                                                              
Loans:
 GVA.................................................  $    71,578  $    60,802
 Specific reserves...................................       12,254        3,475
                                                       -----------  -----------
  Total allowance for estimated losses...............  $    83,832  $    64,277
                                                       ===========  ===========
 Writedowns(1).......................................  $     4,251  $     5,574
                                                       ===========  ===========
 Total allowance and loan writedowns to gross loans..         2.32%        1.72%
 Loan GVA to loans and ISF...........................         1.88%        1.49%
 Loan GVA to nonaccruing loans and ISF...............        58.75%       38.15%
 Nonperforming loans to total loans..................         2.52%        2.83%
Owned Real Estate (including ISF and real estate held
 for investment):
 REO GVA.............................................  $     8,442  $    13,619
 GVA on real estate held for investment..............          --         1,200
 Specific reserves...................................        9,273        1,631
                                                       -----------  -----------
  Total allowance for estimated losses...............  $    17,715  $    16,450
                                                       ===========  ===========
 Writedowns(1).......................................  $    90,901  $    79,041
                                                       ===========  ===========
 Total REO allowance and REO writedowns to gross REO.        37.41%       34.97%
 REO GVA to REO (excluding ISF)(2)...................         6.91%       15.36%
Total Loans and REO:
 GVA.................................................  $    80,020  $    75,621
 Specific reserves...................................       21,527        5,106
                                                       -----------  -----------
  Total allowance for estimated losses...............  $   101,547  $    80,727
                                                       ===========  ===========
 Writedowns(1).......................................  $    95,152  $    84,615
                                                       ===========  ===========
 Total allowance and writedowns to gross loans and
  REO (including ISF)................................         4.87%        3.88%
 Total GVA to loans and REO (including ISF)(2).......         2.03%        1.82%
 Total GVA to NPAs(2)................................        32.79%       30.49%

- --------
(1) Writedowns include cumulative charge-offs taken on outstanding loans and
    REO as of the date indicated.
 
(2) Loans, REO and NPAs in these ratios are calculated prior to the reduction
    for loan and REO GVA, but are net of specific reserves.
 
                                       78

  During current market conditions, the Bank rarely sells REO for a price equal
to or greater than the loan balance, and the losses suffered are impacted by
the market factors discussed elsewhere in this report. REO is recorded at
acquisition at the lower of the recorded investment in the subject loan or the
fair market value of the assets received. The fair market value of the assets
received is based upon a current appraisal adjusted for estimated carrying,
rehabilitation and selling costs. The Bank's policy has been generally to
proceed promptly to market the properties acquired through foreclosure, and the
Bank often makes financing terms available to buyers of such properties.
Generally, the Bank experiences higher losses on sales of REO properties for
all cash, as opposed to financing the sale. However, by financing the sale, the
Bank incurs the risk that the loan may not be repaid. During 1993, the Bank
sold 210 REO properties for net sales proceeds of $83.5 million, with a gross
book and net book value totaling $138.5 million and $89.8 million,
respectively. This compares to 43 properties sold in 1992 for net sales
proceeds of $25.6 million, with a gross book and net book value of $34.9
million and $27.6 million, respectively. The loss on sale of REO (i.e., the
shortfall between the net proceeds and net book value) is charged to the REO
GVA upon sale.
 
  The Company is pursuing its Restructuring plan, including the possible
transfer of a significant portion of certain Fidelity assets (including
substantially all of its problem assets). As a result of such plan the Bank is
not currently marketing the assets expected to be transferred in the
Restructuring transaction, and thus a slowdown from the rate at which REO
properties were disposed in 1993 can be expected in the first half of 1994.
 
  During 1993, 1992 and 1991, the Bank charged off a total of $79.4 million,
$41.2 million and $25.6 million, respectively, on loans and on real estate
owned. The following table indicates the charge-offs and recoveries by property
type for the respective years:

                                          YEAR ENDED DECEMBER 31,
                             --------------------------------------------------
                                   1993             1992             1991
                             ---------------- ---------------- ----------------
                             NUMBER OF        NUMBER OF        NUMBER OF
                             PROPERTIES TOTAL PROPERTIES TOTAL PROPERTIES TOTAL
                             ---------- ----- ---------- ----- ---------- -----
                                           (DOLLARS IN MILLIONS)
                                                        
Charge-offs:
 Properties in California:
  Multifamily (2 units and
   over)....................    311     $70.8     92     $27.8     12     $ 4.6
  Commercial................     11       3.9     11       9.6      3       0.3
  Single family residences..     64       3.5     36       1.7      4       0.1
  Single family development
   projects.................     --        --     --        --      2       5.5
  Hotels....................      1       0.9     --        --      3       2.9
 Out-of-state properties:
  Commercial................      2       0.3      2       2.1      2       3.8
  Hotels....................     --        --     --        --      2       7.4
  Multifamily (2 units and
   over)....................     --        --     --        --      3       1.0
                                ---     -----    ---     -----    ---     -----
 Total charge-offs..........    389      79.4    141      41.2     31      25.6
                                ===              ===              ===
Recoveries..................    129       5.0     13       0.5     11       3.0
                                ===     -----    ===     -----    ===     -----
  Net charge-offs...........            $74.4            $40.7            $22.6
                                        =====            =====            =====

                                       79

  The following table presents loan and REO charge-offs by property type and
year of loan origination for the year ended December 31, 1993:

                                               YEAR OF ORIGINATION
                                 -----------------------------------------------
                                 TOTAL 1992 1991  1990  1989  1988  1979 TO 1987
                                 ----- ---- ---- ------ ----- ----- ------------
                                              (DOLLARS IN MILLIONS)
                                               
PROPERTY TYPE:
 Single Family.................. $ 3.5 $ -- $0.3 $  2.1 $ 0.8 $ 0.3    $  --
 Multifamily:
  2 to 4 units..................   5.0   --  0.1    3.6   0.8   0.4      0.1
  5 to 36 units.................  44.0  0.1  6.0   21.7   7.4   4.5      4.3
  37 units and over.............  21.8   --  0.8    9.1   0.9   5.0      6.0
                                 ----- ---- ---- ------ ----- -----    -----
   Total multifamily............  70.8  0.1  6.9   34.4   9.1   9.9     10.4
 Commercial and industrial......   5.1   --   --     --   0.5   1.1      3.5
   Total charge-offs............ $79.4 $0.1 $7.2 $36.5. $10.4 $11.3    $13.9
                                 ===== ==== ==== ====== ===== =====    =====

  The following table presents loan and REO charge-offs by property type and
year of loan origination for the year ended December 31, 1992:

                                                 YEAR OF ORIGINATION
                                     -------------------------------------------
                                     TOTAL 1991 1990  1989 1988 1977 TO 1987
                                     ----- ---- ----- ---- ---- ------------
                                              (DOLLARS IN MILLIONS)
                                                        
PROPERTY TYPE:
 Single Family...................... $ 1.7 $0.2 $ 1.1 $0.3 $ --    $ 0.1
 Multifamily:
  2 to 4 units......................   2.2   --   1.9  0.3   --
  5 to 36 units.....................  12.4  0.2   7.7  2.1  0.3      2.1
  37 units and over.................  13.2  0.7   1.6  3.5  4.0      3.4
                                     ----- ---- ----- ---- ----    -----
   Total multifamily................  27.8  0.9  11.2  5.9  4.3      5.5
 Commercial and industrial..........  11.7   --   0.7   --  0.7     10.3
                                     ----- ---- ----- ---- ----    -----
   Total charge-offs................ $41.2 $1.1 $13.0 $6.2 $5.0    $15.9
                                     ===== ==== ===== ==== ====    =====

  The following table presents Fidelity's real estate loan portfolio (including
loans held for sale) as of December 31, 1993 by year of origination and type of
security:

                                               YEAR OF ORIGINATION
                         ----------------------------------------------------------------
                                                                                           1987 AND
                           TOTAL      1993     1992     1991     1990     1989     1988     PRIOR
                         ---------- -------- -------- -------- -------- -------- -------- ----------
                                              (DOLLARS IN THOUSANDS)
                                                                  
Property type:
 Single family.......... $  792,054 $118,802 $ 54,035 $ 40,417 $105,854 $ 73,466 $149,435 $  250,045
 Multifamily:
   2 to 4 units.........    505,219   36,822   23,892   50,069  139,430   77,837  100,182     76,987
   5 to 36 units........  1,795,374   92,798  118,176  205,279  479,998  216,091  273,376    409,656
   37 units and over....    406,330   12,861   15,753    8,049   59,566   75,111   62,990    172,000
                         ---------- -------- -------- -------- -------- -------- -------- ----------
     Total multifamily..  2,706,923  142,481  157,821  263,397  678,994  369,039  436,548    658,643
 Commercial and
  industrial............    300,589    1,332      815    1,821   11,532   53,936   65,239    165,914
                         ---------- -------- -------- -------- -------- -------- -------- ----------
     Total mortgage
      loans receivable.. $3,799,566 $262,615 $212,671 $305,635 $796,380 $496,441 $651,222 $1,074,602
                         ========== ======== ======== ======== ======== ======== ======== ==========
Loans by year of
 origination to total...     100.0%     6.9%     5.6%     8.0%    21.0%    13.1%    17.1%      28.3%
                         ========== ======== ======== ======== ======== ======== ======== ==========

 
                                       80

  During the years 1990, 1989 and 1988, Fidelity originated loans at peak
levels totaling $1,211.3 million, $897.6 million and $1,467.1 million,
respectively. During 1993, the Bank reserved and/or charged off amounts
corresponding to these peak origination years totaling $36.5 million, $10.4
million and $11.3 million, respectively. These losses were due primarily to the
decline of the California economy and real estate market. Multifamily (5 or
more units) and commercial loans accounted for a substantial percentage of such
losses, and as a result, the Bank has reduced recent loan origination
activities in these areas. However, continued downward pressure on the economy
and real estate market could lead to additional losses in these portfolios.
 
  The ongoing uncertainty in the Southern California economy, the weak real
estate market and the level of the Bank's nonperforming assets continue to be
significant concerns to the Company. The Bank increased the staff of the Real
Estate Asset Management ("REAM") Group in 1993 from 13 to 40 in order to handle
the increased number of foreclosed properties and the increased volume of loan
workout requests. In 1993, the REAM Group sold 210 properties, generating net
sales proceeds of $83.5 million and restructured109 loans with an aggregate
gross book value of $89.1 million. These increased loan workout activities are
expected to continue in 1994, due primarily to the January 1994 Northridge
Earthquake, property tax delinquencies and the continued soft real estate
market. The REAM Group will shift its focus to bulk sales transactions in 1994
and concentrate its efforts on the "hands on" management of its real estate
assets. All of these factors may require additional loss provisions, as the
Bank performs its quarterly reviews of the adequacy of its allowance for
estimated losses on loans and real estate, based upon the then current economic
environment.
 
  If economic conditions in Southern California do not improve and delinquent
loans continue at current levels, it is likely that Fidelity will need to
establish further reserves in 1994. If the trend continues, no assurances can
be given that potentially significant additional reserves will not be needed in
future periods.
 
  As of December 31, 1993, Fidelity's 15 largest borrowers accounted for $226.7
million of gross loans. A number of these borrowing relationships also include
Fidelity's largest loans. Details of these relationships follow:

                           NUMBER                        TOTAL                          LARGEST
                             OF                        AMOUNT OF                        SINGLE
      BORROWER             LOANS                         LOANS                           LOAN
      --------             ------                      ---------                        -------
                                                                               
        1                    46(1)                     $ 31,486(2)                      $9,934
        2                     9                          27,340(2)                      11,122
        3                     3                          23,880                         15,081
        4                     3                          20,714(2)                      13,912
        5                    55                          16,159                          6,570
        6                     1                          13,929                         13,929
        7                     3                          13,810                         13,682
        8                     2                          11,355                          5,845
        9                     3                          11,057                          6,826
       10                     1                          10,253                         10,253
       11                     9                          10,229(2)                       3,484
       12                     1                          10,056                         10,056
       13                     1                           9,276                          9,276
       14                     3                           8,765(2)                       7,550
       15                     5                           8,404                          3,101
                                                       --------
                                                       $226,713
                                                       ========

- --------
(1) Includes 9 loans totaling $8.0 million that were considered as ISF as of
    December 31, 1993.
 
(2) Amounts are shown net of participations.

                                       81

  Fidelity's 10 largest loans aggregated $114.8 million at December 31, 1993,
of which $21.1 million was classified as Substandard and $37.9 million was
listed as Special Mention. As of December 31, 1993, 3 of Fidelity's 5 largest
borrowers and 4 of Fidelity's 15 largest borrowers had loans either considered
nonperforming or performing with increased risk.
 
  At December 31, 1993, Fidelity had approximately $31.5 million total loans
outstanding (including 9 loans designated as ISF) to its largest borrower on 46
loans secured by multifamily apartment dwellings located in the San Gabriel
Valley and eastern Los Angeles areas. Of the total loans, $24.1 million were
classified as Substandard, including the 9 loans considered ISF. Fidelity began
discussions with the borrower regarding modifications in mid-1993. In January
1994, Fidelity completed the restructure of $3.3 million of loans and is
continuing the modification process with the remaining loans.
 
  During 1992, Fidelity's second largest borrower was in default on eight of
that borrower's nine loans. Six of the eight defaulted loans were restructured
in 1992 allowing the borrower to make interest only payments through the end of
1992. The remaining two loans in default were modified in February 1993 to
include interest only payments through June 1993. These two loans were
classified as Substandard and identified as TDRs. As of December 31, 1993,
seven of the loans totaling $24.6 million were 29 days delinquent and one
totaling $2.1 million was 59 days delinquent. At December 31, 1993, 5 loans
totaling $17.2 million were classified as Substandard. Fidelity has entered
into a forebearance agreement with the borrower whereby Fidelity agreed not to
instigate foreclosure proceedings against the borrower's eight properties
securing the loans until February 28, 1994, in exchange for $150,000. Fidelity
is currently pursuing a workout arrangement with the borrower. However, the
January 1994 Northridge Earthquake has further complicated the situation, as
several of the borrower's properties are located in the most severely damaged
areas. In January 1994, an additional 3 loans totaling $9.5 million were moved
to the Substandard classified loans, for a total of 8 loans and $26.7 million.
 
  It is the Bank's practice to review the adequacy of its GVA on loans and real
estate owned on a quarterly basis. The Bank uses two methodologies in
determining the adequacy of its GVA. These are delinquency migration and
classification methods. The delinquency migration method attempts to capture
the potential future losses as of a particular date associated with a given
portfolio of loans, based on the Bank's own historical experience over a given
period of time, in a 4-step process: first, estimate the percentage of a given
portfolio of performing loans which will become newly delinquent; second,
evaluate the probability that new delinquent loans will become REO; third,
calculate the historical loss ratio on REO and other problem loans; and fourth,
derive the resulting potential losses for the portfolio of performing loans by
multiplying the corresponding potential amount of REO with the reserve factor.
 
  The likelihood that new delinquent loans will become REO is estimated
historically by tracing the percentage of the balances of a given set of new
delinquent loans that have migrated toward an increasingly worse credit status:
i.e., the percentage of the balances of 30 to 59 days delinquent loans that
have become 60 to 89 days delinquent; then the percentage of the balances of
these loans that have become at least 90 days delinquent; and the percentage of
the balances of these loans which have become REO. To ensure that the
historically derived percentages are calculated on a consistent basis, only
those loans that have become newly delinquent are traced through the different
stages of delinquencies all the way to REO.
 
  The total projected loss associated with a given portfolio of performing and
nonperforming loans and REO is calculated by summing the losses corresponding
to each credit status category at a given point in time. The result is
sensitive to a number of factors, including the historical period over which
the estimates are derived; the growth pattern of the portfolio, the composition
of the portfolio and the stability of the underwriting criteria over the period
covered.
 
  The Bank has derived migration statistics over past periods and updates them
quarterly to take into account the most recent trends. The Bank has applied the
results of such methodology with respect to the December 31, 1993 financial
statements and the Bank updates its analysis quarterly. The Bank has observed
 
                                       82

an increasing delinquency trend as a percentage of the net real estate loan
portfolio and during 1993, as property values deteriorated, the resulting
historical loss ratios increased. Continuation of these trends may increase the
historical loss ratios in 1994.
 
  The second methodology for determining the adequacy of GVA is the
classification method. During 1993, the Bank utilized this approach to analyze
classifications including Pass, Special Mention, Substandard, Doubtful and
Loss. A reserve factor is applied to each aggregate classification level by
asset collateral type in an effort to estimate the loss content in the
portfolio. The Company's actual loss experience with Pass and Special Mention
assets is 0.0% while the actual loss experience on Substandard assets is 23.5%.
Again, the Company has observed an increase of classified loans at all levels
which will inevitably lead to increased estimates of loss exposure under this
method. See Item 1. "Business--Regulation and Supervision--Classification of
Assets."
 
  Each quarter, the Bank calculates a range of loss using both methodologies.
Once a range is established, the Company applies judgment and a knowledge of
particular credits, trends in the market, and other factors to estimate the GVA
amount. As of December 31, 1993, the Bank's GVA was approximately $80.0
million.
 
  Once a GVA is estimated, the Bank applies three separate stress tests to the
portfolio to analyze the ability of the Bank to maintain adequate capital
levels under different economic scenarios. This process is considered
appropriate given the weak economy and the unstable market in which the Bank
operates. The scenarios range from mild change (continuation of current rates
of loss migration and expected percentage loss estimates) to severe change (the
worst experience in the 1980s in Texas and Arizona). The Bank's peak loan
balance was reached in late 1990 and early 1991. The stress tests assume the
losses in the peak portfolio will be experienced for the most part over a five-
year cycle and that three years of this cycle has lapsed. The peak portfolio
performance is stressed with a variety of projected levels of NPA, REO, and
loss on sale of REO. Projected losses are first absorbed by current levels of
GVA, then by forecasted Company earnings over the remaining three years of the
assumed cycle. Tangible capital ratios are then calculated for each of the
economic scenarios. At December 31, 1993, these studies showed the Company
could maintain capital in excess of the 1.5% minimum required level of tangible
capital under the capital regulations and the 2.0% level of tangible equity to
total assets required to avoid being "critically undercapitalized," as defined
by the OTS regulations implementing the FDICIA prompt corrective action
requirements. See "Capital Resources and Liquidity" and Item 1. "Business--
Regulation and Supervision--FDICIA Prompt Corrective Action Requirements." The
foregoing exercise is only a test, based on assumptions that can change at any
time. There can be no assurance that the Bank would be allowed to operate
independently if its tangible capital began to approach the minimum required
levels.
 
  If the OTS disagrees with management's assessment of the adequacy of such
reserves, it can effectively require Fidelity to increase its reserves to
levels satisfactory to the OTS. The Bank increased its GVA for losses on loans
and real estate to approximately $80.0 million at year-end 1993 from its third
quarter 1993 level of approximately $71.0 million in part to address OTS
concerns regarding the Bank's asset quality. If the Restructuring is not
successful and the Bank has no viable problem asset disposition alternative,
the Bank anticipates that it may be required to increase its GVA to higher
levels that cannot currently be determined.
 
  Approximately 71.1% of Fidelity's loan portfolio consisted of loans secured
by multifamily properties at December 31, 1993. Although, in the view of the
Bank, this portfolio is less sensitive to the effects of the recession than
those of institutions which have emphasized commercial and/or construction
lending, it is likely to be more sensitive than the portfolios of institutions
which have placed greater emphasis on single family residential lending.
 
IMPACT OF INFLATION
 
  The Company's assets and liabilities are primarily monetary in nature and are
affected most directly by changes in interest rates rather than other elements
of the Consumer Price Index. As a result, increases in the prices of goods and
services do not have a significant impact on the Company's results of
operations.
 
                                       83

INTEREST RATE RISK MANAGEMENT
 
  Prevailing economic conditions, particularly changes in market interest
rates, as well as governmental policies and regulations concerning, among other
things, monetary and fiscal affairs, significantly affect interest rates and a
savings institution's net interest income. Fidelity actively manages its assets
and liabilities in an effort to mitigate its exposure to interest rate risk,
but it cannot eliminate this exposure entirely without unduly affecting its
profitability. As is the case with many thrift institutions, Fidelity's
deposits historically have matured or repriced more rapidly than its loans and
other investments, and consequently, increases in market interest rates have
tended to reduce Fidelity's net interest income, while decreases in market
interest rates have tended to increase its net interest income.
 
  Fidelity's interest rate risk ("IRR") management plan is aimed at maximizing
net interest income while controlling interest rate risk exposure in terms of
market value of portfolio equity, consistent with the objectives and limits set
by the Board of Directors and applicable regulations. Financial institutions,
by their funds intermediation function, gather deposits which have a different
duration than the loans that they originate, i.e., interest rate risk exposure
is an inherent characteristic of the banking business. The IRR management plan
is designed to maintain interest rate exposure within target limits.
Elimination of interest rate risk is usually not cost effective; while excess
exposure could result in additional capital requirements.
 
  There are two ways by which Fidelity maintains its exposure profile within
satisfactory limits: first, by explicitly changing the composition of its
balance sheet; second, by the use of financial instruments, often in the form
of off-balance sheet derivative products. The extent to which Fidelity elects
to use either or both of these methods will depend on the observed preferences
of its customers, time horizon of its objectives (short-term versus long-term
objectives), conditions in the financial markets (especially volatility of
interest rates and steepness of the yield curves), its operating
characteristics and the associated cost/benefit tradeoffs.
 
  In accordance with the Company's IRR management plan, the Company continues
to monitor its interest rate risk position and to maintain its sensitivity to
rate changes within desired limits. The balance sheet strategies consist of
reducing basis risk by adding market index loans to the asset portfolio and
decreasing liability sensitivity by encouraging growth of its transactions
account base. The Bank provides products to meet its customers' needs. The Bank
uses derivative products and changes its asset mix to maintain its desired risk
profile in response to changing customers' preference.
 
  The Company continues to naturally reduce its IRR exposure by originating ARM
loans for its portfolio. Since 1985, the Company has consistently moved toward
building a portfolio consisting predominantly of interest rate sensitive loans.
ARM loans comprised 96% of the portfolio of total loans at December 31, 1993,
1992 and 1991. The percentage of monthly adjustable ARMs to total loans was 75%
at December 31, 1993, 74% at December 31, 1992, and 72% at December 31, 1991.
Interest sensitive assets provide the Company with long-term protection from
rising interest rates.
 
  The Bank is also emphasizing the growth of its transaction account base to
reduce its overall cost of funds. The ratio of retail transaction accounts,
money market savings and passbook accounts to total deposits decreased to 21.6%
at December 31, 1993 from 24.3% at December 31, 1992 and increased from 19.4%
at December 31, 1991.
 
  At December 31, 1993, the Company had synthetic hedges with a total notional
principal amount of $250 million. These were composed of interest rate swap
contracts with an average receive rate of 4.84% and a current pay rate of
3.43%. These contracts support the Bank's total risk management by lengthening
certain short-term assets and shortening certain long-term liabilities.
 
  In 1993, the Bank had also sold options to enter into swap contracts with a
notional principal amount of $200 million. These options give the buyers the
right to cancel the swap agreements at a specified future date and if not
cancelled, provide the Bank with additional synthetic hedges. During the life
of the agreement, the Bank receives a fixed interest rate and pays a floating
interest rate tied to LIBOR. At December 31, 1993, the average fixed receive
rate was 5.00% and the average pay rate was 3.34%. The swap options were held
as
 
                                       84

trading positions during the option period and were carried at market value
with gains and losses recorded. In January 1994, the options to cancel were not
exercised and the average fixed receive rate adjusted to 4.70%. The swaps have
remaining maturities of less than four years.
 
  In 1990, the Company purchased interest rate caps to protect against rising
rates. In 1993, the final $400 million of interest rate caps matured and were
not renewed. During 1992 and the first 6 months of 1993, the average maturity
of the Company's liabilities lengthened, due primarily to customer preference
for longer term CDs. To maintain its target risk position, the Company entered
interest rate swap contracts to synthetically shorten the maturity of these
liabilities.
 
  The Company's maturity and repricing mismatch ("Gap") between interest rate
sensitive assets and liabilities due within one year was a negative 3.38% and a
positive 6.12% of total assets at December 31, 1993 and 1992, respectively. A
positive gap indicates an excess of maturing or repricing assets over such
liabilities while a negative gap indicates an excess of maturing or repricing
liabilities over such assets. However, Gap is not a particularly helpful
measure of IRR exposure, because of four major deficiencies: (a) Gap assumes
that both assets and liabilities react immediately to market rate changes
although loans usually reprice to an index that is approximately two months old
and therefore cannot immediately react to current rates; (b) Gap assumes that
all instruments react fully to market rates, whereas loans tied to COFI or
other lagging indices can take many months to fully adjust to market rate
changes; (c) Gap assumes that there will be no change in repricing behavior
caused by a change in interest rates and, in reality, prepayment speed,
amortization schedules and early withdrawal are all impacted by changes in
rate; and (d) finally, Gap does not consider periodic rate caps and floors.
Consequently, the Company does not use Gap as an IRR measurement and management
tool. Instead, it uses a scenario-based approach which measures bankwide risk
and a probabilistic approach for specific products. The Bank regularly analyzes
scenarios that contemplate low, expected and high inflation. The Bank also
complies with OTS requirements for interest rate shock scenarios (immediate
permanent change in interest rates of various levels). For product and option
valuation, the Bank employs a Monte Carlo simulation model (one that assumes
random variation in interest rates) to measure and evaluate risk and return
trade-offs.
 
  The Company's IRR management plan is reviewed on a continuing basis. As
previously discussed, the Bank's interest rate risk is less than half of the
OTS limit. See "Capital Resources and Liquidity." Even at this lower risk
level, due to the lag effect that COFI has on Fidelity's loan portfolio the
decline in short-term rates from 1990 to early 1993 contributed significantly
to the Company's net interest margin. Recent stable rates have eroded this
margin, and an increase in rates could produce an initial reduction in net
interest income. Management intends to continue to manage its IRR exposure
through introducing products tied to indices that reprice without a timing lag
and by using hedging techniques.
 
                                       85

  The following table of projected maturities and repricings details major
financial asset and liability categories of the Company as of December 31,
1993. Projected maturities are based on contractual maturities as adjusted for
estimates of prepayments and normal historical amortization. (Prepayment
estimates are based on recent portfolio experience of approximately 15%
Constant Prepayment Rate ("CPR") on all residential 1 to 4 unit loans and 10%
on all other loans.) While the estimated prepayment rates utilized are based on
the best information available to the Company, there can be no assurance that
the projected rates used in developing this table will coincide with the actual
results.
 
                     MATURITY AND RATE SENSITIVITY ANALYSIS

                                AS  OF DECEMBER 31, 1993 MATURITY OR REPRICING
                          ------------------------------------------------------------------
                             0-3         4-12        1-5        6-10     OVER 10
                            MONTHS      MONTHS      YEARS      YEARS      YEARS     TOTAL
                          ----------  ----------   --------   --------   -------  ----------
                                            (DOLLARS IN THOUSANDS)
                                                                
INTEREST-EARNING ASSETS:
 Cash and cash equiva-
  lents.................  $   62,690  $       --   $     --   $     --   $    --  $   62,690
 Investment securi-
  ties(1)(2)............          --      54,587     97,094      1,143        --     152,824
 Mortgage-backed
  securities(1).........      39,669       8,885     42,059         --        --      90,613
 Loans receivable:
  ARMs and other
   adjustables(3).......   2,877,329     492,028    257,768     22,472       117   3,649,714
  Fixed rate loans......      54,701         348      8,219      4,616    81,968     149,852
  Consumer and other
   loans................       5,332       2,408      1,258         --        --       8,998
                          ----------  ----------   --------   --------   -------  ----------
   Gross loans receiv-
    able................   2,937,362     494,784    267,245     27,088    82,085   3,808,564
                          ----------  ----------   --------   --------   -------  ----------
    Total...............   3,039,721     558,256    406,398     28,231    82,085  $4,114,691
                          ----------  ----------   --------   --------   -------  ==========
INTEREST-BEARING LIABIL-
 ITIES:
 Deposits:
  Checking and savings
   accounts.............     396,201          --         --         --        --  $  396,201
  Money market accounts.     280,474          --         --         --        --     280,474
  Fixed maturity depos-
   its:
   Retail customers.....     961,634     964,895    530,056        330        --   2,456,915
   Wholesale customers..     100,353      70,592     11,173         --        --     182,118
                          ----------  ----------   --------   --------   -------  ----------
                           1,738,662   1,035,487    541,229        330        --   3,315,708
                          ----------  ----------   --------   --------   -------  ----------
 Borrowings:
  FHLB Advances(3)......     216,400          --     90,000     20,000        --     326,400
  Other.................     307,830          --    100,000     60,000        --     467,830
                          ----------  ----------   --------   --------   -------  ----------
                             524,230          --    190,000     80,000        --     794,230
                          ----------  ----------   --------   --------   -------  ----------
    Total...............   2,262,892   1,035,487    731,229     80,330        --  $4,109,938
                                                                                  ==========
IMPACT OF HEDGING(5)....    (400,000)    (50,000)   450,000         --        --
                          ----------  ----------   --------   --------   -------
MATURITY GAP............  $  376,829  $ (527,231)  $125,169   $(52,099)  $82,085
                          ==========  ==========   ========   ========   =======
GAP TO TOTAL ASSETS.....        8.46%     (11.84)%     2.81%     (1.17)%    1.84%
                          ==========  ==========   ========   ========   =======
CUMULATIVE GAP TO TOTAL
 ASSETS.................        8.46%      (3.38)%    (0.57)%    (1.74)%    0.10%
                          ==========  ==========   ========   ========   =======

- -------
(1) Maturities shown are based on the contractual maturity of the instrument.
(2) Includes investments in FHLB and FRB stock and cash equivalents.
(3) ARMs and variable rate FHLB Advances are in the "within 0-3 months"
    categories as they are subject to interest rate adjustments.
(4) These liabilities are subject to daily adjustments and are therefore
    included in the "within one year" category.
(5) Fidelity had synthetic hedges with a total notional principal amount of
    $450 million at December 31, 1993. These off-balance sheet instruments
    support the Bank's total risk management by enhancing yield and altering
    its exposure to interest rate risk.

                                       86

OTHER FACTORS AFFECTING EARNINGS
 
Growing Emphasis on Fee Income Generation
 
  Management believes that, given the highly competitive nature of the Bank's
historical business and the regulatory constraints it faces in competing with
unregulated companies, the Bank must expand from its historical business focus
and adopt a broader product line business strategy. Specifically, management
believes that the Bank's existing customers provide a ready market for the
sale of nontraditional financial services and investment products. This belief
prompted the implementation of a new business strategy for the retail
financial services group that integrated its traditional functions (mortgage
origination, deposit services, checking, savings, etc.) with the sale of
investment services and products by Gateway. Management's objective is to
build a "relationship bank" that works with clients to determine their
financial needs and offers a broad array of more customized products and
services.
 
  Through this new strategy of targeting retail and mortgage customers and
offering a variety of new investment products and services, Fidelity and
Gateway hope to attract more of the Bank customers' deposits, investment
accounts and mortgage business. Management believes that this new strategy has
been successful, as evidenced by the increase of 22% in total checking
accounts at December 31, 1993 over the level a year earlier. As a result of
this strategy, fee income should become a growing portion, and net interest
income a declining portion, of the Company's total income.
 
  Management also intends to offer a wider range of loan types than the Bank
currently originates. While continuing to offer adjustable rate mortgages and
to maintain an expertise in originating and servicing multifamily mortgages,
the Bank plans to increase its mortgage banking capabilities and to originate
mortgages that, while not appropriate for inclusion in the Bank's portfolio in
significant quantities, are attractive to borrowers and to the secondary
market.
 
Northridge Earthquake
 
  The Northridge Earthquake of January 17, 1994, and subsequent aftershocks
will adversely affect the Bank's loan and real estate portfolios. The Bank's
portfolio includes loans and REO with a net book value of approximately $937
million secured by or comprised of 1,414 multifamily (5 units or more), 15
commercial, and 2,313 single family and multifamily (2 to 4 units) collateral
properties in the primary earthquake areas. After the earthquake, the Bank's
appraisers surveyed all the multifamily (5 units or more) and commercial
properties located in these areas which secured the Bank's loans or constitute
REO of the Bank. The Bank also made selected inspections at more remote
locations where damage has been reported. In total, approximately 1,450
properties have been inspected. Of such inspected properties, 231 properties,
representing loans and REO with a net book value of $140 million, have been
identified as having sustained more than "cosmetic" damage. Of such 231
properties, 204 properties related to the Bank's loans and REO with a net book
value of $124 million were identified as having "possible serious damage" and
an additional 27 properties with a net book value of $16 million were
identified as "actually or potentially condemned". The Bank commissioned
structural and building engineers or building inspectors to estimate the cost
of repairs to properties in these two categories. The cost of repairs has been
preliminarily estimated to be $5.7 million and $11.1 million, respectively. Of
this total $16.8 million, approximately $6.0 million of seismic damage exceeds
the net book value of the related loans and REO. Accordingly, the Bank
currently would not expect its losses due to the earthquake to exceed $10.8
million with respect to its commercial and multifamily loans and REO. The Bank
expects the actual losses payable by the Bank to be lower because many repair
costs may be borne by the borrowers, who in addition to their own funds, may
have access to government assistance and/or earthquake insurance proceeds. As
part of its normal internal asset review process, the Bank will adjust its
reserves as its losses become quantifiable.
 
  In addition to the multifamily and commercial assets referenced above, the
Bank has identified 2,313 single family and multifamily (2 to 4 units) assets
in the affected areas. 173 borrowers with unpaid principal balances totaling
$29.4 million called in to report damages through February 8, 1994. The Bank
has commenced inspection of these properties and continues to assess damages
and potential earnings and loss impact with respect to these properties.
 
  The earthquake will also have some adverse affect on loan originations and
the sale of financial services in the retail branch network in the near term.
 
                                      87

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                          INDEPENDENT AUDITORS' REPORT
 
Board of Directors and Stockholders
Citadel Holding Corporation
Glendale, California
 
  We have audited the accompanying consolidated statements of financial
condition of Citadel Holding Corporation and subsidiaries (the "Company") as of
December 31, 1993 and 1992, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principle used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
  In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Citadel Holding Corporation and
subsidiaries at December 31, 1993 and 1992 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted accounting principles.
 
  As discussed in Note 17 to the consolidated financial statements, on March 4,
1994, one of four lenders to Fidelity Federal Bank, F.S.B. (the "Bank") under
its $60 million Subordinated Loan Agreement of 1990 filed a lawsuit against the
Bank and Citadel Holding Corporation ("Citadel") alleging a breach of the loan
agreement and other allegations, and is seeking to enjoin a restructuring plan
(described in footnote 14) and to recover damages in unspecified amounts. The
impact of this lawsuit on the capital position of the Bank, cross default
provisions under the Bank's other debt agreements and the guarantee by Citadel
is uncertain. Accordingly, no adjustments that may result from the ultimate
resolution of this uncertainty have been made in the accompanying financial
statements.
 
  As discussed in Notes 14 and 16 to the financial statements, the Bank, the
primary subsidiary of Citadel, is subject to numerous regulatory requirements,
including, among others: (i) minimum capital to be considered "adequately
capitalized" under the Prompt Corrective Action provisions of the Federal
Deposit Insurance Corporation Improvement Act ("FDICIA") as implemented by the
Office of Thrift Supervision ("OTS"), and (ii) minimum capital requirements of
the OTS. Although the Bank met these capital requirements at December 31, 1993,
the Bank's ability to meet the prescribed capital requirements in the future is
uncertain. Failure on the part of the Bank to meet these capital requirements
may subject the Bank to significant regulatory sanctions. Management's
immediate plans to address these capital requirements are described in Note 14.
The financial statement impact, if any, that might result from the failure of
the Bank to comply with the capital requirements prescribed by the OTS cannot
presently be determined. Accordingly, no adjustments that may result from the
ultimate resolution of the uncertainty have been made in the accompanying
financial statements.
 
                                        Deloitte & Touche
 
February 4, 1994, except for Note 17,
 as to which the date is March 4, 1994
Los Angeles, California
 
                                      F-1

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                              DECEMBER  31,
                                                          ---------------------
                                                             1993       1992
                                                          ---------- ----------
                                                               
ASSETS:
 Cash, federal funds sold and other cash equivalents
  (Note 2)............................................... $  145,961 $  110,262
 Investment securities held for sale (market value of
  $92,512) (Notes 2 and 10)..............................     92,259         --
 Investment securities, at amortized cost (market value
  of $69,041) (Notes 2 and 10)...........................         --     67,337
 Mortgage-backed securities held for sale (market value
  of $91,298) (Note 3)...................................     91,108         --
 Mortgage-backed securities, at amortized cost (market
  value of $230,561) (Notes 3 and 10)....................         --    230,384
 Loans held for sale, at lower of cost or market 
  (Note 4)...............................................    367,688     26,482
 Loans receivable, net of allowances of $83,832 and
  $64,277 at December 31, 1993 and 1992, respectively
  (Notes 4, 6, 8, 9 and 10)..............................  3,345,695  3,965,299
 Interest receivable (Notes 2, 3 and 4)..................     23,052     27,132
 Investment in FHLB and FRB stock (Note 9)...............     52,151     50,574
 Owned real estate (Notes 5 and 6).......................    153,607    133,255
 Premises and equipment, net.............................     49,247     46,585
 Intangible assets, net (Note 7).........................      2,098     20,556
 Deferred tax assets (Note 12)...........................      1,247      3,182
 Other assets (Note 12)..................................     65,406     17,278
                                                          ---------- ----------
                                                          $4,389,519 $4,698,326
                                                          ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
 Liabilities:
  Deposits (Note 8)...................................... $3,368,643 $3,457,918
  FHLB Advances (Note 9).................................    326,400    581,400
  Commercial paper (Note 10).............................    304,000     65,000
  Mortgage-backed notes and bonds (Note 10)..............    100,000    262,000
  Other borrowings (Note 10).............................      3,830         --
  Deferred tax liabilities (Note 12).....................     14,564      2,008
  Other liabilities (Notes 11 and 12)....................     24,679     46,814
  Subordinated notes (Note 10)...........................     60,000     60,000
                                                          ---------- ----------
                                                           4,202,116  4,475,140
                                                          ---------- ----------
 Commitments and contingencies (Note 13)
 Stockholders' equity (Note 14):
  Serial preferred stock, par value $.01 per share; 
    authorized, 5,000,000 shares; no shares outstanding..         --         --
  Common stock, par value of $.01 per share; authorized
   10,000,000 shares; issued and outstanding, 6,595,624
   shares and 3,297,812 shares at December 31, 1993 and
   1992, respectively....................................         66         33
 Paid-in capital.........................................     60,052     28,707
 Retained earnings (Note 12).............................    127,285    194,446
                                                          ---------- ----------
                                                             187,403    223,186
                                                          ---------- ----------
                                                          $4,389,519 $4,698,326
                                                          ========== ==========

See notes to consolidated financial statements.

                                      F-2

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                 YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                                1993        1992        1991
                                             ----------  ----------  ----------
                                                            
Interest Income:
 Loans.....................................  $  269,712  $  355,560  $  497,005
 Mortgage-backed securities................      11,051       5,631       6,016
 Investment securities and other...........       8,829       9,531      17,103
                                             ----------  ----------  ----------
  Total interest income....................     289,592     370,722     520,124
                                             ----------  ----------  ----------
Interest Expense:
 Deposits..................................     131,618     175,024     278,617
 FHLB Advances.............................      17,077      20,877      43,024
 Other borrowings..........................      32,323      36,667      49,003
 Subordinated notes........................       7,373       7,373       7,373
                                             ----------  ----------  ----------
  Total interest expense...................     188,391     239,941     378,017
                                             ----------  ----------  ----------
Net Interest Income........................     101,201     130,781     142,107
 Provision for estimated loan losses 
   (Notes 4 and 6).........................      65,100      51,180      49,843
                                             ----------  ----------  ----------
Net Interest Income after Provision for 
  Estimated Loan Losses ...................      36,101      79,601      92,264
                                             ----------  ----------  ----------
Noninterest Income (Expense):
 Loan and other fee income.................       5,389       7,885       5,869
 Gains on sales of loans, net..............         194       1,117       2,118
 Fee income from investment products.......       4,313       3,368       2,487
 Fee income on deposits and other income
  (expense)................................       3,271       4,406      (3,350)
                                             ----------  ----------  ----------
                                                 13,167      16,776       7,124
                                             ----------  ----------  ----------
 Provision for estimated real estate losses
  (Notes 5 and 6)..........................     (30,200)    (17,820)     (8,562)
 Direct costs of real estate operations,
  net (Note 5).............................     (18,643)     (4,441)     (2,060)
                                             ----------  ----------  ----------
                                                (48,843)    (22,261)    (10,622)
                                             ----------  ----------  ----------
 Gains on sales of mortgage-backed 
   securities, net (Note 3)................       1,342          --       8,993
 Gains (losses) on sales of investment 
   securities, net (Note 2)................         (54)         --           1
                                             ----------  ----------  ----------
                                                  1,288          --       8,994
                                             ----------  ----------  ----------
  Total noninterest income (expense).......     (34,388)     (5,485)      5,496
                                             ----------  ----------  ----------
Operating Expense:
 Personnel and benefits....................      46,873      36,656      36,293
 Occupancy.................................      13,202      12,705      12,692
 FDIC insurance............................       8,628       8,391       8,680
 Professional services.....................      11,970       6,119       6,786
 Office-related expenses...................       6,785       5,031       5,565
 Marketing.................................       3,080       2,548       3,130
 Amortization of intangibles (Note 7)......       9,246         596         840
 Other general and administrative..........       5,557       5,865       5,460
                                             ----------  ----------  ----------
  Total operating expense..................     105,341      77,911      79,446
                                             ----------  ----------  ----------
Earnings (Loss) before Income Taxes........    (103,628)     (3,795)     18,314
 Income tax expense (benefit) (Note 12)....     (36,467)     (5,841)     15,651
                                             ----------  ----------  ----------
Net Earnings (Loss)........................  $  (67,161) $    2,046  $    2,663
                                             ==========  ==========  ==========
Net Earnings (Loss) Per Share..............  $   (11.56) $     0.62  $     0.81
                                             ==========  ==========  ==========
Weighted Average Common and Common 
  Equivalent Shares Outstanding............   5,809,570   3,297,812   3,297,812
                                             ==========  ==========  ==========

See notes to consolidated financial statements.
 
                                      F-3

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                             (DOLLARS IN THOUSANDS)

                                   THREE YEARS ENDED DECEMBER 31, 1993
                         -----------------------------------------------------------
                          COMMON STOCK
                         ----------------                                  TOTAL
                          NUMBER     PAR  PAID-IN  RETAINED  TREASURY  STOCKHOLDERS'
                         OF SHARES  VALUE CAPITAL  EARNINGS   STOCK       EQUITY
                         ---------  ----- -------  --------  --------  -------------
                                                     
Balance, January 1,
 1991................... 3,477,512   $35  $34,784  $189,737  $(6,079)    $218,477
 Net earnings for 1991..        --    --       --     2,663       --        2,663
                         ---------   ---  -------  --------  -------     --------
Balance, December 31,
 1991................... 3,477,512    35   34,784   192,400   (6,079)     221,140
 Retirement of treasury
  stock.................  (179,700)   (2)  (6,077)       --    6,079           --
 Net earnings for 1992..        --    --       --     2,046       --        2,046
                         ---------   ---  -------  --------  -------     --------
Balance, December 31,
 1992................... 3,297,812    33   28,707   194,446       --      223,186
 Proceeds of rights 
  offering.............. 3,297,812    33   31,345        --       --       31,378
 Net loss for 1993......        --    --       --   (67,161)      --      (67,161)
                         ---------   ---  -------  --------  -------     --------
Balance, December 31,
 1993................... 6,595,624   $66  $60,052  $127,285  $    --     $187,403
                         =========   ===  =======  ========  =======     ========

See notes to consolidated financial statements.
 
                                      F-4

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (DOLLARS IN THOUSANDS)

                                                 YEAR ENDED DECEMBER 31,
                                            -----------------------------------
                                              1993        1992         1991
                                            ---------  -----------  -----------
                                                           
CASH FLOWS--OPERATING ACTIVITIES:
 Net earnings (loss)......................  $ (67,161) $     2,046  $     2,663
 Reconciliation of net earnings (loss) to
  net operating cash flows:
 Provisions for estimated losses..........     95,300       69,079       58,597
 Gains on sales of loans and securities...     (1,482)      (1,117)     (11,112)
 Capitalized loan origination costs.......     (2,187)      (3,001)      (2,450)
 Amortization of deferred loan items, net.     (1,163)        (604)      (1,057)
 Purchases of investment securities held
  for trading.............................   (248,272)          --           --
 Proceeds from sales of investment
  securities held for trading.............    248,248           --           --
 Purchases of investment securities held
  for sale................................   (420,956)          --           --
 Maturities of investment securities held
  for sale................................    260,838           --           --
 Proceeds from sales of investment
  securities held for sale................     76,687           --           --
 Investment securities held for sale lower
  of cost or market writedown.............      2,074           --           --
 Purchases of mortgage-backed securities
  ("MBS") held for trading................    (51,248)          --           --
 Proceeds from sales of MBS held for
  trading.................................     51,277           --           --
 Purchases of MBS held for sale...........   (395,561)          --           --
 Principal repayment of MBS held for sale.     58,865           --           --
 Proceeds from sales of MBS held for sale.    463,704           --           --
 Originations of loans held for sale......   (162,868)    (176,220)    (354,365)
 Proceeds from sales of loans held for
  sale....................................    138,399      204,435      282,728
 FHLB stock dividend......................     (1,640)        (790)      (3,070)
 Depreciation and amortization............     23,092        9,344       10,079
 Interest receivable net decrease.........      4,080        9,974        7,849
 Other assets (increase) decrease.........    (49,414)       3,934       11,770
 Deferred income tax expense (benefit)....     14,491      (19,966)     (13,276)
 Interest payable increase (decrease).....     (5,103)      (5,954)      (2,431)
 Other liabilities and deferred income,
  net increase (decrease).................    (16,350)     (19,283)       4,366
 Other, net...............................         72          257       (3,426)
                                            ---------  -----------  -----------
  Operating cash flows, net...............     13,722       72,134      (13,135)
                                            ---------  -----------  -----------
CASH FLOWS--INVESTING ACTIVITIES:
 Purchases of investment securities.......   (200,055)    (170,539)    (187,592)
 Maturities of investment securities......    226,617      137,237      280,165
 Proceeds from sales of investment
  securities..............................     26,908           --        1,547
 Purchases of MBS held for investment.....         --      (92,502)          --
 Principal repayments of MBS held for
  investment..............................      9,565        8,588        9,724
 Proceeds from sales of MBS held for
  investment..............................      7,114           --      273,098
 Purchases of loans.......................     (3,951)      (1,675)      (2,939)
 Loans receivable, net decrease...........    149,909      274,181      286,120
 Real estate investment dispositions, net.      3,050           --           --
 Proceeds from sales of real estate.......     41,608       24,329        6,237
 Premises and equipment additions, net....     (6,946)      (2,460)      (5,318)
 Other, net...............................        225       (4,746)        (107)
                                            ---------  -----------  -----------
 Investing cash flows, net................    254,044      172,413      660,935
                                            ---------  -----------  -----------

                                      F-5

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
 
                             (DOLLARS IN THOUSANDS)

                                                  YEAR ENDED DECEMBER 31,
                                              ---------------------------------
                                                1993        1992        1991
                                              ---------  ----------  ----------
                                                            
CASH FLOWS--FINANCING ACTIVITIES:
 Demand deposits and passbook savings, net
  increase (decrease).......................   (111,601)     86,531     370,014
 Certificate accounts, net increase
  (decrease)................................     22,326    (513,320)   (452,795)
 Proceeds from FHLB Advances................    250,000   1,273,400     860,000
 Repayments of FHLB Advances................   (505,000) (1,017,000) (1,290,000)
 Proceeds from (repayments of) related party
  loan......................................         --     (15,000)     15,000
 Short-term borrowings, net increase
  (decrease)................................    242,830      61,800     (27,390)
 Repayments of long-term borrowings.........   (162,000)   (265,950)    (35,626)
 Proceeds from stock rights offering........     31,378          --          --
                                              ---------  ----------  ----------
 Financing cash flows, net..................   (232,067)   (389,539)   (560,797)
                                              ---------  ----------  ----------
  Net increase (decrease) in cash and cash
   equivalents..............................     35,699    (144,992)     87,003
 Cash and cash equivalents at beginning of
  period....................................    110,262     255,254     168,251
                                              ---------  ----------  ----------
  Cash and cash equivalents at end of
   period...................................  $ 145,961  $  110,262  $  255,254
                                              =========  ==========  ==========
CASH FLOWS--SUPPLEMENTAL INFORMATION:
 Cash paid (received) during the period for:
  Interest on deposits, advances and other
   borrowings...............................  $ 180,861  $  236,953  $  369,366
  Income taxes..............................       (679)     21,697      30,105
 Noncash transactions:
  Additions to real estate acquired through
   foreclosure..............................    193,641     121,192      49,951
  Loans originated to finance sale of real
   estate acquired through foreclosure......     51,607      11,243       1,604
 Transfers from loan and investment
  portfolio to held for sale:
   Loans receivable.........................    325,222          --          --
   Investment securities....................     14,264          --          --
   Mortgage-backed securities...............    214,310          --          --
   Mortgage loans exchanged for mortgage-
    backed securities.......................         --     114,277     235,758
   Retirement of treasury stock.............         --       6,079          --

See notes to consolidated financial statements.
 
                                      F-6

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of Citadel Holding
Corporation ("Citadel") and subsidiaries. Citadel is the holding company of
Fidelity Federal Bank, a Federal Savings Bank ("Fidelity" or the "Bank") and
Gateway Investment Services, Inc. ("Gateway"). Unless otherwise indicated,
references to the "Company" include Citadel, Fidelity, Gateway, and all
subsidiaries of Fidelity and Citadel. All significant intercompany transactions
and balances have been eliminated. Certain reclassifications have been made to
prior years' consolidated financial statements to conform to the 1993
presentation.
 
 Cash and Cash Equivalents
 
  For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods. Fidelity is required by the Federal Reserve
System to maintain noninterest-earning cash reserves against certain of its
transaction accounts. At December 31, 1993, the required reserves totaled $28.6
million including vault cash.
 
 Investment Securities and Mortgage-backed Securities
 
  U.S. Government and agency obligations, commercial paper, mortgage-backed
securities and other corporate debt securities identified as held for
investment are recorded at cost, with any discount or premium recognized over
the life of the related security by using a methodology which approximates the
interest method. The Bank's portfolio of mortgage-backed securities consists of
pools of mortgage loans exchanged for mortgage-backed securities and those
purchased. Securities held for investment are those securities which the
Company has the intent and ability to hold until maturity, and are carried on
an amortized cost basis. Securities to be held for indefinite periods of time,
including securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar factors, are classified as held for sale and are
carried at the lower of cost or market value. Any gains or losses incurred on
sales of securities are calculated based upon the specific identification
method. Any investment securities held for trading are carried at market value.
 
 Loans
 
  Interest on loans is credited to income as earned and is accrued only if
deemed collectible. Accrued interest is fully reserved on loans over 90 days
contractually delinquent and on other loans which have developed inherent
problems prior to being 90 days delinquent. Discounts and premiums on loans are
included with loans receivable and are credited or charged to operations over
the estimated life of the related loans using the interest method. The Bank
charges fees for originating loans. Loan origination fees, net of direct costs
of originating the loan are recognized as an adjustment of the loan yield over
the life of the loan by the interest method, which results in a constant rate
of return. When a loan is sold, net loan, origination fees and direct costs are
recognized in operations. Other loan fees and charges representing service
costs for the prepayment of loans, for delinquent payments or for miscellaneous
loan services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
 
  The Bank has designated certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, the Bank considers
whether loans (a) would be sold as part of its asset/liability strategy, or (b)
may be sold in response to changes in interest rates, changes in prepayment
risk, the need to increase regulatory capital or other similar factors. Such
loans are classified as held for sale and are carried at the lower of cost or
market value.
 
                                      F-7

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
  The Bank's current policy is to designate substantially all originations of
fixed rate residential 1 to 4 unit loans as being held for sale as part of the
asset/liability strategy. In further compliance with the Bank's policy, $321
million of adjustable FHLB Eleventh District Cost of Funds Index ("COFI") loans
were transferred from held for investment to held for sale in December 1993 as
part of the Bank's asset/liability strategy and the possible need to increase
regulatory capital in the future. Loans held for sale are valued at the lower
of aggregate cost or market value as determined by outstanding commitments from
investors or, in the absence of such commitments, the current investor yield
requirements calculated on an aggregate loan basis. The market value
calculation includes consideration of commitments and related fees. Adjustments
to the lower of cost or market are charged to current operations and are
included in net gains/losses on loan sales in the statement of operations.
 
  Fidelity has sold loans which have generated gains on sale, a stream of loan
servicing revenue and cash for lending or liquidity. Sales of loans are
dependent upon various factors, including interest rate movements, investor
demand for loan products, deposit flows, the availability and attractiveness of
other sources of funds, loan demand by borrowers and liquidity and capital
requirements. Due to the volatility and unpredictability of these factors, the
volume of Fidelity's sales of loans has fluctuated. All loans sold during 1993
and 1992 were from the held for sale portfolio. Fidelity has the intent and
ability to hold all of its loans, other than those designated as held for sale,
until maturity.
 
 Owned Real Estate
 
  Real estate held for sale acquired in settlement of loans generally results
when property collateralizing a loan is foreclosed upon or otherwise acquired
by the Bank in satisfaction of the loan. Real estate acquired through
foreclosure is recorded at the lower of fair value or the recorded investment
in the loan satisfied at the date of foreclosure. Fair value is based on the
amount that the Company could reasonably expect to receive for the asset in a
current sale between a willing buyer and a willing seller, that is, other than
in a forced or liquidation sale. Inherent in the computation of estimated fair
value are assumptions about the length of time the Company may have to hold the
property before disposition. The holding costs through the expected date of
sale and estimated disposition costs are included in the valuations. Real
estate held for investment or development is carried at the lower of cost or
fair value. Adjustments to the carrying value of the assets are made through
valuation allowances and charge-offs, through a charge to operations. Net cash
receipts on real estate owned or on those loans designated as in-substance
foreclosures and net cash payments are recorded in real estate operations on
specific properties.
 
  Loans meeting certain criteria are accounted for as "in-substance
foreclosures." These substantially foreclosed assets are recorded at the lower
of the loan's carrying amount or at the estimated fair value of the collateral
at the date the loan was determined to be in-substance foreclosed. These assets
are reported as "real estate owned" in addition to formally foreclosed real
estate.
 
  Statement of Position ("SOP") 92-3, "Accounting for Foreclosed Assets," was
issued by the Accounting Standards Division of the American Institute of
Certified Public Accountants in April 1992 and became effective for the
Company's December 31, 1992 financial statements. SOP 92-3 presumes that
foreclosed assets are held for sale and not for the production of income. It
requires the Company to carry foreclosed assets held for sale, after
foreclosure, at the lower of (a) fair value minus estimated costs to sell or
(b) cost. The impact of implementing SOP 92-3 was immaterial to the Company's
financial position, due to the Company's policy of carrying foreclosed assets
at fair value, net of disposition costs.
 
                                      F-8

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
 Allowances for Estimated Losses on Loans and Real Estate
 
  The Company has established valuation allowances for estimated losses on
specific loans and real estate ("specific reserves") and for the inherent risk
in the loan and real estate portfolios which has yet to be specifically
identified ("general valuation allowances" or "GVA"). The internal asset review
department reviews the quality and recoverability of the Company's assets on a
quarterly basis in order to establish adequate specific reserves and general
valuation allowances. The Bank utilizes the delinquency migration and the
classification methods in determining the adequacy of its GVA. The delinquency
migration method attempts to capture the potential future losses as of a
particular date associated with a given portfolio of loans, based on the Bank's
own historical migration experience over a given period of time. Under the
classification method, a reserve factor is applied to each aggregate
classification level by asset collateral type in an effort to estimate the loss
content in the portfolio. The Bank calculates a range of loss by applying both
methodologies and then applies judgment and knowledge of particular credits,
economic trends, industry experience and other relevant factors to estimate the
GVA amount. Additions to the allowances, in the form of provisions, are
reflected in current operations. Charge-offs to the allowances are made when
the loss is determined to be significant and permanent.
 
 Depreciation and Amortization
 
  Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized over the lives of the respective leases or the useful lives of
the improvements, whichever is shorter.
 
 Earnings per Share
 
  Earnings per share are based on weighted average common shares outstanding,
net of treasury stock in 1992 and 1991, of 5,809,570 in 1993 and 3,297,812 in
1992 and 1991.
 
 Intangible Assets
 
  In 1993, the Company reassessed the valuation of its intangible assets which
resulted in a writedown of $14.0 million. See Note 7 for further information.
 
  Until 1993, the excess of cost over the fair value of net assets acquired
(goodwill) in connection with the acquisition of Mariners Savings and Loan in
1978, was included in intangible assets in the statements of financial
condition and was being amortized to operations over forty years.
 
  The cost of core deposits purchased from various financial institutions is
amortized over the average life of the deposits acquired, generally five to ten
years.
 
 Income Taxes
 
  The Company files a consolidated federal income tax return with its
subsidiaries and a combined California franchise tax return.
 
  Beginning in 1991, income taxes have been determined pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Prior to 1991, income taxes were determined pursuant to SFAS No. 96. The impact
of adopting SFAS No. 109 was not material in relation to SFAS No. 96.
 
                                      F-9

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
 Financial Instruments
 
  In the normal course of business, the Company enters into off-balance sheet
instruments to enhance yields and to alter its exposure to interest rate risk.
These financial instruments include interest rate swaps and swap option
agreements and puts and calls. The differences to be paid or received on swaps
are included in interest expense as payments are made or received. The swap
options are held as trading positions during the option period and are carried
at market value and gains and losses are reflected in operations.
 
  SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. Financial instruments are defined as
cash, evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
 
  Much of the information used to determine fair value is highly subjective.
When applicable, readily available market information has been utilized.
However, for a significant portion of the Bank's financial instruments, active
markets do not exist. Therefore, considerable judgment was required in
estimating fair value for certain items. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair value is estimated as of December 31, 1993, the amounts
that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
 
  The following methods and assumptions were used in estimating fair value
disclosures for financial instruments which are contained in the notes to the
consolidated financial statements that describe each financial instrument.
 
  Cash and cash equivalents: The book value amounts reported in the statement
of financial condition for cash and cash equivalents approximate the fair value
of such assets, because of the short maturity of such investments.
 
  Investment securities and mortgage-backed securities: Estimated fair values
for investment and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
 
  Loans: The estimated fair values of real estate loans held for sale are based
on quoted market prices. The estimated fair values of loans receivable are
based on quoted market prices, when available, or an option adjusted cash flow
valuation ("OACFV"). The OACFV includes forward interest rate simulations and
the credit quality of performing and nonperforming loans. Such valuations may
not be indicative of the value derived upon a sale of all or part of the
portfolio. The book value of accrued interest approximates its fair value.
 
  Investment in FHLB stock: The book value reported in the statement of
financial condition for the investment in FHLB stock approximates fair value as
the stock may be sold back to the Federal Home Loan Bank at face value to the
extent that it exceeds the amount of FHLB stock which Fidelity is required to
hold.
 
                                      F-10

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
  Deposits: The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand. The fair value of fixed
rate certificates of deposits is estimated by using an OACFV analysis.
 
  Borrowings (including FHLB Advances, other borrowings and subordinated
notes): The estimated fair value is based on an OACFV model.
 
  Off-balance sheet instruments: The estimated fair value for the Bank's off-
balance sheet instruments are based on quoted market prices, when available, or
an OACFV analysis.
 
 Recent Accounting Pronouncements
 
  In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." This statement
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings ("TDRs"). SFAS No. 114 states that a loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest amounts due according to the contracted terms of the
loan agreement. A creditor is required to measure impairment by discounting
expected future cash flows at the loan's effective interest rate, or by
reference to an observable market price, or by determining the fair value of
the collateral for a collateral dependent asset. The statement also clarified
the existing accounting for in-substance foreclosures ("ISFs") by stating that
a collateral dependent real estate loan would be reported as real estate owned
("REO") only if the lender had taken possession of the collateral. The
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1994. Earlier application is encouraged.
 
  Additionally, in June 1993, the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, Federal Reserve Board and Office of
Thrift Supervision issued a Joint Statement providing interagency guidance on
the reporting of ISFs. This Joint Statement lent support to SFAS No. 114,
further clarifying that losses must be recognized on real estate loans that
meet the existing ISF criteria based on fair value of the collateral, but such
loans need not be reported as REO unless possession of the underlying
collateral has been obtained.
 
  Management will implement SFAS No. 114 beginning in 1994. The Company already
measures impairment based on the fair value of the collateral, therefore, the
estimated impact of application will consist of a reclassification of ISFs on
the statement of financial condition from REO to loans. At December 31, 1993,
the amount of ISFs totaled $28.4 million.
 
  In May 1993, the FASB also issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified in three categories and accounted for as
follows: (a) debt securities for which the enterprise has the positive intent
and ability to hold to maturity are classified as held to maturity securities
and reported at amortized cost; (b) debt and equity securities that are bought
and held principally for the purpose of selling in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and (c) debt and equity securities not classified
as either held to maturity securities or trading securities are classified as
available for sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported, net of tax effect, in a
separate component of stockholders'
 
                                      F-11

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
 
equity. SFAS No. 115 does not apply to unsecuritized loans. However, after
mortgage loans are converted to mortgage-backed securities, they are subject to
its provisions.
 
  SFAS No. 115 is effective for fiscal years beginning after December 15, 1993.
It is to be initially applied as of the beginning of a company's fiscal year
and cannot be applied retroactively to prior years' financial statements.
However, a company may elect to initially apply this statement as of the end of
1993. The Company has not elected to apply this statement in 1993. However, the
impact of the adoption of SFAS No. 115 as of December 31, 1993, would not have
had a material effect on stockholders' equity.
 
NOTE 2--CASH EQUIVALENTS AND INVESTMENT SECURITIES
 
  Federal funds sold are included in cash and cash equivalents. The Company had
$60.0 million of federal funds sold at December 31,1993 and no outstanding
federal funds sold at December 31, 1992.
 
 Investment securities held for trading
 
  Investment securities held for trading during 1993 consisted of U.S.Treasury
securities purchased with the intent to be subsequently sold to provide net
securities gains. Proceeds from sales of investment securities held for trading
during 1993 were $248.3 million. Gross gains of $332,000 and gross losses of
$345,000 were realized from those sales and are reported in the statement of
operations as a component of gains/losses on sales of investment securities.
 
  There were no investment securities held for trading activities during 1992
and 1991 and the Company had no outstanding investment securities held for
trading at year-end 1993 or 1992.

 Investment securities held for sale
 
  The following table summarizes the investment securities held for sale at
December 31, 1993:

                                        BOOK    UNREALIZED UNREALIZED  MARKET
                                        VALUE     GAINS      LOSSES    VALUE
                                       -------  ---------- ---------- --------
                                               (DOLLARS IN THOUSANDS)
                                                          
   U.S. Government and agency
    obligations....................... $87,385    $ 256       $ (3)   $ 87,638
   Other investments..................   4,874       --         --       4,874
                                       -------    -----       ----    --------
                                       $92,259    $ 256       $ (3)   $ 92,512
                                       =======    =====       ====    ========
    Weighted average yield............    4.65%
                                       =======

  Other investments represent U.S. Treasury securities, carried at the lower of
cost or market value, which have been pledged and placed in trust to provide a
credit enhancement to a FNMA securitization of loans in September 1992 of
$114.3 million.
 
  The Company had no outstanding investment securities held for sale at
December 31, 1992 or 1991.
 
  During the year ended December 31, 1993, the Company had gross gains of
$110,000 and gross losses of $23,000 on the sale of investment securities held
for sale. The Company also recorded a loss of $2.1 million at December 31, 1993
to adjust the book value of investment securities held for sale to the lower of
cost or market. During the years ended December 31, 1992 and 1991, the Company
had no gross gains or losses on the sale of investment securities held for
sale.
 
                                      F-12

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 2--CASH EQUIVALENTS AND INVESTMENT SECURITIES--(CONTINUED)
 
  The following maturity table shows the book value and market value of
investment securities held for sale at December 31, 1993:

                                                            BOOK       MARKET
   YEAR OF MATURITY                                         VALUE       VALUE
   ----------------                                      ----------- -----------
                                                         (DOLLARS IN THOUSANDS)
                                                               
   1994................................................. $     1,301 $     1,301
   1995 through 1998....................................      90,686      90,939
   1999 through 2003....................................         272         272
                                                         ----------- -----------
                                                             $92,259     $92,512
                                                         =========== ===========

 Investment securities held for investment
 
  Proceeds from sales of securities held for investment during 1993, 1992 and
1991 were $26.9 million, $0 and $1.5 million, respectively. The following gross
gains and gross losses were realized from those sales and are reported in the
statements of operations for the indicated periods, as a component of
gains/losses on sales of investment securities, net:

                                                             GROSS
                                                    -----------------------
                   YEAR ENDED DECEMBER 31,           SALES  GAINS  (LOSSES)
                   -----------------------          ------- ------ --------
                                                    (DOLLARS IN THOUSANDS)
                                                                
           1993.................................... $26,908 $1,946    --
           1992....................................      --     --    --
           1991....................................   1,547      1    --

  During 1993, the Company changed its investment strategy and as a result,
moved its entire portfolio of investment securities from the investment
portfolio to the held for sale portfolio. The Company had no outstanding
investment securities held for investment at December 31, 1993.
 
  The following table summarizes the investment securities held for investment
at December 31, 1992:

                    BOOK    UNREALIZED UNREALIZED MARKET
                    VALUE     GAINS      LOSSES    VALUE
                   -------  ---------- ---------- -------
                            (DOLLARS IN THOUSANDS)
                                           
U.S. Government
 obligations.....  $24,950    $1,908     $  --    $26,858
Commercial paper.   29,986        14        --     30,000
Other
 investments.....   12,401        --      (218)    12,183
                   -------    ------     -----    -------
                   $67,337    $1,922     $(218)   $69,041
                   =======    ======     =====    =======
 Weighted average
  yield..........     5.77%
                   =======

  Other investments represents U.S. Treasury securities which have been pledged
and placed in trust to provide a credit enhancement to a FNMA securitization of
loans in September 1992 of $114.3 million.
 
  At December 31, 1993 and 1992, the Company had accrued interest receivable of
$0.7 million and $0.8 million, respectively, on investment securities held for
sale and investment, which is included in interest receivable in the
accompanying statements of financial condition.
 
                                      F-13

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 3--MORTGAGE-BACKED SECURITIES
 
 Mortgage-backed securities held for trading
 
  The Company had no outstanding mortgage-backed securities held for trading at
December 31, 1993 and 1992. Proceeds from sales of mortgage-backed securities
held for trading during 1993 totaled $51.3 million. Gross gains of $54,000 were
realized from those sales and are reported in the statement of operations as a
component of gains/losses on sales of mortgage-backed securities, net. There
were no comparable activities for mortgage-backed securities held for trading
during 1992 and 1991.
 
 Mortgage-backed securities held for sale
 
  Summarized below are mortgage-backed securities held for sale at December 31,
1993:

                                          BOOK    UNREALIZED UNREALIZED MARKET
                                          VALUE     GAINS      LOSSES    VALUE
                                         -------  ---------- ---------- -------
                                                (DOLLARS IN THOUSANDS)
                                                            
      FHLMC............................. $34,184     $  3      $(217)   $33,970
      FNMA..............................  14,853       --        (33)    14,820
      Participation Certificates........  38,223      454         --     38,677
      CMO...............................   3,848       --        (17)     3,831
                                         -------     ----      -----    -------
                                         $91,108     $457      $(267)   $91,298
                                         =======     ====      =====    =======
      Weighted average yield............    5.33%
                                         =======

  The Company had no outstanding mortgage-backed securities held for sale at
December 31, 1992.
 
  During the year ended December 31, 1993, the Company had gross gains of $4.9
million and gross losses of $5.1 million on the sale of mortgage-backed
securities held for sale compared to no gross gains or losses for the years
ended December 31, 1992 and 1991.
 
 Mortgage-backed securities held for investment
 
   During 1993, the Company changed its investment strategy and as a result,
moved its entire portfolio of mortgage-backed securities from the investment
portfolio to the held for sale portfolio. The Company had no outstanding
mortgage-backed securities held for investment at December 31, 1993.
 
  During the year ended December 31, 1993, the Company had gross gains of $1.5
million and gross losses of $1,000 on the sale of mortgage-backed securities
held for investment compared to no gross gains or losses for the year ended
December 31, 1992 and gross gains of $9.3 million and gross losses of $.3
million for the year ended December 31, 1991.
 
  Summarized below are mortgage-backed securities held for investment at
December 31, 1992:

                                          BOOK    UNREALIZED UNREALIZED  MARKET
                                         VALUE      GAINS      LOSSES    VALUE
                                        --------  ---------- ---------- --------
                                                (DOLLARS IN THOUSANDS)
                                                            
      FHLMC............................ $102,476    $  410    $(1,397)  $101,489
      GNMA.............................   14,466       889         --     15,355
      FNMA.............................  113,442       275         --    113,717
                                        --------    ------    -------   --------
                                        $230,384    $1,574    $(1,397)  $230,561
                                        ========    ======    =======   ========
      Weighted average yield...........     6.36%
                                        ========

 
                                      F-14

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 3--MORTGAGE-BACKED SECURITIES--(CONTINUED)
 
  At December 31, 1993 and 1992, the Company had accrued interest receivable on
mortgage-backed securities held for sale and investment of $0.5 million and
$1.5 million, respectively, which is included in interest receivable in the
accompanying statements of financial condition.
 
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE
 
  Total loans include loans receivable and loans held for sale and are
summarized as follows:

                                                             DECEMBER 31,
                                                        -----------------------
                                                           1993        1992
                                                        ----------- -----------
                                                        (DOLLARS IN THOUSANDS)
                                                              
      Real Estate loans:
       Single family................................... $   792,054 $   857,631
       Multifamily:
        2 to 4 units...................................     505,219     526,826
        5 to 36 units..................................   1,795,374   1,880,589
        37 units and over..............................     406,330     444,576
       Commercial and industrial.......................     295,761     343,270
       Land............................................       4,828       6,445
                                                        ----------- -----------
        Total real estate loans........................   3,799,566   4,059,337
      Other............................................       8,998       8,278
                                                        ----------- -----------
                                                          3,808,564   4,067,615
                                                        ----------- -----------
      Less:
       Undisbursed loan funds..........................          --         301
       Unearned discounts..............................         210         104
       Deferred loan fees..............................      11,139      11,152
       Allowance for estimated losses (Note 6).........      83,832      64,277
                                                        ----------- -----------
                                                             95,181      75,834
                                                        ----------- -----------
                                                        $ 3,713,383 $ 3,991,781
                                                        =========== ===========
 
  Included above are $56.3 million and $63.3 million of amounts drawn under home
equity lines of credit at December 31, 1993 and 1992, respectively. The
remaining, unused balance of approved home equity credit lines was $52.1 million
and $66.2 million at the respective dates.
 
  Also included above are loans held for sale, consisting of the following at
the dates indicated:

                                                             DECEMBER 31,
                                                        -----------------------
                                                           1993        1992
                                                        ----------- -----------
                                                        (DOLLARS IN THOUSANDS)
                                                              
      Residential loans:
       Single family................................... $   239,371 $    25,043
       Multifamily 2 to 4 units........................     128,317       1,439
                                                        ----------- -----------
        Total loans held for sale...................... $   367,688 $    26,482
                                                        =========== ===========

  Fidelity's portfolio of mortgage loans serviced for others amounted to $888.4
million at December 31, 1993 and $982.7 million at December 31, 1992.
 
                                      F-15

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 4--LOANS RECEIVABLE AND LOANS HELD FOR SALE--(CONTINUED)
 
  Fidelity's loan portfolio includes multifamily, commercial and industrial
loans of $2.9 billion which depend on operating income to provide debt service
coverage. Therefore, these loans generally have a greater risk of default than
single family residential loans and, accordingly, earn a higher rate of
interest to compensate in part for the risk. Approximately 99% of these loans
are secured by property within the state of California. The continued weakening
in the California real estate market does not make the market compare as
favorably to other sections of the country as it has in the past.
 
  The Company has modified a number of its loans. In some cases, the
modifications have taken the form of "early recasts" in which the amortizing
payments are revised (or recalculated) earlier than scheduled to reflect
current lower interest rates. In other cases, the Company has agreed to accept
interest only payments for a limited time at current interest rates. In still
other cases, the Company has modified loans at terms that are less favorable to
the Company than the current market. These loans have interest rates that may
be less than current market rates or may contain other concessions. Due to the
fact that these modifications resulted from formal requests from borrowers
claiming economic distress and due to increased risk of borrower inability to
perform according to contractual terms, these modified loans have been
categorized by the Company as "TDRs". At December 31, 1993 and 1992,
outstanding TDRs totaled $28.7 million and $87.3 million, respectively.
 
  For the year ended December 31, 1993, interest income of $8.3 million was
recorded on TDRs, $0.1 million less than would have been recorded had the loans
performed according to their original terms. During 1992, $10.0 million of
interest income was recorded on TDRs, $0.3 million less than would have been
recorded had the loans performed according to their original terms.
 
  It is the Company's policy to reserve all earned but unpaid interest on loans
over 90 days contractually delinquent and other loans the Company believes
exhibit materially deficient characteristics. The total of these loans was
$93.5 million, $112.0 million, and $69.0 million at December 31, 1993, 1992 and
1991, respectively. The reduction in income related to these loans upon which
interest was not paid was $8.7 million,$13.6 million and $7.6 million for the
corresponding periods.
 
  The estimated fair value of loans receivable (not including loans held for
sale) as of December 31, 1993, was $3.4 billion, which includes $93.5 million
of nonperforming loans (See Note 1 discussion of SFAS No. 107).
 
  At December 31, 1993, loans held for sale consisted of $321 million of
adjustable rate loans and $47 million of fixed rate loans on 1 to 4 unit
properties. The estimated fair value of loans held for sale as of December 31,
1993, was $368.8 million (see Note 1 discussion of SFAS No. 107).
 
NOTE 5--OWNED REAL ESTATE
 
  Owned real estate consists of the following:

                                                               DECEMBER 31,
                                                             ------------------
                                                               1993      1992
                                                             --------  --------
                                                                (DOLLARS IN
                                                                THOUSANDS)
                                                                 
   Real estate held for investment or development........... $ 11,161  $ 15,411
   Real estate acquired through foreclosure.................  131,799    90,290
   In-substance foreclosed real estate......................   28,362    44,004
   Allowance for estimated losses...........................  (17,715)  (16,450)
                                                             --------  --------
                                                             $153,607  $133,255
                                                             ========  ========

 
                                      F-16

                 CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 5--OWNED REAL ESTATE--(CONTINUED)
 
  The following summarizes the results of real estate operations:

                                                         DECEMBER 31,
                                                  ----------------------------
                                                    1993      1992      1991
                                                  --------  --------  --------
                                                    (DOLLARS IN THOUSANDS)
                                                             
   Income (loss) from:
    Real estate acquired for investment or
     development................................. $    110  $   (841) $   (934)
    Real estate acquired through foreclosure.....  (18,753)   (3,600)   (1,126)
    Provision for estimated losses...............  (30,200)  (17,820)   (8,562)
                                                  --------  --------  --------
                                                  $(48,843) $(22,261) $(10,622)
                                                  ========  ========  ========

NOTE 6--ALLOWANCE FOR ESTIMATED LOAN AND REAL ESTATE LOSSES
 
  The following summarizes the activity in the Company's allowance for
estimated loan and real estate losses:

                                                              OWNED
                                                  LOANS    REAL ESTATE  TOTAL
                                                 --------  ----------- --------
                                                    (DOLLARS IN THOUSANDS)
                                                              
   Balance at January 1, 1991................... $ 16,552   $     --   $ 16,552
    Provision for losses........................   49,843      8,562     58,405
    Charge-offs.................................  (17,005)    (8,562)   (25,567)
    Recoveries..................................    2,984         --      2,984
                                                 --------   --------   --------
   Balance at December 31, 1991.................   52,374         --     52,374
    Provision for losses........................   51,180     17,820     69,000
    Transfer of general valuation allowance.....  (12,400)    12,400         --
    Charge-offs.................................  (27,350)   (13,826)   (41,176)
    Recoveries..................................      473         56        529
                                                 --------   --------   --------
   Balance at December 31, 1992.................   64,277     16,450     80,727
    Provision for losses........................   65,100     30,200     95,300
    Charge-offs.................................  (50,504)   (28,940)   (79,444)
    Recoveries..................................    4,959          5      4,964
                                                 --------   --------   --------
   Balance at December 31, 1993................. $ 83,832   $ 17,715   $101,547
                                                 ========   ========   ========

  Current Southern California economic conditions have adversely affected the
credit risk profile and performance of the Company's loan portfolio. In light
of the concentration of the Company's loan portfolio in loans secured by
Southern California multifamily residential properties, there is particular
concern about the potential for further declines in the Southern California
economy, increasing vacancy rates, declining rents, declining debt coverage
ratios, declining market values for multifamily residential properties, and
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.
 
  Fidelity's percentage of nonperforming assets to total assets increased to
5.37% at December 31, 1993 from 4.99% at December 1992 and 2.43% at December
31, 1991.
 
NOTE 7--INTANGIBLE ASSETS
 
  In 1993, Fidelity reassessed the valuation of its intangible assets. Based
upon the results of a branch profitability analysis and an analysis of the
recoverability of its core deposit intangible assets, Fidelity wrote
 
                                     F-17

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 7--INTANGIBLE ASSETS--(CONTINUED)
 
down the carrying value of its core deposit intangible assets in an amount of
$5.2 million (which writedown is included in interest expense). The net
unamortized balance of core deposit intangibles was $2.1 million at December
31, 1993 and is being amortized over the remaining average life of the deposits
acquired, generally one to three years.
 
  In addition, an analysis was performed of the recoverability of the goodwill
related to the acquisition of Mariners Savings and Loan ("Mariners") in 1978.
This analysis indicated that the expected future net earnings from the branches
or assets acquired did not support the carrying value of the goodwill. As a
result, Fidelity wrote down the remaining $8.8 million balance of goodwill
related to the Mariners acquisition (which writedown is included in operating
expense).
 
  The amortization and writedown of core deposit intangibles, resulting from
purchases of deposits, and goodwill acquired in the acquisitions of other
financial institutions for each of the three years in the period ended
December 31, 1993, are summarized as follows:

                                                            1993    1992   1991
                                                           ------- ------ ------
                                                                (DOLLARS IN
                                                                THOUSANDS)
                                                                 
   Amortization of core deposit intangibles............... $ 4,020 $4,199 $4,296
   Writedown of core deposit intangibles..................   5,192     --     --
   Amortization of goodwill...............................     470    596    840
   Writedown of goodwill..................................   8,776     --     --
                                                           ------- ------ ------
   Net decrease in income before income taxes............. $18,458 $4,795 $5,136
                                                           ======= ====== ======

                                      F-18

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 8--DEPOSITS
 
  Deposits consist of the following:

                                                      DECEMBER 31,
                                            ------------------------------------
                                                  1993               1992
                                            -----------------  -----------------
TYPE OF ACCOUNT, WEIGHTED AVERAGE INTEREST
RATE                                          AMOUNT      %      AMOUNT      %
- ------------------------------------------  ----------  -----  ----------  -----
                                                 (DOLLARS IN THOUSANDS)
                                                               
Passbook, 2.00% at December 31, 1993 and
 2.50% at December 31, 1992...............  $   82,168    2.4% $   74,738    2.2%
Checking and money market checking, 0.96%
 at December 31, 1993 and 1.48% at December
 31, 1992.................................     366,968   10.9     338,496    9.7
Money market passbook, 2.37% at December
 31, 1993 and 2.79% at December 31, 1992..     280,474    8.3     427,978   12.4
                                            ----------  -----  ----------  -----
                                               729,610   21.6     841,212   24.3
                                            ----------  -----  ----------  -----
Certificates with rates of:
 Under 3.00%..............................     418,326   12.4     290,646    8.4
  3.01-4.00%..............................   1,326,449   39.4   1,127,109   32.7
  4.01-5.00%..............................     395,129   11.7     375,034   10.8
  5.01-6.00%..............................     137,710    4.1     236,627    6.8
  6.01-7.00%..............................     225,035    6.7     381,334   11.0
  7.01-8.00%..............................      90,280    2.7     147,037    4.3
 Over 8.00%...............................      46,104    1.4      58,919    1.7
                                            ----------  -----  ----------  -----
                                             2,639,033   78.4   2,616,706   75.7
                                            ----------  -----  ----------  -----
                                            $3,368,643  100.0% $3,457,918  100.0%
                                            ==========  =====  ==========  =====
Weighted average interest rate............        3.59%              4.00%
                                            ==========         ==========

  Fidelity had noninterest-bearing checking accounts of $52.9 million and $31.6
million at December 31, 1993 and 1992, respectively.
 
  At December 31, 1993, certificate accounts were scheduled to mature as
follows:

     YEAR OF MATURITY                                             AMOUNT
     ----------------                                     ----------------------
                                                          (DOLLARS IN THOUSANDS)
                                                       
     1994................................................       $2,097,475
     1995................................................          220,791
     1996................................................           91,610
     1997................................................          203,317
     1998................................................           25,488
     After 1999..........................................              352
                                                                ----------
                                                                $2,639,033
                                                                ==========

  At December 31, 1993, loans totaling $98.3 million were pledged as collateral
for $5.9 million of public funds on deposit with the Bank and potential future
deposits.
 
                                      F-19

                 CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 8--DEPOSITS--(CONTINUED)
 
  Certificates of deposits of $100,000 or more accounted for $593 million and
represented 18% of all deposits at December 31, 1993, $550 million or 16% of
all deposits at December 31, 1992 and $629 million or 16% of all deposits at
December 31, 1991.
 
  The Bank also utilizes brokered deposits as a short-term means of funding.
These deposits are obtained or placed by or through a deposit broker and are
subject to certain regulatory limitations. The following table summarizes the
Bank's outstanding balance of brokered deposits at the dates indicated:

                                                PERCENT OF
           DECEMBER 31,               AMOUNT  TOTAL DEPOSITS
           ------------               ------- --------------
                                      (DOLLARS IN THOUSANDS)
                                        
           1993...................... $92,196      2.74%
           1992...................... $12,850      0.37%

  The carrying amounts and the estimated fair values of deposits consisted of
the following at December 31, 1993 (see Note 1 discussion of SFAS No. 107):

                                                          BOOK VALUE FAIR VALUE
                                                          ---------- ----------
                                                               (DOLLARS IN
                                                               THOUSANDS)
                                                               
   Passbook, checking and money market accounts.......... $  729,610 $  729,600
   Certificates of deposit...............................  2,639,033  2,684,100
                                                          ---------- ----------
     Total deposits...................................... $3,368,643 $3,413,700
                                                          ========== ==========

  SFAS No. 107 defines the fair value of demand deposits as the stated amount
of passbook, checking and certain money market accounts. Although SFAS No. 107
specifically prohibits including a deposit-based intangible element as part of
the fair value disclosure for deposit liabilities, it does allow supplemental
disclosure, which is unaudited. The core deposit intangible is the excess of
the fair value of demand deposits over recorded amounts and represents the
benefit of retaining these deposits for an expected period of time. Fair value
is based on a discounted cash flow analysis using the Bank's alternative
funding costs for similar maturities and assumed retention rates for each type
of deposit. The core deposit intangible is estimated to be $63.0 million at
December 31, 1993, and is not included in the above fair values or recorded as
an asset in the statement of financial condition.
 
                                     F-20

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
 
  FHLB Advances are summarized as follows:

                                                              DECEMBER 31,
                                                          ---------------------
                                                            1993       1992
                                                          --------  -----------
                                                              (DOLLARS IN
                                                               THOUSANDS)
                                                              
Balance at year-end...................................... $326,400  $   581,400
Average amount outstanding during the year............... $394,591  $   393,344
Maximum amount outstanding at any month-end.............. $496,400  $   581,400
Weighted average interest rate during the year...........     4.33%        5.27%
Weighted average interest rate at year-end...............     4.52%        4.25%
Secured by:
 FHLB Stock.............................................. $ 51,951  $    50,559
 Loans receivable (1)....................................  900,776    1,661,950
                                                          --------  -----------
                                                          $952,727  $ 1,712,509
                                                          ========  ===========

- --------
(1) Includes pledged loans available for use under the letter of credit
    securing commercial paper (available unused balance was $96 million at
    December 31, 1993). See Note 10.
 
  The maturities and weighted average interest rates on FHLB Advances are
summarized as follows:

                                                DECEMBER 31,
                             ---------------------------------------------------
                                       1993                      1992
                             ------------------------- -------------------------
                                      WEIGHTED AVERAGE          WEIGHTED AVERAGE
YEAR OF MATURITY              AMOUNT   INTEREST RATE    AMOUNT   INTEREST RATE
- ----------------             -------- ---------------- -------- ----------------
                                           (DOLLARS IN THOUSANDS)
                                                    
1993........................ $     --         --%      $325,000       3.64%
1994........................    3,700       3.32          3,700       4.10
1996........................   60,000       4.88             --         --
1997........................  232,700       4.02        232,700       4.73
1998........................   10,000       6.30             --         --
2000........................   20,000       8.61         20,000       8.61
                             --------                  --------
                             $326,400       4.52%      $581,400       4.25%
                             ========                  ========

  The estimated fair value of FHLB Advances at December 31, 1993, was $328
million (see Note 1 discussion of SFAS No. 107).
 
                                      F-21

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 10--OTHER BORROWINGS AND SUBORDINATED NOTES
 
  Other borrowings consist of the following:

                                                                DECEMBER 31,
                                                     YEAR OF  -----------------
                                                     MATURITY   1993     1992
                                                     -------- -------- --------
                                                                 (DOLLARS IN
                                                                 THOUSANDS)
                                                              
Short-term borrowings:
 8 7/8% Mortgage-backed medium term notes ("1993
  MTNs")............................................   1993   $     -- $100,000
 9 3/4% Commercial mortgage-backed bonds ("CMBBs")..   1993         --   62,000
 Commercial paper...................................   1993         --   65,000
 Commercial paper...................................   1994    304,000       --
 Securities sold under agreement to repurchase......   1994      3,830       --
                                                              -------- --------
                                                               307,830  227,000
Long-term borrowings:
 8 1/2% Mortgage-backed medium-term notes ("1997
  MTNs")............................................   1997    100,000  100,000
                                                              -------- --------
                                                              $407,830 $327,000
                                                              ======== ========

  The mortgage-backed bonds and notes are summarized as follows:

                                                              DECEMBER 31,
                                                            ------------------
                                                              1993      1992
                                                            --------  --------
                                                               (DOLLARS IN
                                                               THOUSANDS)
                                                                
Mortgage-backed medium term notes:
 1993 MTNs, matured May 15, 1993:
  Balance at year-end......................................       --  $100,000
  Interest rate at year-end................................       --      8.88%
 1997 MTNs, due April 15, 1997:
  Balance at year-end...................................... $100,000  $100,000
  Interest rate at year-end................................     8.50%     8.50%
 1993 and 1997 MTNs are secured by:
  Joint pool of mortgage loans and mortgage-backed
   securities, at cost.....................................       --  $414,573
  Joint pool of mortgage loans and U.S. Treasury notes, at
   cost.................................................... $255,720        --
CMBBs, matured September 15, 1993:
 Balance at year-end.......................................       --  $ 62,000
 Secured by mortgage loans and U.S. Treasury notes, at
  cost.....................................................       --  $208,923
 Interest rate at year-end.................................       --      9.32%

                                      F-22

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 10--OTHER BORROWINGS AND SUBORDINATED NOTES--(CONTINUED)
 
  Borrowings other than the mortgage-backed bonds and notes are summarized as
follows:

                                                               DECEMBER 31,
                                                             ------------------
                                                               1993      1992
                                                             --------  --------
                                                                (DOLLARS IN
                                                                THOUSANDS)
                                                                 
Commercial paper:
 Balance at year-end........................................ $304,000  $ 65,000
 Average amount outstanding during the year................. $274,620  $ 21,165
 Maximum amount outstanding at any month-end................ $342,090  $ 94,400
 Weighted average interest rate during the year.............     3.44%     4.05%
 Weighted average interest rate at year-end.................     3.38%     3.57%
 Secured by Letter of Credit from FHLB...................... $400,000  $400,000
Securities sold under agreement to repurchase:
 Balance at year-end........................................ $  3,830        --
 Average amount outstanding during the year................. $138,701  $ 19,542
 Maximum amount outstanding at any month-end................ $289,885  $111,633
 Weighted average interest rate during the year.............     3.23%     3.32%
 Weighted average interest rate at year-end.................     3.40%       --
 Secured by mortgage-backed securities, at cost............. $  4,000        --
Other borrowings:
 Balance at year-end........................................       --        --
 Average amount outstanding during the year.................       --  $  1,085
 Maximum amount outstanding at any month-end................       --  $  3,193
 Weighted average interest rate during the year.............       --      9.54%
 Weighted average interest rate at year-end.................       --        --

  The Bank entered into a Subordinated Loan Agreement dated as of May 15, 1990
(the "Subordinated Loan Agreement") pursuant to which $60 million in
subordinated notes (the "Notes") are outstanding, which Notes are guaranteed by
Citadel. The Notes were approved by the OTS as additional regulatory capital.
The Notes were issued to institutional investors in the amount of $60.0
million, interest payable semiannually at 11.68% per annum, and are repayable
in five equal annual installments commencing May 15, 1996.
 
  The Subordinated Loan Agreement, among other covenants, contains a provision
requiring Fidelity to maintain a consolidated tangible net worth at least equal
to the greater of (a) $170 million plus 50% of consolidated net earnings since
January 1, 1990, or (b) 3.25% of consolidated assets. Management anticipates
that additional losses are likely to be incurred during 1994 and that, as a
result, consolidated tangible net worth may be reduced to less than $170
million sometime during the first quarter of 1994. However, management's
projections for 1994 indicate that the Bank's consolidated tangible net worth
will remain above the net worth requirement under the foregoing clause (a)
through the end of the year, assuming the formula in clause (a) permits a
reduction of the $170 million test if a consolidated net loss has been
sustained since January 1, 1990. Under this interpretation, the required
consolidated tangible net worth under clause (a) would be $153.9 million at
December 31, 1993 and would be further reduced by 50% of all losses during
1994. As of December 31, 1993, the Bank's consolidated tangible net worth
amounted to $180.2 million.
 
                                      F-23

                 CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 10--OTHER BORROWINGS AND SUBORDINATED NOTES--(CONTINUED)
 
  On the other hand, the holders of the Notes could take the position that the
amount under clause (a) may not be reduced by losses to less than $170
million. Under that position, Fidelity would be in violation of the covenant
as soon as consolidated tangible net worth were reduced to less than $170
million. Management believes that such position is not correct; however, there
can be no assurance that such position would not prevail if the issue were
ever tested in court. If the above covenant were violated, the holders of 66
2/3% in aggregate principal amount of the Notes would be entitled to declare
the entire amount of the Notes immediately due and payable. However, if such
acceleration would result in the Bank's failure to meet applicable regulatory
capital requirements, the holders would be prohibited from accelerating the
Notes without the prior approval of the OTS. If the Bank failed to make such
payment, Citadel would be required to make such payment under its guarantee of
the Notes. Management anticipates that Citadel's funds would be insufficient
to make such payment, unless additional funds were raised.
 
  The holders of the Notes have power of approval over certain matters,
including certain asset sales, and may require a repurchase of the Notes upon
a "Significant Event." Management believes that neither the approval of the
holders nor a Significant Event repurchase offer would be required for
consummation of the proposed Restructuring (See Note 14.) if an acquiror of
the Bank has outstanding, immediately prior to the closing of the
Restructuring, unsecured debt with a credit rating of BBB or better by
Standard & Poor's Corporation or Baa2 or better by Moody's Investors Service,
Inc. and various financial tests are satisfied after giving effect to the
Restructuring. However, should the Restructuring be found to trigger the
Significant Event repurchase requirement, Fidelity could be required to pay
the principal balance of the Notes of $60 million plus accrued interest and a
premium of approximately $12.8 million (calculated as of December 31, 1993).
Also, if the consent of the holders should be required under any of the
covenants of the Subordinated Loan Agreement but not be obtained, an event of
default would occur under the Subordinated Loan Agreement (subject to grace or
cure periods in the case of certain covenants) if the Restructuring is
completed.
 
  On March 4, 1994, The Chase Manhattan Bank, N.A. ("Chase"), one of four
lenders under the Subordinated Loan Agreement, sued Fidelity, Citadel and
Citadel's Chairman of the Board, alleging, among other things, that the
transfer of assets pursuant to the Restructuring would constitute a breach of
the Subordinated Loan Agreement, including the tangible net worth and other
various financial tests contained therein, and seeking to enjoin the
Restructuring and to recover damages in unspecified amounts. In addition, the
lawsuit alleges that past responses of Citadel and Fidelity to requests by
Chase for information regarding the Restructuring violate certain provisions
of the Subordinated Loan Agreement and that such alleged violations, with the
passage of time, have become current defaults under the Subordinated Loan
Agreement. While the other three lenders under the Subordinated Loan Agreement
hold $25 million of the Notes, none of them has joined Chase in this lawsuit.
The Company is evaluating the lawsuit and, based on its current assessment,
the Company does not believe that the allegations have merit.
 
  Any violation of the tangible net worth covenant or the occurrence of any
other event of default under the Subordinated Loan Agreement would also result
in a cross default under Fidelity's debt agreements with the FHLB (whether or
not the Notes are accelerated) and entitle the FHLB to declare all amounts
outstanding to become immediately due and payable. Also, the FHLB may elect
not to make further Advances to the Bank and may prevent the Bank from issuing
further commercial paper under its existing facility.
 
  During 1992 and 1991, the Company paid $0.4 million and $0.7 million,
respectively, in interest to Craig Corporation (an 8.9% stockholder of the
Company and thus a related party) on a $15 million borrowing from that entity.
The loan was paid off in June 1992.
 
  The weighted average interest rate on other borrowings and subordinated
notes was 5.54% and 8.39% at December 31, 1993 and 1992, respectively.
 
                                     F-24

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 10--OTHER BORROWINGS AND SUBORDINATED NOTES--(CONTINUED)
 
  The carrying and estimated fair values of other borrowings and subordinated
notes consisted of the following at December 31, 1993 (see Note 1 discussion of
SFAS No. 107):

                                                           BOOK VALUE FAIR VALUE
                                                           ---------- ----------
                                                                (DOLLARS IN
                                                                THOUSANDS)
                                                                
   Commercial paper.......................................  $304,000   $304,000
   1997 MTNs..............................................   100,000    110,600
   Subordinated notes.....................................    60,000     60,300
   Securities sold under agreement to repurchase..........     3,830      3,800
                                                            --------   --------
                                                            $467,830   $478,700
                                                            ========   ========

NOTE 11--EMPLOYEE BENEFIT PLANS
 
 Postretirement Benefits
 
  The Company provides certain health and life insurance postretirement
benefits for all eligible retired employees. Eligibility for the plan is met
when the participant reaches age 55 and has 10 years of continuous service.
 
  Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" for its unfunded
postretirement health care and life insurance program. This statement requires
the cost of postretirement benefits to be accrued during the service lives of
employees. The Company's previous practice was to expense these costs on a cash
basis.
 
  As of December 31, 1992, the Company's accumulated postretirement benefit
obligation ("APBO") was approximately $3.1 million. Upon adoption of the
statement, the Company could make the election to immediately recognize the
liability or to amortize the amount to expense over 20 years. The Company has
elected to amortize this transition obligation over 20 years. Net periodic
postretirement benefit costs for 1993 included the following components:

                                                                AMOUNT
                                                        ----------------------
                                                        (DOLLARS IN THOUSANDS)
                                                     
   Service cost (benefits attributed to service during
    the period)........................................         $187.1
   Interest cost on accumulated postretirement benefit
    obligation.........................................          250.2
   Amortization of transition obligation...............          156.4
                                                                ------
   Net periodic postretirement benefit cost............         $593.7
                                                                ======

                                      F-25

                 CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 11--EMPLOYEE BENEFIT PLANS--(CONTINUED)
 
  The following table sets forth the postretirement benefit liability at
December 31, 1993:
 
  Accumulated postretirement benefit obligation:

                                                                 AMOUNT
                                                         ----------------------
                                                         (DOLLARS IN THOUSANDS)
                                                      
   Retirees.............................................        $1,616.7
   Employees presently eligible to retire...............         1,115.9
   Employees not yet eligible to retire.................           974.7
                                                                --------
    Total APBO..........................................         3,707.3
   Unrecognized transition obligation...................        (2,971.2)
   Unrecognized cumulative loss.........................          (237.4)
                                                                --------
   Net postretirement benefit liability recognized in
    the statement of financial condition................         $ 498.7
                                                                ========

  The APBO as of December 31, 1993, was determined using a 7.25% weighted
average discount rate. The health care cost trend rates were assumed to be
9.5% at December 31, 1993, gradually declining to 5.25% after ten years and
remaining at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amount reported. For example, a 1% increase in
the health care trend rate in each year, would increase the accumulated
postretirement benefit obligation by $0.6 million (or 17.2%) at December 31,
1993 and the net periodic cost by $0.1 million (or 14.6%) for the year.
 
 Retirement Income Plan
 
  The Company has a retirement income plan covering substantially all
employees. The defined benefit plan provides for payment of retirement
benefits commencing normally at age 65 in a monthly annuity, however, the
option of a single cash payment is available. An employee becomes vested upon
five years of service. Benefits payable under the plan are generally
determined on the basis of the employee's length of service and average
earnings. Annual contributions to the plans are sufficient to satisfy legal
funding requirements.
 
 401(k) Plan
 
  The Company has a 401(k) defined contribution plan available to all
employees who have been with the Company for one year and have reached the age
of 21. Employees may generally contribute up to 15% of their salary each year,
and the Company matches 50% up to the first 6% contributed by the employee.
 
                                     F-26

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 12--INCOME TAXES
 
  Income tax expense/benefit was comprised of the following:

                                                    YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                     1993      1992      1991
                                                   --------  --------  --------
                                                     (DOLLARS IN THOUSANDS)
                                                              
Current income tax expense (benefit):
 Federal.......................................... $(51,033) $ 12,429  $ 21,562
 State............................................       75     1,696     7,365
                                                   --------  --------  --------
                                                    (50,958)   14,125    28,927
                                                   --------  --------  --------
Deferred income tax expense (benefit):
 Federal..........................................   17,746   (15,503)   (8,383)
 State............................................   (3,255)   (4,463)   (4,893)
                                                   --------  --------  --------
                                                     14,491   (19,966)  (13,276)
                                                   --------  --------  --------
                                                   $(36,467) $ (5,841) $ 15,651
                                                   ========  ========  ========

 
  Income tax liability/receivable was comprised of the following:

                                                             DECEMBER 31,
                                                        ------------------------
                                                           1993         1992
                                                        -----------  -----------
                                                        (DOLLARS IN THOUSANDS)
                                                               
Current income tax liability (receivable):
 Federal............................................... $   (43,603) $    6,242
 State.................................................      (1,767)     (1,332)
                                                        -----------  ----------
                                                            (45,370)      4,910
                                                        -----------  ----------
Deferred income tax liability (receivable):
 Federal...............................................      14,564      (3,182)
 State.................................................      (8,555)      2,008
 Valuation Allowance--State............................       7,308          --
                                                        -----------  ----------
                                                             13,317      (1,174)
                                                        -----------  ----------
                                                        $   (32,053) $    3,736
                                                        ===========  ==========

                                      F-27

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 12--INCOME TAXES--(CONTINUED)
 
  The components of the net deferred tax liability/asset are as follows:

                                                                DECEMBER 31,
                                                              -----------------
                                                                1993     1992
                                                              --------  -------
                                                                (DOLLARS IN
                                                                 THOUSANDS)
                                                                  
FEDERAL:
Deferred tax liabilities:
 Loan fees and interest...................................... $ 12,995  $13,906
 FHLB stock dividends........................................   12,066   11,515
 California franchise tax....................................    2,691       --
 Other.......................................................    7,480    5,229
                                                              --------  -------
Gross deferred tax liabilities...............................   35,232   30,650
                                                              --------  -------
Deferred tax assets:
 California franchise tax....................................       --    1,633
 Bad debt and loan loss deduction............................   11,369   25,997
 REO operating income........................................    2,926       --
 Other.......................................................    6,373    6,202
                                                              --------  -------
Gross deferred tax assets....................................   20,668   33,832
Valuation allowance..........................................       --       --
                                                              --------  -------
Deferred tax assets, net of allowance........................   20,668   33,832
                                                              --------  -------
Net deferred tax liability (asset)........................... $ 14,564  $(3,182)
                                                              ========  =======
STATE:
Deferred tax liabilities:
 Loan fees and interest...................................... $  4,245  $ 4,502
 FHLB stock dividends........................................    3,942    3,728
 Other.......................................................    2,514    1,371
                                                              --------  -------
Gross deferred tax liabilities...............................   10,701    9,601
Deferred tax assets:
 Bad debt and loan loss deduction............................   16,187    5,391
 Other.......................................................    3,069    2,202
                                                              --------  -------
Gross deferred tax assets....................................   19,256    7,593
Valuation allowance..........................................   (7,308)      --
                                                              --------  -------
Deferred tax assets, net of allowance........................   11,948    7,593
                                                              --------  -------
Net deferred tax liability (asset)........................... $ (1,247) $ 2,008
                                                              ========  =======

  No valuation allowance under SFAS No. 109 was required for federal purposes.
Federal deferred tax assets would be fully realized as an offset against
reversing temporary differences which create net future tax liabilities, and/or
through loss carrybacks. Therefore, even if no future income was expected,
federal deferred tax assets would still be fully realized. However, a valuation
allowance under SFAS No. 109 was required for state purposes, as certain state
deferred tax assets would not be realized as an offset against reversing
temporary differences which create net future state tax liabilities.
 
                                      F-28

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 12--INCOME TAXES--(CONTINUED)
 
  A reconciliation from the statutory income tax expense/benefit to the
consolidated effective income tax expense/benefit follows:

                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1993     1992     1991
                                                    --------  -------  -------
                                                     (DOLLARS IN THOUSANDS)
                                                              
   Expected federal income tax expense (benefit)... $(35,234) $(1,290) $ 6,227
   Increases (reductions) in taxes resulting from:
    Franchise tax expense (benefit), net of
     federal income tax............................   (4,398)    (234)   1,631
    Bad debt and loan loss deduction...............       --       --    3,300
    Goodwill.......................................    3,108      124      124
    Redetermination of tax.........................       --   (4,130)   4,373
    Other, net.....................................       57     (311)      (4)
                                                    --------  -------  -------
   Income tax expense (benefit).................... $(36,467) $(5,841) $15,651
                                                    ========  =======  =======

  The Company's tax returns have been audited by the Internal Revenue Service
through December 31, 1987 and by the California Franchise Tax Board through
December 31, 1985. The tax returns filed for 1986, 1987 and 1988 are currently
under audit by the California Franchise Tax Board. The tax returns filed for
1988 and 1989 are currently in the appeals process with the Internal Revenue
Service. In addition, the Internal Revenue Service is currently auditing the
tax returns filed for 1990 and 1991. Although the Company's management believes
its federal income tax returns properly reflect the Company's tax liability,
the Internal Revenue Service might assess additional taxes related to, among
other things, certain disputed industry issues affecting the industry as a
whole. If additional taxes are assessed, the Company intends to utilize all
statutorily allowable remedies to achieve a favorable outcome for years under
examination.
 
  Savings institutions are allowed a bad debt deduction for federal income tax
purposes based on either 8% of taxable income or the savings institution's
actual loss experience. Fidelity's bad debt deductions for the years presented
were based on actual loss experience.
 
  Under the provisions of SFAS No. 109 (paragraphs 31 and 32), a deferred tax
liability has not been provided for tax bad debt and loan loss reserves which
arose in tax years prior to December 31, 1987. The Company had $52.5 million of
such reserves at December 31, 1993, for which $18.4 million of taxes have not
been provided. If these reserves are used for any purpose other than to absorb
bad debt losses, federal taxes would have to be provided at the then current
income tax rate. It is not contemplated that the accumulated reserves will be
used in a manner that will create such liabilities.
 
NOTE 13--COMMITMENTS AND CONTINGENCIES
 
  The Company and certain of its subsidiaries had a number of lawsuits and
claims pending at December 31, 1993. 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.
 
  See Note 17--Subsequent Events.
 
                                      F-29

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
 
  Fidelity enters into agreements to extend credit to customers on an ongoing
basis. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Most commitments are expected to be
drawn upon, and therefore the total commitment amounts generally represent
future cash requirements. At December 31, 1993, the Bank had commitments to
fund loans of $37.9 million at market interest rates on the dates such
commitments are to be funded.
 
  At December 31, 1993, the Bank was a party to interest rate swap agreements
in which the Bank receives a fixed interest rate and pays a floating interest
rate on a total notional principal amount of $250 million. These agreements
have remaining maturities of less than four years and an estimated fair value
of $2.0 million (See Note 1 discussion of SFAS No. 107).
 
  As of December 31, 1993, the Bank had sold several interest rate swap option
agreements with a total notional amount of $200 million. The agreements give
the right to the buyer to cancel the swap agreement at a specified future date.
The Bank receives a fixed interest rate and pays a floating interest rate tied
to LIBOR over the life of the agreement for the option and swap. At December
31, 1993, the average fixed receive rate was 5.00% and the average pay rate was
3.34%. The swap options are held as trading positions during the option period
and are carried at market value and gains and losses are recorded in
operations. The estimated fair value of these positions at December 31, 1993
was a loss of approximately $1.7 million. In January 1994, the options to
cancel were not exercised and the average fixed receive rate adjusted to 4.70%.
The swaps have remaining maturities of less than four years.
 
  As of December 31, 1993, the Bank had several open put and call positions for
mortgage loans expiring in January 1994. These positions were minor and no
losses were incurred.
 
  As of December 31, 1993, the Bank had certain loans with a gross principal
balance of $127.3 million, of which $106.3 million had been sold in the form of
mortgage pass-through certificates, over various periods of time, to four
investor financial institutions leaving a balance of $21.0 million retained by
the Bank. These mortgage pass-through certificates provide a credit enhancement
to the investor financial institutions in the form of the Bank's subordination
of its retained percentage interest to that of the investor financial
institutions. In this regard, the aggregate of $106.3 million held by the
investor financial institutions are deemed Senior Mortgage Pass-Through
Certificates and the $21.0 million held by the Bank are subordinated to the
Senior Mortgage Pass-Through Certificates in the event of borrower default.
Full recovery of the $21.0 million is subject to this contingent liability due
to its subordination. In 1993, the Bank repurchased one of the Senior Mortgage
Pass-Through Certificates with a face value of $38.3 million, from one of the
investor institutions. It is included in the mortgage-backed securities held
for sale portfolio at December 31, 1993. The other Senior Mortgage Pass-Through
Certificates totaling $68.0 million are owned by other investor institutions.
 
  During 1992, the Bank effected the securitization by FNMA of $114.3 million
of multifamily mortgages wherein $114.3 million in whole loans were swapped for
Triple A rated mortgage-backed securities through FNMA's Alternative Credit
Enhancement Structure ("ACES") program. These mortgage-backed securities were
sold in December 1993 and the current outstanding balance as of December 31,
1993 of $102.0 million is serviced by the Bank.
 
  As part of a credit enhancement to absorb losses relating to the ACES
transaction, the Bank has pledged and placed in a trust account, as of December
31, 1993, $13.3 million, comprised of (a) $2.7 million in cash and (b) $10.6
million in book value U.S. Treasury securities. The Bank shall absorb losses,
if any, which may
 
                                      F-30

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 13--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
 
be incurred on the securitized multifamily loans and FNMA is responsible for
losses, if any, in excess of the $13.3 million. The securities have been
included in other investments held for sale and in response to this
classification, an adjustment has been recorded for lower of cost or market in
addition to any credit losses. Total reserves equal $8.4 million as of December
31, 1993.
 
  The Company conducts portions of its operations from leased facilities. All
of the Company's leases are operating leases. At December 31, 1993, aggregate
minimum rental commitments on operating leases with noncancelable terms in
excess of one year were as follows:

         YEAR OF MATURITY                         AMOUNT
         ----------------                 ----------------------
                                          (DOLLARS IN THOUSANDS)
                                       
           1994..........................        $ 3,218
           1995..........................          2,751
           1996..........................          2,759
           1997..........................          2,830
           1998..........................          2,709
           Thereafter....................         10,842
                                                 -------
                                                 $25,109
                                                 =======

  Operating expense includes rent expense of $3.0 million in 1993, $2.8 million
in 1992, and $2.7 million in 1991.
 
NOTE 14--STOCKHOLDERS' EQUITY
 
 Fidelity's Regulatory Capital
 
  The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required
the OTS to implement a system requiring regulatory sanctions action against
institutions that are not adequately capitalized, with the sanctions growing
more severe, the lower the institution's capital. Under FDICIA, the OTS issued
regulations establishing specific capital ratios for five separate capital
categories. The five categories of ratios are:

                                                                       TOTAL
                                                                    CAPITAL  TO
                                 CORE CAPITAL TO    CORE CAPITAL TO    RISK-
                              ADJUSTED TOTAL ASSETS  RISK-WEIGHTED    WEIGHTED
                                (LEVERAGE) RATIO     ASSETS RATIO   ASSETS RATIO
                              --------------------- --------------- ------------
                                                           
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

                                      F-31

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 14--STOCKHOLDERS' EQUITY--(CONTINUED)
 
  The following table summarizes the capital ratios of the adequately
capitalized category and Fidelity's regulatory capital at December 31, 1993 as
compared to such ratios. As indicated in the table, Fidelity's capital levels
exceeded the three minimum capital ratios of the adequately capitalized
category.

                                               CORE CAPITAL
                             CORE CAPITAL TO     TO RISK-       TOTAL CAPITAL
                             ADJUSTED TOTAL      WEIGHTED         TO RISK-
                                 ASSETS           ASSETS       WEIGHTED ASSETS
                             ---------------  ---------------  ---------------
                              BALANCE    %     BALANCE    %     BALANCE    %
                             ---------- ----  ---------- ----  ---------- ----
                                         (DOLLARS IN THOUSANDS)
                                                        
  Regulatory capital........ $  182,100 4.15% $  182,100 6.27% $  270,600 9.32%
  Adequately capitalized
   requirement..............    175,500 4.00     116,100 4.00     232,300 8.00
                             ---------- ----  ---------- ----  ---------- ----
  Excess capital............ $    6,600 0.15% $   66,000 2.27% $   38,300 1.32%
                             ========== ====  ========== ====  ========== ====
  Adjusted Assets(1)........ $4,388,400       $2,903,600       $2,903,600
                             ==========       ==========       ==========

- --------
(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 core capital
    requirements, and for purposes of risk-based capital requirements, refers
    to the term "risk-weighted assets" as defined in 12 C.F.R. section
    567.1(bb).
 
  Although the Bank was deemed adequately capitalized at December 31, 1993, at
such date, absent the $28 million in capital contributed to the Bank by Citadel
during the year (see "Other Equity Transactions" below), the Bank would not
have met the 4% core capital to adjusted total assets requirement of the
adequately capitalized category and thus would have been classified as
undercapitalized for purposes of the OTS' prompt corrective action regulations.
 
  The OTS' capital regulations, as required by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), include three separate
minimum capital requirements for the savings institution industry--a "tangible
capital requirement," a "leverage limit" and a "risk-based capital
requirement." These capital standards must be no less stringent than the
capital standards applicable to national banks. The OTS also has the authority,
after giving the affected institution notice and an opportunity to respond, to
establish individual minimum capital requirements ("IMCR") for a savings
institution which are higher than the industry minimum requirements, upon a
determination that an IMCR is necessary or appropriate in light of the
institution's particular circumstances, such as if the institution is expected
to have losses resulting in capital inadequacy, has a high degree of exposure
to credit risk, or has a high amount of nonperforming loans. The OTS has
proposed a regulation that would add to the list of circumstances in which an
IMCR may be appropriate for a savings association the following: a high degree
of exposure to concentration of credit risk or risks arising from
nontraditional activities, or failure to adequately monitor and control the
risks presented by concentration of credit and nontraditional activities.
 
                                      F-32

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 14--STOCKHOLDERS' EQUITY--(CONTINUED)
 
  The following table summarizes the regulatory capital requirements for
Fidelity under FIRREA at December 31, 1993, but does not reflect the required
future phasing out of certain assets, including investments in, and loans to,
subsidiaries which may presently be engaged in activities not permitted for
national banks and, for risk-based capital, real estate held for investment
(the impact of which the Bank believes to be immaterial), nor does the table
reflect the impact of certain proposed regulations. As indicated in the table,
Fidelity's capital levels exceed all three of the currently applicable minimum
capital requirements.

                                         DECEMBER 31, 1993
                          ----------------------------------------------------
                                                                  CURRENT
                             TANGIBLE                           RISK-BASED
                              CAPITAL        CORE CAPITAL         CAPITAL
                          ----------------  ----------------  ----------------
                           BALANCE     %     BALANCE     %     BALANCE     %
                          ----------  ----  ----------  ----  ----------  ----
                                      (DOLLARS IN THOUSANDS)
                                                        
Stockholder's Equity(1).. $  182,300        $  182,300        $  182,300
Adjustments:
 Intangible assets.......     (2,100)               --                --
 Nonincludable
  subsidiaries...........       (200)             (200)             (200)
 General valuation
  allowances.............         --                --            36,700
 Qualifying subordinated
  notes..................         --                --            59,200
 Equity investments......         --                --            (7,400)
                          ----------        ----------        ----------
Regulatory capital(2)....    180,000  4.10%    182,100  4.15%    270,600  9.32%
Required minimum.........     65,800  1.50     131,700  3.00     232,300  8.00
                          ----------  ----  ----------  ----  ----------  ----
Excess capital........... $  114,200  2.60% $   50,400  1.15% $   38,300  1.32%
                          ==========  ====  ==========  ====  ==========  ====
Adjusted assets(3)....... $4,386,300        $4,388,400        $2,903,600
                          ==========        ==========        ==========

- --------
(1) Fidelity's total stockholder's equity, calculated in accordance with
    generally accepted accounting principles, was 4.16% of its total assets at
    December 31, 1993.
(2) At periodic intervals, both the OTS and the FDIC routinely 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 for purposes of risk-based capital requirements,
    refers to the term "risk-weighted assets" as defined in 12 C.F.R. section
    567.1(bb).
 
  The Company is actively pursuing a restructuring plan that would include both
the transfer to a newly-formed Citadel subsidiary or division of certain
problem assets of the Bank and a sale of the Bank and Gateway (the
"Restructuring"; discussions of the sale of the Bank in the context of the
Restructuring include the sale of Gateway). The Company is currently seeking a
strategic buyer or a new core set of equity investors for the Bank. Any such
sale of the Bank will be subject to the approval of Citadel's Board of
Directors (the "Board") and stockholders as well as the OTS. Following the
proposed sale of the Bank, Citadel would become a real estate company and focus
on the servicing and enhancement of its loan and real estate portfolio. The
Restructuring calls for the Bank's disposition of substantially all of its
problem assets, together with a small amount of its performing assets, so as to
improve the attractiveness of the Bank to potential acquisition or investment
candidates. Most the Bank's problem assets would be transferred to the new
Citadel real estate subsidiary or division using securitized debt financing.
 
                                      F-33

                 CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 14--STOCKHOLDERS' EQUITY--(CONTINUED)
 
  The Bank does not intend to implement the above-described bulk problem asset
dispositions in the absence of an acquisition of the Bank by another financial
institution or financial investors who are able to infuse additional core
capital into the Bank. Any such acquisition will also require the approval of
Citadel's Board and stockholders, as well as the OTS, which will condition its
approval in part on the adequacy of the capital of the Bank after the
Restructuring.
 
 OTS Examinations
 
  In January 1994, Citadel and the Bank received reports of the various
regular examinations conducted by the OTS in 1993. As a result of the findings
of the OTS in its safety and soundness examination of the Bank, Fidelity will
be subject to higher examination assessments and is subject to additional
regulatory restrictions including, but not limited to, (a) a prohibition,
absent prior OTS approval, on increases in total assets during any quarter in
excess of an amount equal to net interest credited on deposit liabilities
during the quarter; (b) a requirement that the Bank submit to the OTS for
prior review and approval the names of proposed new directors and executive
officers and proposed employment contracts with any director or senior
officer; (c) a requirement that the Bank submit to the OTS for prior review
and approval any third-party contract outside the normal course of business;
and (d) the OTS would have the ability, in its discretion, to require 30 days'
prior notice of all transactions between Fidelity and its affiliates
(including Citadel and Gateway).
 
  The OTS also expressed concern in a number of specific areas principally
relating to asset quality and the resulting negative impact on capital levels
and earnings, as well as management effectiveness in certain areas. Management
believes that the proposed Restructuring of the Company discussed above, if
accomplished, will be responsive to most of the OTS' concerns.
 
 Other Equity Transactions
 
  In March 1993, the Company completed a rights offering in which
approximately $31.4 million of capital, net of expenses, was raised. Of that
amount, $18.0 million was contributed to the capital of Fidelity in the first
quarter of 1993 and an additional $10.0 million was contributed in the fourth
quarter of 1993. Also, in the fourth quarter of 1993, Gateway paid a $1.0
million dividend to Citadel.
 
  In the third quarter of 1992, the Company retired its treasury stock of
179,700 shares. The carrying value of the stock of $6.1 million reduced the
common stock and paid-in capital accounts as reflected in the statement of
financial condition. The retirement of treasury stock did not affect the
Bank's regulatory capital.
 
  The Bank paid a cash dividend of $1.0 million in the third quarter of 1992
to Citadel and during the fourth quarter of 1992, Fidelity paid a dividend in
kind to Citadel consisting of its equity ownership of its securities brokerage
subsidiary, Gateway. These dividends reduced Fidelity's capital by $2.1
million and had an immaterial effect on the Bank's tangible, core and risk-
based capital.
 
 Stock Option Plans
 
  Citadel has two qualified stock option plans under which options to purchase
shares of Citadel's common stock may be granted. Under the Key Employee Stock
Option Program (the "1982 Stock Option Plan"), all options available for grant
have been granted. Under the 1987 Stock Option and Stock Appreciation Rights
Plan (the "1987 Stock Option Plan"), options to purchase up to 175,000 shares
may be granted through April 22, 1997 and at December 31, 1993, there were
140,450 shares still available to grant. Options granted under both plans may
not have an exercise price less than the fair market value of the common stock
on the date of the grant, are exercisable in whole or in part, and expire no
later than the tenth anniversary of the date of grant.
 
                                     F-34

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993

NOTE 14--STOCKHOLDERS' EQUITY--(CONTINUED)
 
  A summary of the 1982 Stock Option Plan and the 1987 Stock Option Plan
activity follows:

                                                    1982             1987
                                                STOCK OPTION     STOCK OPTION
                                                    PLAN             PLAN
                                               ---------------- ----------------
                                               NUMBER   AVERAGE NUMBER   AVERAGE
                                                 OF     OPTION    OF     OPTION
                                               OPTIONS   PRICE  OPTIONS   PRICE
                                               -------  ------- -------  -------
                                                             
   Balance, January 1, 1991...................  4,825   $58.00   30,100  $40.66
    Expired...................................     --       --   (3,800)  32.78
                                               ------           -------
   Balance, December 31, 1991.................  4,825    58.00   26,300   41.80
    Expired................................... (4,825)   58.00  (20,750)  44.21
                                               ------           -------
   Balance, December 31, 1992.................     --       --    5,550   32.78
    Granted...................................     --       --   20,000   21.90
                                               ------           -------
   Balance, December 31, 1993.................     --       --   25,550  $24.26
                                               ======           =======

  At December 31, 1993, all of the options outstanding under the 1987 Stock
Option Plan were fully exercisable.
 
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

                                   FIRST   SECOND    THIRD   FOURTH
                                  QUARTER  QUARTER  QUARTER  QUARTER    YEAR
                                  -------- -------  -------  -------  --------
                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
                                                  AMOUNTS)
                                                       
1993:
 Interest income................. $ 78,187 $73,679  $69,187  $68,539  $289,592
 Interest expense................   49,397  46,748   43,767   48,479   188,391
 Provision for estimated loan
  losses.........................    7,500  14,500   19,500   23,600    65,100
 Provision for estimated real
  estate losses..................    1,000  16,000    4,000    9,200    30,200
 Gains (losses) on sales of
  loans, net.....................      395     225      (34)    (392)      194
 Gains (losses) on sales of
  mortgage-backed securities,
  net............................       --   1,543      917   (1,118)    1,342
 Gains (losses) on sales of
  investment securities, net.....       --   1,946       17   (2,017)      (54)
 Net earnings (loss).............      135 (15,245) (14,725) (37,326)  (67,161)
 Net earnings (loss) per share...      .04   (2.31)   (2.23)   (5.66)   (11.56)
 Market prices of common stock:
  High...........................   23 7/8  21 7/8   18 5/8   19 1/2    23 7/8
  Low............................   16      12 5/8   14 1/4    9 3/8     9 3/8
1992:
 Interest income................. $104,918 $96,838  $86,743  $82,223  $370,722
 Interest expense................   69,757  61,203   56,337   52,644   239,941
 Provision for estimated loan
  losses.........................    6,970   7,656   32,660    3,894    51,180
 Provision for estimated real
  estate losses..................    2,030   2,344    6,340    7,106    17,820
 Gains on sales of loans, net....      353     284      403       77     1,117
 Net earnings (loss).............    6,055   4,472  (14,870)   6,389     2,046
 Net earnings (loss) per share...     1.84    1.35    (4.51)    1.94       .62
 Market prices of common stock:
  High...........................   32 7/8  29 1/2   25 5/8   20 7/8    32 7/8
  Low............................   14 5/8  23 1/2   13       13 7/8    13

                                      F-35

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--(CONTINUED)

                                   FIRST    SECOND   THIRD     FOURTH
                                  QUARTER  QUARTER  QUARTER   QUARTER    YEAR
                                  -------- -------- --------  -------- --------
                                              (DOLLARS IN THOUSANDS,
                                            EXCEPT PER SHARE AMOUNTS)
                                                        
1991:(1)
 Interest income................. $136,808 $133,934 $128,080  $121,302 $520,124
 Interest expense................  105,268   98,494   89,865    84,390  378,017
 Provision for estimated loan
  losses.........................    3,924    5,417   36,502     4,000   49,843
 Provision for estimated real es-
  tate losses....................    2,076      583    3,903     2,000    8,562
 Gains on sales of loans, net....       --      114      256     1,748    2,118
 Gains on sales of mortgage-
  backed securities, net.........       --    1,008       --     7,985    8,993
 Gains on sales of investment se-
  curities, net..................       --        1       --        --        1
 Net earnings (loss).............    4,421    7,093  (21,129)   12,278    2,663
 Net earnings (loss) per share...     1.34     2.15    (6.41)     3.73      .81
 Market prices of common stock:
  High...........................   34 1/4   34 1/8   37 1/8    28       37 1/8
  Low............................   17 1/4   28 1/2   28 5/8     8 7/8    8 7/8

- --------
(1) The 1991 third quarter earnings originally reported had been reduced by
    $11,593,000 due to the temporary Staff Accounting Bulletin ("SAB") No. 91
    limitation of tax benefits on loan loss reserves. The restated third
    quarter amounts reflect earnings which were increased by $11,593,000 in tax
    benefits which were allowable under SFAS No. 109 and SFAS No. 96. No other
    amounts were required to be restated. See Notes 1 and 12 to the
    consolidated financial statements. The effect of the change on the third
    quarter of 1991 is as follows:

                                                        QUARTER ENDED
                                                      SEPTEMBER 30, 1991
                                                   ---------------------------
                                                                    NET LOSS
                                                    NET LOSS       PER SHARE
                                                   -------------  ------------
                                                    (DOLLARS IN THOUSANDS,
                                                   EXCEPT PER SHARE AMOUNT)
                                                            
   As originally reported with SAB No. 91
    limitation.................................... $     (32,722)  $     (9.92)
   Effect of reversal of SAB No. 91 limitation....        11,593          3.51
                                                   -------------   -----------
   As restated.................................... $     (21,129)  $     (6.41)
                                                   =============   ===========

                                      F-36

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 16--PARENT COMPANY CONDENSED FINANCIAL INFORMATION
 
  This information should be read in conjunction with the other notes to the
consolidated financial statements.
 
                          CITADEL HOLDING CORPORATION
                       STATEMENTS OF FINANCIAL CONDITION

                                                                DECEMBER 31,
                                                              -----------------
                                                                1993     1992
                                                              -------- --------
                                                                 (DOLLARS IN
                                                                 THOUSANDS)
                                                                 
ASSETS:
 Cash........................................................ $  2,284 $    710
 Investment in subsidiaries..................................  182,966  221,427
 Other assets................................................    2,767    2,931
                                                              -------- --------
                                                              $188,017 $225,068
                                                              ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
 Liabilities:
  Income tax liability....................................... $     15 $    590
  Other liabilities..........................................      599    1,292
                                                              -------- --------
                                                                   614    1,882
 Total stockholders' equity..................................  187,403  223,186
                                                              -------- --------
                                                              $188,017 $225,068
                                                              ======== ========

                                      F-37

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993

NOTE 16--PARENT COMPANY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
 
                          CITADEL HOLDING CORPORATION
                            STATEMENTS OF OPERATIONS

                                                       YEAR ENDED DECEMBER 31,
                                                      -------------------------
                                                        1993     1992    1991
                                                      --------- ------ --------
                                                       (DOLLARS IN THOUSANDS)
                                                              
INCOME:
 Dividends from subsidiaries......................... $   1,000 $2,075 $     --
 Subordinated notes interest income..................        --    538    1,800
 Other income........................................       324     55      230
                                                      --------- ------ --------
                                                          1,324  2,668    2,030
EXPENSES:
 Interest expense....................................        --     --      752
 Related party loan interest expense.................        --    408      709
 Provision for estimated real estate losses..........        --     --    1,025
 Other expense.......................................     2,986  2,402    3,630
                                                      --------- ------ --------
                                                          2,986  2,810    6,116
                                                      --------- ------ --------
Earnings (loss) before income tax benefit............   (1,662)  (142)  (4,086)
Income tax benefit...................................     (961)  (845)  (1,595)
                                                      --------- ------ --------
Net earnings (loss) before equity in undistributed
 net earnings of subsidiaries........................     (701)    703  (2,491)
Equity in undistributed net earnings (loss) of
 subsidiaries........................................  (66,460)  1,343    5,154
                                                      --------- ------ --------
Net earnings (loss).................................. $(67,161) $2,046 $  2,663
                                                      ========= ====== ========

                                      F-38

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 16--PARENT COMPANY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
 
                          CITADEL HOLDING CORPORATION
                            STATEMENTS OF CASH FLOWS

                                                   YEAR ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1993      1992      1991
                                                  --------  --------  --------
                                                    (DOLLARS IN THOUSANDS)
                                                             
CASH FLOWS--OPERATING ACTIVITIES:
 Net earnings (loss)............................. $(67,161) $  2,046  $  2,663
 Reconciliation of net earnings (loss) to net
  operating cash flows:
  Provision for estimated losses.................       --        33     1,025
  Losses on sales of securities..................       16        --        --
  Purchases of investment securities held for
   sale..........................................  (35,001)       --        --
  Maturities of investment securities held for
   sale..........................................   21,844        --        --
  Sale of investment securities held for sale....   13,239        --        --
  Interest receivable decrease...................       --       471         7
  Other assets increase (decrease)...............      164    (1,032)     (204)
  Equity in net (earnings) loss of subsidiaries..   65,460    (3,418)   (5,154)
  Deferred income taxes increase (decrease)......       36      (816)      312
  Interest payable (decrease)....................       --        --        (4)
  Other liabilities and deferred income increase
   (decrease)....................................   (1,303)      116     1,514
  Other, net.....................................      (98)       --      (445)
                                                  --------  --------  --------
   Operating cash flows, net.....................   (2,804)   (2,600)     (286)
                                                  --------  --------  --------
CASH FLOWS--INVESTING ACTIVITIES:
 Retirement of subordinated notes................       --    15,000        --
 Other, net......................................       --     1,059    (1,891)
                                                  --------  --------  --------
   Investing cash flows, net.....................       --    16,059    (1,891)
                                                  --------  --------  --------
CASH FLOWS--FINANCING ACTIVITIES:
 Short-term borrowings decrease..................       --        --   (15,000)
 Proceeds from (repayment of) related party loan.       --   (15,000)   15,000
 Proceeds from stock rights offering.............   31,378        --        --
 Capital contributions to Fidelity...............  (28,000)       --        --
 Dividends from subsidiaries.....................    1,000     1,000        --
                                                  --------  --------  --------
  Financing cash flows, net......................    4,378   (14,000)       --
                                                  --------  --------  --------
   Net increase (decrease) in cash and cash
    equivalents..................................    1,574      (541)   (2,177)
  Cash and cash equivalents at beginning of
   period........................................      710     1,251     3,428
                                                  --------  --------  --------
  Cash and cash equivalent at end of period...... $  2,284  $    710  $  1,251
                                                  ========  ========  ========
CASH FLOWS--SUPPLEMENTAL INFORMATION:
 Cash paid during the period for:
  Interest expense on borrowings................. $     --  $    408  $  1,465
  Income taxes...................................       75        96        52
 Dividend of Gateway from Fidelity...............       --     1,075        --

                                      F-39

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 16--PARENT COMPANY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
 
 Citadel's Liquidity
 
  Citadel has limited cash assets and no material cash producing operations or
assets other than its investment in Fidelity and in Gateway.
 
  Because of Fidelity's current capital levels, dividends and distributions
from Fidelity will not be available to Citadel for the foreseeable future.
Thus, Citadel's current cash balances, together with potential future dividends
from Gateway, are the only sources of cash to Citadel. Management believes that
these cash resources will only be sufficient to meet Citadel expenditures
through mid-1994. Unless the Restructuring (see Note 14) is consummated at that
time, Citadel will be required to obtain additional cash to fund its
expenditures, and no assurances can be given that Citadel will be able to
obtain such funds.
 
NOTE 17--SUBSEQUENT EVENTS
 
 Northridge Earthquake
 
  In January 1994, the greater Los Angeles area was seriously affected by a
major earthquake and attendant aftershocks, centered in the San Fernando
Valley. Because the Bank's main operations are located near the most seriously
affected areas, and a substantial number of its customers are located in the
most seriously affected areas, management has initiated, but not completed,
efforts to evaluate the effect of the earthquake on the Bank's operations and
customers.
 
  The Bank's portfolio includes loans and REO with a net book value of
approximately $937 million secured by or comprised of 1,414 multifamily (5
units or more), 15 commercial, and 2,313 single family and multifamily (2 to 4
units) collateral properties in the primary earthquake areas. After the
earthquake, the Bank's appraisers surveyed all of Fidelity's multifamily and
commercial properties located in these areas and identified 231 properties,
representing loans and REO with a net book value of $140 million, with more
than "cosmetic" damage. Of such 231 properties, 204 properties related to the
Bank's loans and REO with a net book value of $124 million were identified as
having "possible serious damage" and an additional 27 properties with a net
book value of $16 million were identified as "actually or potentially
condemned". The Bank commissioned structural and building engineers or building
inspectors to estimate the cost of repairs to properties in these two
categories. The cost of repairs has been preliminarily estimated to be $5.7
million and $11.1 million, respectively. Of this total $16.8 million,
approximately $6.0 million of seismic damage exceeds the principal balance on
the collateral properties' respective loans. Accordingly, the Bank currently
would not expect its losses due to the earthquake to exceed $10.8 million with
respect to its commercial and multifamily properties. The Bank expects the
actual losses payable by the Bank to be lower because many repair costs may be
borne by the borrowers, who in addition to their own funds, may have access to
government assistance and/or earthquake insurance proceeds. As part of its
normal internal asset review process, the Bank will adjust its reserves as its
losses become quantifiable.
 
  In addition to the multifamily and commercial assets referenced above, the
Bank has identified 2,313 single family and multifamily (2 to 4 units) assets
in the affected areas. 173 borrowers with unpaid principal balances totaling
$29.4 million called in to report damages through February 8, 1994. The Bank
has commenced inspection of these properties and continues to assess damages
and potential earnings and loss impact with respect to these properties.
 
  The earthquake will also have some adverse affect on loan originations and
the sale of financial services in the retail branch network in the near term.
In addition, physical damage was sustained at some of
 
                                      F-40

                  CITADEL HOLDING CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                      THREE YEARS ENDED DECEMBER 31, 1993
 
NOTE 17--SUBSEQUENT EVENTS--(CONTINUED)
 
the Bank administrative and branch office facilities located in the Los Angeles
area, however, only one Bank-owned building in the San Fernando Valley region
of Los Angeles sustained major damage. It is estimated that necessary repairs
to all affected facilities, net of anticipated insurance reimbursement, shall
not exceed $0.5 million. Other potential financial impacts of the earthquake
include additional personnel costs, property inspection costs, and others.
Based upon the information gathered to date, the total estimated cost to the
Company for these items is not expected to be material.
 
 Pending Litigation
 
  On March 4, 1994, The Chase Manhattan Bank, N.A. ("Chase"), one of four
lenders under Fidelity's $60 million subordinated loan agreement of 1990 (the
"Subordinated Loan Agreement"), sued Fidelity, Citadel and Citadel's Chairman
of the Board, alleging, among other things, that the transfer of assets
pursuant to the Restructuring would constitute a breach of the Subordinated
Loan Agreement, and seeking to enjoin the Restructuring and to recover damages
in unspecified amounts. In addition, the lawsuit alleges that past responses of
Citadel and Fidelity to requests by Chase for information regarding the
Restructuring violate certain provisions of the Subordinated Loan Agreement and
that such alleged violations, with the passage of time, have become current
defaults under the Subordinated Loan Agreement. While the other three lenders
under the Subordinated Loan Agreement hold $25 million of the subordinated
notes (the "Notes"), none of them has joined Chase in this lawsuit. The Company
is evaluating the lawsuit and, based on its current assessment, the Company
does not believe that the allegations have merit. The impact of this lawsuit on
the capital position of the Bank, cross default provisions under the Bank's
other debt agreements and the guarantee by Citadel is uncertain. See Notes 10
and 14.
 
                                      F-41

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Incorporated herein by this reference is the information set forth in the
sections entitled "ELECTION OF DIRECTORS" and "MANAGEMENT" contained in the
Company's Proxy Statement for its 1994 Annual Meeting of Stockholders (the
"1994 Proxy Statement").
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Incorporated herein by this reference is the information set forth in the
section entitled "EXECUTIVE COMPENSATION" contained in the 1994 Proxy
Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Incorporated herein by this reference is the information set forth in the
sections entitled "ELECTION OF DIRECTORS" and '"PRINCIPAL HOLDERS OF CITADEL
COMMON STOCK" contained in the 1994 Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Incorporated herein by this reference is the information set forth in the
section entitled "RELATED PARTY TRANSACTIONS" contained in the 1994 Proxy
Statement.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (A)(1) FINANCIAL STATEMENTS

                             DESCRIPTION                               PAGE NO.
                             -----------                               --------
                                                                    
  Independent Auditors' Report........................................   F-1
  Consolidated Statements of Financial Condition at December 31, 1993
   and 1992...........................................................   F-2
  Consolidated Statements of Operations for Each of the Three Years in
   the Period Ended December 31, 1993.................................   F-3
  Consolidated Statements of Stockholders' Equity for Each of the
   Three Years in the Period Ended December 31, 1993..................   F-4
  Consolidated Statements of Cash Flows for Each of the Three Years in
   the Period Ended December 31, 1993.................................   F-5
  Notes to Consolidated Financial Statements for Each of the Three
   Years in the Period Ended December 31, 1993........................   F-7

  (A)(2) FINANCIAL STATEMENT SCHEDULES
 
  All schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
 
  (B) REPORTS ON FORM 8-K
 
  The Company filed a Report on Form 8-K on January 11, 1994 reporting on
  Item 5. "Other Events."
 
                                     II-1

  (C) EXHIBITS
 
3.1    Certificate of Amendment of Restated Certificate of Incorporation of the
       Company (filed as Exhibit 3.1(a) to the Company's Form 10-K for the year
       ended December 31, 1988, and incorporated herein by reference).
 
3.2    Restated By-laws of the Company (filed as Exhibit 3.2 to the Company's
       Form 10-K for the year ended December 31, 1988, and incorporated herein
       by reference).
 
4.1    Indenture dated as of March 1, 1985, between Fidelity and First
       Interstate Bank of California, as trustee (filed as Exhibit 4 to the
       Company's Form 10-K for the year ended December 31, 1984, and
       incorporated herein by reference).
 
4.2    The Company agrees to provide the Securities and Exchange Commission,
       upon request, copies of instruments defining the rights of holders of
       long-term debt of the Company and all of its subsidiaries for which
       consolidated or unconsolidated financial statements are required to be
       filed with the Commission.
 
10.1   Fidelity Federal Savings and Loan Association Key Employee Stock Option
       Program (filed as Exhibit A to the Company's Registration Statement on
       Form S-8 (No. 2-96207) filed on March 4, 1985, and incorporated herein
       by reference).
 
10.2   Loan Agreement between Fidelity and Royal Shore Associates Limited
       Partnership, dated February 17, 1984 (filed as Exhibit 10.10 to the
       Company's Form 10-K for the year ended December 31, 1984, and
       incorporated herein by reference).
 
10.3   Agreement, dated August 2, 1984, between Fidelity and Marine Midland
       Bank, N.A. (filed as Exhibit 10.13 to the Company's Form 10-K for the
       year ended December 31, 1984, and incorporated herein by reference).
 
10.4   Indemnity Agreement, dated August 13, 1987, between the Company and the
       Directors and Officers of the Company (filed as Exhibit 10.15 to the
       Company's Form 10-K for the year ended December 31, 1987, and
       incorporated herein by reference).
 
10.5   Indemnity Agreement dated August 26, 1987 between Fidelity and the
       Directors and Officers of Fidelity (filed as Exhibit 10.16 to the
       Company's Form 10-K for the year ended December 31, 1987, and
       incorporated herein by reference).
 
10.6   Citadel Holding Corporation 1987 Stock Option and Stock Appreciation
       Rights Plan (filed as Exhibit A to the Company's definitive Proxy
       Statement dated May 29, 1987, and incorporated herein by reference).
 
10.7   Form of Incentive Stock Option Agreement (filed as Exhibit 10.18 to the
       Company's Form 10-K for the year ended December 31, 1987, and
       incorporated herein by reference).
 
10.8   Form of Indemnity agreement approved June 27, 1990, between Citadel and
       directors and certain officers of Citadel terminating and replacing that
       certain Indemnity Agreement dated August 22, 1987 (filed as Exhibit
       10.15 to the Company's Form 10-K for the year ended December 31, 1987,
       and incorporated herein by reference).
 
10.9   Form of Indemnity Agreement approved June 27, 1990, between Fidelity and
       directors and certain officers of Fidelity terminating and replacing
       that certain Indemnity Agreement dated August 22, 1987 (filed as Exhibit
       10.16 to the Company's Form 10-K for the year ended December 31, 1987,
       and incorporated herein by reference.
 
10.10  Loan agreement dated as of May 15, 1990, between Fidelity, the Company
       and certain lenders as defined in said Loan Agreement regarding the
       issuance by Fidelity of $60 million of Fidelity's 11.68% subordinated
       notes (filed as Exhibit 10.24 to the Company's Form 10-K for the year
       ended December 31, 1990, and incorporated herein by reference).
 
                                      II-2

10.11  Letter agreement dated May 1, 1991 summarizing the terms and conditions
       of employment between Philip R. Sherringham and Fidelity (filed as
       Exhibit 10.18 to the Company's Form 10-K for the year ended December 31,
       1991, and incorporated herein by reference).
 
10.12  Letter agreement dated as of June 29, 1992 with Walter H. Morris, Jr.
       with respect to employment (filed as Exhibit 10.12 to the Company's Form
       10-K for the year ended December 31, 1992, and incorporated herein by
       reference).
 
10.13  Consulting Agreement with Scott A. Braly dated as of August 3, 1992, and
       amendments thereto dated as of August 26, 1992 and November 30, 1992
       (filed as Exhibit 10.13 to the Company's Form 10-K for the year ended
       December 31, 1992, and incorporated herein by reference).
 
10.14  Form of Severance Agreement and related Guaranty Agreement to be entered
       into with Kirk S. Sellman, Walter H. Morris, Jr., Godfrey B. Evans, and
       other company executives (filed as Exhibit 10.14 to the Company's Form
       10-K for the year ended December 31, 1992, and incorporated herein by
       reference).
 
10.15  Executive Employment Agreement dated as of June 2, 1992 between Richard
       M. Greenwood and Fidelity and Amendment No. 1 thereto dated March 24,
       1993 (filed as Exhibit 10.15 to the Company's Form 10-K for the year
       ended December 31, 1992, and incorporated herein by reference).
 
10.16  Letter agreement of employment and guaranty dated as of June 2, 1992
       between Richard M. Greenwood and Citadel Holding Corporation and
       Amendment No. 1 thereto dated January 24, 1993 (filed as Exhibit 10.16
       to the Company's Form 10-K for the year ended December 31, 1992, and
       incorporated herein by reference).
 
10.17  Dealer agreement, Letter of Credit Reimbursement Agreement and
       Depository Agreement dated as of July 31, 1992 relating to the
       commercial paper of Fidelity (filed as Exhibit 10.17 to the Company's
       Form 10-K for the year ended December 31, 1992, and incorporated herein
       by reference).
 
10.18  Data Processing Agreement by and between Systematics Financial Services,
       Inc. and Fidelity dated May 1, 1993, with exhibits and First Amendment
       thereto (filed herewith).
 
10.19  Letter agreement dated January 4, 1994 summarizing the terms and
       conditions of employment between James E. Stutz and Fidelity (filed
       herewith).
 
10.20  Letter agreement dated December 14, 1993 summarizing the terms and
       conditions of employment between Steve Wesson and Citadel (filed
       herewith).
 
22     Subsidiaries of the Company (filed herewith).
 
27     Financial Data Schedule (filed herewith).
 
                                      II-3

                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          Citadel Holding Corporation
 
                                          By     /s/ James J. Cotter
                                            ___________________________________
                                                     James J. Cotter
                                                  Chairman of the Board
 
Date: March 30, 1994
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.

             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----

       /s/ James J. Cotter           Director, Chairman of the        March 30, 1994
- ------------------------------------  Board, Citadel Holding     
          James J. Cotter             Corporation                 

    /s/ Richard M. Greenwood         President and Chief              March 30, 1994
- ------------------------------------  Executive Officer, Citadel   
        Richard M. Greenwood          Holding Corporation;         
                                      Chairman of the Board,       
                                      President and Chief          
                                      Executive Officer, Fidelity  
                                      Federal Bank                  
                                     
     /s/ Donald R. Boulanger         Director                         March 30, 1994
- ------------------------------------
        Donald R. Boulanger          

       /s/ Peter W. Geiger           Director                         March 30, 1994
- ------------------------------------
          Peter W. Geiger            

        /s/ Mel Goldsmith            Director                         March 30, 1994
- ------------------------------------
           Mel Goldsmith             

       /s/ Zelbie Trogden            Director                         March 30, 1994
- ------------------------------------
           Zelbie Trogden            

      /s/ S. Craig Tompkins          Director                         March 30, 1994
- ------------------------------------
         S. Craig Tompkins           

   /s/ Alfred Villasenor, Jr.        Director                         March 30, 1994
- ------------------------------------
       Alfred Villasenor, Jr.        

       /s/ Andre S.W. Shih           Treasurer,                       March 30, 1994
- ------------------------------------  Senior Vice President--    
          Andre S.W. Shih             Acting Chief Financial     
                                      Officer (Principal         
                                      Financial Officer)          
                                     
         /s/ Heidi Wulfe             Senior Vice President--          March 30, 1994
- ------------------------------------  Controller and Chief     
            Heidi Wulfe               Accounting Officer       
                                      (Principal Accounting    
                                      Officer)                  

 
                                      II-4

                           DATA PROCESSING AGREEMENT

                                 by and between

                      SYSTEMATICS FINANCIAL SERVICES, INC.

                                      and

                             FIDELITY FEDERAL BANK,
                             A FEDERAL SAVINGS BANK
                           600 NORTH BRAND BOULEVARD
                        GLENDALE, CALIFORNIA  91209-1631

                                  May 1, 1993

     Note:  This Agreement contains confidential material which has been omitted
from this filing. All confidential material so omitted is identified herein as 
"[CM]."

                                 Exhibit 10.18

                               TABLE OF CONTENTS

1.  Services..............................................    -7-
    1.1   General Scope of Services.......................    -7-
    1.2   Alternative Technology..........................    -8-

2.  Term..................................................    -8-

3.  Billing and Payment Terms; Special Service Pricing....    -8-
    3.1   Billing and Payment.............................    -8-
    3.2   Additional Services Charges.....................    -8-
    3.3   Special Services................................    -9-
    3.4   Right to Offset.................................   -10-
 
4.  Responsibilities of the Parties.......................   -11-
    4.1   Systematics' Responsibilities...................   -11-
    4.2   Fidelity's Responsibilities.....................   -15-
 
5.  Data Processing Premises and Security, Audit..........   -16-
    5.1   Data Center Access..............................   -16-
    5.2   Data Center Services............................   -17-
    5.3   Telephone Service...............................   -17-
    5.4   Policies Relating to Systematics Occupancy......   -17-
    5.5   Disposition of Property.........................   -17-
    5.6   General Cooperation.............................   -18-
    5.7   Security Standards..............................   -18-
    5.8   Use of Equipment................................   -18-
    5.9   Maintenance of the Equipment....................   -18-
    5.10  Risk of Loss and Damage.........................   -19-
    5.11  Equipment Warranty Limitations..................   -19-
    5.12  No Consequential Damages........................   -19-
    5.13  Audit Conference................................   -19-
    5.14  Audit and Access Rights.........................   -20-
    5.15  Audit of Operational Procedures.................   -20-
    5.16  Specific Obligations Regarding Third Parties....   -20-

6.  Software..............................................   -22-
    6.1   Additional Licensed Programs....................   -22-
    6.2   Software Warranty...............................   -22-
 
                                      -i-

 
                                                       
    6.3   User Manuals....................................   -22-
    6.4   Third Party Software............................   -22-
    6.5   Installation of New Systems and Subsystems......   -23-
    6.6   Modifications Requested by Fidelity.............   -23-
    6.7   Regulatory Reporting Requirements...............   -23-
    6.8   Systematics Software Functionality Status.......   -24-

7.  Education.............................................   -24-

8.  Staffing; Computer Use................................   -24-
    8.1   Resident Technical Staff........................   -24-
    8.2   Special Computer Use............................   -25-
    8.3   Employee Transfer...............................   -26-
    8.4   Employee Benefits Plans.........................   -26-
    8.5   Third Party Beneficiary Contract................   -27-

9.  Time of Performance...................................   -27-
  
10. Termination...........................................   -27-
    10.1   Termination for Cause..........................   -27-
    10.2   Method of Termination..........................   -29-
    10.3   Early Termination by Fidelity Upon Merger or
           Consolidation..................................   -29-
    10.4   Early Termination Upon Merger or Consolidation
           Fee Schedule...................................   -29-
    10.5   Early Termination by Fidelity for Any Reason...   -30-
    10.6   Early Termination For Any Reason Fee Schedule..   -30- 
    10.7   Effect of Termination for Cause................   -31-
    10.8   Termination Fees Mutually Exclusive............   -31-

11. Transitional Cooperation..............................   -31-
    11.1   Cooperation....................................   -31-
    11.2   Termination Assistance.........................   -31-
    11.3   Offer of Employment............................   -32-
    11.4   Return of Data.................................   -32-
    11.5   Return of Third Party Software.................   -33-
    11.6   Survival.......................................   -33-
 
12. Account Managers, Informal Dispute Resolution.........   -33-
    12.1   Account Managers...............................   -33-
    12.2   Fidelity System Management Committee...........   -34-
    12.3   MIS Steering Committee.........................   -35-
    12.4   Good Faith Efforts.............................   -35-
    12.5   Continued Performance..........................   -36-

                                      -ii-

 
                                                       
13. Backup, Storage, Files and Programs...................   -36-
    13.1   Files and Programs.............................   -36-
    13.2   Storage........................................   -36-
    13.3   Disaster Recovery..............................   -36-
    13.4   Emergency Backup Services......................   -36-
    13.5   Responsiveness.................................   -37-
 
14. Systematics' Service Bureau Customers.................   -37-

15. Maintenance of Records; Examination by and 
    Reporting to Regulators...............................   -37-
    15.1   Maintenance of Records.........................   -37-
    15.2   Examination, Reporting to 
            Regulators, Data Security.....................   -38-

16. No Waiver of Default..................................   -38-
 
17. Representations and Warranties........................   -39-
    17.1   Representations and Warranties of Systematics..   -39-
    17.2   Representations and Warranties of Fidelity.....   -40-
    17.3   Systematics' Financial Warranties..............   -41-
    17.4   Fidelity's Financial Warranties................   -41-
    17.5   Survival of Representations and Warranties.....   -42-
 
18. Performance Incentives................................   -42-
    18.1   Performance Incentives.........................   -42-
    18.2   Conversion Completion Incentives...............   -42-
 
19. Indemnification.......................................   -42-
    19.1   Mutual Indemnifications........................   -42-
    19.2   Indemnity by Systematics.......................   -43-
    19.3   Subrogation....................................   -43-
 
20. Arbitration...........................................   -44-
    20.1   Scope of Applicability; Arbitration Rules......   -44-
    20.2   Continuity of Service..........................   -45-
  
21. Processing Priorities.................................   -46-
 
22. Mergers and Acquisitions..............................   -46-
 
23. Entire Agreement......................................   -46-
 
24. Assignment............................................   -46-
 
25. Confidential Agreement................................   -46-
 
                                     -iii-

 
                                                       
26. Taxes.................................................   -47-
 
27. Independent Contractor................................   -47-
    27.1   Fidelity Supervisory Powers....................   -47-
    27.2   Systematics' Employees.........................   -47-
    27.3   Systematics as an Agent........................   -47-
 
28. Fidelity and Systematics Employees....................   -47-
 
29. Previous Liabilities..................................   -47-
 
30. Notices...............................................   -48-

31. Covenant of Good Faith................................   -49-
 
32. Limitation of Liability...............................   -49-
 
33. Insurance.............................................   -49-
 
34. Section Titles........................................   -49-
 
35. Counterparts..........................................   -50-
 
36. Governing Law.........................................   -50-
 
37. Time of the Essence...................................   -50-
 
38. Security, Health and Safety...........................   -50-
 
39. Cooperation...........................................   -50-
 
40. Attorneys' Fees.......................................   -50-
 
41. Severability..........................................   -51-
 
42. Survival..............................................   -51-
 
43. Exhibits and Schedules................................   -51-
 
44. Thrift Bulletin 46 Provisions.........................   -51-
 
45. Rights and Remedies...................................   -51-

46. Compliance with Laws..................................   -51- 

                                      -iv-

                                    EXHIBITS

     A.   Systems Installation Schedule
     B.   Reports
     C.   Charges
     D.   Reporting Schedule and Performance Standard
     E.   Equipment
     F.   (intentionally left blank)
     G.   Software License Agreement
     H.   Disaster Recovery Agreement

                                      -v-

                           DATA PROCESSING AGREEMENT

     This is an Agreement, dated as of the 1st day of May, 1993 (the "Effective
Date"), by and between SYSTEMATICS FINANCIAL SERVICES, INC., an Arkansas
corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212-2496
(hereinafter "Systematics") and

                 Fidelity Federal Bank, a Federal Savings Bank

                           600 North Brand Boulevard

                        Glendale, California  91209-1631

("Fidelity", use of the term Fidelity shall also include Fidelity's Affiliates
as that term is defined herein).

     In consideration of the payments to be made and services to be performed
hereunder, the parties agree as follows:

                              CERTAIN DEFINITIONS

     As used herein and in the Exhibits and Schedules attached hereto, the
following terms shall have the meanings indicated below:

     "AAA Rules" shall have that meaning set forth in Section 20.1.
      ---------                                                    

     "Account Managers" shall have that meaning set forth in Section 12.
      ----------------                                                  

     "Accounts" means open accounts on Fidelity's master file with respect to
      --------                                                               
the applications listed in Section 2.1 of Exhibit C.

     "Additional Volume Charges" means the variable monthly charges determined
      -------------------------                                               
according to the methodology described in Exhibit C of this Agreement which
shall be paid by Fidelity to Systematics in exchange for Systematics' provision
of Services for that number of Accounts that exceed the Base Account Volume in
any month, as specified in Section 2.2 of Exhibit C.

     "Affiliate" means, with respect to any Person, (i) any Person controlling,
      ---------                                                                
controlled by or under common control with any such Person or (ii) any director
or executive officer of any such Person or of any Person referred to in clause
(i) above.  For purposes hereof, "control" and its derivatives mean the
possession, directly or indirectly, of the power to

                                      -1-

direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or voting interests, by
contract or otherwise.

     "Agreement" means this Data Processing Agreement by and between Systematics
      ---------                                                                 
and Fidelity dated as of May 1, 1993.

     "Alternative Technology" shall have that meaning set forth in Section 1.2.
      ----------------------                                                   

     "Amended Charter Software License Agreement" shall have that meaning set
      ------------------------------------------                             
forth in Section 6.

     "Application System" means a System used for a business application, such
      ------------------                                                      
as General Ledger.

     "Arbitration" shall have that meaning set forth in Section 20.
      -----------                                                  

     "Base Account Volume" means [CM].
      -------------------                                                       

     "Best Efforts" shall have that meaning set forth in Section 11.1.
      ------------                                                    

     "Code" means the Internal Revenue Code.
      ----                                  

     "Confidential Information" shall have that meaning set forth in Section
      ------------------------                                              
5.16.

     "Conversion" means the provision of sufficient products and services such
      ----------                                                              
that a new System is successfully implemented so that a given System is
available for use by Fidelity and/or Systematics in a production environment at
a performance level which meets the Performance Criteria and permits Fidelity to
engage its normal business operations without material disruption or degradation
including, without limitation, the installation, modification and enhancement of
the new System and the modification and transformation of the existing data.

     "Conversion Date" means the date on which the Conversion is completed for
      ---------------                                                         
all Systems described in Exhibit A such that the Conversion Plan has been
successfully implemented at the Data Center including, without limitation, the
integration of the individual Systems so that Systematics can perform the
Services at a performance level which meets the Performance Criteria and permits
Fidelity to engage in its normal business operations without material disruption
or degradation.

     "Conversion Plan" means the process, procedures and responsibilities of the
      ---------------                                                           
parties with respect to Conversion as described in Exhibit A and as otherwise
mutually agreed upon by the parties.

                                      -2-

     "Conversion Services" shall have that meaning set forth in Section 1.1.
      -------------------                                                   

     "Core Accounts" means [CM].
      -------------                                                           

     "CPI Index" shall have that meaning set forth in Section 7 of Exhibit C.
      ---------                                                              

     "Data Center" means that portion of the first floor of 4565 Colorado Blvd.,
      -----------                                                               
Los Angeles, California, 90039, which is being used by Fidelity as a data
processing as of the Effective Date and described herein in Section 5.

     "Data Center Assets" means the improvements, owned equipment and other
      ------------------                                                   
property including office equipment, furniture and telephone equipment as set
forth on Exhibit E to this Agreement.

     "Data Center Staff" shall have that meaning set forth in Section 4.1.
      -----------------                                                   

     "Disaster Recovery Facility" is the Computer Equipment described in Exhibit
      --------------------------                                                
H and located at Systematics' corporate headquarters.

     "Disaster Test" shall have that meaning set forth in Section 13.3.
      -------------                                                    

     "Documentation" means information as defined in Section 3 of the Charter
      -------------                                                          
Software License Agreement between the parties dated as of October 31, 1991
necessary for the operation, modification, enhancement or use of a System, as
herein defined.

     "DP Employees" shall have that meaning set forth in Section 8.3.
      ------------                                                   

     "Effective Date" means May 1, 1993.
      --------------                    

     "Equipment" shall have that meaning set forth in Section 5.8.
      ---------                                                   

     "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
      -----                                                                    
amended.

     "Existing System" means any System that is being operated by or on behalf
      ---------------                                                         
of Fidelity immediately before the Effective Date.

     "Expiration Date" shall have that meaning set forth in Section 2.
      ---------------                                                 

     "ERISA Affiliate" shall mean any company which, as of the relevant
      ---------------                                                  
measuring date under ERISA, is a member of a group described in Sections 414(b),
(c), (m) or (o) of the Internal Revenue Code of which Systematics is a member,
provided however, ERISA

                                      -3-

Affiliate shall not include Fidelity or any Company which is a member of such a
group with Systematics solely because of the transactions contemplated by this
Agreement.

     "Fidelity Information" shall have that meaning set forth in Section 4.1
      --------------------                                                  
(l).

     "Fidelity Plans" shall have the meaning set forth in Section 8.4(a).
      --------------                                                     

     "Fidelity System Management Committee" shall have that meaning set forth in
      ------------------------------------                                      
Section 12.2.

     "Fidelity Telecommunications Network" means and consists of all equipment
      -----------------------------------                                     
(including multiplexors, modems and digital service units), software, circuits
and cabling which are used to connect and transmit data between the Data Center,
any remote Fidelity data processing locations and end-user locations.

     "Governmental Entity" means any federal agency and entities created by the
      -------------------                                                      
foregoing.

     "Hazardous Materials" means any substance (i) the presence of which
      -------------------                                               
requires investigation or remediation under any federal, state or local statute,
regulation, ordinance, order, action or policy; (ii) which is or becomes defined
as a "hazardous waste" or "hazardous substance" under any federal, state or
local statute, regulation, ordinance or amendments thereto including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. Section 9601 et seq.) and or the Resource Conservation and
Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) which is toxic, explosive,
corrosive flammable, infectious, radioactive, carcinogenic, mutagenic or
otherwise hazardous and is or becomes regulated by any governmental authority,
agency, department, commission, board, agency or instrumentality of the United
States, the State of California or any political subdivision thereof; (iv) the
presence of which in, on or around the Data Center causes or threatens to cause
a nuisance in, on or around the Data Center or to adjacent properties or poses
or threatens to pose a hazard to the Data Center or to the health or safety of
persons on or about the Data Center; (v) without limitation which contains
gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without
limitation which contains polychlorinated bipheynols (PCBs), asbestos or urea
formaldehyde foam insulation.

     "Insolvency Event" means, with respect to any party hereto, the occurrence
      ----------------                                                         
of any of the following events: (i) an assignment by such party for the benefit
of creditors; (ii) such party's dissolution or loss of charter by forfeiture;
(iii) such party having been adjudged bankrupt or insolvent by a United States
court of competent jurisdiction; (iv) a trustee or receiver having been
appointed for such party or its assets or any substantial part thereof; (v) such
party having filed a voluntary petition under any bankruptcy or other similar
law providing for its reorganization, dissolution or liquidation; or (vi) such
party having consented to the appointment of a receiver or a trustee for itself
or its assets or of any substantial part thereof.

                                      -4-

     "Losses" means, with respect to any party hereto, direct damages actually
      ------                                                                  
incurred and shall not include incidental, consequential, punitive or special
damages nor any claim or demand made by a third party provided, however, that
Systematics shall reimburse Fidelity for direct damages paid to third parties
that result from the Services provided herein.

     "Maintain" or "Maintenance" means either of the following as may be
      --------      -----------                                         
applicable; (i) as to Systems; any correction or modification of a System to
correct bugs or errors which does not materially improve or add substantial
functionality or features to the System, or (ii) as to Equipment or Data Center
Assets; any actions (including modification, adjustment, repair or replacement)
necessary to make the Equipment or Data Center Asset perform in good working
order in accordance with any applicable specifications.

     "MIS Steering Committee" shall have that meaning set forth in Section 12.3.
      ----------------------                                                    

     "Monthly Base Charge" means the fixed monthly charges as specified in
      -------------------                                                 
Section 1 of Schedule C of this Agreement to be paid to Systematics by Fidelity
in exchange for Systematics' provision of the Services as set forth herein.

     "Multiple Disaster" means disasters experienced by two or more Subscribing
      -----------------                                                        
Clients at times when such Subscribing Clients would be entitled to use the
Disaster Recovery Facility at the same time.

     "OTS" shall mean the Office of Thrift Supervision as set forth in Section
      ---                                                                     
17.3.

     "Performance Criteria" means the performance criteria set forth in Exhibit
      --------------------                                                     
D attached hereto to which Systematics shall adhere in connection with
performing or providing the Services hereunder.

     "Performance Incentive" shall have that meaning set forth in Section 18.
      ---------------------                                                  

     "Person" means an association, firm, individual, partnership (general or
      ------                                                                 
limited), corporation, trust, financial institution, unincorporated
organization, or other entity or any Governmental Entity.

     "Planned Conversion Completion Date" means the date upon which the parties
      ----------------------------------                                       
contemplate that the Conversion Date is to occur as specified in Exhibit A.

     "Purchased Equipment" shall have that meaning set forth in Section 5.8.
      -------------------                                                   

     "Regulatory Minimum" shall have that meaning set forth in Section 5.7.
      ------------------                                                   

     "Required Consent" means any consent required to be obtained by either
      ----------------                                                     
party for the transfer of the right to use applicable space, equipment, software
and third party services and the assumption of the obligations related to such
resources.

                                      -5-

     "Resident Staff" shall have that meaning set forth in Section 8.1.
      --------------                                                   

     "Service Assets" shall have that meaning set forth in Section 11.2 (b).
      --------------                                                        

     "Services" shall have that meaning set forth in Section 1.1.
      --------                                                   

     "Shell Facility" means preconditioned space suitable for the installation
      --------------                                                          
of Fidelity's computer equipment, located at 409 Shall Street, Little Rock,
Arkansas.

     "Special Service" means any service requested by Fidelity outside the scope
      ---------------                                                           
of the Services and not covered by the Monthly Base Charge or the Additional
Volume Charges and as further defined in Section 3.3.

     "Special Service Price Proposal" shall have that meaning set forth in
      ------------------------------                                      
Section 3.3(a).

     "Subscribing Client" means any person, firm or corporation which has
      ------------------                                                 
entered into a Disaster Recovery Agreement with Systematics for use of the
Disaster Recovery Facility.

     "System" means a computer program or a series of computer programs, the
      ------                                                                
tangible media on which it is recorded and the related Documentation.

     "Systematics' Similarly Situated Customers"  Systematics' customers which
      -----------------------------------------                               
are comparable to Fidelity in terms of services provided, asset size, number of
branches,  numbers of accounts and transactions or other factors which affect
Systematics pricing for services similar to those being provided to Fidelity.

     "Systematics Systems" means all Systems and System revisions, releases,
      -------------------                                                   
customization, improvements, modifications and enhancements to the functions and
features of the Systems along with any new systems or major subsystems which
are; (i) now or hereafter owned and developed by Systematics, and (ii) now or
hereafter used in connection with providing or performing Services hereunder or
are offered for use to Fidelity at any point in time during the Term of this
Agreement.

     "Term" shall have that meaning set forth in Section 2.
      ----                                                 

     "Termination Date" shall have that meaning set forth in Section 10.2.
      ----------------                                                    

     "Third Party System" means any System which (i) is not a Systematics System
      ------------------                                                        
and (ii) is acquired from a third party for operation by Systematics under this
Agreement on behalf of Fidelity, as set forth on Exhibit E hereto, as amended
from time to time by mutual agreement.

     "Training Agreement" shall have that meaning set forth in Section 7.
      ------------------                                                 

                                      -6-

     "Truth in Savings Project" means all modifications, enhancement, testing
      ------------------------                                               
and error correction of the IMPACS Systems necessary to be in substantial
compliance with the Truth in Savings Act and Regulation DD promulgated
thereunder.

     "Truth in Savings Project Deadline" means June 21, 1993, the date on which
      ---------------------------------                                        
the Truth in Savings Project is to be functional in a production environment
available for use by Fidelity.

     Other capitalized terms used in this Agreement are defined in the context
in which they are used and shall have the meanings indicated by such use.

1.   SERVICES.

     1.1  GENERAL SCOPE OF SERVICES.  In exchange for the Monthly Base Charge
          and any applicable Additional Volume Charges and upon the terms and
          conditions set forth in this Agreement, Systematics shall provide to
          Fidelity the data processing services and products described in this
          Agreement and its schedules and exhibits including, without
          limitation, the following: (i) overall management and operation of
          Fidelity's data processing operations subject to Fidelity's reasonable
          approval including, without limitation, responsibility for Conversion
          to the Systematics Systems and Third Party Systems, including, without
          limitation, on-line transaction processing, batch processing and
          report creation and distribution ("Conversion Services"), (ii)
          installation (including related Conversion), support, operation,
          maintenance and enhancement of Systematics Systems and Third Party
          Systems including, without limitation, on-line transaction processing,
          batch processing of all Systems and report creation and distribution,
          installation, support and maintenance of operating system software and
          system environment and telecommunication software, (iii) forms
          management for the Data Center, (iv) providing competent staff
          necessary to provide the Services, (v) furnishing, maintaining and
          operating computer equipment as described herein, (vi) services
          related to the Fidelity Telecommunications Network as set forth in
          Exhibit D, (vii) providing information to Fidelity in various media
          forms and on such schedule as provided herein including, without
          limitation, providing information in such forms as may be necessary to
          interface with any other System, (viii) disaster recovery services
          from the date of termination or expiration of the current disaster
          recovery agreement as more fully discussed in Section 13 hereof,
          through the expiration or termination of this Agreement, (ix) offering
          employment to the Fidelity data processing employees designated by
          Fidelity and (x) the grant to Fidelity of a license to use Systematics
          Systems (all the preceding products and services along with other
          products and services as more fully described herein, in the attached
          Exhibits and Schedules and elsewhere herein shall be referred to
          herein as the "Services").  Systematics shall perform the Services in
          a good and workmanlike manner and in

                                      -7-

          accordance with all applicable laws and regulations of any
          Governmental Entities, the terms and conditions hereof (including,
          without limitation, the Performance Criteria), and such standard of
          care as is generally accepted in the data processing services and
          software industries.

     1.2  ALTERNATIVE TECHNOLOGY.  If at any time during the Term of this
          Agreement, Systematics has available or offers to any of its current
          or prospective customers any delivery methods for services similar to
          the Services or any portion thereof including, without limitation,
          delivery of the Services from a remote Systematics' technology center
          or by use of an alternative technology platform or architecture (the
          "Alternative Technology"), [CM]. Systematics shall submit a proposal
          to Fidelity regarding the implementation of such Alternative
          Technology which shall include information reasonably requested by
          Fidelity including, without limitation, information regarding
          conversion, operation and logistical details of implementing such
          Alternative Technology along with a price for providing such
          Alternative Technology. If Fidelity, in its sole and absolute
          discretion, decides to obtain the Alternative Technology from
          Systematics then this Agreement shall be deemed amended, to
          incorporate the terms, conditions and pricing related to the
          Alternative Technology. [CM]

2.   TERM.

     The term of this Agreement is [CM], beginning on the Effective Date
     reflected above. The end of such term shall be the "Expiration Date". At
     least two hundred and seventy (270) days prior to the Expiration Date,
     Systematics will submit to Fidelity a written proposal for renewal of this
     Agreement. Fidelity will respond to such proposal within one hundred twenty
     (120) days following receipt thereof.

3.   BILLING AND PAYMENT TERMS; SPECIAL SERVICE PRICING.

     3.1  BILLING AND PAYMENT.  Subject to Fidelity's ability to audit and
          dispute amounts charged by Systematics as set forth elsewhere herein,
          Fidelity agrees to pay Systematics for the Services performed
          hereunder in accordance with the fees set forth in Exhibit C to this
          Agreement, pursuant to invoices prepared and delivered to Fidelity
          provided, however, that Fidelity's payment of fees

                                      -8-

          pursuant to such invoices shall not waive Fidelity's right, as set
          forth herein, to audit or dispute any amounts paid or due hereunder.
          The Monthly Base Charge shall be payable on the first day of each
          month for Services to be rendered during that month.  Additional
          Volume Charges shall be reflected in the first monthly invoice after
          the relevant usage data is available and shall be payable by Fidelity
          promptly following receipt of such invoice.

     3.2  ADDITIONAL SERVICES CHARGES. [CM] 

     3.3  SPECIAL SERVICES.

          (a)  SPECIAL SERVICE PROPOSALS.  If Fidelity requests Systematics to
               perform activities outside the scope of the Services ("Special
               Services"), Fidelity shall notify Systematics in writing of such
               request. [CM] Such notice by Fidelity shall contain the
               general requirements of such Special Services, a desired
               schedule, any estimated increase in number of transactions to be
               processed and the extent of commitment of Fidelity resources to
               the accomplishment of the Special Services.  Systematics shall,
               within a reasonable time after such request, provide Fidelity
               with a proposal ("Special Service Price Proposal") to perform the
               requested Special Services.  Systematics shall advise Fidelity of
               any development, implementation and operational changes necessary
               to implement the requested Special Service, if any, and provide
               Fidelity a project plan for the implementation of the Special
               Service including, without limitation, a description of the work
               to be performed by each party, the parties' responsibilities with
               respect to that work, a schedule for implementation and
               Systematics' proposed charges (as determined below pursuant to
               Section 3.3(d)) for the Special Service.  Systematics shall
               cooperate with Fidelity in an effort to determine the lowest cost
               implementation of such Special Service including, without
               limitation, proposing alternative delivery schedules and
               alternative deliverables or services.  All proposals by
               Systematics shall be subject to approval by Fidelity, in its sole
               and absolute discretion.

                                      -9-

          (b)  SPECIAL SERVICE PRICE. [CM]

          (c)  SPECIAL SERVICE CHARGE THRESHOLD.  Notwithstanding any other
               provision of this Agreement, Systematics shall charge an
               additional fee for a Special Service only if [CM]

          (d)  SPECIAL SERVICE PRICE PROPOSAL COMPONENTS.  The Special Service
               Price Proposal shall be calculated based upon the following
               components: [CM]

          (e)  SPECIAL SERVICE APPROVAL.  Upon receiving written authorization
               to proceed from Fidelity, Systematics shall perform the Special
               Services for the price and in the manner agreed.

          (f)  THIRD PARTY SERVICE.  If the parties are unable to agree upon the
               terms and conditions of doing the Special Services, Fidelity
               shall have the option, subject to the terms and conditions set
               out herein, to have a third party perform such Special Services.

     3.4  [CM]

                                      -10-

          [CM]

4.   RESPONSIBILITIES OF THE PARTIES.

     4.1  SYSTEMATICS' RESPONSIBILITIES.  In addition to other responsibilities
          and obligations of Systematics as set forth elsewhere in this
          Agreement, Systematics, by its personnel located at the Data Center
          ("Data Center Staff"), shall:

          (a)  Perform the Services set out in this Agreement and the Exhibits
               and Schedules attached hereto.

          (b)  Process and produce all current reports and Systematics reports
               as described in Exhibit B at the times and frequencies set forth
               in Exhibit B and additional reports as described in Exhibit B as
               may reasonably be scheduled or requested from time to time by
               Fidelity.

          (c)  Install (including required Conversions) all Systematics Systems
               and Third Party Systems listed on the implementation schedule in
               Exhibit A and operate such Systems for Fidelity after their
               implementation, accepting input and delivering output at the Data
               Center.

          (d)  Provide planning and services associated with the transition from
               the current data processing operations being performed at
               Fidelity's Data Center to a Systematics' operation in accordance
               with the detailed Conversion Plan.

          (e)  Provide Maintenance by the Resident Staff on the Systems operated
               by Systematics for Fidelity under this Agreement.

          (f)  Make modifications (other than Maintenance) by the Resident Staff
               or perform development or conversions by the Resident Staff of
               Existing Systems, Third Party Systems (when allowed by the third
               party license)

                                      -11-

               or Systematics Systems when authorized by Fidelity in writing in
               accordance with the provisions of this Agreement.

          (g)  Prepare system requirements and specifications, acceptance test
               plans and acceptance criteria as mutually agreed by the parties.

          (h)  Process and update Fidelity's data in accordance with the
               schedule set forth in Exhibit D.

          (i)  Perform reruns promptly as required by processing errors without
               additional charge to Fidelity.

          (j)  Provide services related to the Fidelity Telecommunications
               Network as set forth on Exhibit D and advise the appropriate
               vendor if a problem is detected.  Systematics will provide the
               terminals and personal computers used by its personnel.

          (k)  Provide sufficient numbers of qualified personnel to perform the
               Services and Special Services: (i) in a timely manner to the
               professional standards applicable in the industry by qualified
               personnel familiar with the subject matter and with the proper
               skill, training and background, (ii) following the operational
               and management methodologies and requirements set forth in this
               Agreement as modified from time to time by mutual agreement and
               (iii) in accordance with the Performance Criteria.

          (l)  Hold all information obtained from Fidelity (the "Fidelity
               Information") in confidence and not disclose such information to
               any person or entity without the express written authorization of
               Fidelity in accordance with Section 5.16.  Fidelity Information
               is and shall always remain the exclusive property of Fidelity and
               all such Fidelity Information shall be available for reasonable
               examination by Fidelity or Fidelity's designees at any time
               during regular business hours, without notice.

          (m)  Subsequent to the transfer of any Fidelity Information to
               Systematics, Systematics shall store and safeguard all such
               Fidelity Information (under the retention schedule agreed upon by
               the parties) regardless of the form in which such Fidelity
               Information is transferred to Systematics including, without
               limitation, documents, tapes, electronic impulses, or magnetic
               storage media containing the Fidelity Information.  Such storage
               and safeguard by Systematics shall be in accordance with the
               safeguards specified in Section 13.1 of this Agreement,
               including, without limitation, taking all steps necessary to
               ensure that the magnetic tapes furnished by Fidelity to
               Systematics

                                      -12-

               remain in machine readable condition.  If any regulatory body
               requires a longer retention schedule for such storage media or
               the data they contain, or Fidelity requests a longer retention
               schedule, Systematics shall comply with such requirements or
               request and price such service as a Special Service pursuant to
               Section 3.3.  After Systematics has provided to Fidelity copies
               of all Fidelity information, Systematics shall not be obligated
               to store or retain any Fidelity Information after the termination
               of this Agreement for any reason.

          (n)  Maintain, modify, enhance and update all Documentation related to
               the Systems used to perform the Services, for as long as
               Systematics operates such Systems for Fidelity under this
               Agreement, as follows:

               (i)  For any Third Party Systems, Systematics Systems and any new
                    Systems developed or installed by Systematics under this
                    Agreement, Systematics shall maintain and update the
                    Documentation in accordance with mutually agreed
                    documentation standards at the Effective Date.

               (ii) Systematics' obligation to maintain and update user manuals
                    shall be limited to providing Fidelity with a master copy of
                    any applicable user manual or any change to such manuals
                    (with instructions for updating the manuals).  Fidelity
                    shall be responsible for reproducing and distributing such
                    manual and changes to the appropriate Fidelity employees.

          (o)  Provide training and education as specified in Section 7 hereof.

          (p)  Provide all magnetic tapes, tape cartridges and impact printer
               ribbons required to perform the Services under this Agreement
               over and above those that are currently in inventory at the Data
               Center.  Systematics shall manage and monitor the inventory of
               all consumable goods associated with the performance of Services
               hereunder and ensure that same are available as needed and shall
               provide reports of such inventory levels to Fidelity on a monthly
               basis.  Systematics shall notify Fidelity of the need to order
               any input forms, output forms, balance control forms or stock
               paper which Fidelity is to provide hereunder in sufficient time
               to permit the normal ordering and delivery of such supplies prior
               to the exhaustion of the existing inventory.

          (q)  Provide a help desk to provide customer support to Fidelity
               employees during all System operational hours.

                                      -13-

          (r)  Supply all CPUs, communications controllers, DASD equipment,
               tape/cartridge equipment, printers and related peripheral
               equipment which may be required for its operation of the Data
               Center and the provision of Services hereunder, except for that
               equipment listed in Schedule E and which shall be provided by
               Fidelity on a temporary basis until such time as the current
               terms of the agreements for the lease of such equipment and
               acquisition of such services expire without any obligation on the
               part of Fidelity to renew such agreements for additional terms.

          (s)  Perform the services, duties and obligations assigned to
               Systematics as set forth in Exhibit A.

          (t)  Cooperate with any third party in connection with services being
               performed by such third party under contract with Fidelity and
               manage and administer such third party contracts as requested by
               Fidelity from time to time.  Systematics will provide such third
               party with reasonable cooperation and assistance requested by
               Fidelity in connection with such services.

          (u)  [CM]

          (v)  Not perform changes to programs used to process Fidelity's data
               affecting the input, output, control, audit or accounting
               procedures of Fidelity without first obtaining Fidelity's prior
               written approval.

          (w)  Provide to Fidelity all enhancements, modifications and
               improvements to the Services, applications, reports, functions
               and features of the Services which Systematics makes available
               generally to its client base without additional charge to
               Fidelity.

          (x)  Complete the Truth in Savings Project at a time mutually agreed
               upon by the parties.

          (y)  Provide to Fidelity reports, in a format reasonably acceptable to
               Fidelity, including any and all operational and management
               information necessary for Fidelity to administer and monitor
               progress under this Agreement, including, a monthly report of
               Systematics service performance as measured by Fidelity
               procedures and policies, a monthly conversion management status
               report, a monthly project status

                                      -14-

               report and such other information and reports as Fidelity may
               reasonably request from time to time.

          (z)  Provide all resources necessary to make the following on-line
               systems available to Fidelity with the capabilities and on the
               schedule as established and modified by the parties from time to
               time:  (i) training system, (ii) user test system, (iii)
               production system and (iv) development system.

          (aa) Comply and ensure compliance by any ERISA Affiliate of
               Systematics with the continuation coverage requirements of
               Sections 601 et seq. of ERISA provided however, that a breach of
                            -------                                            
               this Section 4.(aa) shall give rise for a claim for
               indemnification by Fidelity but shall not constitute a default of
               the Agreement giving rise to a termination for cause under
               Section 10.1(b).

     4.2  FIDELITY'S RESPONSIBILITIES.  In addition to other responsibilities
          and obligations of Fidelity as set forth elsewhere in the Agreement,
          Fidelity shall:

          (a)  Cooperate with Systematics in establishing appropriate testing
               criteria and procedures for and in the testing of new Systems.

          (b)  Establish data processing priorities for Fidelity on an on-going
               basis, including providing the business plan objectives and
               requirements of Fidelity to Systematics.

          (c)  Supply to Systematics for processing, source data in machine
               readable condition, accompanied by control totals and, if
               applicable, encoded batch tickets and proof tapes with totals, in
               the form agreed upon by the parties.  Fidelity assumes all risk
               of loss and expenses of reconstruction as to that data supplied
               by Fidelity, except for loss caused by Systematics.

          (d)  Review all reports prepared by Systematics, balance to the
               appropriate control totals, and reject all incorrect or
               incomplete reports and notify Systematics of any erroneous
               processing within a reasonable time after any error or out of
               balance control totals should be detectable.

          (e)  Create and Maintain Fidelity end user procedures manuals.

          (f)  Provide the necessary transportation for the physical delivery of
               data and other input to, and for distribution of reports and
               other output from, the Data Center.

                                      -15-

          (g)  Prepare and input test data for and conduct acceptance testing
               according to the acceptance test plan as mutually agreed upon by
               the parties.

          (h)  Pay the rent for that computer equipment identified on Exhibit E
               as being supplied by Fidelity, until such time as the leases
               expire on such equipment, without any obligation to renew or
               extend the leases thereon.  For the period during which Fidelity
               is obligated to provide such equipment as set forth on Exhibit E
               hereto, Fidelity shall pay all other expenses, if any, except for
               maintenance on the equipment which Systematics will pay
               associated with Systematics' use of the equipment identified on
               Exhibit E as being supplied by Fidelity.

          (i)  Pay all costs of installing and utilizing communication or
               telephone lines, data sets, modems, ATMs, terminals and terminal
               control units, as required for Fidelity's on-line operations,
               testing and training and provide all personal computers used by
               Fidelity personnel.

          (j)  Approve as it deems appropriate, in its sole and absolute
               discretion, any changes to programs used to process Fidelity's
               data affecting the input, output, control, audit or accounting
               procedures of Fidelity.

          (k)  Furnish to Systematics Fidelity's current inventory of magnetic
               tapes, tape cartridges and impact printer ribbons for use in
               processing Fidelity's data.  Provide all input and output forms,
               balance control forms, stock paper and any forms necessary for
               Systematics to meet the processing requirements of Fidelity, as
               well as adequate storage therefor.

          (l)  Promptly analyze all changes proposed by Systematics to programs
               used to process Fidelity's data affecting the input, output,
               control, audit or accounting procedures of Fidelity in order to
               inform Systematics promptly of Fidelity's approval or disapproval
               thereof.

          (m)  Fidelity shall be responsible for normal user department
               activities such as understanding all input, output system
               features, accounting and balance control, and personalization and
               subsequent maintenance of the basic user manuals provided by
               Systematics.

5.   DATA PROCESSING PREMISES AND SECURITY, AUDIT.

     5.1  DATA CENTER ACCESS.  Fidelity shall provide Systematics access to and
          use of the Data Center and the Data Center Assets for Systematics to
          perform its responsibilities under this Agreement.  Systematics shall
          not permit the removal of any Data Center Assets from the Data Center
          without first

                                      -16-

          obtaining the express written consent of Fidelity.  Systematics shall
          use the Data Center and the Data Center Assets in a careful and proper
          manner and, upon termination or expiration of this Agreement,
          Systematics shall return possession of the Data Center and the Data
          Center Assets to Fidelity in good condition and repair, ordinary wear
          and tear excepted.  In addition, Systematics shall take reasonable
          steps to prevent damage to the Data Center Assets or the Data Center
          by any act or omission by Systematics employees or any other parties
          to which Systematics permits access to the Data Center.

     5.2  DATA CENTER SERVICES.  Fidelity shall supply water, sewer services,
          heat, lights, air conditioning, electricity (including, if desired by
          Fidelity, an uninterruptable power system, battery backup and backup
          generator capacity) and daily janitorial services for the Data Center
          to the same extent as are supplied at the Data Center as of the
          Effective Date.  In addition, Fidelity shall provide parking spaces
          for Systematics employees under the same conditions as provided to
          them as employees of Fidelity immediately prior to the Effective Date.

     5.3  TELEPHONE SERVICE.  Fidelity will provide telephone instruments and
          telephone service at such levels as Fidelity determines are reasonably
          necessary for Systematics to communicate with the employees of
          Fidelity as required for Systematics to perform its responsibilities
          under this Agreement; provided, however, that Systematics shall pay to
          Fidelity, all costs and charges associated with any long distance
          calls made from telephones located in the Data Center not associated
          with the provision of Services hereunder.

     5.4  POLICIES RELATING TO SYSTEMATICS OCCUPANCY.  At all times during the
          period Systematics uses space and related utilities and services in
          the Data Center or any other Fidelity facilities, Systematics shall
          comply with the customary and reasonable policies governing access to
          and use of the facilities in effect from time to time, as long as such
          policies do not inhibit Systematics' ability to perform under this
          Agreement.

     5.5  DISPOSITION OF PROPERTY.  In the case of disposition by sale, lease,
          transfer or otherwise, including condemnation, of existing Fidelity
          property which is occupied by Systematics, Fidelity may provide
          written notice to Systematics to vacate the affected Fidelity
          property.  Systematics will cooperate with Fidelity in vacating such
          premises as promptly as practical, but in no event will Systematics be
          required to vacate the premises on less than thirty (30) days notice
          from Fidelity.  In the event that Systematics is required to vacate
          such premises, Fidelity will provide replacement premises in accord
          with this Agreement and will pay reasonable costs associated with such
          move.

                                      -17-

     5.6  GENERAL COOPERATION.  The parties will cooperate with each other and
          will act reasonably and in good faith in coordinating the ongoing use
          of the Data Center by the parties.

     5.7  SECURITY STANDARDS.  Systematics shall adhere to any and all security
          standards with respect to Fidelity's data as may be required by any
          and all laws, regulations, orders or other requirements of any
          Governmental Entity (the "Regulatory Minimum"), Fidelity policies and
          procedures, and other standards and procedures as may be requested by
          Fidelity from time to time including, without limitation,
          investigative procedures prior to hiring any personnel and in
          connection with the termination of Data Center personnel.  Any
          modifications or additions to the Data Center or actual increases in
          Systematics' costs of operation which are required in order to
          implement additional security measures requested by Fidelity which are
          not otherwise required to meet the Regulatory Minimum will be provided
          by Systematics as a Special Service pursuant to Section 3.3.
          Systematics personnel shall comply with all rules established by
          Fidelity with respect to access to the Data Center, Fidelity offices,
          the Fidelity data and data files.

     5.8  USE OF EQUIPMENT.  During the Term of this Agreement, Fidelity shall
          provide Systematics access to and use of the equipment, documentation
          and other property enumerated and described in Exhibit E attached
          hereto (the "Equipment").  Systematics shall have the right to use the
          Equipment during the Term of this Agreement at the Data Center;
          provided, however, that as to any Equipment which is under lease to
          Fidelity, Fidelity shall not be obligated to provide access to or use
          of such Equipment subsequent to the expiration of the current lease
          term as to each piece of Equipment, as set forth in Exhibit E.
          Systematics shall use the Equipment in a careful and proper manner and
          shall comply with all laws and regulations applicable to the
          possession or use of the Equipment.  At the expiration or termination
          of this Agreement, Systematics shall return the Equipment (not
          including the Purchased Equipment as defined below) to Fidelity in the
          same condition as such Equipment is provided to Systematics, ordinary
          wear and tear excepted and with the same warranties as provided by
          Fidelity hereunder.  If at any time during the Term of this Agreement,
          Fidelity supplies Systematics with labels, plates or other markings
          stating that the Equipment is owned by Fidelity, Systematics shall
          affix and keep the same in a prominent place on the Equipment.  In
          addition, Systematics agrees to purchase from Fidelity and Fidelity
          agrees to sell to Systematics that equipment, documentation and other
          property enumerated in Exhibit E attached hereto (the "Purchased
          Equipment") as of the Effective Date.

     5.9  MAINTENANCE OF THE EQUIPMENT.  In the event that, subsequent to the
          Effective Date, the Equipment (except that which is then under lease
          to

                                      -18-

          Fidelity) is no longer in good working order or does not perform in
          accordance with the applicable equipment specifications, Systematics
          shall, at its own expense, take all actions (including modification,
          adjustment, repair or replacement of the Equipment) necessary to make
          the Equipment perform in good working order in accordance with the
          applicable equipment specifications.

     5.10 RISK OF LOSS AND DAMAGE.  Following the Effective Date, Systematics
          assumes and shall bear the risk of loss and/or damage to the Equipment
          resulting from action or inaction of Systematics or Systematics'
          agents.  In the event of such loss or damage of any kind to any item
          of Equipment, Systematics shall either: (i) take all actions
          (including modification, adjustment, repair or replacement of the
          Equipment) necessary to make the Equipment perform in good working
          order or (ii) at Fidelity's option pay Fidelity the fair market value
          of the equipment.

     5.11 EQUIPMENT WARRANTY LIMITATIONS.  THE EQUIPMENT AND THE PURCHASED
          EQUIPMENT IS PROVIDED TO SYSTEMATICS AS-IS, WITHOUT ANY WARRANTIES OF
          ANY KIND OR NATURE, WHETHER EXPRESS OR IMPLIED INCLUDING, WITHOUT
          LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
          PARTICULAR PURPOSE, WHETHER OR NOT FIDELITY KNOWS OR HAS REASON TO
          KNOW OF ANY SUCH PURPOSE AND WHETHER ARISING BY LAW OR BY REASON OF
          CUSTOM OR USAGE IN THE TRADE.

     5.12 NO CONSEQUENTIAL DAMAGES.  IN NO EVENT SHALL FIDELITY BE LIABLE TO
          SYSTEMATICS IN CONNECTION WITH THE PROVISION OR USE OF THE EQUIPMENT
          OR PURCHASED EQUIPMENT FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL OR
          RELIANCE DAMAGES INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOST
          PROFITS OR ECONOMIC DAMAGE OR INJURY TO PROPERTY REGARDLESS OF THE
          FORM OF ACTION, WHETHER IN CONTRACT, INDEMNITY, WARRANTY, STRICT
          LIABILITY OR TORT AND REGARDLESS OF WHETHER FIDELITY HAS REASON TO
          KNOW OR IN FACT KNOWS OF THE POSSIBILITY THEREOF.

     5.13 AUDIT CONFERENCE.  Systematics will cooperate fully with Fidelity or
          its designee in connection with Fidelity's audit functions or with
          regard to examinations by regulatory authorities.  Fidelity
          acknowledges that Systematics is not responsible for providing audit
          services or for auditing Fidelity's records or data.  Following any
          audit or examination, Fidelity will conduct (in the case of an
          internal audit), or instruct its external auditors or examiners to
          conduct an exit conference with Systematics and, at such time, and as
          soon as available

                                      -19-

          thereafter, to provide Systematics with a copy of the applicable
          portions of each report regarding Systematics or Systematics' services
          (whether draft or final) prepared as a result of such audit or
          examination.  Fidelity also agrees to provide and to instruct its
          external auditors to provide Systematics, a copy of the portions of
          each written report containing comments concerning Systematics or the
          services performed by Systematics pursuant to this Agreement.

     5.14 AUDIT AND ACCESS RIGHTS.  Fidelity shall also have audit and access
          rights with respect to Systematics to enable its internal or outside
          auditors to perform their respective functions including, without
          limitation, audit and access rights to any and all of: (i) Fidelity's
          Confidential Information (as such term is defined in Section 5.16
          hereof) in the possession of Systematics, (ii) such other information
          and data as Fidelity may reasonably request from time to time to the
          extent necessary to implement the provisions hereof.  To the extent
          any such audit results in the identification of legitimate
          deficiencies, Systematics shall correct such deficiencies at its
          expense as soon as is practicable.

     5.15 AUDIT OF OPERATIONAL PROCEDURES.  Fidelity shall also have all audit
          and access rights sufficient to enable its internal auditors and other
          designated employees, as well as independent outside consultants, as
          reasonably requested by Fidelity, the systems architecture,
          operations, development methodologies and data security of the
          Systematics Systems and to verify that Systematics is exercising
          reasonable operational procedures in accordance with generally
          accepted standards in its performance of the Services and to confirm
          Systematics' performance and observance of its obligations hereunder
          including, without limitation, the Performance Criteria.  To the
          extent such audit results in the identification of a legitimate
          technical deficiency from then-current industry standards, Systematics
          shall use industry standard commercial efforts to resolve such
          technical deficiency at its cost.

     5.16 SPECIFIC OBLIGATIONS REGARDING THIRD PARTIES.  The parties agree that
          information submitted by either of them in connection with the
          negotiation of this Agreement and to assist either party in meeting
          its obligations hereunder (including all information relating to
          Fidelity's and Systematics' organizational structure and future
          business plans), all data generated as a result of Services or
          Conversion Services rendered hereunder and any and all documents,
          cards, tapes, discs and other media upon which such data or
          information is contained (herein collectively referred to as the
          "Confidential Information") constitute valuable proprietary products
          or contain trade secrets and confidential information concerning the
          business of Fidelity or Systematics.  The Confidential Information is
          and shall remain the sole property of the party submitting the same
          and each party agrees to observe reasonable confidentiality standards
          with respect to the Confidential Information of the other party and,

                                      -20-

          upon request, to return such Confidential Information to its owner
          upon any termination or expiration of this Agreement regardless of the
          existence of or status of any dispute between the parties.  Without
          limiting the generality of the foregoing, and except as otherwise
          authorized elsewhere by this Agreement, each party specifically
          agrees: (i) to take reasonable precautions not to disclose or
          otherwise permit to any other Person access to, in any manner, the
          Confidential Information or any part thereof of the other party except
          as such access shall be required by an employee with a need to know in
          the course of his or her employment; (ii) to take reasonable
          precautions to assure that third parties are advised of the
          confidential nature of the Confidential Information and to require by
          agreement that they are prohibited from copying or revealing the
          Confidential Information or any part thereof without prior written
          consent of the party owning the Confidential Information; (iii) to
          notify the other party promptly and in writing of the circumstances
          known to such party surrounding any possession, use or knowledge of
          the Confidential Information by any Person other than those authorized
          by this Section 5.16; (iv) immediately upon receipt by such party of
          any legal process (whether initiated by private parties or
          Governmental Entities) requesting access to Confidential Information
          under such party's control (except as otherwise provided herein), to
          transmit such request to the other party, and not to divulge such
          Confidential Information in response to such legal process without the
          other party's written consent, except for criminal actions involving
          non-monetary sanctions and penalties, which consent shall be
          conclusively deemed granted if no response is made to such request for
          consent by the time set by the legal process for the provision of the
          Confidential Information (it being understood that the party in
          possession of such Confidential Information (the "Possessing Party")
          shall undertake the burden of opposing such process if the other party
          should deem it necessary and agree to indemnify in writing the
          Possessing Party for any costs or penalties incurred by the Possessing
          Party in connection with its refusal to comply with such process); (v)
          to take reasonable precautions not to use, provide, make available or
          permit the use of the Confidential Information or any part thereof in
          any form whatsoever, whether gratuitously or for valuable
          consideration, to or for the benefit of any other Person; (vi) to take
          at such party's expense to the extent it was at fault in permitting
          access to the Confidential Information, any legal action reasonably
          necessary to prevent unauthorized use of such Confidential Information
          by any third Person who or which has gained access to the Confidential
          Information due to the fault of such party; and (vii) to take any and
          all other reasonable actions deemed necessary or appropriate by the
          other party, at the other party's expense and subject to the other
          party's control, to assure the continued confidentiality and
          protection of the other party's Confidential Information and to
          prevent access to the other party's Confidential Information by any
          Person not authorized under this Section 5.16.

                                      -21-

6.   SOFTWARE.

     Fidelity and Systematics entered into a Charter Software License Agreement
     dated the 31st day of October, 1991.  The Charter Software License
     Agreement was amended of even date herewith and is referred to herein as
     the "Amended Charter Software License Agreement."  The Charter Software
     License Agreement, as amended, is attached hereto as Exhibit G.  During the
     term of this Agreement, Fidelity agrees not to process, operate or
     otherwise use the Software licensed to Fidelity pursuant to the Charter
     Software License Agreement simultaneously on another processor at another
     data center installation site.  At the termination of this Agreement,
     Fidelity may, at its option renegotiate new ESR Service (as defined in
     Section 7 of the Charter Software License Agreement) for the software
     provided pursuant to the Charter Software License Agreement at Systematics'
     then current rate for such services.  In the event that Fidelity exercises
     its option to obtain ESR Services within ninety (90) days after the
     expiration of the Agreement according to its terms, Fidelity shall not be
     required to pay a recertification fee to obtain such ESR Services.

     6.1  ADDITIONAL LICENSED PROGRAMS.  The license contemplated by this
          Section 6 shall also apply to all Systematics' owned and developed
          program modifications, enhancements, new systems or major subsystems
          installed for Fidelity's benefit pursuant to this Agreement.
          Systematics will furnish Fidelity, upon request, a current list of all
          Software systems and subsystems developed or made available by
          Systematics. Systematics will give Fidelity ninety (90) days notice
          prior to eliminating updates for a particular system version of any
          Systematics-developed program.

     6.2  SOFTWARE WARRANTY.  Each of the warranties set forth in Exhibit G, as
          well as the patent and trademark indemnity provisions of Exhibit G,
          shall apply to the Software, and all enhancements, modifications or
          changes thereto, furnished or used pursuant to this Agreement.

     6.3  USER MANUALS. Prior to the installation of each Software system,
          Systematics will deliver to Fidelity two copies of the applicable User
          Manuals, and thereafter, two copies of standard updates thereto.
          Fidelity is responsible for the initial personalization and for the
          maintenance, reproduction and distribution of User Manuals.
          Systematics hereby consents to the reproduction of User Manuals by
          Fidelity solely for the internal use of Fidelity in accordance with
          this Agreement.

     6.4  THIRD PARTY SOFTWARE.  Systematics will use all computer programs
          acquired by Fidelity from third parties listed on Schedule C attached
          hereto as amended from time to time by the parties or developed by
          Fidelity without the assistance of Systematics to the extent such use
          is permitted by Fidelity's license agreement with the third party
          vendor for each such Third Party

                                      -22-

          System, if any, and provided that the Required Consent has been
          obtained prior to such use, exclusively to process Fidelity's data.
          Additional use of such programs by Systematics shall require the
          written approval of Fidelity.  Systematics reserves the right to
          review and/or test such programs, in advance of processing, to assure
          compatibility with Systematics equipment and systems software.  In the
          event that any Required Consent is not obtained with respect to any of
          the Third Party Systems then, unless and until such Required Consent
          is obtained, Systematics shall refrain from using such Third Party
          Systems.  Except for the Third Party Systems Fidelity has currently
          licensed from vendors Dunn & Bradstreet (McCormack & Dodge), Fi Tech,
          and Tower Systems Group, Systematics shall be responsible for
          obtaining any Required Consents from third parties necessary for
          Systematics to operate any Third Party Systems as contemplated by this
          Agreement and shall bear all costs associated therewith including,
          without limitation those listed on Exhibit E attached hereto.  The
          Resident Staff will provide support and maintenance services with
          respect to such Third Party Systems.  Fidelity may purchase
          maintenance contracts for such programs in its discretion.

     6.5  INSTALLATION OF NEW SYSTEMS AND SUBSYSTEMS.  Systematics will install
          regulatory changes, updates, new systems and subsystems using the
          Resident Staff.  Systematics will present to Fidelity the features of
          and estimated hours required to install such systems or subsystems.
          Fidelity, at its option, may elect to install the new system or
          subsystem or to continue use of the then installed Systematics-
          developed system.

     6.6  MODIFICATIONS REQUESTED BY FIDELITY.  If requested by Fidelity,
          Systematics agrees to use personnel other than the Resident Staff to
          modify the Systematics-developed programs installed for Fidelity by
          Systematics.  Implementation of such Fidelity-authorized modifications
          will be performed by the Resident Staff.  Fidelity understands that
          modifications may require an increase in the time of performance for
          the Resident Staff to subsequently install Systematics-developed
          updates, new systems or subsystems.

     6.7  REGULATORY REPORTING REQUIREMENTS.  During the term of this Agreement,
          Systematics agrees to modify those Systematics-developed programs
          installed for Fidelity so that such programs will comply with the
          mandatory data processing output requirements specified by federal
          regulatory authorities applicable to Fidelity.  Program modifications
          necessary to meet state and local regulatory requirements will be
          provided at Fidelity's request by the Resident Staff.  To the extent
          agreed upon by the affected customers, costs of making modifications
          to comply with state or other regulatory requirements shall be shared
          among such customers.  Fidelity agrees to make Systematics aware of
          any local or state regulatory requirements not included in the
          requirements established by federal regulatory authorities.

                                      -23-

     6.8  SYSTEMATICS SOFTWARE FUNCTIONALITY STATUS. All Systematics Systems
          shall be enhanced and Maintained by Systematics during the Term at no
          additional cost or expense to Fidelity to meet all applicable
          regulatory requirements of any Governmental Entity and Systematics
          shall continue to update and enhance the Systematics Systems.

7.   EDUCATION.

     Fidelity and Systematics acknowledge that they entered into an agreement on
     the 14th day of August, 1992 ("Training Agreement") which provided Fidelity
     the right to acquire certain training services from Systematics.  That
     agreement is not modified or amended by the terms of this Agreement.

     In addition to the services described in that agreement, Systematics will
     make available to Fidelity personnel, its standard application software
     training courses, which are generally held in Little Rock, Arkansas, in
     accordance with Systematics' Education and Training Department schedule, a
     current copy of which will be provided to Fidelity upon request.  Fidelity
     personnel may attend such courses, and any other standard courses generally
     offered by Systematics to its other customers, upon payment of Systematics'
     then current published course fee, subject to normal space availability
     requirements and compliance with Systematics' standard registration and
     enrollment deadlines and procedures.

8.   STAFFING; COMPUTER USE.

     8.1  RESIDENT TECHNICAL STAFF.  Systematics will provide, the staffing
          level of technical and analyst personnel set forth in Section 5 of
          Exhibit C (the "Resident Staff").  Subject to a reasonable time for
          replacements in the event of resignations or terminations, Systematics
          will maintain such staffing levels throughout the term of this
          Agreement.  Provided, however, that if the actual number of Resident
          Staff is decreased by the equivalent of two or more below the then
          agreed upon level for more than one month, (e.g., one person for two
          months, two persons for one month) Systematics will supply comparable
          temporary resources equivalent to the deficiency at no additional fee
          to Fidelity, until the permanent Resident Staff is restored to the
          agreed upon level.  Duties of the Resident Staff shall include, but
          are not limited to, installing the systems reflected in Exhibit A,
          installing program updates, installing new systems and subsystems,
          programming resulting from regulatory changes, user interface,
          communication and customer service, systems programming, attending
          education classes, Fidelity meetings and research meetings, as well as
          Fidelity-requested program modifications and general programming
          duties.

                                      -24-

          (a)  Project Control - The Resident Staff will use a project
               management system for Fidelity projects, and Systematics will
               provide Fidelity with output from such system as frequently as
               weekly.

          (b)  Priorities - Fidelity shall have the right to establish all
               programming and project priorities.  Changes in priorities,
               however, which require reassignment of Systematics Resident Staff
               to other responsibilities may result in an enlargement of
               Systematics' time to complete certain tasks hereunder.

          (c)  Resource Change Procedure - At Fidelity's written request,
               Systematics will increase or decrease the Resident Staff, as long
               as the staffing level is not less than the minimum number set
               forth in Exhibit C.  Systematics will promptly respond to
               Fidelity's request with a proposed fee schedule adjustment which
               shall be an amount equal to 1.8 times the salary of the
               additional resource(s).  Quotations for increases or decreases in
               the Resident Staff will be in minimum increments of one person
               for a minimum term of one year.  Systematics will have up to
               sixty (60) days to implement agreed changes in the Resident
               Staff.

          (d)  Temporary Non-Resident Personnel - If Fidelity does not wish to
               re-order priorities to permit the Resident Staff to perform
               additional services, or to direct Systematics to increase the
               Resident Staff, Fidelity may request Systematics to provide
               additional non-resident personnel on temporary basis and
               Systematics will provide such non-resident personnel on an as-
               available basis.  Systematics will promptly respond with a
               quotation for such non-resident personnel in accordance with
               Section 6 of Exhibit C.  If Fidelity wishes to utilize the
               Systematics personnel services quoted, Fidelity will notify
               Systematics in writing, authorizing Systematics to provide such
               services.

     8.2  SPECIAL COMPUTER USE.  Fidelity may use any Systematics computer time
          which is available in the Data Center, without additional charge, for
          the purpose of the performance of services necessary for Fidelity's
          normal business activities requested by Fidelity or for use with
          regard to audit functions. In the event that Systematics determines
          that such usage exceeds the level for normal business activities,
          Systematics will notify Fidelity and demonstrate such excess to
          Fidelity's reasonable satisfaction whereupon the parties will
          cooperate in scheduling such computer use to accomplish the goals of
          each party. In conjunction with such computer usage, Systematics will
          provide a computer operator and Fidelity will pay Systematics for
          related overtime, if any, incurred by such computer operator.

                                      -25-

     8.3  [CM]

     8.4  EMPLOYEE BENEFITS PLANS

               (a)  Data Exchange.  Fidelity and Systematics acknowledge that
                    --------------                                           
               the DP Employees shall not be eligible for distribution of their
               benefits under either Fidelity Federal Bank 401(k) Savings and
               Investment Plan or the Fidelity Federal Bank Retirement Income
               Plan (collectively, the "Fidelity Plans") solely because of their
               termination of employment with Fidelity.  Systematics shall
               cooperate with Fidelity by notifying Fidelity whenever a DP
               Employee has terminated employment with Systematics, entitling
               the DP Employee to a distribution of his benefits under the
               Fidelity Plans.

               (b)  Waiting Periods and Pre-existing Conditions.  Systematics
                    --------------------------------------------             
               agrees that the DP Employees and their eligible dependents shall
               be eligible to participate in Systematics' medical and dental
               plans as of the Effective Date and any and all waiting periods
               and pre-existing condition clauses shall be waived under such
               plans with respect to the DP Employees and their eligible
               dependents.

               (c)  Employee Reporting.  Systematics shall report monthly to
                    -------------------                                     
               Fidelity on a timely basis the names of those Systematics
               employees who provide services to Fidelity and any other
               information (including

                                      -26-

               hours of service) that Fidelity may need for the proper
               administration of its employee benefits plans (including any
               additional information reasonably requested by Fidelity for the
               determination by Fidelity of which if any such employees are
               subject to Section 4.14(u) of the Code).

     8.5  THIRD PARTY BENEFICIARY CONTRACT.  The provisions of this Section 8
          shall not be construed or applied as a third party beneficiary
          contract.

9.   TIME OF PERFORMANCE.

     The parties agree that timely and accurate submission of input and output
     is essential to satisfactory performance under this Agreement. Systematics'
     time of performance shall be enlarged, if and to the extent reasonably
     necessary, in the event that:  (a) Fidelity fails to submit input data in
     the prescribed form or in accordance with the schedules set forth in
     Exhibit D, (b) an act of God, malfunction of any equipment provided that
     Systematics Maintains such equipment or other cause beyond the control of
     Systematics prevents timely data processing hereunder, (c) special requests
     by Fidelity or any governmental agency authorized to regulate or supervise
     Fidelity impact Systematics' normal processing schedule; or (d) if Fidelity
     fails to provide any equipment, software, premises or performance called
     for by this Agreement, and the same is necessary for Systematics'
     performance hereunder.  The time for Systematics to perform hereunder shall
     be extended one day for each day by which Fidelity fails to meet any of
     Fidelity's deadlines unless Systematics notifies Fidelity in writing prior
     to the time for Systematics' commencement of performance, that Fidelity's
     failure to meet such deadline shall result in delays by Systematics of a
     longer duration.

10.  TERMINATION.

     10.1 TERMINATION FOR CAUSE.  In addition to any other rights which either
          party may have in law or equity, either Systematics or Fidelity may
          terminate this Agreement prior to the Expiration Date, as follows:

          (a)  By Systematics, on written notice thereof by Systematics to
               Fidelity, at any time if Fidelity fails to pay when due any
               amount payable by Fidelity pursuant hereto and such failure
               remains uncured for a period of forty-five (45) days after
               Fidelity is given notice of such breach as provided herein.
               Notwithstanding anything to the contrary herein, this Agreement
               may not be terminated pursuant to this Section until seventy-two
               (72) hours after each member of the MIS Steering Committee has
               been notified of the intent of Systematics to terminate.
               Notwithstanding anything to the contrary herein, Systematics may
               not terminate this Agreement pursuant to this Section for
               Fidelity's failure to pay to Systematics any amount that is due
               by Fidelity if:

                                      -27-

               (i)  Fidelity notifies Systematics of any good faith disputed
                    amount at the time such amount is due and specifies the
                    reasons that amount is disputed;

               (ii) Such notice is signed by an officer of Fidelity at the level
                    of Senior Vice President or above; and

               (iii) Fidelity is diligently pursuing the dispute resolution
                    procedures specified in Section 12 hereof.

          (b)  By Systematics or Fidelity, if there has been a material breach
               of any representation or warranty made by the other herein, or if
               there has been any failure by the other to perform in all
               material respects any obligation or to comply with any covenant
               on its part to be performed or complied with hereunder, and such
               failure or breach remains uncured for a period of thirty (30)
               days (unless otherwise specified) after written notice thereof,
               except with respect to any such failure or breach that is not
               reasonably susceptible of cure within such thirty (30) day period
               if the other promptly commences to cure such failure or breach
               within such thirty (30) day period and diligently prosecutes such
               cure to completion as soon as is reasonably practicable (but in
               no event later than sixty (60) days after written notice of such
               failure or breach);

          (c)  By either party, at any time on written notice thereof, upon the
               occurrence of an Insolvency Event with respect to the non-
               terminating party;

          (d)  By Fidelity, pursuant to its right to early termination of this
               Agreement as provided in Section 10.3 below;

          (e)  By Fidelity at any time if Systematics fails to meet the same
               Performance Criteria in each of four (4) months during any six
               (6) month period; provided, however, that any such right shall be
               deemed waived if not exercised by Fidelity within ninety (90)
               days after the end of such fourth (4th) month;

          (f)  By Fidelity at any time if Systematics fails to meet the same
               Performance Criteria in each of six (6) months during any twelve
               (12) month period; provided, however, that any such right shall
               be deemed waived if not exercised by Fidelity within ninety (90)
               days after the end of such sixth (6th) month;

          (g)  By Fidelity, if any delay or failure caused by Systematics causes
               the normal operation of the Data Center (or the alternative
               facility utilized

                                      -28-

               for disaster recovery purposes during the Term) to be interrupted
               for more than four (4) consecutive days;

          (h)  [CM]

          (i)  By Fidelity, if any Systematics' act or omission in providing
               Services hereunder, is primarily the cause for an enforcement
               action, civil money penalty, cease and desist order or other
               order of a Government Entity which gives rise to a finding that
               such act or omission is unsafe and unsound.

          (j)  By Fidelity, if the Conversion is delayed more than six (6)
               months, pursuant to Section 18.2.

     10.2 METHOD OF TERMINATION.  Exercise of the right to terminate under this
          Section shall be accomplished by providing a written notice of
          termination to the defaulting party specifying in such written notice
          to the defaulting party, the nature and extent of such default and
          fixing a date one hundred eighty (180) days following the date of
          receipt of such notice, for cessation of Services hereunder (the
          "Termination Date").

     10.3 EARLY TERMINATION BY FIDELITY UPON MERGER OR CONSOLIDATION.  Fidelity
          may terminate this Agreement without cause, effective at the end of
          any month on or after the eighteenth (18th) month after the Effective
          Date upon satisfaction of the following conditions ("Termination Upon
          Merger"): (a) Fidelity shall have notified Systematics in writing of
          its intention to terminate, and such notice shall provide for a
          termination date at least one-hundred eighty (180) days after the date
          of receipt of such notice, (b) Fidelity shall have merged or
          consolidated with an unaffiliated third party or sold more than fifty
          percent (50%) of its assets to an unaffiliated third party in an arms
          length, bona fide transaction, no substantial purpose of which is
          related to a termination of this Agreement, and (c) Fidelity shall pay
          Systematics a fee as set forth in Section 10.4 below payable in six
          (6) equal installments due each thirty (30) days subsequent to the
          notice described in (a) above with the first payment due with such
          notice.

     10.4 EARLY TERMINATION UPON MERGER OR CONSOLIDATION FEE SCHEDULE.  In order
          to effect an early Termination Upon Merger pursuant to Section 10.3,
          Fidelity must pay an early termination fee as indicated in the table
          below:

                                      -29-

                   DATE                        FEE
                 -------                      -----

                            [CM]

     10.5 EARLY TERMINATION BY FIDELITY FOR ANY REASON.  Fidelity may terminate
          this Agreement without cause, effective at the end of any month after
          the Effective Date upon satisfaction of each of the following
          conditions ("Termination for Any Reason"):  (a)  Fidelity shall have
          notified Systematics in writing of its intention to terminate, and
          such notice shall provide for a termination date at least one hundred
          eighty (180) days after the date of receipt of such notice, and (b)
          Fidelity shall pay Systematics a fee as set forth in Section 10.6
          below payable in six (6) equal installments due each thirty (30) days
          subsequent to the notice described in (a) above. with the first
          payment due with this notice.

     10.6 EARLY TERMINATION FOR ANY REASON FEE SCHEDULE.  In order to effect a
          Termination For Any Reason pursuant to Section 10.5 above, Fidelity
          must pay an early termination fee as indicated in the table below.

                   DATE                        FEE
                  ------                      -----

                              [CM]

          Fees for termination on dates other than listed in the tables in
          Sections 10.4 and 10.6 above shall be prorated accordingly.

          In exchange for Fidelity's payment of the early termination fee set
          forth in Sections 10.4 and 10.6 above, Systematics shall provide
          Fidelity all deconversion services as requested by Fidelity and more
          fully described in Section 11 below.
 
                                      30

     10.7 EFFECT OF TERMINATION FOR CAUSE. If Fidelity terminates this
          Agreement pursuant to a breach by Systematics, then in addition to
          any other right Fidelity may have at law or in equity, Fidelity shall
          be relieved of any further obligations under this Agreement
          including, without limitation, any early termination fee obligation
          and Fidelity may pursue any rights or remedies it may have in law or
          equity.

     10.8 TERMINATION FEES MUTUALLY EXCLUSIVE.  Fidelity and Systematics
          acknowledge that only one termination fee may apply to any Termination
          Upon Merger or Termination for Any Reason by Fidelity therefore, under
          no circumstances shall Fidelity be obligated to pay early termination
          fees pursuant to both Sections 10.4 and 10.6.

11.  TRANSITIONAL COOPERATION.

     11.1 COOPERATION.  Systematics agrees that upon the expiration or
          termination of this Agreement for any reason, for no additional charge
          to Fidelity beyond the early termination fee, if any, Systematics
          shall exercise its Best Efforts (as defined below) to effect an
          orderly and efficient transition to a successor provider of services.
          Systematics shall provide full disclosure to Fidelity of the resources
          being utilized to perform the Services for Fidelity including, without
          limitation, the equipment, software and third party vendor services,
          and shall exercise its Best Efforts to effect a transfer of license or
          assignment of agreement(s) for any software or any third party
          services utilized to provide the services to Fidelity.  For purposes
          of this Section, "Best Efforts" means that Systematics will, and
          Systematics will cause its employees, agents or any other party or
          entity providing some or all of the services or products hereunder,
          apply its resources to the extent reasonably practical to effect an
          orderly and efficient transition to a successor provider of Services
          for Fidelity.

     11.2 TERMINATION ASSISTANCE.  Commencing upon any notice of termination by
          either party or six (6) months prior to the expiration of the Term of
          this Agreement, Systematics will provide to Fidelity or its designee,
          at no additional charge beyond the early termination fee, if any, any
          and all assistance reasonably requested by Fidelity to allow the
          Services to continue without interruption or adverse effect and to
          facilitate the orderly transfer of responsibility for the services to
          Fidelity or its designee and to aid in an orderly and efficient
          transition to whatever method of computer processing Fidelity may
          select.  Such assistance shall be provided by the Data Center Staff
          provided that Fidelity relieves the Data Center Staff of sufficient
          obligations hereunder as are necessary to permit the Data Center Staff
          to provide such assistance.  Termination assistance to be provided to
          Fidelity by Systematics shall include, without limitation, the
          following:

                                      -31-

          (a)  developing, with the assistance of Fidelity, a plan for the
               transition of operations from Systematics to Fidelity or its
               designee;

          (b)  making available to Fidelity or its designee any assets used to
               provide the Services to Fidelity including, without limitation,
               any equipment owned or leased by Systematics that is then
               required in the performance of the Services (the "Service
               Assets").  Fidelity or its designee, in its sole and absolute
               discretion, may purchase all or any portion of the Service Assets
               which are owned by Systematics at the greater of: Systematics'
               then current net book value or the fair market value.
               Systematics shall offer such Service Assets to Fidelity at least
               one-hundred and twenty (120) days prior to the Termination Date
               and Fidelity shall accept or reject such option no later than
               thirty (30) days prior to the Termination Date.  Fidelity or its
               designee, in its sole and absolute discretion, may either: (i)
               assume Systematics' rights and obligations with respect to any
               such Service Assets leased by Systematics, (ii) negotiate
               directly with any of the owners of leased Service Assets to
               establish its direct contractual relationship for the leased
               Service Assets or (iii) sublease such equipment from Systematics
               at the exact terms, conditions and costs of the lease then in
               effect (if and to the extent permitted by the underlying lease);

          (c)  making available to Fidelity or its designee, pursuant to
               mutually acceptable terms and conditions, any third party
               services then being utilized by Systematics in the performance of
               the Services;

          (d)  providing to Fidelity all Services upon the same terms and
               conditions hereof including, without limitation, in accordance
               with the Performance Criteria until the expiration or termination
               of this Agreement;

          (e)  cooperating and furnishing services necessary to affect the
               transfer of Fidelity's data to Fidelity or its designee; and

          (f)  providing up to ninety (90) days of additional technical support
               from Systematics subsequent to the Termination Date.  Fidelity
               will pay for such additional technical support at Systematics'
               then current hourly rates.

     11.3 OFFER OF EMPLOYMENT.  Fidelity may offer employment to any Systematics
          Data Center employees except the Account Manager.

     11.4 RETURN OF DATA.  Upon expiration or termination of this Agreement for
          any reason, Systematics shall provide to Fidelity all of Fidelity's
          data files, records

                                      -32-

          and programs on magnetic media in a format reasonably acceptable to
          Fidelity and then, if requested by Fidelity, Systematics shall destroy
          all copies of such data and notify such destruction to Fidelity in
          writing from an officer of Systematics.

     11.5 RETURN OF THIRD PARTY SOFTWARE.  Upon any expiration or termination of
          this Agreement, Systematics shall reassign, retransfer and deliver to
          Fidelity all Third Party Systems then in its possession, subject to
          receipt of all necessary consents by the licensors thereof of any
          portion thereof.  The cost of obtaining such consents shall be borne
          by Fidelity.

     11.6 SURVIVAL.  The rights and obligations of the parties under this
          Section 11 shall survive any expiration or termination hereof.

12.  ACCOUNT MANAGERS, INFORMAL DISPUTE RESOLUTION.

     12.1 ACCOUNT MANAGERS.

     (a)  Appointment and Duties.  Systematics and Fidelity shall each appoint
          an individual with, among other duties, overall responsibility for
          monitoring performance and addressing any performance deficiencies
          under this Agreement (the "Account Managers").  Subject to and in
          accordance with the terms and requirements of this Agreement, the
          Account Managers shall meet as often as either party may reasonably
          request, but at least weekly, to:

          (i)   evaluate whether the Performance Criteria are met and, in the
                event of deficiencies not resolved by the personnel directly
                involved in the preparation and execution of the task, develop
                and implement problem recovery plans and solutions;

          (ii)  review the performance of the parties, coordinate the provision
                of Services to Fidelity and discuss future Fidelity
                requirements;

          (iii) serve as the principal interface between Fidelity and
                Systematics with respect to all issues relating to the Services;

          (iv)  discuss rate and pricing issues not specifically covered by this
                Agreement;

          (v)   discuss and effect any other program management matter that may
                arise from time to time; and

          (vi)  attempt to resolve any disputes hereunder.

                                      -33-

     (b)  Referral to Fidelity System Management Committee.  In the event any
          issue or dispute is not resolved for whatever reason within fifteen
          (15) days from the commencement of such issue or dispute, either
          Account Manager may refer the issue or dispute to the Fidelity System
          Management Committee.

     (c)  Account Manager.  Systematics agrees that if, at any time during the
          Term of this Agreement, Fidelity determines that the current
          Systematics Account Manager is undesirable, Fidelity shall notify
          Systematics of such fact and Systematics shall consult with Fidelity
          in regard to such Account Manager.  In the event of the replacement of
          the Systematics Account Manager for whatever reason, Fidelity may,
          upon request, interview candidates selected by Systematics and consult
          with Systematics prior to the placement of a new Account Manager.

     12.2 FIDELITY SYSTEM MANAGEMENT COMMITTEE.

          (a)  Appointment of Fidelity System Management Committee.  Systematics
               shall appoint three (3) members and Fidelity shall appoint three
               (3) members to a board (the "Fidelity System Management
               Committee").  The Systematics members to the Fidelity System
               Management Committee shall include the Systematics Account
               Manager, and two (2) other members selected by Systematics at its
               discretion.  The Fidelity members to the Fidelity System
               Management Committee shall include the Fidelity Account Manager
               and two (2) other members selected by Fidelity at its discretion.

          (b)  Fidelity System Management Committee Objectives.  The Fidelity
               System Management Committee will meet as often as either party
               may reasonably request to resolve any continuing dispute between
               the parties that has not been resolved after reasonable attempts
               by the Account Managers pursuant to Section 12.1.

          (c)  Dispute Resolution Meetings of the Fidelity System Management
               Committee.  The Fidelity System Management Committee shall meet
               as often as either party reasonably deems necessary in order to
               gather and furnish to the other party all information with
               respect to the matter at issue which the parties believe to be
               appropriate in connection with its resolution.  Such
               representatives shall discuss the problem and negotiate in good
               faith in an effort to resolve the dispute without the necessity
               of any action by the MIS Steering Committee or any formal
               proceeding relating thereto.  During the course of such
               negotiation, all reasonable requests made by one party to the
               other for information will be honored in order that each of the
               parties may be fully advised as to the details of the dispute.
               The specific format for such discussions will be left to

                                      -34-

               the discretion of the Fidelity System Management Committee.  In
               the event any issue or dispute is not resolved for whatever
               reason within ten (10) days after the initial request to
               negotiate such dispute or issue is given, either party may submit
               the controversy to arbitration in accordance with Section 20 or
               both parties may, by agreement, submit the controversy to the MIS
               Steering Committee.

     12.3 MIS STEERING COMMITTEE.

          (a)  Appointment of MIS Steering Committee Members.  Systematics shall
               appoint two (2) representatives to serve as advisory members to
               provide consultation and recommendation about MIS strategic
               direction and Fidelity shall appoint certain representatives
               determined by Fidelity to serve on a committee (the "MIS Steering
               Committee").

          (b)  Notice and Appeal for Dispute Resolution.  In the event that a
               controversy is submitted to the MIS Steering Committee pursuant
               to Section 12.2(c) and the MIS Steering Committee is unable to
               resolve a dispute within fifteen (15) days after the initial
               request to resolve such dispute is received by the MIS Steering
               Committee, then either party may submit the matter for resolution
               by formal arbitration as provided under Section 20.

     12.4 GOOD FAITH EFFORTS.  Should there be any dispute between the parties
          as to the rates, charges, adjustments or pricing, the parties shall
          make a good faith effort to negotiate a resolution to such dispute
          pursuant to this Agreement in a timely manner.  Until a resolution to
          such dispute is reached, billing and payments will continue at the
          most recent prior billing rates.  Once an agreement has been reached
          as to the proper billing rate such agreement shall be retroactive to
          the date when the dispute began. In the event Fidelity has a good
          faith dispute as to any amount payable hereunder, Fidelity may
          withhold payment of such amounts under the following conditions:

          (i)   Fidelity has notified Systematics in writing prior to the time
                such payment is due;

          (ii)  such notice states with specificity and in detail the basis for
                such dispute;

          (iii) such notice is signed by an individual with the title of Senior
                Vice President or a more senior title of Fidelity; and

          (iv)  the dispute has been submitted for resolution pursuant to this
                Section 12.

                                      -35-

     12.5 CONTINUED PERFORMANCE. Each party agrees to continue performing its
          obligations under this Agreement while any dispute is being addressed
          in accordance with this Section 12 as long as the other party also
          continues to perform.

13.  BACKUP, STORAGE, FILES AND PROGRAMS.

     13.1 FILES AND PROGRAMS.  Systematics agrees to provide and maintain
          adequate backup files for retention in storage on magnetic media of
          Fidelity data and all programs utilized to process Fidelity's data.

     13.2 STORAGE.  Fidelity agrees to provide off-site storage for backup data
          files and programs.  Fidelity agrees to pick up the backup data files
          and programs from the Data Center, deliver them to its off-site
          storage location, store them, and return them to the Data Center
          pursuant to mutually agreed upon procedures and schedules.  If
          requested by Fidelity, Systematics shall provide Fidelity with a
          quarterly listing of the names of data files and programs for
          verification of the items in storage.  Fidelity is solely responsible
          for the physical security of such files and programs while not in
          Systematics' possession.

     13.3 DISASTER RECOVERY.  From and after the date of the expiration or
          termination of that certain disaster recovery service agreement
          between Sungard and Fidelity dated as of October 30, 1991, Systematics
          shall provide to Fidelity through the remaining Term hereof at no
          additional fee except as otherwise set out hereunder those disaster
          recovery services as described in Exhibit H attached hereto.  Such
          arrangements are designed to deal with circumstances which are
          expected to cause any substantial portion of the capabilities of the
          data center to be unavailable for a consecutive period exceeding 72
          hours.  Emergency backup, as referred to below, is designed only for
          difficulties of a shorter duration.  Fidelity and Systematics
          acknowledge that Fidelity currently has a disaster recovery procedural
          plan to interface with the current disaster recovery vendor, SunGard.
          Systematics Resident Staff will continue to update the procedural plan
          until the SunGard service is replaced by Systematics Disaster Recovery
          Service, which will include a comparable plan. Systematics agrees to
          conduct appropriate tests ("Disaster Test") of disaster recovery
          arrangements annually and Fidelity agrees to pay for all travel,
          personnel and equipment expenses incurred in connection with such
          testing.  There shall be no additional personnel charge, however, for
          participation in the testing of such backup arrangements by members of
          the Resident Staff.

     13.4 EMERGENCY BACKUP SERVICES.  Systematics will work diligently with
          Fidelity in an emergency to restore on-line communications including,
          without limitation, facilitating communication with vendor and
          supplier contacts and identifying alternate sites in which emergency
          computing equipment could be

                                      -36-

          installed.  Systematics shall define in writing from time to time the
          procedures it proposes to follow with respect to the use of emergency
          backup, which shall be subject to the approval of Fidelity.  Fidelity
          shall have the right, to be exercised in its discretion, to direct
          Systematics to utilize such backup capability, at Fidelity's expense,
          provided that Fidelity's processing is behind schedule.  Upon written
          notice from Fidelity, Systematics shall conduct all tests of the
          emergency backup arrangements as requested by Fidelity.  There shall
          be no additional personnel charge, however, for participation in the
          testing of such emergency backup arrangements by members of the
          Resident Staff.

     13.5 RESPONSIVENESS.  Systematics shall use its good faith efforts to re-
          establish Services within twenty-four (24) hours following any
          disaster.

14.  SYSTEMATICS' SERVICE BUREAU CUSTOMERS.

     Systematics may not process data for any third parties at the Data Center.

15.  MAINTENANCE OF RECORDS; EXAMINATION BY AND REPORTING TO REGULATORS.

     15.1 MAINTENANCE OF RECORDS.  Each party shall at all times establish and
          maintain such books, records and accounting practices as may be
          required by applicable laws and regulations of any Governmental Entity
          or Fidelity's policies and procedures.  By entering into this
          Agreement, Systematics agrees that the Office of Thrift Supervision
          (the "OTS") shall have the authority and responsibility provided to
          the other regulatory agencies pursuant to the Bank Service Corporation
          Act., 12 U.S.C. 1867(C), relating to Services performed or provided by
          contract or otherwise.  The records maintained and produced for
          Fidelity pursuant to this Agreement shall be subject to examination by
          such Governmental Entity's regulatory agencies as may have
          jurisdiction over Fidelity's business to the same extent as such
          records would be subject if they were maintained and produced by
          Fidelity on their own premises; provided, however, that Systematics
          shall only permit examinations by regulatory agencies or release any
          reports, summaries and information contained in, or derived from the
          data in the possession of Systematics relating to Fidelity to
          regulatory agencies in accordance herewith and with all applicable
          laws and regulations.  Each of the parties shall notify the other
          party in the event that, (i) any information is requested from such
          party relating to this Agreement or the Services being provided
          hereunder by any regulatory agency, (ii) any regulatory agency
          requests access to any such information or any facility involved in
          providing any Services or (iii) such party believes it is obligated to
          provide any such information to any regulatory agency.  Such notice
          shall be delivered to the other party a reasonable period of time
          prior to disclosure of any such information or the granting of such
          access to the extent feasible or

                                      -37-

          concurrently with or immediately following any such disclosure or
          access where prior notice is not feasible.  Fidelity reserves the
          right to intervene before anything is delivered to any regulatory
          agency to prevent its release by lawful means but nothing herein shall
          be construed as requiring Systematics to delay release of information
          to such regulatory agency to allow time for such intervention if
          Systematics reasonably believes that such immediate release is
          mandated by law and such agency demands immediate access or
          disclosure.

     15.2 EXAMINATION, REPORTING TO REGULATORS, DATA SECURITY.  The parties
          shall comply with and shall be responsible for complying with all
          applicable regulatory and legal requirements of any Governmental
          Entity to which the parties are subject, including without limitation:

          (a)  submitting a copy of this Agreement to the appropriate regulatory
               agencies prior to the date on which Services shall commence;

          (b)  providing adequate notice to the appropriate regulatory agencies
               of the termination of this Agreement or any material changes in
               Services;

          (c)  retaining such records of its accounts as required by its
               regulatory authorities;

          (d)  obtaining and maintaining, at its own expense, any fidelity bond
               required by any regulatory or governmental agency;

          (e)  maintaining, at its own expense, such casualty and business
               interruption insurance coverage for loss of records from fire,
               disaster or other causes, and taking such precautions regarding
               the same, as may be required by regulatory authorities, or which
               it shall deem advisable; and

          (f)  meeting all data security requirements with respect to all data
               and Systems related to the Services as provided herein including,
               without limitation the performance of periodic test, audit and
               any other procedures as may be required.

16.  NO WAIVER OF DEFAULT.

     The failure of either party to exercise any right of termination hereunder
     shall not constitute a waiver of the rights granted herein with respect to
     any subsequent default.

                                      -38-

17.  REPRESENTATIONS AND WARRANTIES.

     17.1 REPRESENTATIONS AND WARRANTIES OF SYSTEMATICS.  Systematics represents
          and warrants to Fidelity, as of the Effective Date, as follows:

          (a)  Systematics is a corporation duly incorporated, validly existing
               and in good standing under the laws of the State of Arkansas and
               is qualified to do business in the State of California and in
               other jurisdictions where failure to do to would have a
               materially adverse impact on its ability to do business.

          (b)  Systematics has all requisite corporate power and authority to
               own its assets and properties, to carry on its business as now
               conducted and to enter into and perform this Agreement;

          (c)  The execution, delivery and performance of this Agreement by
               Systematics has been duly authorized by all requisite corporate
               action;

          (d)  This Agreement constitutes the valid and binding obligation of
               Systematics enforceable against Systematics in accordance with
               its terms, except that enforceability may be limited by
               applicable bankruptcy, insolvency, reorganization, moratorium,
               fraudulent conveyance or other similar laws of general
               application now or hereafter in effect relating to the
               enforcement of creditors' rights generally and except that the
               remedies of specific performance, injunction and other forms of
               equitable relief are subject to certain tests of equitable
               jurisdiction, equitable defenses and the discretion of the court
               before which any proceeding therefor may be brought;

          (e)  The entering into and performance by Systematics of this
               Agreement will not breach or violate any provision of the
               articles of incorporation or bylaws of Systematics or any
               provision of any indenture, mortgage, lien, lease, agreement,
               order, judgment or decree to which Systematics is a party or by
               which its assets or properties are bound;

          (f)  Systematics has obtained all licenses, permits and other
               authorizations and has taken all actions required by applicable
               laws or governmental regulations in connection with its business
               as now conducted;

          (g)  Systematics is not in default with respect to any order of any
               court, governmental authority or arbitration board or tribunal to
               which Systematics is a party or is subject;

                                      -39-

          (h)  Systematics is not in violation of any laws, ordinances, or
               governmental rules or regulations to which it is subject, which
               would have a material adverse effect on the financial condition
               of Systematics;

          (i)  All products and Services delivered by Systematics hereunder
               shall be of good and workmanlike quality, provided on a timely
               basis and shall meet or exceed the Performance Criteria; and

          (j)  All information provided by Systematics to Fidelity in connection
               with this Agreement regarding Systematics shall be true and
               correct in all material respects.

     17.2 REPRESENTATIONS AND WARRANTIES OF FIDELITY.  Fidelity represents and
          warrants to Systematics, as of the Effective Date, as follows:

          (a)  Fidelity is a federal savings bank duly organized, validly
               existing and in good standing under the laws of the United States
               of America;

          (b)  Fidelity has all requisite corporate power and authority to own
               its assets and properties, to carry on its business as now
               conducted and to enter into and perform this Agreement;

          (c)  The execution, delivery and performance of this Agreement by
               Fidelity has been duly authorized by all requisite corporate
               action;

          (d)  This Agreement constitutes the valid and binding obligation of
               Fidelity enforceable against Fidelity in accordance with its
               terms, except that enforceability may be limited by applicable
               bankruptcy, insolvency, reorganization, moratorium, fraudulent
               conveyance or other similar laws of general application now or
               hereafter in effect relating to the enforcement of creditors'
               rights generally and except that the remedies of specific
               performance, injunction and other forms of equitable relief are
               subject to certain tests of equitable jurisdiction, equitable
               defenses and the discretion of the court before which any
               proceeding therefor may be brought;

          (e)  The entering into and performance by Fidelity of this Agreement
               will not breach or violate any provision of the articles of
               incorporation or bylaws of Fidelity or any provision of any
               indenture, mortgage, lien, lease, agreement, order, judgment or
               decree to which Fidelity is a party or by which its assets or
               properties are bound except for those agreements licensing the
               applications listed on Exhibit E for which consents are required
               but have not been obtained as of the Effective Date.

                                      -40-

          (f)  Fidelity has obtained all licenses, permits and other
               authorizations and has taken all actions required by applicable
               laws or governmental regulations in connection with its business
               as now conducted or this Agreement except for such license,
               permits, authorizations or actions, the absence of which does not
               have a material adverse effect on its ability to do business;

          (g)  Fidelity is not in default with respect to any order of any
               court, governmental authority or arbitration board or tribunal to
               which Fidelity is a party or is subject which would have a
               material effect on the financial condition of Fidelity; and

          (h)  Fidelity is not in violation of any laws, ordinances, or
               governmental rules or regulations to which it is subject, which
               would have material adverse effect on the financial condition of
               Fidelity.

          (i)  All information regarding Fidelity provided by Fidelity to
               Systematics in connection with this Agreement shall be true and
               correct in all material respects.

     17.3 SYSTEMATICS' FINANCIAL WARRANTIES.  Systematics hereby represents and
          warrants to Fidelity:  (i) that the financial statements of
          Systematics previously provided to Fidelity are in accordance with the
          books and records of Systematics, set forth fairly the financial
          condition and results of operations of Systematics as, at and for the
          periods therein specified, are prepared in accordance with generally
          accepted accounting principles (or with regulatory accounting
          principles if so specified) applied on a consistent basis and (ii)
          that there have been no material adverse changes in the financial
          condition, assets, liabilities or business of Systematics since the
          date of such financial statements.  During the Term, Systematics shall
          provide to Fidelity and upon request shall provide to the District
          Director of the Office of Thrift Supervision (OTS) District in which
          the Data Center is located quarterly and annual audited consolidated
          financial statements covering Systematics as soon as such financial
          statements are publicly released to any Person, other than officers or
          directors of Systematics.

     17.4 FIDELITY'S FINANCIAL WARRANTIES.  Fidelity hereby represents and
          warrants to Systematics:  (i) that the financial statements of
          Fidelity contemporaneously or previously provided to Systematics are
          in accordance with the books and records of Fidelity, set forth fairly
          the financial condition and results of operations of Fidelity as, at
          and for the periods therein specified, are prepared in accordance with
          generally accepted accounting principles (or with regulatory
          accounting principles if so specified) applied on a consistent basis
          and (ii) that

                                      -41-

          there have been no material adverse changes in the financial
          condition, assets, liabilities or business of Fidelity since the date
          of such financial statements.

     17.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.  All representations and
          warranties by either party contained herein shall survive the date of
          execution hereof, the execution hereof an any termination or
          expiration hereof.

18.  PERFORMANCE INCENTIVES.  The performance incentives outlined in this
     section shall not preclude other remedies that may be available to Fidelity
     under this Agreement, at law or in equity.

     [CM]

19.  INDEMNIFICATION.

     19.1 MUTUAL INDEMNIFICATIONS.  Systematics and Fidelity shall indemnify,
          defend and hold harmless each other and each other's respective
          officers, directors, employees, agents, successors and assigns,
          against all Losses arising from or in connection with the following:

          (a)  The injury or death of any person, or loss of or damage to
               tangible real or tangible personal property, to the extent that
               such liability, loss, damage or expense was proximately caused by
               the indemnifying party's negligent act or omission, or willful
               act or omission, or those of its agents, employees or
               subcontractors.  The indemnifying party shall be notified as soon
               as practicable of any such claim and shall have the right to
               control the defense of all such claims, related lawsuits or
               proceedings, with counsel reasonably satisfactory to the
               indemnified party, and the indemnified party shall have the right
               to participate in such proceedings.  In no event shall the
               indemnified party settle any such claim, lawsuit or proceeding
               without the indemnifying party's prior approval.

                                      -42-

          (b)  The material breach of any covenant, representation, or warranty
               made to the other party.

     19.2 INDEMNITY BY SYSTEMATICS.  Systematics shall indemnify, defend and
          hold harmless Fidelity and its officers, directors, employees, agents,
          successors and assigns, from any and all Losses arising from or in
          connection with the following:

          (a)  any infringement or violation, or allegation thereof, of any
               patent, copyright, trade secret or other proprietary or property
               rights caused by Systematics or arising in any manner out of or
               from Fidelity's use of Systematics Systems, the Services or other
               transactions contemplated by this Agreement;

          (b)  any claim, action or liability by or to any third Person dealing
               solely with Systematics or under any contract with Systematics to
               which Fidelity is not a party;

          (c)  any negligent act or omission by Systematics with respect to its
               use of the Equipment or use of the Data Center;

          (d)  any Hazardous Materials placed in, on under or above the Data
               Center by Systematics; the violation or alleged violation of or
               any liability under any law, regulation, or ordinance or order,
               pertaining to any Hazardous Material; any step taken by any
               person or entity, including Systematics, to clean up, remedy or
               remove the Hazardous Materials released or disposed of subsequent
               to the Effective Date; the off-site disposal, treatment or
               storage of Hazardous Materials generated by Systematics'
               operation of Data Center subsequent to the Effective Date, or the
               violation or alleged violation by Systematics after the Effective
               Date of any federal, state or local laws relating to
               environmental matters, including air pollution, water pollution,
               Hazardous Materials, or any other activities or conditions which
               impact or relate to the environment or nature.  This liability
               includes, but is not limited to, costs of enforcement, costs of
               investigation and/or remedial action.

          (e)  any consent by the software vendors listed in Exhibit E except
               Dunn & Bradstreet (McCormack & Dodge), Fi Tech and Tower Systems
               Group for Systematics to use the products listed therein to
               perform under this Agreement.

     19.3 SUBROGATION.  In the event that an indemnifying party shall be obliged
          to indemnify an indemnified party pursuant to this Section 19, the
          indemnifying party shall, upon payment of such indemnity in full, be
          subrogated to all rights

                                      -43-

          of the indemnified party with respect to the claims to which such
          indemnification relates.

20.  ARBITRATION.

     20.1 SCOPE OF APPLICABILITY; ARBITRATION RULES.  Any claim or controversy
          arising out of or relating to this Agreement, or the breach thereof,
          including an anticipated breach or disagreement as to interpretation
          of this Agreement, which is not resolved pursuant to Section 12
          hereof, shall be settled by binding arbitration as follows:

          (a)  Except as provided below and to the extent the parties may
               otherwise agree in writing, any arbitration under this Section
               (the "Arbitration") shall be conducted in accordance with the
               rules of the American Arbitration Association (the "AAA Rules")
               by one (1) arbitrator who is experienced in data processing
               matters, who shall not be an officer, director, or employee of
               any party hereto or its Affiliates, selected by the President of
               the American Arbitration Association in Los Angeles, California;
               provided, however, that in the event that the selection of the
               arbitrator does not occur within ten (10) days after the
               commencement of arbitration, Fidelity and Systematics shall each
               choose one (1) arbitrator within five (5) days.  Such arbitrators
               shall in turn choose the arbitrator to conduct the hearing within
               five (5) days.

          (b)  The Arbitration shall be governed by the United States
               Arbitration Act, 9 U.S.C. (S)1 et seq., and judgment upon the
               award rendered by the arbitrators may be entered by any court of
               competent jurisdiction.

          (c)  The Arbitration shall take place in Los Angeles County,
               California.  The arbitrator may hold individual hearings at any
               location he deems appropriate.

          (d)  The arbitrator shall hold a pre-hearing conference as promptly as
               possible after the selection of the arbitrator and shall hold the
               first hearing within twenty (20) days after the selection of the
               arbitrator.  If additional hearings are needed they shall be held
               as promptly as possible thereafter, so that all hearing that may
               be required are concluded within sixty (60) days after the
               selection of the arbitrator.  The arbitrator shall render their
               award within fifteen (15) days after the last hearing.

          (e)  The parties may by written notice to each other and the
               arbitrator freely specify further controversies or claims to be
               arbitrated up until the date

                                      -44-

               of the pre-hearing conference.  Thereafter, additional
               controversies or claims may be added only with the consent of the
               arbitrator.

          (f)  After arbitration has been initiated, each party shall be
               entitled to: (i) request and receive from the other any and all
               non-privileged documents or records relevant to the subject
               matter of the arbitration and (ii) select and take the deposition
               of no more than three (3) officers, directors or employees of the
               other party.  All officers, directors and employees of each party
               shall cooperate fully in producing documents subject to discovery
               and shall make themselves available for deposition if selected
               hereunder.  Said discovery shall be conducted pursuant to the
               procedures of the California Code of Civil Procedure as if the
               subject matter of the arbitration were pending in a civil action
               before a California Superior court, and the provisions of
               California code of Civil Procedure Section 1283.05 are
               incorporated into this Agreement for that purpose, except that
               the parties are deemed to have leave to take the depositions
               referred to above pursuant to Section 1283.05(e).

          (g)  The arbitrator may make interim awards and may award equitable
               and declaratory relief.

          (h)  The costs and expenses of the Arbitration (including reasonable
               attorneys' fees shall be allocated by the arbitrator between the
               parties as the arbitrator sees fit.

          (i)  The arbitrators shall not consider, nor shall any award include
               amounts for incidental, consequential, punitive or exemplary
               damages.

          (j)  Notwithstanding any other provision of this Section, either party
               may seek from any court of competent jurisdiction interim relief,
               including but not limited to temporary restraining order,
               preliminary injunctions and other interim equitable relief as the
               same may vary from jurisdiction to jurisdiction, in aid of
               arbitration or to protect the rights of either party pending the
               establishment of the arbitral tribunal and rendering the
               arbitration decision.

     20.2 CONTINUITY OF SERVICE.  Notwithstanding anything to the contrary
          contained herein, and irrespective of the existence of any dispute
          between the parties, the parties will continue to perform in
          accordance with this Agreement during the pendency of any such
          dispute.

                                      -45-

21.  PROCESSING PRIORITIES.

     If any emergency requires a change in the processing schedule set
     forth in Exhibit D, Systematics and Fidelity agree to negotiate in good
     faith to adjust the processing schedule and related priorities in light of
     then prevailing circumstances.

22.  MERGERS AND ACQUISITIONS.

     Upon written request by Fidelity, Systematics will process additional data
     resulting from any merger or acquisition involving Fidelity; subject to
     Fidelity's payment of additional volume fees reflected in Section 2 of
     Exhibit C, and subject to agreement on the fees, if any, applicable to
     related conversion and testing services which fees shall be determined
     pursuant to Section 3.3 hereof.  Fidelity will notify Systematics of any
     such proposed merger or acquisition as soon as reasonably practicable.

23.  ENTIRE AGREEMENT.

     This Agreement and the exhibits hereto contain the entire agreement of the
     parties and supersedes all prior agreements whether written or oral with
     respect to the subject matter hereof.  Expiration or termination of any
     part of this Agreement shall terminate the entire Agreement except for any
     portion hereof which expressly remains in force and in effect
     notwithstanding such termination or expiration.  Modification or amendment
     of this Agreement or any part thereof may be made only by written
     instrument executed by both parties.

24.  ASSIGNMENT.

     Neither party hereto shall assign, subcontract, or otherwise convey or
     delegate its rights or duties hereunder to any other party without the
     prior written consent of the other party to this Agreement, which consent
     shall provide that it is subject to all the terms and conditions of this
     Agreement.  Subject to the provisions of Exhibit G, no such consent shall
     be required in the event of a merger, consolidation, sale of substantially
     all of the assets, or any other change of control of either party hereto,
     in which event, this Agreement shall apply to, inure to the benefit of, and
     be binding upon the parties hereto and upon their respective successors in
     interest.

25.  CONFIDENTIAL AGREEMENT.

     This Agreement is a confidential agreement between Systematics and
     Fidelity.  In no event may this Agreement be reproduced or copies shown to
     any third parties by either Fidelity or Systematics without the prior
     written consent of the other party, except as may be necessary by reason of
     legal, accounting or regulatory requirements beyond the reasonable control
     of Systematics or Fidelity, as the case may be, in which

                                      -46-

     event Systematics and Fidelity agree to exercise diligence in limiting such
     disclosure to the minimum necessary under the particular circumstances.

26.  TAXES.

     In addition to all other amounts payable by Fidelity hereunder, Fidelity
     shall pay to Systematics, or reimburse Systematics for, all taxes that are
     applicable to the Services; provided, however, that this provision does not
     include Systematics' franchise taxes, personal property taxes, payroll
     taxes, or taxes based on Systematics' net income.  Fidelity shall have the
     right to contest any such liability, and Systematics shall cooperate with
     Fidelity in any such dispute subject to Fidelity's payment of such taxes
     under protest or Fidelity's agreement to indemnify Systematics for
     liability or penalties incurred as a result thereof.

27.  INDEPENDENT CONTRACTOR.

     It is agreed that Systematics is an independent contractor and that:

     27.1 FIDELITY SUPERVISORY POWERS.  Fidelity has no power to supervise, give
          directions or otherwise regulate Systematics' operations or its
          employees, except as herein provided for security of Fidelity's data
          and detection of errors in processing.

     27.2 SYSTEMATICS' EMPLOYEES.  Persons who process Fidelity's data are
          employees of Systematics and Systematics shall be solely responsible
          for payment of compensation to such personnel and for any injury to
          them in the course of their employment.  Systematics shall assume full
          responsibility for payment of all federal, state and local taxes or
          contributions imposed or required under unemployment insurance, social
          security and income tax laws with respect to such persons.

     27.3 SYSTEMATICS AS AN AGENT.  Systematics is not an agent of Fidelity and
          has no authority to represent Fidelity as to any matters, except as
          authorized herein.

28.  FIDELITY AND SYSTEMATICS EMPLOYEES.

     Except as specifically set forth in Section 11.3, above, both Fidelity and
     Systematics agree not to offer employment to any employee of the other
     without the prior written consent of the other.

29.  PREVIOUS LIABILITIES.

     The parties hereto agree to indemnify the other and hold the other harmless
     against any losses (including attorney's fees and expenses) arising out of
     any claims or

                                      -47-

     lawsuits filed or subsequently filed as a result of the acts of the other
     party which occurred prior to the Effective Date of this Agreement except
     those losses arising out of or in connection with the business dealings
     between the parties, including, without limitation, negotiation, execution,
     implementation and operation under that certain Software License Agreement
     dated as of October 31, 1991 and that certain Consulting Agreement dated as
     of February 1, 1993 as amended from time to time.

30.  NOTICES.

     All notices, requests, demands and other communications required or
     permitted hereunder, other than routine operational communications under
     this Agreement, shall be in writing and shall be deemed to have been duly
     given, made and received only when personally delivered or delivered by
     Federal Express or other nationally recognized courier service, or two (2)
     days after having been deposited in the United States mail, certified mail,
     postage prepaid, return receipt requested (except when such notice is a
     termination notice, in which event any two (2) of the delivery methods
     described above must be used), addressed as set forth below:

     If to Fidelity:          Fidelity Federal Bank, FSB
                              600 North Brand
                              Glendale, California  91209-1631
     Attention:
                              Chief Information Officer

     With a copy to:          Fidelity Federal Bank, FSB
                              600 North Brand
                              Glendale, California  91209-1631
     Attention:
                              General Counsel

     With a copy to:          Gibson, Dunn & Crutcher
                              4 Park Plaza
                              Irvine, California  92714-8557
     Attention:               Robert E. Dean, Esq.
                              David L. Hayes, Esq.

     If to Systematics:       Systematics Financial Services, Inc.
                              4001 Rodney Parham Road
                              Little Rock, Arkansas  72212-2496
     Attention:               President

                                      -48-

     With a copy to:          Systematics Financial Services, Inc.
                              4001 Rodney Parham Road
                              Little Rock, Arkansas  72212-2496
     Attention:               General Counsel

     Any party may change the address to which communications or copies are to
     be sent by giving notice of such change of address in conformity with the
     provisions of this Section for the giving of notice.

31.  COVENANT OF GOOD FAITH.

     Systematics and Fidelity agree that, in their respective dealings arising
     out of or related to this Agreement, they shall act fairly and in good
     faith.

32.  LIMITATION OF LIABILITY.

     If either party shall breach any covenant, agreement or undertaking
     required of it by this Agreement, the liability of such party shall be
     limited to direct damages, actually incurred.  Neither party shall be
     liable to the other for any special or consequential damage or for any
     claim or demand made by any third party provided, however, that Systematics
     shall reimburse Fidelity for direct damages paid to third parties as a
     result of the Services provided herein.

33.  INSURANCE.

     A schedule of Systematics' current insurance coverage is attached hereto as
     Exhibit F.  During the Term of this Agreement, Systematics shall either
     maintain comparable insurance with comparable insurance companies as set
     forth on Exhibit F or Systematics in its reasonable discretion in
     exercising reasonable business judgement shall self-insure against the
     risks covered by the insurance coverage indicated on Exhibit F.
     Systematics shall, at Fidelity's request from time to time during the Term,
     furnish to Fidelity certificates of insurance, signed by authorized
     representatives of the surety or insurers of all bonds and insurance
     relating to the provision of the Services and the amount of such coverage.

34.  SECTION TITLES.

     Section titles as to the subject matter of particular sections herein are
     for convenience only and are in no way to be construed as part of this
     Agreement or as a limitation of the scope of the particular sections to
     which they refer.

                                      -49-

35.  COUNTERPARTS.

     This Agreement may be executed in several counterparts, each of which shall
     be deemed to be an original, but all of which shall constitute one and the
     same instrument.

36.  GOVERNING LAW.

     This Agreement shall be governed by and construed in accordance with the
     laws of the State of California.  The sole jurisdiction and venue for any
     litigation arising out of this Agreement shall be an appropriate federal or
     state court in Los Angeles County, California.

37.  TIME OF THE ESSENCE.

     Time is of the essence as to each and every provision of this Agreement.

38.  SECURITY, HEALTH AND SAFETY.

     Each party covenants that it will cause its employees, while such employees
     are on premises owned or leased by the other party, to comply with such
     other party's reasonable requirements regarding security, health and safety
     and other such matters as the other party may deem appropriate.

39.  COOPERATION.

     Each party shall cooperate fully with the other party and shall execute
     such further instructions, documents, and agreements and shall provide such
     further written assurances, as reasonably may be requested by the other
     party, to better evidence and reflect the transactions described herein and
     contemplated hereby and to carry into effect the intents and purposes
     hereof.

40.  ATTORNEYS' FEES.

     The prevailing party in any dispute between the parties arising out of the
     interpretation, application or enforcement of any provision hereof shall be
     entitled to recover all of its reasonable attorneys' fees and costs whether
     suit be filed or not, including without limitation costs and attorneys'
     fees related to or arising out of any arbitration proceeding, trial,
     appellate or collection proceedings.

                                      -50-

41.  SEVERABILITY.

     If any provision of this Agreement shall be held to be invalid, illegal or
     unenforceable, the validity, legality and enforceability of the remaining
     provisions hereof shall not in any way be affected or impaired.

42.  SURVIVAL.

     All obligations contemplated to be performed, whether as a whole or in
     part, after termination of this Agreement, shall in fact survive after
     termination of this Agreement regardless of the basis for such termination.

43.  EXHIBITS AND SCHEDULES.

     All Exhibits and Schedules attached hereto are by this reference
     incorporated herein and made a part hereof for all purposes as if fully set
     forth herein.

44.  THRIFT BULLETIN 46 PROVISIONS.

     By entering into this Agreement, Systematics agrees that the Office of
     Thrift Supervision will have the authority and responsibility provided to
     the other regulatory agencies pursuant to the Bank Service Corporation Act,
     12 U.S.C. 1867(C) relating to services performed by contract or otherwise.
     Systematics shall provide, upon request, the OTS District Director of the
     district in which the data processing center is located with a copy of the
     current third party review report when a review has been performed.
     Systematics shall provide the OTS District Director of the district in
     which the data processing center is located with a copy of Systematics'
     current audited financial statements, which may be on a consolidated basis
     with Systematics' affiliates.  Systematics agrees to release the
     information necessary to allow Fidelity to develop a disaster contingency
     plan which will work in concert with Systematics' plan.

45.  RIGHTS AND REMEDIES.  Except as otherwise expressly provided herein, the
     rights and remedies provided in this Agreement are cumulative and not
     exclusive of any rights or remedies any party could have or at law or in
     equity or otherwise.

46.  COMPLIANCE WITH LAWS.  Systematics shall at all times during the Term
     perform its duties and obligations hereunder in compliance with all
     requirements of applicable laws, statutes, ordinances, rules, regulations,
     orders and decrees of any Governmental Entities the failure to comply with
     which would have a material adverse impact on Fidelity ("Compliance with
     Laws").  Provided, however, that such Compliance with Laws shall not be
     interpreted to obligate Systematics to identify changes required to
     Systematics Systems that are required by state and local banking laws or
     regulations.

                                      -51-

     IN WITNESS WHEREOF, this Agreement has been executed by the undersigned
officers, thereunto duly authorized, on the 17th day of May, 1993.

SYSTEMATICS FINANCIAL                         FIDELITY FEDERAL BANK, a Federal
SERVICES, INC.                                        Savings Bank
                                    
By:         /s/ MICHAEL MONTGOMERY     By:         /s/ RICHARD M. GREENWOOD
         ---------------------------         ----------------------------------------
Name:        Michael Montgomery        Name:         Richard M. Greenwood
         ---------------------------         ----------------------------------------
Title:    Executive Vice President     Title:  President and Chief Executive Officer
         ---------------------------         ----------------------------------------
Date:                                  Date:
         ---------------------------         ----------------------------------------

                                      -52-

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT A
                                   ---------

                         SYSTEMS INSTALLATION SCHEDULE

1.   CONVERSION SERVICES.

     1.1  SYSTEMATICS' RESPONSIBILITIES.

          (a)  Systematics shall provide, at no additional charge beyond the
               Monthly Base Charge, necessary Resident Staff resources to
               install the Systems listed in Section 2 of this Exhibit A such
               that they are functional and available for use by Fidelity in its
               normal operations, which resources shall include, without
               limitation, the following: (i) programming, testing and error
               correction and related computer time required for loading,
               testing and configuring the Systems to run in a manner required
               to meet the Performance Criteria and schedules listed in Exhibit
               D, as well as converting Fidelity's master file and transaction
               data currently on magnetic storage media to the necessary System
               record formats (the "Installation Services"); and (ii)
               programming modifications (including testing and error
               correction) as requested by Fidelity, up to the number of hours
               listed under the heading "Customization Allowance" for each
               System set forth in Section 2 of this Exhibit A below (the
               "Customization Services") (Customization Services and
               Installation Services shall be referred to herein as the
               "Conversion Services").  It is agreed by the parties that the
               number of programming hours that are to be counted against the
               Customization Allowance shall not include any hours spent by the
               Resident Staff or Systematics in completing the Installation
               Services.  In addition to the foregoing, the Resident Staff shall
               provide, at no additional charge beyond the Monthly Base Charge,
               Conversion Services including, without limitation, installation
               planning and consulting, and assistance in the selection and
               installation of the Systematics standard BCR systems options and
               standard Systematics user routines as more fully described in
               Systematics' Documentation.  At no additional charge to Fidelity
               over and above the Monthly Base Charge, Systematics shall convert
               each system listed in Section 2 of this Exhibit A on or before
               the Installation Date for each such System and further that the
               Conversion of all such Systems occurs on or prior to the Planned
               Conversion Date.  Any delays caused by or requested by Fidelity
               will affect the Conversion Date as detailed in Section 9 of this
               Agreement.

                                      A-1

          (b)  Systematics represents and warrants that no modification,
               enhancement or customization of any Systematics System listed in
               Section 2 of this Exhibit A is required in order for each of such
               Systematics Systems to interface with all other Systematics
               Systems and be operational with the features and functions
               selected by Fidelity which meet or exceed the Performance
               Criteria set forth herein. Consequently, the Systematics Systems
               listed below shall be installed without modification, except for
               the Customization Allowance for each System provided, however,
               that Systematics shall provide services necessary so that each
               System interfaces with all Systematics Systems so that such
               Systems are operational and meet or exceed the Performance
               Criteria; without additional charge and without such services
               being counted against the Customization Allowance.

          (c)  If Fidelity requests additional programming modifications beyond
               the Customization Allowance which cannot be completed by the
               Resident Staff by the Installation Date specified for such System
               ("Installation Deadline"), Systematics shall provide Fidelity
               with a written estimate of the effect on costs or schedules
               likely to result therefrom.  Fidelity shall then direct
               Systematics, in Fidelity's sole and absolute discretion, to
               either: (i) extend the Installation Deadline for the Systems
               involved in the requested programming modifications such that the
               schedule change permits the necessary programming services to be
               completed by the Resident Staff whereupon the requested
               programming changes shall be provided at no additional charge, or
               (ii) direct Systematics to keep the original Installation
               Deadline with the additional services to be provided and priced
               as Special Services pursuant to Section 3.3 hereof.

     1.2  FIDELITY RESPONSIBILITIES.  Fidelity shall provide the teller terminal
     and platform equipment and controller-based software if any such equipment
     and software is required in conjunction with Systematics Systems set forth
     in Section 2 of this Exhibit A.  Fidelity shall provide Systematics
     information regarding such equipment and software to which it has access
     and sufficient access to terminals, controllers and software.  Systematics
     shall evaluate such equipment and software to determine whether: (i) such
     controller-based software processes data in a manner consistent with the
     "model transaction set" specified for use with Systematics Systems; (ii)
     all preinstallation modifications of such controller-based software are
     completed and properly tested in accordance with the detailed installation
     time schedule requirements provided by Systematics.  In addition,
     Systematics' representatives shall be included in all appropriate
     installation planning meetings.

                                      A-2

2.   SYSTEM INSTALLATION DATES.

 
Installation Date                    Software System                   Customization Allowance
- --------------------   --------------------------------------------    ------------------------
                                                                               (hours)

June 21, 1993          Modifications to IMPACS                                      0
                       (Truth in Savings Project)
 
October 30, 1993       Atchley - Large Currency Transactions                        0
 
July 30, 1993          FiTech                                          To be determined
 
                       FiTech Interfaces to:
July 30, 1993          . Computer Power, Inc. System                   To be determined
To be determined       . Commercial Loans System                       To be determined
To be determined       . Secondary Marketing System                    To be determined
 
October 30, 1993       Savings Time                                               250
 
October 30, 1993       Customer Service                                             0
 
October 30, 1993       Commercial Loans System                                    100
 
October 30, 1993       TS Delivery                                                250
 
October 30, 1993       InterSystem Transfer (IT)                                    0
 
May 30, 1993           Item Reconciliation (IR)                                     0
 
To be determined       ATM Interfaces to ATM Processor
                       (positive balance file)                         To be determined
 
To be determined       IMPACS Interface to Item Processing Provider    To be determined
 
October 30, 1993       ATM Interfaces to ATM Processor
                       (on-line authorizations)                        To be determined
 
December 31, 1993      Tax (TX)                                                    0
 
December 31, 1993      TIN Certification (HX)                                      0
 
To be determined       CIF                                                        50
 
To be determined       Profitability Analysis                                     50
 
Installed              SIMS                                                      N/A
 
Installed              IMPACS                                                    N/A
 
To be determined       CRF (if required)                               To be determined

                                      A-3

                                                                 
To be determined       Contract Collections                            To be determined
                       (System to be determined)
 
To be determined       Combined Statements                                        50
 
To be determined       On-Line Collections                                       N/A
 
October 30, 1993       Safe Deposit Box (SSI)                                      0

* Installation and customization for May - June, 1993.

For any designation of "To be determined" in the table above, the applicable
entry shall be determined by mutual agreement and documented in writing within
sixty (60) days after the Effective Date.

                                      A-4

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT B
                                   ---------

                                    REPORTS

1.   REPORTS.

     During the Term of this Agreement, at no additional charge beyond the
     Monthly Base Charge and in accordance with the performance criteria and
     delivery schedules set forth in Exhibit D hereof, Systematics shall process
     and produce the following reports:

     1.1  THIRD PARTY REPORTS.  Any and all reports currently produced from
          Fidelity's present Systems including, without limitation, Third Party
          Systems until such Systems are replaced in accordance with the terms
          of this Agreement or at the request of Fidelity whereupon Systematics
          shall process any and all reports or output from those replacement
          Systems.

     1.2  SYSTEMATICS REPORTS.  Any and all reports set forth in the standard
          Systematics user documentation for each of the Systematics Systems
          listed in Section 2 of Exhibit A.  In addition, Systematics shall
          provide to Fidelity reports, in a format reasonably acceptable to
          Fidelity, including any and all operational and management information
          necessary for Fidelity to administer and monitor progress under this
          Agreement including, a monthly report of Systematics' service
          performance as measured by Fidelity procedures and policies, a monthly
          conversion management status report, a monthly project status report
          and such other information and reports as Fidelity may reasonably
          request from time to time.

2.   REPORT MODIFICATION.

     At no additional charge beyond the Monthly Base Charge, Systematics shall
     make such additions, deletions and modifications to the types of reports
     produced and the report production schedule as Fidelity may request from
     time to time including, without limitation, adding to or deleting from the
     reports produced from any Systematics Systems or Third Party Systems and
     changing the frequency and delivery times for the preparation of such
     reports ("Report Schedule Modifications").  If the additional services
     necessitated by the cumulative effect of the Report Schedule Modifications
     exceeds the level for normal business activities, Systematics will notify

                                      B-1

     Fidelity and demonstrate such excess to Fidelity's reasonable satisfaction
     whereupon the parties will cooperate in scheduling and determining such
     Report Schedule Modifications to accomplish the goals of each party.
     Fidelity shall not be charged any amounts over the Monthly Base Charge for
     any Report Schedule Modifications required by any law, ordinance,
     regulation or practice of any Governmental Entity.  Upon receipt of
     authorization from Fidelity in writing, Systematics shall, within a
     reasonable time of such authorization, acquire such additional personnel
     and/or equipment as are necessary and shall deliver the reports pursuant to
     the Report Schedule Modification.

                                      B-2

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT C
                                   ---------

                                      FEES

1.   FEES AND CREDITS.

     1.1  FEE SCHEDULE.  As consideration for the Services, Fidelity shall make
     certain monthly payments to Systematics in the amounts set forth in the
     following table:

     Applicable Period          Amount of Monthly Payment
     -----------------          -------------------------
                             
     Months 1 - 18                      
 
     Months 19 - 24                     [CM]

     Months 25 - 60                     
 
     Months 61 - 84                     [CM]

2.   ADDITIONAL VOLUME CHARGES.

     Fidelity shall pay those fees set forth in Section 1 of this Exhibit C in
     exchange for Systematics' provision of the Services for the Base Account
     Volumes.  In addition to such fees, Fidelity shall pay Systematics
     additional fees in accordance with this Section 2 for Services related to
     Accounts above the Base Account Volumes.  Increased work volume may result
     from internal growth, mergers or acquisitions or a combination thereof.

     2.1  CORE ACCOUNTS.  As used herein, the term "Core Accounts" means [CM]

                                      C-1

       Account Type                            Account Volume
       ------------                            --------------
                                            
       Demand Deposit Accounts                    
       Statement Savings                          
       Passbook Savings                           
       Certificates of Deposit                    
       IRS's and KEOGH Plans                      [CM]         
       Home Equity (ALS)                          
       Contract Collections                       
       General Ledger Accounts                    
                                                          
          Total Core Accounts                     

     2.2  BASE VOLUMES AND ADDITIONAL VOLUME CHARGES.
  
     Actual volumes of Accounts shall be measured on the last day of each month.
     [CM]
                                      C-2

     [CM]

3.   ADDITIONAL RESPONSIBILITIES OF THE PARTIES.

     3.1  FIDELITY RESPONSIBILITIES.  In addition to its responsibilities as set
     forth in the Agreement, Fidelity is responsible for the following: (i)
     operations at all of its data processing facilities other than the Data
     Center; (ii) input processing at the Data Center; (iii) check signing; (iv)
     providing and maintaining all personal computer software, no portion of
     which operates on the mainframe ("Non-mainframe Software"); (v)
     modifications to the Non-mainframe Software necessary to interface with
     Systematics Systems; provided, however, that Systematics shall be
     responsible for any such modifications of the FiTech Systems and the Loan
     Production System (ALS); (vi) payment of any laser or page printer vendor
     usage fees and (vii) payment of all costs associated with obtaining the
     following services or products; maintenance of bursting equipment,
     maintenance of de-collation equipment, maintenance of check signing
     equipment, microfiche service, microfiche supplies, microfiche separation
     by branch, laser or page printer supplies and chemicals, maintenance of
     network diagnostic equipment, license fees related to all Non-mainframe
     Software, and maintenance fees related to all Non-mainframe Software.

     3.2  SYSTEMATICS RESPONSIBILITIES.  In addition to its responsibilities as
     set forth in the Agreement, Systematics is responsible for the following:
     (i) bursting; (ii) de-collation; (iii) reports separation by branch or
     department; (iv) delivery to courier; (v) laser or page printer operations;
     (vi) tracking inventories of paper stock and forms; (viii) tape library
     management; (ix) downloading of data; (x) interfacing with other systems,
     (xi) telecommunications network control including: network monitoring,
     initial assessment of problem coordination with vendors, reporting problems
     to appropriate vendors, reporting problems to end users and operating
     diagnostic equipment; (xii) modifications of the FiTech System and Loan
     Productions System (ALS) Non-mainframe Software necessary to interface with
     Systematics Systems; (xiii) installation of maintenance and enhancement of
     mainframe systems necessary to interface with Non-mainframe Software, and
     (xiv) processing and maintaining the Systems in the following table until
     replaced pursuant to Exhibit E:

                                      C-3

           .  All Systems listed on Exhibit A
           .  Broadview Total Banking System
           .  Dunn & Bradstreet Financial Systems
                   General Ledger
                   Fixed Assets
                   Accounts Payable
                   Millinium & PC Link
           .  PEP (Paperless Entry Processing) ACH
           .  Extended ALS - Loan Origination
           .  Top Secret Security Software System
           .  INFOPAC - Online Report Distribution System
           .  DataCom DB - Dataquery & IDEAL
           .  Pan Audit & Easytrieve Software Systems (Audit Confirmations)

4.   DASD CAPACITY.

     If Fidelity increases the length of its customer data records by a material
     amount which results in a need for additional DASD capacity which would not
     otherwise be necessary to accommodate the planned Account volumes, then
     Systematics shall provide a written quotation of the cost to Fidelity for
     Systematics' acquisition of the additional DASD capacity by Systematics at
     the quoted price or modify its request for expansion of the customer data
     records.  Systematics shall integrate the newly acquired DASD capacity into
     the Data Center operation as soon as practicable at no additional charge.
 
5.   RESIDENT STAFF.

     Systematics agrees to provide the following Resident Staff on a full time
     basis during the Term of this Agreement:

============================================================================================== 
               '93                                             '94                     1994
                                                                                       thru
               May   Jun   Jul   Aug   Sep   Oct   Nov   Dec   Jan   Feb   Mar   Apr   2000
                                                                                       5/94
                                                                                       thru
                                                                                       4/2000
- ---------------------------------------------------------------------------------------------- 
                                                
Resident        23    23    23    21    21    21    18    18    18    18    18    18     13
Staff
Members
- ----------------------------------------------------------------------------------------------
Minimum         23    23    23    21    21    21    18    18    18    18    18    18     13
Resident
Staff
==============================================================================================

                                      C-4

     The Resident Staff shall not be reduced to less than twenty (20) members
     prior to the completion of the Conversion as set forth in Exhibit A.

6.   SYSTEMATICS HOURLY RATES.

     The following hourly rates are currently in effect which apply to the
     services provided pursuant to Section 8.1(d) by staff other than Resident
     Staff.  The Systematics hourly rates may be changed by Systematics upon
     written notice to Fidelity not more often than once during each twelve
     month period following the Effective Date.  Systematics' Hourly Rates for
     programming include all related computer time required for program testing.
     Overtime rates are only applicable, if and to the extent, Systematics will
     incur overtime expense.  Systematics fees are computed by multiplying the
     actual personnel hours expended on Fidelity's project(s) including any
     travel time to and from Fidelity's location(s).  In addition, Fidelity
     agrees to reimburse Systematics for the actual expense of reasonable travel
     and lodging expense, if any, related to hourly rate based services
     requested by Fidelity.  Systematics will inform Fidelity, in advance, if
     overtime or travel and lodging expense is anticipated to be incurred.

==============================================================
                          Regular Hourly     
                               Rate           Overtime Hourly
                            Per Person        Rate Per Person
- -------------------------------------------------------------- 
                                        
Programmer                    [CM]                 [CM]
- --------------------------------------------------------------
Computer Operators            [CM]                 [CM]
==============================================================

     In addition, Fidelity will pay all reasonable travel and subsistence costs
     incurred by Systematics' employees in performance of any such additional
     services.

7.   PRICE ADJUSTMENT.

     The fees and charges reflected in this Agreement will be increased or
     decreased, based upon changes in certain indices as set out below.  The
     index to be used in computing such increase, if any, shall be either of the
     following:

          [CM]
                                      C-5

     [CM]

                                      C-6

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------
                                   EXHIBIT D
                                   ---------
                  REPORTING SCHEDULE AND PERFORMANCE CRITERIA

If requested by Fidelity, Systematics agrees to process and update Fidelity's
data more frequently than set forth in this Exhibit or to extend such on-line
service hours as a Special Service pursuant to Section 3.4 of the Agreement.
All references to time herein are in Pacific Time.

1.   FIDELITY DELIVERY SCHEDULES

     1.1  FIDELITY INPUT TO SYSTEMATICS.

     Item                               Frequency    Available to Systematics
     ----                               ---------    ------------------------

     Monetary Input-Daily               (Mon.-Fri.)         7:30 p.m.
 
     Non-Monetary Input-Daily           (Mon.-Fri.)         7:30 p.m.
 
     Monetary and Non-monetary
       Input                            (Saturday)          3:00 p.m.

                     [This space intentionally left blank.]

                                      D-1

     1.2  SYSTEMATICS OUTPUT TO FIDELITY.

     Item                          Frequency                     Available to Fidelity
     ----                          ---------                     ---------------------
                                                           
     Batch Reports                 Daily (Tues.-Sat.)                  7:00 a.m.
                                   Weekly (2nd Business
                                    Day of Each Week)                  7:00 a.m.
                                   Monthly (2nd Business
                                    Day of Each Month)                 7:00 a.m.
     General Ledger
      Reports                      Daily (Mon.-Fri.)                   6:30 a.m.
 
     Savings Statements            Quarterly (2nd Business
                                    Day of each Quarter)               7:00 a.m.

     1099 Processing               Annually (15th Business
                                    Day of each Year)                  7:00 a.m.

     Interest Registers/
      Notice                       Annually (15th Business
                                    Day of each Year)                  7:00 a.m.

     General Ledger
      Close                        Annually (15th Business
                                    Day of each Year)                  7:00 a.m.

     IRA Statements                Annually (15th Business
                                    Day of each Year)                  7:00 a.m.

                     [This space intentionally left blank.]

                                      D-2

     1.3  FIDELITY ONLINE AVAILABILITY.

==================================================================================== 
                     MONDAY THRU FRIDAY       SATURDAY         SUNDAY & HOLIDAYS
====================================================================================
                                                     
                           Daily
- ------------------------------------------------------------------------------------ 
Administrative        7:30am   7:30pm     7:30am   7:30pm     To be determined by
                                                               Fidelity Systems
                                                                  Management
                                                                  Committee
- ------------------------------------------------------------------------------------ 
Teller Terminal       7:30am   7:30pm     7:30am   7:30pm      N/A            N/A
- ------------------------------------------------------------------------------------ 
ATM/Voice            12:00am  11:59pm    12:00am  11:59pm      12:00am    11:59pm
 Response Unit
- -------------------------------------------------------------------------------------
Operations            8:00am   7:59am     8:00am   7:59am      To be determined by
 Support                                                       the Fidelity Systems
                                                                   Management
                                                                   Committee
=====================================================================================

     1.4  BATCH PROCESSING UPDATE FREQUENCY.

          Systematics shall complete a batch update of Fidelity's file five (5)
          times weekly, Monday through Friday.

     1.5  ADDITIONAL SCHEDULES - FIDELITY.

         TASK                                FREQUENCY               DELIVERY DEADLINE
         ----                                ---------               -----------------
                                                                
         Deliver Exception Item and
           Statement Cycle Tape
           to Union Bank                  Daily (Mon.-Fri.)           12:00 (midnight)
 
         Delivery Offsite Storage
           Tapes to ARCUS Courier         Daily (Mon.-Sun.)           8:30 a.m.
 
         Deliver Transmatic Tapes
           (ACH) to First Interstate
           by Courier                     1st, 4th, 10th, and 18th
                                            of each Month  9:00 a.m.

                                      D-3

     2.   PERFORMANCE CRITERIA.

          2.1  INPUT AND OUTPUT PERFORMANCE.  The parties agree that timely and
          accurate submission of input and output is essential to satisfactory
          performance under this Agreement.  The parties acknowledge that the
          following is a list of acceptable time of performance standards.
          However, regardless of the effect of the on-line uptime provisions of
          this Section 2, if Fidelity experiences downtime or significantly
          degraded performance at peak hours or other times important to
          Fidelity's operation, Systematics shall research the cause, with
          Fidelity's reasonable assistance, and will take corrective action
          (where Systematics is responsible) or recommend corrective action
          (where Fidelity or a third party is responsible) and initiate action
          for correction as soon as reasonably practicable.

          2.2  ON-TIME DELIVERY - OUTPUT TO FIDELITY.  [CM] Systematics
          shall submit a written report to Fidelity on a monthly basis, in a
          format reasonably acceptable to Fidelity and including that
          information reasonably requested by Fidelity, including, without
          limitation, the results of the previous  Performance Period's on-time
          output delivery performance.  The on-time delivery percentages shall
          be calculated by dividing the number of reports that were delivered
          on-time (as specified in Exhibit D) by the number of reports scheduled
          to be delivered to Fidelity for the Performance Period as described in
          Exhibit B ("On-Time Percentage").  [CM]

               On-Time Percentage          Rebate

                    [CM]                    [CM]

          [CM]
                                      D-4

     2.3  ONLINE APPLICATIONS [AND NETWORK] UPTIME.

     (a)  Online Application Uptime.  [CM]  Systematics shall submit a written
          report to Fidelity on a monthly basis, in a format reasonably
          acceptable to Fidelity and including that information reasonably
          requested by Fidelity, including, without limitation, the results of
          the previous Performance Period's on-line uptime performance.  The
          on-line uptime percentages shall be calculated by dividing the
          accumulative number of application hours that such on-line up-time was
          achieved by the accumulative number of application hours the on-line
          System is scheduled to be available to Fidelity during the Performance
          Period pursuant to Section 1.3 of this Exhibit D (the "On-line Uptime
          Percentage").  Systematics shall not perform scheduled preventative
          maintenance during periods which the on-line systems are to be
          available to Fidelity pursuant to Section 1.3 of this Exhibit D and
          the performance of such preventative maintenance shall be designed to
          avoid or minimize disruption of Fidelity's operations.  [CM]

          On-line Uptime Percentage        Rebate

               [CM]                         [CM]

          [CM]

     (b)  On-line Network Up-Time.  During the first sixty (60) days of this
          -----------------------                                           
          Agreement, Systematics and Fidelity will jointly establish
          measurements for on-line up-time for Fidelity's network equipment and
          configuration (the

                                      D-5

          "Network Up-Time Standards").  Systematics shall provide planning and
          design services, problem diagnosis and problem resolution management
          and make recommendations to Fidelity as to how they should configure
          the Fidelity Network to meet or exceed their Network Up-Time
          Standards.

     2.4  RESPONSE TIME.  Systematics and Fidelity acknowledge the high
          importance of maintaining acceptable response time for users of
          Fidelity's on-line Systems.  Systematics and Fidelity agree that on-
          line response time, herein defined as the elapsed time between the
          time any transactions are "entered" at the terminal and the time a
          related response is "received" by the terminal (the "On-line Response
          Time"), can be detrimentally affected by factors such as line speeds,
          modem speeds, terminal control unit capacity, third party on-line
          software, on-line transaction mix and other factors which may
          materially affect response time.  Systematics shall submit a written
          report to Fidelity on a monthly basis, in a format reasonably
          acceptable to Fidelity and including that information reasonably
          requested by Fidelity, including, without limitation, the results of
          the previous month's response time performance.

          (a)  On-line Response Time.  During the first sixty (60) days of this
               ---------------------                                           
               Agreement, Fidelity and Systematics shall work together to
               jointly determine and document the On-line Response Time levels.
               The On-line Response Times achieved subsequent to the Effective
               Date hereof shall meet or exceed the On-line Response Time
               Standard; provided, however, that Systematics shall not be
               responsible for degraded On-line Response Times if Systematics
               can demonstrate that such degraded On-line Response Times are
               directly attributable to: (i) Fidelity's failure to follow
               Systematics' recommendations with respect to line speeds, modem
               speeds, terminal control unit capacity or third party on-line
               software, or (ii) circumstances beyond the control of either
               Systematics or Fidelity. Systematics will monitor and make
               engineering recommendations to Fidelity in order to maintain the
               On-line Response Time Standards.

          (b)  Host Internal Response Time.  In addition to the foregoing, the
               ---------------------------                                    
               response times as measured internal to the host computer (the
               "Internal Response Time") shall be less than one (1) second
               response time (the "Internal Response Time Standard").

          (c)  Response Time Incentives.  [CM]
               ------------------------                                         
               
                                      D-6

                    Response Time Average
                    For Month In Seconds          Rebate

                          [CM]                     [CM]

     2.5  GRACE PERIOD AND CURE.  The provisions of Section 2 shall not be
          effective until the beginning of the first full calendar month
          beginning after thirty (30) days from the application conversion date.
          In the event that an incentive rebate is incurred during a given
          Performance Period none of the months belonging to that Performance
          Period will be utilized to measure performance in subsequent
          Performance Periods.

                                      D-7

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT E
                                   ---------

                   FIDELITY-FURNISHED EQUIPMENT AND SOFTWARE

1.   TERM.

     Fidelity shall furnish to Systematics the leased equipment and licensed
     software ("Equipment" and "Software") described below through the listed
     expiration dates and under the terms and conditions set forth below and in
     the Agreement.  The Expiration Date, if any, represents the date after
     which Fidelity is no longer obligated to provide the same to Systematics.

2.   TAXES.

     Fidelity will pay all taxes, however designated or levied or based on the
     Equipment or Software or their use.

3.   RISK OF LOSS; REPLACEMENT.

     Except for loss or damage caused by the negligence or intentional
     misconduct of Systematics, Systematics shall not be responsible for any
     loss or damage to the Equipment or Software.

     If any Equipment or Software furnished hereunder is damaged, destroyed or
     malfunctions to the extent that the same cannot be repaired, or Fidelity
     elects not to so repair then, provided such damage or malfunction was not
     caused by Systematics as set forth above, Fidelity agrees to acquire and
     install, as soon as reasonably practicable, comparable replacement
     Equipment or Software.

4.   CHARGES.

     No charge shall be payable by Systematics for its use of the Equipment or
     Software.  Services provided under the Agreement by Systematics are
     acknowledged by Fidelity to be adequate consideration of Fidelity's
     agreement to provide such Equipment and Software.

                                      E-1

5.   INSURANCE.

     Fidelity is responsible for the cost of all fire, extended coverage and
     theft insurance in an amount covering the Equipment for the period during
     which Fidelity is obligated to provide the Equipment pursuant hereto.

6.   MAINTENANCE.

     Systematics agrees to enter into and to keep in force during the term
     hereof, at Systematics' sole cost and expense, standard maintenance
     agreements to keep the Equipment in good working order, to make all
     necessary adjustments and repairs thereto, and to pay all maintenance costs
     relative to the use of the Equipment.  Fidelity may purchase software
     maintenance agreements from the vendors of each item of Software listed
     below until the expiration date listed below.

                                LEASED EQUIPMENT
                                ================

                                            EXPIRATION   MONTHLY
LESSOR           TYPE       DESCRIPTION        DATE       LEASE
- ------------   --------   ---------------   ----------   --------

IBM-ICC        9121-320   CPU               Jan-94        
IBM-ICC        9371-12    CPU Monitor       Jan-94        
                                                          
EL CAMINO      3990-G03   DASD Controller   Dec-94        
                                                          
PREMIER        3480-A22   Cartridge Tape    Sep-94        
PREMIER        3480-B22   Cartridge Tape    Sep-94       
PREMIER        3480-B22   Cartridge Tape    Sep-94       
PREMIER        3480-B22   Cartridge Tape    Sep-94       
PREMIER        3480-B22   Cartridge Tape    Sep-94       
INSIGHT        3480-A22   Cartridge Tape    Mar-93        
INSIGHT        3480-B22   Cartridge Tape    Mar-93        
INSIGHT        3480-B22   Cartridge Tape    Mar-93        
                                                         [CM] 
PREMIER        3480-AE4   DASD              May-94        
PREMIER        3380-BE4   DASD              May-94        
PREMIER        3380-BE4   DASD              May-94       
PREMIER        3380-AE4   DASD              May-94       
INSIGHT        3380-BE4   DASD              Apr-94        
INSIGHT        3380-BE4   DASD              Apr-94       
INSIGHT        3380-AE4   DASD              Dec-93        
INSIGHT        3380-BE4   DASD              Dec-93       
PHOENIX        3380-AE4   DASD              Sep-94       
PHOENIX        3380-BE4   DASD              Sep-94       

                                      E-2

                                             
PHOENIX        3380-BE4   DASD              Sep-94       
PHOENIX        3380-BE4   DASD              Sep-94       
                                                         
INSIGHT        3174-001   Controller        Nov-93       
INSIGHT        3290-220   Terminal          Nov-93       
INSIGHT        3290-220   Terminal          Nov-93       
INSIGHT        3290-220   Terminal          Nov-93       [CM]
INSIGHT        3290-220   Terminal          Nov-93       
                                                         
XEROX          4090       Laser Printer     Oct-94       
XEROX                     Extended Serv     Oct-94       
                          Weekend
XEROX                     Average Click     Oct-94
                          Charge

                                    SOFTWARE
                                    ========

 
VENDOR                   APPLICATION             EXPIRATION DATE
- ------                   -----------             ---------------
                                            
Computer Associates      Top Secret              December 1993
                         Uni-Service*
                         Look*
                         DataCom DB*
                         IDEAL*

Pansophic                Easytrieve*
                         Pan Audit*              Contract Termination Date

**FiTech                 Mortgage Loan
                          Origination            Contract Termination Date

Broadview                Total Banking
                          Systems*               Conversion Date

In-House                 Current Mortgage Loan
                          Origination*           Conversion Date

Conversion

**Dunn & Bradstreet      General Ledger          Contract Termination Date
                         Fixed Assets            Contract Termination Date
                         Accounts Payable        Contract Termination Date
                         Fixed Assets            Contract Termination Date
                         Accounts Payable        Contract Termination Date

                                      E-3

 

**Dunn & Bradstreet      Millinium               Contract Termination Date

Software Diversified     Power Tools*
                         ORCA*
                         Interpartition
                          Command*

ALTAI                    Zack*

Goal System              Flee*

Sterling Software        Comparex*

**Tower                  EPIC

Software applications annotated with "*" are expected to be replaced with
products acceptable to Fidelity or removed with Fidelity's prior approval at no
additional cost to Fidelity.

Software Vendors annotated with "**" are those referenced in Section 17.2(f) of
the Agreement.

7.   Systematics will purchase certain equipment from Fidelity as set out below.

                    EQUIPMENT TO BE PURCHASED BY SYSTEMATICS
                    ========================================

          EQUIPMENT TYPE                              PURCHASE PRICE
          --------------                              --------------
                                                   
       3420-008  Tape Drives                               
       3420-008  Tape Drives                              [CM]
       3420-008  Tape Drives                               
       3803-002  Tape Controller                           

          EQUIPMENT TYPE                              PURCHASE PRICE
          --------------                              --------------
                                                     
       4245-020  Impact Printer                           
       4245-020  Impact Printer                           [CM]
                                                          
       3725-26   Communications Controller                

                                      E-4

                                               
   4050              Xerox Laser Printer             
                                                     
                     Personal Computers,             
                     Peripheral Equipment and        [CM]
                     Related Equipment as agreed     
                     by the parties                  

                                                     

                                      E-5

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------
                                   EXHIBIT F
                                   ---------
                               INSURANCE COVERAGE

===================================================================================================
    Type of Coverage               Limit               Insurance                 Remarks
                                                        Company
===================================================================================================
                                                                   
Commercial General          $1,000,000 each          Cincinnati           Bodily injury and
 Liability                  occurrence               Insurance            property damage;
                            $2,000,000 general       Company              combined limit.  $5,000
                            aggregate                                     premises medical each
                                                                          person
- ---------------------------------------------------------------------------------------------------- 
Contents                    Variable                 Cincinnati           Blanket converge
                                                     Insurance            $100,000 deductible.
                                                     Company
- ---------------------------------------------------------------------------------------------------- 
Data Processors Errors      $25,000,000              Cincinnati           $25,000,000 each
and Omissions                                        Insurance            occurrence and
                                                     Company              aggregate.  $250,000
                                                                          deductible.
- ---------------------------------------------------------------------------------------------------- 
Equipment                   Blanket Coverage         Cincinnati           $5,000,000 limit any
                                                     Insurance            one loss on EDP
                                                     Company              equipment; $15,000,000
                                                                          extra expense any one
                                                                          loss.  An all risks
                                                                          policy covering owned
                                                                          and leased equipment
                                                                          for replacement cost at
                                                                          each location with
                                                                          $100,000 deductible for
                                                                          all losses from any one
                                                                          event.  $1,000,000 with
                                                                          $25,000 deductible in
                                                                          transit.  Data
                                                                          Processing media
                                                                          coverage included.
- -----------------------------------------------------------------------------------------------------
Automobile                  $1,000,000 each          Cincinnati           Owned, hired and non-
                            occurrence               Insurance            owned vehicles.
                                                     Company
- ----------------------------------------------------------------------------------------------------- 
Worker's Compensation       $500,000                 Cincinnati           Statutory limit
                                                     Insurance            required
                                                     Company              by various state laws.
- ----------------------------------------------------------------------------------------------------- 
Fidelity Coverage           $10,000,000              Cincinnati           Employee dishonesty
                            Blanket                  Insurance            $100,000 deductible.
                            Bond                     Company
- -----------------------------------------------------------------------------------------------------
Umbrella                    $50,000,000              Cincinnati           Fiduciary liability
                                                     Insurance            specifically excluded.
                                                     Company
=====================================================================================================
Effective January 1, 1993
=====================================================================================================

                                      F-1

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT G

     This Exhibit G consists of the AMENDMENT TO SOFTWARE LICENSE AGREEMENT
effective the first day of May, 1993, and the SOFTWARE LICENSE AGREEMENT dated
as of the 31st day of October, 1991.

                                  AMENDMENT TO
                           SOFTWARE LICENSE AGREEMENT

      This Amendment ("Amendment") is effective as of the first day of May, 1993
("Amendment Effective Date") and amends and supplements that certain Software
License Agreement ("License Agreement") dated as of the 31st day of October,
1991 by and between FIDELITY FEDERAL BANK, FSB ("Customer") and SYSTEMATICS
FINANCIAL SERVICES, INC. ("Systematics").

                              W I T N E S S E T H:

      WHEREAS, Customer and Systematics have entered into a Data Processing
Agreement of even date herewith ("DP Agreement");

      WHEREAS, [CM]

      WHEREAS, the parties desire to supplant Systematics' obligation to provide
the ESR Services as set out in the License Agreement and other provisions of the
License Agreement with those provisions set forth in the DP Agreement; and

      WHEREAS, the parties are willing to do so pursuant to the terms and
conditions contained herein.

      NOW, THEREFORE, in consideration of the mutual promises and considerations
contained herein, the parties hereto agree as follows:

      1.   [CM]

      2.   Pursuant to the DP Agreement, Systematics agrees to provide Customer
with certain data processing services which are currently being performed by
Customer through the utilization of Systematics' Software.    Customer and
Systematics agree that upon termination or expiration of the DP Agreement,
Customer may reinstate the ESR Services for a term to be mutually determined and
at Systematics' then current prices.  In the event that Fidelity obtains ESR
Services within ninety (90) days after the expiration or termination of the DP
Agreement, Fidelity shall not be required to pay a recertification fee to obtain
such ESR Services.

      3.   Exhibit A of the License Agreement shall be amended to delete
Mortgage System (RE) from the list of Systematics Software Systems to be
licensed to Customer under the License Agreement.  Customer and Systematics
agree that the License Agreement does not provide for any mortgage processing
systems.

      4.  Customer and Systematics further agree that upon the expiration of the
DP Agreement the License Agreement shall also apply to all Systematics-developed
program modifications, enhancements, new systems or major subsystems installed
for Customer's benefit pursuant to the DP Agreement.

      5.   [CM]

      6.   In addition, during the time of the DP Agreement the following
provisions shall apply:

           6.1  Systematics has or shall, at Fidelity's request, within thirty
      (30) days of the installation thereof deliver to Fidelity a copy of the
      source code form of all Systematics Systems (both mainframe and
      microcomputer Systems) which are installed for the benefit of Fidelity
      pursuant to the DP Agreement (the "Source Code"), including all relevant
      commentary, explanations, and other documentation of the Source Code
      (collectively, "Commentary").  Systematics also agrees to deliver to
      Fidelity, at such times as they are made and upon request by Fidelity, a
      copy of all revisions to the Source Code or Commentary encompassing all
      corrections or enhancements made to the Systematics Systems (both
      mainframe and microcomputer Systems) by Systematics pursuant to the
      Software License Agreement or DP Agreement.

           6.2  Fidelity shall have the right to use the Source Code and
      Commentary for the purpose of continuing the benefits afforded to Fidelity
      under the Software License Agreement including, without limitation to
      support, maintain, modify or enhance for Fidelity's internal use, upon the
      occurrence of any of the following ("Event Permitting Use"):

           (a)      if Systematics has availed itself of, or been subjected to
                    by any third party, a proceeding in bankruptcy in which
                    Systematics is  the named debtor, an assignment by
                    Systematics for the benefit of its creditors, the
                    appointment of a receiver for Systematics, or any other
                    proceeding involving insolvency or the protection of, or
                    from, creditors, and same has not been discharged or
                    terminated without any prejudice to Fidelity's rights or
                    interests under the DP Agreement or Software License
                    Agreement within thirty (30) days; or

                                       2

           (b)      if Systematics has ceased its on-going business operations,
                    or sale, licensing, maintenance or other support of the
                    Systematics Systems (mainframe or microcomputer Systems); or

           (c)      if any other event or circumstance occurs which demonstrates
                    with reasonable certainty the inability or unwillingness of
                    Systematics to fulfill its obligations to Fidelity under the
                    Software License Agreement or the DP Agreement, including,
                    without limitation, the correction of defects in the
                    Systematics Systems (mainframe or microcomputer Systems).

           6.3  Fidelity shall give written notice to Systematics of the
      occurrence of an Event Permitting Use hereunder.  Unless within seven (7)
      days thereafter Systematics files with  Fidelity its affidavit executed by
      a responsible executive officer stating that no such Event Permitting Use
      has occurred or that the Event Permitting Use has been cured, then
      Fidelity shall upon the eighth (8th) day be permitted to use Source Code
      and Commentary as set forth herein.

           6.4  It is understood that ownership of the source Code and
      Commentary at all times belongs solely to Systematics, and that Fidelity's
      right to use the Source Code and Commentary as provided herein is made as
      an accommodation to Fidelity and nothing thereby shall be deemed to vest
      any ownership thereof to Fidelity.

                     [This space intentionally left blank.]

                                       3

      IN WITNESS WHEREOF, the parties have executed this Amendment by their duly
authorized officers as of the Amendment Effective Date.
 
SYSTEMATICS FINANCIAL                          FIDELITY FEDERAL BANK
SERVICES, INC.

By:         /s/ Michael Montgomery     By:      /s/ Richard M. Greenwood
         ---------------------------         --------------------------------
Name:       Michael Montgomery         Name:    Richard M. Greenwood
         ---------------------------         --------------------------------
Title:      Executive Vice President   Title:   President and Chief
                                                Executive Officer
         ---------------------------         --------------------------------
Date:                                  Date:
         ---------------------------         --------------------------------

                                       4

                     SYSTEMATICS FINANCIAL SERVICES, INC.
                          SOFTWARE LICENSE AGREEMENT
                                   (CHARTER)

This Agreement ("Agreement") dated as of the 31st day of October, 1991, 
("Commencement Date") is made and entered into by and between SYSTEMATICS 
FINANCIAL SERVICES, INC., an Arkansas corporation, 4001 Rodney Parham Road, 
Little Rock, Arkansas 72212 ("Systematics") and Fidelity Federal Bank, FSB 
("Customer"), a financial corporation with its principal place of business at 
600 North Brand Blvd., Glendale, CA 91203.

- -------------------------------------------------------------------------------
1.   PROVISION OF SOFTWARE.

     Systematics agrees to license and furnish to Customer the computer software
     programs ("Software") listed on Exhibit A entitled "Software Systems
     Licensed" attached to and made a part of this Agreement.

2.   DELIVERY AND ACCEPTANCE.

     2.1   Systematics agrees to deliver each item of Software to Customer at
           Customer's premises designated on Exhibit A ("Installation Site") on
           or before the date requested for delivery as indicated on Exhibit A
           or at such other time as may be mutually agreed. Delivery shall be
           deemed to be complete upon receipt of the first item of Software by
           Customer at the Installation Site.

     2.2   Customer shall have until March 1, 1992, (the "Acceptance Period"),
           to test the Software to determine whether the Software substantially
           meets the specifications reflected in the Documentation. Unless
           within the Acceptance Period Customer has given SI written notice
           specifying a material failure of the Software to meet such
           specifications, the Software shall be deemed to have been accepted.
           If Customer gives written notice to SI of such a material failure
           during the Acceptance Period, SI shall have thirty (30) days
           following receipt of such notification to cure such material failure
           and SI agrees to exercise good faith and its best eforts to cure the
           material failure. Upon SI's cure of such material failure, the
           Acceptance Period shall be extended by an additional thirty (30) days
           to permit Customer to complete its retesting procedures and so notify
           SI. In the event SI fails to cure all material failures within the
           thirty-day period after notification as set out above, Customer may
           terminate the Agreement upon written notice to SI. Such written
           notice to terminate shall be given within sixty (60) days after
           Customer's notice of material failure described above. In the event
           of such termination by Customer, SI agrees to refund to Customer all
           fees previously paid to SI by Customer under the Agreement, and
           Customer agrees to promptly return all Software, Documentation, and
           related materials to Systematics.

3.   DOCUMENTATION.

     Systematics agrees to deliver to Customer two complete sets of its standard
     operational instructions, manuals, and other related documentation
     ("Documentation") for each item of Software ordered. In order to satisfy
     its internal requirements and subject to the disclosure restrictions set
     forth herein, Customer may copy the Documentation or may request additional
     copies from Systematics at Systematics' then standard fees for such
     Documentation.

                                       5

4.   SOFTWARE LICENSE.

     Systematics grants to Customer, and Customer accepts from Systematics, a
     non-exclusive, ninety-nine year license beginning on the Commencement Date
     and continuing hereafter until expiration or termination of this license in
     accordance with its terms to use the Software and Documentation, only at
     the Installation Site (except for regular offsite backup at the "Backup
     Site" designated on Exhibit A, or a temporary emergency relocation), solely
     for processing of Customer, its affiliated corporations and subsidiaries.
     Customer may change the Installation Site upon prior written notice to
     Systematics. Upon such notice of the change of Installation Site, Customer
     will promptly cease use of the Software at the old Installation Site and
     will in no event use the Software for production purposes at more than one
     site concurrently.

5.   CONFIDENTIALITY AND SAFEGUARDS.

     Customer acknowledges that the Software and Documentation constitute
     valuable assets and trade secrets of Systematics, that neither legal nor
     equitable title to the Software passes to Customer under the terms of this
     Agreement, and that all information with respect to the Software is
     confidential.

     Customer agrees to use its best efforts to prevent disclosure of any part
     of the Software or Documentation, and shall assure that it does not,
     through its employees or representatives, sell, lease, assign, or otherwise
     transfer, disclose, or make available, in whole or in part, the licensed
     Software or Documentation to any third party for any reason (except for
     employees of Customer, necessary for the use of the Software and
     Documentation by Customer, for auditing purposes by independent certified
     public accountants, or for complying with applicable governmental laws,
     regulations, or court orders). In the event that Customer desires to
     provide any third party access to the Software and Documentation, Customer
     agrees that such third party shall execute a Non-Disclosure Agreement in
     the form attached as Exhibit B and Customer shall immediately provide a
     copy of such executed proposed Non-Disclosure Agreement to Systematics.
     Systematics, has the right to not accept any such proposed Non-Disclosure
     Agreement and until such Non-Disclosure Agreement is accepted by
     Systematics, no disclosure of any part of the Software or Documentation may
     be made by Customer to any third party. Systematics will exercise
     reasonable efforts to accept or reject a proposed Non-Disclosure Agreement
     within thirty days of the receipt of the proposed Non-Disclosure Agreement
     by Systematics. In no event shall any competitor of Systematics be
     furnished with any information concerning the Software or Documentation.

     If either party discloses to the other confidential information concerning
     the disclosing party's business, plans or customers and if the recipient is
     advised in writing at the time of disclosure that such information is
     confidential, the recipient will take reasonable steps to maintain such
     confidentiality. Systematics understands and agrees that information given
     to Systematics by customer is acknowledged to be privileged and
     confidential and that Systematics will use its best efforts to prevent
     disclosure of any part of that data.

     The terms and conditions of this Section shall survive the termination or 
     expiration of this Agreement for any reason.

                                       6

6.   CUSTOMER MODIFICATIONS.

     Customer may modify the Software and/or the Documentation, and such
     modifications shall become a part of the Software, subject to all the terms
     and conditions fo this Agreement. Customer may not offer or make available
     to any third party, with or without charge, any modification to the
     Software.

7.   SOFTWARE ENHANCEMENT, SUPPORT AND REPLACEMENT SERVICES ("ESR SERVICES").

     7.1  For a period of 5 years from the Commencement Date (the "ESR Period"),
          the parties agree as follows:

          a.  Systematics shall correct and repair any failure, malfunction, 
              defect, or nonconformity ("Defect") in the Software, if such 
              Defect prevents the Software from operating and performing
              substantially in accordance with the Documentation and applicable
              warranties. Should Systematics request, Customer agrees to provide
              in writing and in reasonable detail a description of such Defect.

          b.  Systematics agrees to provide to Customer all revisions,
              modifications, and enhancements ("Updates") to each item of
              Software which Updates shall become a part of the licensed
              Software for all purposes described herein. New systems will not
              be considered an Update, but will be available to Customer at
              Systematics' then standard prices.
          
          As used herein the following terms shall be defined as set forth 
     below:

              i)  Updates - all new releases of revisions, modifications and 
                  enhancements to existing application systems licensed to
                  Customer, which are necessary or desirable to implement  
                  functional or regulatory changes to the existing systems.
                  Updates will generally be provided at least on an annual basis
                  and are provided under normal ESR services;

             ii)  Replacement System - an application system which is: a) a 
                  newly developed application system and is substantially
                  the functional equivalent of an existing application system;
                  b) replaces the existing application system; and c) is 
                  denominated by SI as a Replacement System. Replacement Systems
                  shall be provided at no additional fee; and

            iii)  New System - a newly developed and offered application system
                  which performs different functions from the application
                  systems included in Exhibit A hereto and which are
                  denominated by SI as new systems.  New Systems may be licensed
                  to Customer but require the payment of additional license
                  and maintenance fees.

          c.  Systematics shall provide reasonable technical assistance and 
              consultation by telephone or by mail to Customer on a 
              twenty-four hour, seven day a week basis.

          d.  Customer is responsible for testing the Software and each Update
              and for the control, review, and inspection of all reports
              prepared utilizing the Software. Customer further acknowledges 
              that Customer's exclusive remedy hereunder is set out in  
              Section 7.1.a above and that Systematics has no liability, either
              expressed or implied, for any erroneous processing or processing
              errors whether or not atttributable to the Software.

                                       7

     7.2  Following the ESR Period, Customer may purchase continuing ESR
          Services as described in Section 7.1 above, upon such terms and 
          conditions and at Systematics prices then in effect. Systematics
          will provide Customer with twelve months written notice of any
          discontinuance of such ESR Services on any item of Software. During 
          the ESR Term, Systematics shall not discontinue ESR Services for any
          portion of the Software designated as a "Major System" on Exhibit A,
          unless Systematics offers replacement with respect to such Major 
          System at no cost to customer.

     7.3  To the extent Customer modifies the Software, fails to install 
          Updates, or fails to pay ESR fees as set forth in Article 8.2, 
          Systematics shall only be relieved of its responsibility under this 
          Section 7 and of all responsibility and liability for any Defect
          or improper operation of the affected Software resulting from
          customer modification or failure to install updates in a timely
          manner so as to remain no more than one release less current than
          the most current release of any element of the Software.

     7.4  Until November 1, 1993, Customer shall have the option to license
          the OS/MVS version of the Software in consideration of Customer's
          payment to Systematics of a license upgrade fee of $[CM].
          The annual ESR fee set forth in Article 8.2 shall be increased to
          $[CM], pro-rated for any partial ESR period.

8.   INVOICING AND PAYMENT.

     8.1  For the licensing of the Software pursuant to the terms and 
          conditions of this Agreement Customer will pay to Systematics a
          license fee of [CM] ("Software License Fee"), payable as follows:
         
          a.     [CM] upon execution of the Agreement; and
          b.     [CM] upon delivery of the Software; and
          c.     [CM] upon completion of the Acceptance period

          8.1.1  Customer acknowledges that applicable sales and/or use taxes
                 in the amount of [CM] shall be added to the Software
                 License Fee and Customer will remit such taxes to Systematics.

     8.2  For the ESR Services described in Section 7.1, Customer shall pay to
          Systematics the amounts reflected in the following table increased, in
          accordance with the provisions of Section 8.3 below.
          
                                       8

          Systematics agrees that if ESR Services are discontinued on a
          non-major system without provision of a replacement system of
          substantially equivalent functions the ESR fees payable hereunder will
          be appropriately adjusted. The adjustment will be equal to the sum of
          the then current ESR fees for the Software components removed from the
          Software listed on Exhibit A.

                  PAYMENT DUE DATE                               ESR FEES DUE
                  ----------------                               ------------

                                     [CM]

     8.3  Except for the initial ESR Fee of $[CM] due six months following 
          Commencement Date, ESR Fees may be increased for the calendar year
          following the year of the Commencement Date and all subsequent years
          during the ESR Term by multiplying $[CM] by a fraction, the
          numerator of which is [CM] and the denominator of which is [CM].

     8.4  All sums due from Customer to Systematics are payable in the amounts 
          and at the times described in this Agreement. Any amount or payment
          due for which a specific date is not set out will be due from Customer
          to Systematics within thirty (30) days of Customer's receipt of an
          invoice from Systematics.

     8.5  [CM]

9.   INSTALLATION, CONVERSION AND CONSULTING ASSISTANCE.

     9.1  Systematics agrees to furnish 100 hours of installation, conversion 
          and consulting assistance ("Assistance" at no fee) to Customer. Such
          Assistance may, at Customer's option, be furnished at the Installation
          Site or at Systematics' facilities. If the Assistance is furnished at
          the Installation Site, reasonable travel time for Systematics
          personnel will be deducted from the above allotted hours. The
          Assistance may include conversion planning and/or assistance,
          workshops, or other functions mutually agreed to by Customer and
          Systematics. In addition to applicable fees, Customer agrees to pay
          all reasonable travel and subsistence expenses related to the
          Assistance. Assistance specified in this Section 9.1 must be utilized
          within 24 months from Commencement Date. Systematics will be
          responsible for providing personnel for this role as may be
          reasonable.

     9.2  Systematics agrees to provide additional consulting and/or support 
          services, as available and as requested, upon mutually acceptable
          written terms and conditions.

                                       9

 
10.  EDUCATION AND TRAINING.

     10.1 Systematics will make available to Customer, its standard application 
          software training courses, which are generally held in Little Rock,
          Arkansas, in accordance with Systematics' Education and Training
          Department schedule, a current copy of which will be provided to
          Customer upon request. Customer shall be entitled to a cumulative
          total of 35 student (35) class days for such standard courses at no
          fee. Education and training provided in this Section 10.1 must be
          utilized within 24 months from Commencement Date.

     10.2 Additional Customer personnel may attend such courses, and any other 
          standard courses generally offered by Systematics to its other
          Customers, upon payment of Systematics' then current standard
          published fees.

     10.3 Customer acknowledges that subject to Systematics obligations under 
          paragraph 10.1 herein enrollment of Customer personnel in any courses
          offered by Systematics shall be subject to normal space availability
          requirements and compliance with Systematics' standard registration
          and enrollment deadlines and procedures.

     10.4 Customer may elect to utilize other educational materials, including 
          but not limited to, Computer Based Training ("CBT"). Systematics
          agrees to provide to Customer, upon such terms and conditions and for
          such fees as Systematics may stipulate the educational materials set
          forth on Exhibit A. Systematics may withdraw such materials from
          availabilty to its Customers in general upon provision of six (6)
          months prior written notice. Systematics will provide one copy of the
          CBT Modules listed in Exhibit "A" at no charge for the first year
          following the Commencement Date.

11.  MICRO SOFTWARE

     Customer acknowledges that all PC-based Software ("Micro Software") is
     released in object code only. The following additional provisions shall be
     applicable to Micro Software:

     11.1 Customer may copy the Micro Software and use it on multiple 
          microprocessors solely for the benefit of Customer and Customer's
          affiliated corporations and subsidiaries. Documentation for the Micro
          Software may be similarily copied and utilized. At Customer's option,
          additional copies of the Documentation may be made either by Customer
          or by ordering the same from Systematics at Systematics' standard
          rates.

     11.2 All other restrictions on use, copying or disclosure of the Software 
          and Customer's agreements to maintain the confidentiality shall also
          apply to the Micro Software and its Documentation. In addition,
          Customer may not distribute or provide copies of the Micro Software to
          any person, firm, or corporation not permitted hereunder without the
          prior written consent of Systematics and the payment to Systematics of
          additional license fees.

     11.3 All support for end-users of the Micro Software will be supplied by 
          Customer's personnel. Systematics is not resonsible for providing any
          such support services to end-users. Systematics will provide Micro
          Software support to the Customer's MIS personnel for Micro Computer
          Support.

                                      10

 
12.  REMEDIES.

     12.1 For material breach of this Agreement by either party, the other party
          may terminate this Agreement if cure of any breach is not affected
          within thirty days of receipt of written notice thereof. In the event
          of a threatened or actual breach by Customer of Sections 4, 5 or 6 of
          this Agreement, monetary damages alone may not be an adequate remedy,
          and Systematics shall be entitled to injunctive, equitable, and other
          legal relief against such breach as may be awarded by a court of
          competent jurisdiction, plus reasonable expenses (including attorneys'
          fees). No election of any remedy shall be construed as a waiver of or
          prohibition against any other remedy in the event of breach hereunder.

          In the event of a material breach of this Agreement by Systematics 
          monetary damages alone may not be adequate remedy, and Customer shall
          be entitled to injunctive, equitable, and other legal relief against
          such breach as may be awarded by a court of competent jurisdiction,
          plus reasonable expenses (including attorney's fees). No election of
          any remedy shall be construed as a waiver of or prohibition against
          any other remedy in the event of a breach hereunder.

     12.2 In the event of breach by either party and such party's failure to 
          cure said breach as set out in Section 12.1 above the other party may
          reserving all other remedies, terminate the license arising under this
          Agreement. Upon such termination, Customer agrees to promptly cease
          using and return to Systematics all Software, Documentation, and
          copies thereof, accompanied by written certification by an officer
          verifying the accomplishment of such return.
 
13.  COSTS OF COLLECTION.

     Pursuant to Systematics providing Customer ten days prior written notice 
     that amounts are past due and Customer's failure to cure, Customer agrees
     to pay to Systematics interest on the unpaid balance at a rate equal to the
     lesser of eighteen percent (18%) per annum or the highest rate allowed
     under applicable law, plus reasonable expenses (including attorneys' fees)
     incurred in collection. No failure by Systematics to request such payment
     shall be deemed a waiver by Systematics of Customer's obligation to pay
     such sum.

14.  WARRANTIES.

     14.1 Systematics warrants to Customer that (1) the Software and 
          Documentation are free of all liens, claims and encumbrances; and (2)
          Customer shall have the right of quiet enjoyment of the Software and
          Documentation.

     14.2 Systematics warrants and represents that the Software will perform in 
          the manner and environment described in the Documentation.

     14.3 Systematics agrees to hold Customer harmless from any claims of 
          infringement for patent, copyright or other similar property right
          including misappropriation of trade secrets arising out of Customer's
          use of the Software licensed hereunder, provided that Customer is not
          in default under any of the provisions of this Agreement. Systematics
          will defend, at its own expense, any such claim or action.

                                      11

 
     14.4 EXCEPT AS PROVIDED HEREIN, ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, 
          INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
          PURPOSE, ARE HEREBY EXPRESSLY DISCLAIMED.

15.  LIMITATION OF LIABILITY.

     15.1 Except as specifically described in Section 7, Systematics has no 
          obligation or liability, either express or impled, with respect to any
          erroneous processing attributable to any error in the Software.

     15.2 The liability of Systematics to Customer for any breach or default by 
          Systematics of any warranty, covenant, or undertaking hereunder shall
          be limited to actual direct damages incurred by Customer, and in no
          event shall Systematics' aggregate liability exceed the license fees
          actually paid to Systematics by Customer hereunder.  Customer
          acknowledges that Systematics is not and shall not be liable for any
          special, indirect, incidental or consequential damages suffered by
          Customer or demand made against Customer by any third party.
          Additionally, the liability of Customer to Systematics for any breach
          or defult by Customer of any warranty, covenant or undertaking
          hereunder (except for damages resulting from a breach of Sections 4, 5
          or 6) shall be limited to actual direct damages incurred by
          Systematics and Customer's aggregate liability for such breach shall
          not exceed the license fees actually paid to Systematics by Customer
          hereunder, except for damages resulting from a breach of Sections 4,
          5, or 6.

16.  TAXES.

     Customer agrees to pay all taxes levied by a duly constituted taxing
     authority against or upon the Software or its uses, or arising out of this
     Agreement, exclusive, however, of taxes based on Systematics' income, which
     taxes shall be paid by Systematics. Customer agrees to pay any tax for
     which it is responsible hereunder, which may be levied on or assessed
     against Customer directly, and, if any such tax is paid by Systematics, to
     reimburse Systematics therefor, upon receipt by Customer of proof of
     payment reasonably acceptable to Customer.

17.  EXCUSABLE DELAY.

     In the event of any delay caused by force majeure or other cause beyond the
     control of the parties, performance items called for by this Agreement
     shall be extended to the extent reasonably necessary under the
     circumstances.

                                      12

 
18.  ASSIGNMENT.

     No party may sell, assign, convey, or transfer, by operation of law or
     otherwise, this license or any of such party's rights or obligations
     hereunder without the prior written consent of the other party. Provided,
     however that Customer may assign the license or any of Customer's rights
     and obligations hereunder to Customer's parent or subsidiary or in the
     event of a purchase of all of Customer's capital stock or substantially all
     of Customer's assets which result in a merger in which Customer is not the
     surviving entity, Customer may assign this Agreement to the surviving
     entity; however, the Software may not be used to process beyond the scope
     of the processing regularly being done by Customer with the Software
     immediately prior to such merger or assignment. In any event, Systematics
     may refuse assignment to a competitor of Systematics. This Agreement shall
     be binding upon the parties, their successors and assigns.

 19. GOVERNING LAW AND LIMITATION OF ACTION.

     This Agreement and performance hereunder shall be governed by the laws of
     the State of Arkansas. Customer agrees that the jurisdiction and venue of
     any action arising under this Agreement shall be concurrently and
     exclusively in the state or federal courts located in Pulaski County,
     Arkansas, and Los Angeles County, California and specifically waives any
     other choice of venue.

20.  CONFIDENTIAL AGREEMENT.

     No copy of this Agreement, nor any information relating to the Agreement or
     discussions, negotiations, terms or conditions related to this Agreement,
     may be shared with any third party, except by reason of legal, accounting,
     or regulatory requirements, without prior written permissions of the
     parties hereto.

21.  ADVERTISING OR PUBLICITY.

     Neither party shall use the name of the other in media advertising or
     publicity releases of any sort without securing the prior written consent
     of the other.

22.  EMPLOYMENT.

     Neither Customer nor Systematics will offer employment to any employee of 
     the other without the prior written consent of the other.

23.  ENTIRE AGREEMENT.

     This Agreement, together with all attachments and amendments, constitutes
     the entire agreement between the parties and supersedes all prior
     understandings, either written or oral between them. Each provision of this
     Agreement is severable and shall be stricken in the event the provision is
     void, voidable, or unenforceable.

                                      13 

 
     IN WITNESS WHEREOF, the parties have executed this Agreement as of the 
Commencement Date by their duly authorized representatives.

SYSTEMATICS FINANCIAL SERVICES, INC.          FIDELITY FEDERAL

By:    /s/ RICHARD G> WILDUNG                 By:    /s/ GREGG A. JOHNSON
       -----------------------                       -----------------------
Name:    Richard G. Wildung                   Name:     Gregg A. Johnson
       -----------------------                       -----------------------
          (type or print)                                (type or print)

Title:  Senior Vice President                 Title:  Senior Vice President
       -----------------------                       -----------------------

Date:     10/31/91                            Date:      10/31/91
       -----------------------                       -----------------------

                                      14

 
                                   EXHIBIT A
                 INVESTMENT CHARTER SOFTWARE LICENSE AGREEMENT

     Listed below are the Systematics Software Systems to be licensed to 
Customer under the Investment Charter Software License Agreement.  All systems 
are VSE operating system versions.

 
                                                         System
                                                       Designator
                                                        
     ** Advanced Loan System - Consumer                    AM
        Certification Tracking System                      HX
     ** Customer Information File System                   CF
        Customer Service Management Systems                CM
        Customer Statement Relationship Pricing System     
     ** Demand Deposit System                              IM
     ** Extended Application Architecture                  SA
        Item Reconciliation                                IR
     ** Intersystem Transfer System                        IT
     ** Loan Collections                                   KO
     ** Mortgage System                                    RE
        Profitability Analysis                             PS
     ** Savings/Time System                                ST
      * Systematics Information Management System          IS
        Tax Reporting System                               TX
     ** Transaction Delivery System                        TS
        Warehouse Window                                   WW

  * Certain use restrictions apply to these Micro-based Software Systems as 
    stated in Section 11 herein.

 ** Major System

*** By its acceptance hereof, Customer agrees that these systems are base 
    systems which Customer expects to modify for execution in its specific
    terminal and network environment.

Computer Based Training:

 
    Module                                Annual Usage Fee
                                          
Systems Architecture                        
General Banking                             [CM]
Transaction System                          
Introduction to Deposit Systems             

Installation Site Address:

     4565 Colorado
     Glendale, CA 91209-1631

Backup Site Address:

        N/A

                                      A-1

                                   EXHIBIT B

                           NON-DISCLOSURE AGREEMENT

     THIS NON-DISCLOSURE AGREEMENT ("Non-Disclosure Agreement") is made and 
entered into by and among ___________________ ("Customer"), SYSTEMATICS 
FINANCIAL SERVICES, INC. ("Systematics") and ______________________ 
("Consultant").

                                  WITNESSETH:

     WHEREAS, Systematics has developed and owns software packages and related 
manuals and other documentation and materials, ("Software") more specifically 
described in an Agreement between Systematics and Customer dated as of ____, 
1989 ("Agreement");

     WHEREAS, Customer and Consultant have entered into an agreement pursuant to
which Consultant will provide programming and/or consulting services to 
Customer; and

     WHEREAS, Systematics is unwilling to permit Consultant to have access to 
the Software unless Consultant and Customer enter into this Agreement to protect
the confidentiality of, and Systematics' proprietary rights to, the Software;

     NOW, THEREFORE, the parties agree as follows:

     In this Agreement, the following shall have the meanings shown:

     1.  (a) "Customer" means __________, ___________, __________, its
         successors and assigns, and any of its present or future subsidiaries,
         or organizations controlled by, controlling or under common control
         with it.

         (b) "Consultant" means ___________, ____________, ____________, its
         successors and assigns, and any of its present or future subsidiaries,
         or organizations controlled by, controlling or under common control
         with it.

         (c) "Systematics" means Systematics Financial Services, Inc., Little
         Rock, Arkansas, its successors and assigns, and any of its present or
         future subsidiaries, or organizations, controlled by, controlling or
         under common control of it.

     2.  Customer and Consultant acknowledge that the Software and all 
documentation, modifications, supplements, or alterations thereto (collectively 
referred to "Systematics Property") are owned by Systematics, that neither legal
nor equitable title to the Systematics Property passes to Customer or Consultant
under the terms of the Agreement or this Non-Disclosure Agreement, that the 
Systematics Property constitutes a valuable asset and trade secret of 
Systematics, and that any information with respect thereto is confidential. 
Accordingly, Customer and Consultant agree as follows:

         a.  Customer and Consultant shall exercise best effort to prevent the 
     duplication, reproduction, or copying of the Systematics Property or any
     information related thereto, or otherwise make available for any purpose,
     whether gratuitously or for consideration, the Systematics Property or any
     part thereof or any information pertaining thereto, to any person or entity
     whatsoever (other than employees of Customer or Consultant for use by them
     solely for the benefit of Customer).

                                      B-1

         b.  Except as contemplated hereby, neither Customer nor Consultant 
     shall reveal to any person or entity, and shall instruct their employees
     and customers not to reveal to any person or entity, any information
     related to the design or programming of the Systematics Property, and
     Customer and Consultant shall take appropriate action to fulfill these
     obligations.

         c.  Except as contemplated hereby, neither Customer nor Consultant 
     shall offer to make available to any person or entity, any modification to
     the Systematics Property which may be designed by either of them.

         d.  Consultant may have access to the Systematics Property for the 
     following purposes only: ___________________________________________

         e.  Consultant may have access to the following Systematics Property 
     only: ________________________________________________________

         f.  Neither Consultant nor any other third party shall have any right 
     by virtue of this Non-Disclosure Agreement, the Agreement or any other
     arrangement, whether written, oral, express or implied, to operate, run,
     execute or otherwise deal with the Systematics Property for or on behalf of
     the Customer, the Consultant or any other entity.

         g.  Consultant may have access to the Systematics Property under the 
     conditions set out herein only during the following time period: ________

     3.  Customer and Consultant agree that, upon the occurrence of any actual 
breach or threatened breach of the restrictions upon the use, sale, transfer, or
dislosure of the Systematics Property contained herein, monetary damages alone 
may not be sufficient remedy or protection and Systematics shall be entitled to 
such injunctive or other equitable relief as may be deemed proper or necessary 
by a court of competent jurisdiction.

     4.  The prevailing party in seeking to enforce any of its rights or 
remedies hereunder, shall have the right to collect from the losing party, all 
expenses incurred in connection with such enforcement, including but not limited
to reasonable attorney's fees incurred in connection therewith.

     5.  Customer and Consultant hereby warrant and represent that prior to the 
disclosure of any Systematics Property to Consultant, this agreement will be 
executed and become part of any agreement between Customer and Consultant. 
No agreement or instrument to which any of them is a party or by which any of 
them is bound contains any provision which is inconsistent with this 
Non-Disclosure Agreement or which would inhibit the performance of their 
obligations as set forth herein.

                                      B-2

                                             Client:  Fidelity Federal Bank, FSB
                                                      --------------------------
                                                    Effective Date:  May 1, 1993
                                                                     -----------

                                   EXHIBIT H

                     SYSTEMATICS DISASTER RECOVERY SERVICE

     Systematics will provide Fidelity support of the SunGard Disaster Recovery
Service as described in Section 13.3 of the Agreement until it is replaced by
the Systematics Disaster Recovery Service described below:

1.   TERM.

     The term of this Systematics Disaster Recovery Service shall begin on
     January 1, 1997 and shall be coterminous with the Agreement.  If that
     certain SunGard Disaster Recovery Service Agreement between Fidelity and
     SunGard dated October 30, 1991, terminates or expires prior to January 1,
     1997, then Systematics shall provide the disaster recovery service
     described herein as a Special Service pursuant to Section 3.3 of the
     Agreement.

2.   DISASTER RECOVERY FACILITY.

     2.10 ACCESS.  Upon declaration of a Disaster, Fidelity may use the Disaster
          Recovery Facility under the appropriate class of service, upon at
          least six hours' notice to Systematics, for a period of up to six (6)
          consecutive weeks (the "Recovery Period").  Thereafter, continued use
          of the Disaster Recovery Facility, may be permitted except that
          another Subscribing Client who experiences a Disaster after Fidelity's
          Recovery Period shall be granted priority access to and use of the
          facility.

     2.20 SYSTEMATICS COMPUTER EQUIPMENT.  Systematics will purchase and
          maintain in force maintenance agreements for the equipment described
          in Schedule 2.

     2.30 SYSTEMATICS COMPUTER EQUIPMENT CHANGE.  Systematics may change or
          relocate its IBM compatible computer equipment configuration at any
          time upon sixty (60) days prior written notice to Fidelity.

     2.40 MULTIPLE DISASTERS.  In order to reduce the possibility of a Multiple
          Disaster, Systematics will exercise due care and discretion in
          contracting with new clients to avoid geographic concentrations that
          would unduly increase exposure.

                                      H-1

          In addition, no agreement will be signed with a prospective client who
          is currently experiencing a Disaster.

          If a Multiple Disaster occurs, more than one Subscribing Client may be
          granted access to the Disaster Recovery Facility.  Systematics will
          exercise its best efforts to coordinate the activities of these
          Subscribing Clients.

     2.50 COMPUTER EQUIPMENT COMPATIBILITY ASSURANCE.  The Data Center Staff
          will maintain records of the Data Center computer equipment sufficient
          to identify any differences which could affect successful processing,
          and will promptly notify Systematics'  Disaster Recovery Department of
          any change which may do so.  The Data Center Staff will maintain
          documentation for resolution of such differences in the event of a
          Disaster.  Systematics will provide Fidelity with one (1) copy of the
          Systematics Disaster Recovery Services Users Guide to assist Fidelity
          in the understanding and use of the services provided herein.

          Fidelity will direct the Data Center Staff to conduct a test annually
          in the Disaster Recovery Facility.  Each test should be an analysis of
          compatibility consisting of Fidelity's operating system, applications,
          and communications software sufficient to achieve the pre-established
          mutually agreeable objectives.  The test should be planned for
          completion within the test time allocation specified in Schedule 2,
          although extra time may be authorized by Systematics if unforeseen
          problems occur and there is a reasonable expectation of solution
          within the time extension.  Fidelity will submit the request for an
          annual test to Systematics using forms and procedures established.
          Systematics will schedule the test on a mutually agreeable date.  Data
          Center personnel will conduct the test with the assistance of
          Systematics staff, as necessary.

     2.60 NON-DISASTER USE.  The Disaster Recovery Facility will be used by
          Systematics for development and internal accounting, and for testing
          of other Subscribing Clients.  During any Recovery Period, a
          Subscribing Client who has declared a Disaster shall take priority
          over all such use and may preempt Fidelity's test and use of
          associated services.

3.   DISASTER RECOVERY PLAN.

     Fidelity will assist the Data Center Staff in converting the SunGard
     Disaster recovery procedural plan to a specific Systematics written plan
     for dealing with its data processing needs during a Disaster (the "Disaster
     Recovery Plan").  A current copy of the Disaster Recovery Plan shall be
     retained by Fidelity at its operating facility, at an offsite backup
     location, at the Data Center, and at Systematics' Disaster Recovery
     Facility.

                                      H-2

4.   SYSTEMATICS AND FIDELITY RELATIONSHIP.

     4.10 PERSONNEL.  Data Center Staff with appropriate levels of authority
          shall be temporarily located at the Disaster Recovery Facility during
          all Recovery Period processing to perform all Fidelity operations
          functions.  In addition, to the extent that Fidelity has
          responsibility under the Agreement, Fidelity agrees to provide the
          necessary supplies and personnel (at the Disaster Recovery Facility or
          at Fidelity's facility, as required) to perform said functions.

     4.20 ADDITIONAL SYSTEMATICS PERSONNEL.  Fidelity agrees to pay the amounts
          normally charged to Systematics' Similarly Situated Customers for all
          services performed by Systematics that are not otherwise provided for
          in the Agreement.

     4.30 PROCESSING FREQUENCY.  This Systematics Disaster Recovery Service does
          not guarantee that all applications will be processed as frequently
          during the Recovery Period as they are processed under the Agreement.
          The applications processed will be consistent with the priorities set
          forth in the Disaster Recovery Plan.

     4.40 TIME OF PERFORMANCE.  Systematics will use diligence to provide the
          data processing services set forth in the Agreement at the times
          required therein.  Fidelity acknowledges, however, that the
          circumstances of a Disaster are likely to adversely impact
          Systematics' time of performance and that the provisions of the Time
          of Performance section of the Agreement shall continue to be
          applicable during the Recovery Period.

5.   SERVICE LEVELS.

     5.10 BASIC COVERAGE.  The basic coverage under this Systematics Disaster
          Recovery Service provides for access to the Disaster Recovery Facility
          under the Class of Service indicated in Schedule 1.

     5.20 PLANNING SERVICE.  Planning services, to assist Fidelity in fulfilling
          the requirement for a Disaster Recovery Plan under Section 4 of this
          Systematics Disaster Recovery Service, are provided under the terms
          and conditions of Schedule 3.

     5.30 SHELL FACILITY.  Access to and use of the Shell Facility are provided
          under the terms and conditions of Schedule 4.

     5.40 ONLINE.  Availability of local terminals at the Disaster Recovery
          Facility is provided as shown in Schedule 2.  Backup of Fidelity's
          online circuits, if any,

                                      H-3

          is provided under the terms and conditions of the Schedule 5 for
          Dialup Analog Kits.

     5.50 REMOTE TERMINAL CLUSTER.  Availability of a remote terminal cluster,
          if any, is provided under the terms and conditions of the Addendum For
          Remote Terminal Cluster.

6.   FEES.

     6.10 PARTICIPATION FEE.  Fidelity will pay the applicable monthly
          participation fees for the Class of Service indicated in Schedule 1.
          Included in the Monthly Base Charge paid by Fidelity is a credit equal
          to the Class 6A Participation Fee, as set forth in Schedule 1 as such
          credit amount may be adjusted from time to time (the "Base
          Participation Credit").

     6.20 FIDELITY COMPUTER EQUIPMENT CHANGE.  Upon the installation or
          deinstallation of any computer equipment at the Data Center which
          changes Fidelity's Class of Service, Fidelity agrees to pay or receive
          a credit for the difference between the participation fees (whether
          higher or lower) for the new Class of Service and the Base
          Participation Credit.  If Fidelity's requirements exceed the capacity
          of or are incompatible with the highest class of service available
          from Systematics,  Systematics' Disaster Recovery Department.
          Systematics and Fidelity will then have ninety (90) days in which to
          resolve the capacity or incompatibility situation, which solution may
          include an agreement with a third party.  If, after ninety (90) days
          from Fidelity's notice to Systematics, Systematics and Fidelity have
          not agreed upon a mutually satisfactory solution, either party may
          terminate this Systematics Disaster Recovery Service.

     6.30 FACILITY ACCESS FEE.  Fidelity agrees to notify Systematics verbally
          and in writing of its declaration of a Disaster, and such notice shall
          require payment of the Facility Access Fee set forth in Schedule 1.

     6.40 FACILITY USAGE FEE.  During the Recovery Period, Fidelity will also
          pay the hourly Facility Usage Fee described in Schedule 1.

     6.50 MISCELLANEOUS FEES.  Fidelity will pay for miscellaneous Systematics
          services used during the Recovery Period at the rates then charged to
          Systematics' Similarly Situated Customers.

8.   SECURITY AND CONFIDENTIALITY.

     Fidelity agrees to observe Systematics' security procedures while using the
     Disaster Recovery Facility.

                                      H-4

9.   SHARED USE.

     Fidelity acknowledges that Systematics is not liable for any loss, claim,
     damage or expense directly or indirectly resulting from the shared use of
     the Disaster Recovery Facility and related services in the event of a
     Multiple Disaster, except to the extent that such loss, claim, damage or
     expense was caused by Systematics' negligence or willful misconduct.

                     [This space intentionally left blank.]

                                      H-5

                                   SCHEDULE 1

                                  FEE SCHEDULE

Fidelity's CLASS OF SERVICE is determined by the CPU size (in MIPS) in the Data
Center.  The services provided hereunder are indicated below under Class of
Service.  Total Monthly Participation Fees are computed below and are included
in the Monthly Base Charge shown in Exhibit C.

                                                  CLASS OF SERVICE
                                   ---------------------------------------------

                                                     
I.    PARTICIPATION FEES:                            
                                                     
      Basic Service includes:                        
       Planning Service                              
       Shell Facility                                
      On-Line Processing:                            
       Dialup Analog Kits(6)                         
      TOTAL MONTHLY                                  
       PARTICIPATION FEE                                [CM]

II.   FACILITY ACCESS FEE:                           
                                                     
III.  FACILITY USAGE FEE:                            
                                                     
      Disaster Recovery                              
       Facility (Clock Hour)                         

                                      H-6

                                   SCHEDULE 2

                            COMPUTER EQUIPMENT LIST
                      CLASS OF SERVICE "6A" 16.1-20.0 MIPS

Quantity                Type-Model               Description
- --------                ----------               -----------

  1                     3090-180E                Processor (or Equivalent) and
                                                 the following equivalent 
                                                 capacities:

  12                    3178-C30                 Terminals (Local)

  20 Volumes            3380-E                   Dual Density Disk Drives

  12 Volumes            3380-K                   Triple Density Disk Drives

  3 Drives              3420-8                   Tape Drives (1600/6250 BPI)

  12 Drives             3480                     Tape Cartridges

  1                     3725                     Communications Controller

  2                     4050                     Xerox Laser Printer
                                                 (Supplied by 3rd Party)

  1                     4245-20                  Printer (2000 LPM)

  24 Hours              Test Time                Twenty-four Wall-Clock Hours
                                                 (Non-cumulative)

                                      H-7

                                   SCHEDULE 3

                               PLANNING SERVICES

1.  SYSTEMATICS RESPONSIBILITIES.

    Systematics agrees to provide Fidelity with four (4) copies of the hardcopy
    version of Systematics' generic disaster recovery plan (the "Plan").  In
    addition, Systematics will provide one (1) entry level copy of the PC
    database planning software required to create and maintain the plan.
    Systematics also agrees to pay the maintenance fees associated with
    continued use of the software.  Fidelity agrees to pay any software license
    and maintenance fees associated with any future higher level or LAN-based
    release of the planning software.  Systematics also agrees to provide
    Fidelity with updates to the Plan and planning software as they are
    developed.  Systematics will offer a Disaster Recovery Planning Workshop
    (the "Workshop") on a regular basis, to assist Fidelity planners in
    contingency planning techniques.  Fidelity may send no more than four (4)
    people to the Workshop.  Systematics will publish a list, at the beginning
    of each calendar year, of projected dates for the proposed Workshops, but
    reserves the right to cancel or reschedule workshops as appropriate.

2.  FIDELITY RESPONSIBILITIES.

    Fidelity, with assistance from Systematics Data Center personnel, agrees to
    customize the Plan to fulfill Fidelity's own requirements and to incorporate
    appropriate updates that Systematics may supply from time to time.  Fidelity
    also agrees to exercise its best effort in taking advantage of planning
    Workshops and other planning aids as appropriate to Fidelity's requirements.
    Fidelity furthermore acknowledges that the Plan is confidential and
    proprietary material and will be returned to Systematics upon expiration of
    this contract.

                                      H-8

                                   SCHEDULE 4

                                 SHELL FACILITY

1.   SYSTEMATICS DISASTER RECOVERY SHELL FACILITY.

     1.10 ACCESS AND UTILIZATION.  Upon declaration of a Disaster, Fidelity will
          have access to the Shell Facility for a period of up to nine (9)
          months (the "Extended Recovery Period").  In the event of a Multiple
          Disaster, more than one Subscribing Client may be granted access to
          the Shell Facility pursuant to Section 2.40 of this Exhibit H.
          Systematics may utilize the facility if a Disaster occurs in any of
          its own data centers.

     1.20 COMPUTER EQUIPMENT.  No computer equipment will be installed prior to
          the Recovery Period.  The party responsible for providing the
          equipment in the Data Center pursuant to the Agreement will be
          responsible for procurement, shipment and installation of all required
          equipment following the declaration of a Disaster.

     1.30 SPECIFICATIONS.  The Shell Facility consists of 17,500 sq. ft. of
          space, including 4,500 sq. ft. of raised floor area.  Air conditioning
          capacity is 600,000 BTU/HR, electrical capacity is 160KVA.  There are
          200 telephone pairs into the building, with 20 pairs active.  The
          remaining non-raised floor area consists of office and storage space
          for Fidelity use.  Fidelity will pay the fee prescribed in Schedule 1,
          for the amount of space actually used by Fidelity during the Extended
          Recovery Period.

2.  PERSONNEL.

    Data Center Staff with appropriate levels of authority shall be temporarily
    located at the Shell Facility during the Extended Recovery Period to perform
    all Fidelity operations functions.  A Systematics representative will be
    present while Fidelity personnel are occupying the Shell Facility.  To the
    extent that they are available, qualified Systematics personnel may be
    assigned to augment Fidelity's staff at the rates referenced in Section 6.30
    of this Exhibit.

3.  TERMINATION.

    Systematics may terminate this Schedule 4, without the termination of the
    Systematics Disaster Recovery Service and other schedules upon ninety (90)
    days prior written notice to Fidelity.  Should this service be supplanted by
    another form of service which is useful to Fidelity, Fidelity will be
    afforded priority to subscribe to the new service.  If Systematics
    terminates this Schedule 4 then Fidelity may at its option terminate this

                                      H-9

    Exhibit H and receive a reduction in the Monthly Base Charge for the
    duration of the Terms of the Agreement equal to the Base Participation
    Credit.

                     [This space intentionally left blank.]

                                      H-10

                                   SCHEDULE 5

                               DIALUP ANALOG KITS

1.  RESPONSIBILITIES OF THE PARTIES.

    Systematics will provide up to six (6) dial backup modem kits, and a
    sufficient number of dial telephone lines to accommodate the kits provided.
    Fidelity agrees to provide all other hardware, including compatible modems,
    communications links and any necessary software to utilize this service.
    Systematics will ship the kits to Fidelity's designated locations  as soon
    as possible after Fidelity declares a Disaster.  Fidelity agrees to pay the
    prices that are current at that time to lease or purchase all such equipment
    and to bear all shipping, installation, and telephone usage charges.
    Fidelity also acknowledges that response times may be greater than those
    experienced during normal operations.

2.  LOCATION OF ALTERNATE CONTROL POINT ("ACP").

    Fidelity will provide a location for the installation of dial backup
    equipment for each designated circuit.  At each location, an ACP will be
    installed, along with a corresponding dial telephone circuit, for each
    Fidelity multi-point circuit to be backed up.  Fidelity will notify
    Systematics in writing of ACP locations and of any changes as they occur.

3.  TESTING.

    Systematics hereby grants Fidelity usage of one of the kits for up to one
    week annually for on-line testing, in conjunction with other tests of
    Fidelity's disaster recovery requirements.  Systematics will air-ship the
    on-line backup kit to Fidelity during the week prior to the test.  Fidelity
    will install the kit per Systematics instructions and pay all shipping,
    installation, and telephone usage charges.  Fidelity will return air-ship
    the kit to Systematics Disaster Recovery on the first work day following the
    test.  Additional test time will be chargeable at the rates shown in
    Schedule 1.

                                      H-11

                                FIRST AMENDMENT
                                       TO
                           DATA PROCESSING AGREEMENT
                                      FOR
                               MORTGAGE SERVICING

BACKGROUND
- ----------

Attached is the First Amendment to our Data Processing Agreement with
Systematics Financial Services, Inc. The Amendment is to contract for certain
Mortgage Processing Services to be provided through Computer Power, Inc.(CPI).
CPI is a subsidiary of ALLTEL, also the parent company of Systematics.

During the negotiations for the Systematics outsourcing agreement last spring,
we reached mutual agreement with Systematics over the contracting process for
the mortgage servicing systems. The agreement was to contract through
Systematics for mortgage processing services to be provided by CPI, versus
contracting directly with CPI. This was a very significant gain, as it would
allow Fidelity Federal to utilize the contract leverage we have with our
Systematics DP Agreement with a service to be provided by an affiliated company.

The negotiation team for the mortgage servicing contract addendum was as
follows:

        Gregg A. Johnson       FFB Chief Information Officer
        Godfrey B. Evans       FFB General Counsel
        W. C. Taylor           FFB Loan Administration
        Ronald G. Drake        FFB EDP Auditor
        David L. Hayes         Gibson, Dunn, & Crutcher

The financial analysis for the costing of the mortgage servicing system from CPI
was included, as part of the overall costs for Data Processing services, as
indicated in the April 28, 1993 board recommendation for the Systematics
Agreement.

SCOPE OF SERVICES
- -----------------

CPI Mortgage Servicing Package(MSP) provides for the complete servicing for all
Mortgage loans including:

        Customer Service
        Escrow Management
        Payment Processing
        Default Management
        Investor Reporting
        Management Reporting

 
CPI provides processing services for over 13 million loans totaling $932 billion
of principal balances. They provide services for 43 of the largest 100 savings
institutions and 49 of the 100 largest commercial banks.

The services are provided through a satellite network to the CPI data center in
Jacksonville, Florida in conjunction with our data center in Glendale. The
Fidelity personnel have access through their terminals to both data centers.
Fidelity also has a daily updated copy of the loan master files for further
local access.

CONTRACT ADDENDUM HIGHLIGHTS
- ----------------------------

Since the addendum is part of our Systematics base agreement, only the terms
stated in the addendum would override the base agreement.

Pricing is bundled for the basic services of processing, report creation, on-
line access, information storage, and standard system enhancements. Monthly
charges for loans processed are volume tiered and would range between $[CM] for
the first [CM] loans, $[CM] for the next [CM], $[CM] for the third [CM]
and so on. For example, if Fidelity reaches [CM] loans serviced we would be
paying $[CM] per loan.

Future price increases are tied to the same Consumer Price Index, as the base
agreement.

Performance penalties are included for the CPI services of on-line availability,
terminal response time and daily update schedules.

Addendum administration, governance, and a multi-tiered dispute resolution
mechanism are provided through the Systematics base agreement.

Disaster Recovery Services are annually tested and provided for by CPI.

CONVERSION
- ----------

The conversion to the CPI system was completed on October 31, 1993.

 
                                FIRST AMENDMENT
                                       TO
                           DATA PROCESSING AGREEMENT

     This First Amendment ("First Amendment") is effective as of the 31st day of
October, 1993 ("Amendment Effective Date") and amends and supplements that
certain Data Processing Agreement ("Agreement") dated as of May 1, 1993 by and
between FIDELITY FEDERAL BANK, a Federal Savings Bank ("Fidelity") and
SYSTEMATICS FINANCIAL SERVICES, INC. ("Systematics").

                              W I T N E S S E T H:

     WHEREAS, Fidelity desires to obtain mortgage processing; and

     WHEREAS, Systematics is willing to provide such mortgage processing
pursuant to the terms and conditions set out herein.

     NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:

     1.   The Agreement is amended to add Exhibit I in its entirety as attached
to this First Amendment.

     2.   All warranties, covenants and undertakings of Computer Power, Inc. in
the attached Exhibit I shall be, as between Systematics and Fidelity, deemed to
be warranties, covenants and undertakings of Systematics.

     3.   All terms and conditions of the Agreement not amended herein remain in
full force and effect.

     IN WITNESS WHEREOF, the parties have executed this First Amendment by their
duly authorized representatives as of the Amendment Effective Date.

SYSTEMATICS FINANCIAL                FIDELITY FEDERAL BANK, a Federal
SERVICES, INC.                       Savings Bank
                                  
By:    /s/ CLIFFORD E. NEWKIRK        By:    /s/ GREGG A. JOHNSON
       -----------------------               --------------------
 
Name:  Clifford E. Newkirk            Name:  Gregg A. Johnson
       -----------------------               --------------------             
 
Title: Sr. V. P.                      Title: Sr. V. P. & CIO
       -----------------------               --------------------
 
Date:  November 30, 1993              Date:  November 22, 1993
       -----------------------               -------------------- 

 
                                   EXHIBIT I

                              MORTGAGE PROCESSING
               (THIS EXHIBIT RELATES TO MORTGAGE PROCESSING ONLY)

Systematics will provide, through subcontract with Computer Power, Inc. ("CPI"),
mortgage processing as set out herein.

1.   DEFINITION OF PROCESSING SERVICES
     ---------------------------------

     The Software Systems ("Software" or "System") referred to by this Mortgage
     Agreement are a series of computer programs employed by CPI to perform
     electronic data processing ("EDP") services for Fidelity as described in
     the Documentation, as defined below.  CPI's Documentation User Manuals
     ("Documentation") for the Software are incorporated herein by reference as
     a definition of the functions of the Software.

2.   INPUT/OUTPUT SERVICES
     ---------------------

     2.1  INPUT.  Fidelity shall perform the data entry requirements from items
          ------                                                               
          of original entry (which items remain in the possession of Fidelity).
          Fidelity shall create the input data and Fidelity and/or Fidelity's
          Agent will transmit the input data required by each System, as defined
          in the Documentation, to CPI's computer facilities in Jacksonville,
          Florida via satellite or some other mutually agreed upon method of
          data transmission. Input data is to be received by CPI each business
          day, or other processing frequency as required, at a mutually agreed
          upon time. Fidelity shall be responsible for verification of the data
          transmitted and for the release of the data to CPI for processing.

     2.2  OUTPUT.  CPI will process the data using the Software and will have
          -------                                                            
          the output available to allow the Fidelity to begin to print the
          output data at Fidelity's location at a mutually agreed upon time. CPI
          will use its best efforts to complete the processing and transmission
          of Fidelity's data on schedule, provided Fidelity has transmitted and
          released its input in accordance with paragraph 2.1 of this Mortgage
          Agreement.

     2.3  REJECTED TRANSACTIONS AND SYSTEM BALANCING.  Fidelity shall correct
          -------------------------------------------                        
          and resubmit all transactions rejected by the Software and Fidelity
          shall be responsible for reconciling and adjusting differences in
          batch control totals which result from rejected transactions and/or
          erroneous control totals. Fidelity is responsible for the system
          balancing on a daily basis.

                                      I-1

     2.4  REASONABLE CARE. Fidelity agrees to exercise reasonable care in the
          ---------------
          use of each service. "Reasonable care" includes, but is not limited to
          avoiding the scheduling of certain reports and producing large volumes
          of output data at month end peaks. Certain reports identified in the
          Documentation have been blocked in the Software System from being
          produced during peak cycles.

3.   ON-LINE SERVICES
     ----------------

     3.1  DESCRIPTION AND AVAILABILITY OF SERVICES.  CPI agrees to provide to
          -----------------------------------------                          
          Fidelity on-line access to information contained in Fidelity's
          mortgage master, history, and certain utility files from terminals
          located in Fidelity's office(s). The Documentation lists the inquiry
          displays and the primary data entry menus to be provided by CPI. The
          On-Line Systems access Fidelity's files through the CICS
          telecommunication facility. The data entered by Fidelity is verified
          using logic tests. Errors found in the data are immediately displayed
          to Fidelity for correction. These On-Line services shall be available
          at the times specified in Addendum I Schedule A attached to this
          Exhibit. CPI shall put forth its best efforts to maximize the
          availability of the On-Line Systems during the times specified in
          Schedule A and in accordance with Section 15.2.  Data accepted by the
          On-Line System generates transactions which are stored on CPI's host
          computer. This transaction file serves as an input file for the
          Fidelity's update processing run. The On-Line System includes on-line
          or printed documentation for every screen in the System. Instructions
          for operating the Software and for entering transactions are included
          therein.

     3.2  ERROR CORRECTION.  CPI shall use its best efforts to minimize rejects
          -----------------                                                    
          due to program logic errors. The On-Line Systems also contain an on-
          line interrogation feature. Fidelity realizes that CPI will have no
          control over Fidelity transactions affecting the same loan number
          within the same processing cycle or correction and resubmission of all
          transactions originally entered through the On-Line System and
          rejected by the System. Fidelity shall also be responsible for
          reconciling and adjusting any differences in control totals which
          result from rejected transactions and/or erroneous totals.

4.   TRANSMISSION SERVICE & TERMINAL EQUIPMENT

     4.1  TRANSMISSION SERVICE.  Fidelity will pay all costs for
          ---------------------                                 
          installation/deinstallation and for the data transmission service
          between Fidelity's office and CPI's site. CPI shall specify and order
          the type of transmission service required and will bill Fidelity for
          those transmission services in accordance with the fees set forth on
          Addendum II to this Mortgage Agreement. In the event Fidelity
          relocates its service center, Fidelity shall be responsible for the
          cost of deinstalling at Fidelity's old site and for reinstallation of
          such transmission service at Fidelity's new site. Should Fidelity
          desire to terminate the data

                                      I-2

          transmission service, Fidelity shall give CPI not less than ninety
          (90) days written notice, unless such service is provided by a third
          party in which case the notice shall be given in accordance with
          termination provisions of the Mortgage Agreement with such third
          party. Fidelity shall be responsible for any deconversion costs of
          such transmission service at the time of termination of such service.

     4.2  COMMUNICATION DEVICES.  The communication link, either satellite or
          ----------------------                                             
          terrestrial, shall be specified and ordered by CPI. Such devices will
          be leased in CPI's name or owned by CPI. CPI, in turn, will bill
          Fidelity for such devices located in Fidelity's office(s). Should
          Fidelity desire to terminate the devices, Fidelity shall give CPI not
          less than ninety (90) days notice.

     4.3  TERMINAL AND PRINTING EQUIPMENT.  CPI will specify the type of
          --------------------------------                              
          terminal, controller or printer equipment to be used by Fidelity.
          Fidelity may use its most cost effective or efficient method for
          acquiring the equipment specified by CPI.

     4.4  TRANSMISSION PROBLEMS.  CPI shall use its best efforts in isolating
          ----------------------                                             
          data transmission problems and obtaining service from the terminal
          hardware vendors and/or communication carriers. In situations where
          data transmission is rendered impossible by virtue of equipment
          failure at CPI's site, CPI agrees to print such data and ship to
          Fidelity at the expense of CPI. In the event of inability to transmit
          because of the communication carrier, the cost to print and ship will
          be borne equally by CPI and Fidelity. In the event of equipment
          failure at Fidelity's site which is not caused by Fidelity,
          Systematics shall pay all printing and shipping costs.

     4.5  SHIPMENT OF OUTPUT.  In situations where it is more economical for
          -------------------                                               
          Fidelity to have input/output functions performed at CPI and to ship
          the output to Fidelity, the cost of such functions including postage
          and/or freight incurred to ship output media to Fidelity are billable
          to Fidelity at CPI's standard rates for Optional Processing and
          Support Services as shown in Addendum II.

5.   BASIC PROCESSING CHARGES
     ------------------------

     5.1  BASIC MONTHLY CHARGES.  In consideration for processing its data using
          ----------------------                                                
          the Software, Fidelity agrees to pay a monthly charge and fee
          according to the Schedules contained in each of the Addenda attached
          hereto, but in no case less than the minimum monthly charge set forth
          in the Schedules.  The Basic Processing Charges described in Section 2
          of Addendum I will be adjusted in accordance with Section 7 of Exhibit
          C to this Agreement.  [CM]

                                      I-3

          [CM] Any increases exceeding these limits shall be creditable to
          Client for the period in which such increases are not permitted
          pursuant to these limitations and shall be reflected on the next
          invoice.

     5.2  SOFTWARE MODIFICATIONS.  The basic processing charges are for computer
          -----------------------                                               
          processing and for other services as described in Addendum I, Article
          2. hereto. All reports described in the Documentation and processing
          provided by the standard Software System are available to Fidelity as
          of the date of conversion. Custom or special modifications of the
          Software are available to Fidelity upon specification of the nature of
          such modification and payment of fees to be negotiated between
          Fidelity and CPI for each such modification.

     5.3  CROSS DOMAIN, RFUF.  Fidelity shall not be charged for the following
          -------------------                                                 
          items set forth in Addendum II which do not apply to Fidelity's cross
          domain environment:

          Item #    Item Name
          ------    ---------

          1.a.1.    PC RJE System or MICRO Based Systems
          1.d.1.    Point to Point Leased Line Support (per Line)
          1.d.2.    Multi-drop Branch Office Support (each Branch)
          1.d.3.    RJE/3270 On-Line (per Controller or Emulator)
          3.a.      Central processing unit:  IBM 9021-962
          3.b.      3380 disk/input/output
          3.c.      Magnetic tape drive
          3.d.      Formatted Microfiche tape or disk output
          3.e.      Laser Printing (Non-Special Forms)
          4.a.      Stock Forms, 15 lb. greenbar paper
          4.d.      Microfiche
 
          RFUF.  Fidelity shall not be charged for the following items set forth
          -----                                                                 
          in Addendum II which do not apply to Fidelity while utilizing RFUF:

          Item #    Item Name
          ------    ---------

          5.b.      MSP Loan Master File Copy

                                      I-4

          BUNDLED PRICING.  Fidelity shall not be charged for the following
          ----------------                                                 
          items set forth in Addendum II.
 
          Item #    Item Name
          ------    ---------

          2.1.      Monthly Client Telephone Support

     In the event Systematics or Fidelity requires services which utilize any of
     the aforementioned items, Systematics will be billed and shall pay the then
     current rate for such services.

6.   OPTIONAL PROCESSING AND SUPPORT SERVICES
     ----------------------------------------

     From time to time, Fidelity may elect to use CPI's input/output functions,
     such as data entry, printing, microfiche, special computer usage for
     Easytrieve, consulting, etc. These services will be billed to Fidelity in
     accordance with the Schedule of Optional Processing and Support Services as
     shown in Addendum II. Supplies, including rental charges for tapes and
     disks dedicated to the storage of Fidelity's data, Fidelity's usage of
     CPI's electronic mail communication system known as "CIMON", will also be
     charged according to CPI's Optional Processing and Support Services as
     shown in Addendum II. CPI's Optional Processing and Support Services, as
     described in Addendum II, may be modified from time to time upon thirty
     (30) days written notice to Fidelity.

7.   PROGRAM MODIFICATIONS
     ---------------------

     7.1  CUSTOMIZED MODIFICATIONS.  Report contents and processing logic in the
          -------------------------                                             
          Software may be modified from time to time. Fidelity may initiate such
          modifications by either defining the desired change on a System
          Service Request ("SSR") and submitting the SSR to CPI or submitting
          the request in writing containing the same information as required on
          an SSR.  CPI will review the SSR or written request and return it to
          Fidelity with a fixed price, which will include the cost of the
          programming definition, programming, testing, installation and
          documentation. If Fidelity wishes to proceed with the programming and
          installation of the modification, Fidelity will execute the SSR or
          written request, approving the fixed price indicated and return it to
          CPI for implementation. CPI's 850 Report ("Mortgage Servicing Client
          Project Inventory") will identify all approved SSRs or written
          requests to be invoiced to Fidelity.

     7.2  STANDARD ENHANCEMENTS.  Based on changes to government regulations,
          ----------------------                                             
          tax laws, mortgage industry and mortgage agencies' needs, as well as
          to increase the efficiency of the System, CPI will issue, usually each
          month, standard

                                      I-5

          enhancement changes which are included as part of the Basic Processing
          Charges described in Addendum I, Article 2.

8.   AUTHORIZED EMPLOYEES
     --------------------

     Fidelity shall designate in writing to CPI within thirty (30) days of the
     date hereof and when requested by CPI from time to time, employees who are
     authorized to contact CPI support personnel, to release input data or
     request reports, to approve System Service Requests (SSRs) and to authorize
     other requests for services under this Mortgage Agreement. CPI may rely on
     the actions and representations of such authorized employees without
     performing any further investigation or confirmation. Fidelity shall be
     bound by all agreements both written and verbal, except to the extent
     required to be in writing hereunder, entered into between CPI and such
     authorized employees.

9.   OWNERSHIP AND CONFIDENTIALITY
     -----------------------------

     Systematics acknowledges that the Data (as defined below) is and remains
     the sole property of the Fidelity, and agrees to take and to cause CPI to
     take all such reasonable measures as may be necessary to protect the
     confidentiality of such.

     Fidelity acknowledges that the Software and all information, programs,
     documentation and assistance concerning it are the sole property of CPI,
     and that they constitute the valuable proprietary products and trade
     secrets of CPI embodying substantial creative efforts, ideas and
     expressions.  Fidelity further agrees to observe complete confidentiality
     regarding all aspects of the Software, including without limitation
     agreeing not to disclose or otherwise permit any other person or entity
     access to, in any manner, the Software or any part thereof, except that
     such disclosure or access shall be permitted to an employee of Fidelity
     requiring such access in the course of employment, for auditing purposes by
     independent certified accountants, to consultants, agents or service
     providers, or for complying with applicable governmental laws, regulations
     or court orders.  In situations of disclosure or access permitted by the
     terms of this paragraph, Fidelity will cause the party granted such access
     (except for employees of Systematics or Fidelity and Office of Thrift
     Supervision and Fidelity's accountants, Deloitte and Touche) to execute and
     deliver a confidentiality and non-disclosure agreement in form and
     substance acceptable to Systematics.   CPI will advise all parties that
     have access to the Software but are not required to sign non-disclosure
     agreements hereunder that such is subject to the provisions of this Section
     and secure their agreement to protect the confidentiality of any such
     information received.  Provided, however, in no event shall any information
     regarding the Software be provided to any competitor of Systematics or CPI.
     Upon termination of this Agreement, Fidelity agrees to return the Software
     and all parts thereof, to destroy any copies made by Fidelity, and to
     certify to Systematics in writing that it has returned or destroyed all
     parts of the Software.

                                      I-6

     Systematics acknowledges that the Data is the sole property of Fidelity,
     and that it constitutes valuable proprietary information. Systematics
     further agrees to observe complete confidentiality regarding all aspects of
     the data, including without limitation agreeing not to disclose or
     otherwise permit any other person or entity access to, in any manner, the
     data or any part thereof, except that such disclosure or access shall be
     permitted to an employee of CPI or Fidelity's requiring such access in the
     course of employment, for auditing purposes by independent certified
     accountants, to consultants, agents or service providers, or for complying
     with applicable governmental laws, regulations or court orders. In
     situations of disclosure or access permitted by the terms of this
     paragraph, Systematics will cause the party granted such access to execute
     and deliver a confidentiality and non-disclosure agreement in form and
     substance acceptable to Fidelity. Upon termination of this Agreement,
     Systematics agrees to cause CPI to return the Data and all parts thereof,
     to destroy any copies made by CPI or Systematics, and to certify to
     Fidelity in writing that it has returned or destroyed all parts of the
     Data.

     All Data stored by CPI's system remains the property of Fidelity.  At the
     request of Fidelity, Systematics shall cause CPI to transfer the Data to
     Fidelity at no additional fee and despite the existence of any dispute
     between the parties.

     For the purposes of this section, "Data" shall mean all data and
     information belonging to Fidelity and designated by Fidelity as
     confidential and transmitted to CPI, however communicated or stored.

10.  DOCUMENTATION AND REVIEW OF INTERNAL CONTROLS OF CPI
     ----------------------------------------------------

     Systematics will cause CPI, annually throughout the term of this Agreement,
     to engage an independent certified public accounting firm to conduct an
     audit of CPI's operations, internal controls and accounting procedures and
     Systematics will provide Fidelity (and the District Director of the OTS if
     applicable) at no charge with one (1) copy of the Documentation and Review
     of Internal Controls ("Third Party Review") prepared by such accounting
     firm each year. The Third Party Review is a review of CPI's internal
     procedures, and is not intended in any way to replace or substitute
     Fidelity's internal annual review of its own operations.

11.  STORAGE OF DATA FILES
     ---------------------

     11.1 Off-Site Storage.  Systematics will cause CPI to provide off-site
          storage for Fidelity's data files so that they can be reconstructed
          (at no additional fee to Fidelity) in the event of loss or destruction
          of Fidelity's processing files at CPI's data center. Such off-site
          storage will be in accordance with the guidelines set forth in CPI's
          Third Party Review.

                                      I-7

     11.2 Data Retention.  The standard schedule for annual cycle data files is
          three (3) years after payoff.  Fidelity may request Systematics to
          increase the retention schedule for Fidelity's data files for a period
          of up to seven (7) years by giving Systematics written notice, subject
          to Systematics' charges for such service.  Fidelity may either request
          Systematics to store the data tapes or to send them to Fidelity for
          storage under Fidelity's control.

12.  SECURITY
     --------

     The System provides Fidelity with built-in security through initial access
     and through submenus. Fidelity is responsible for the initial setup of
     security levels and security codes as well as for the ongoing maintenance
     of security codes and security levels within the system. Fidelity agrees at
     the time this Mortgage Agreement is executed to identify in writing to CPI
     the person who is responsible for the initiation and maintenance of the
     security controls within the System.

13.  DISASTER RECOVERY
     -----------------

     At all times during the term of the Mortgage Agreement, Systematics agrees
     to cause CPI to maintain an adequate disaster recovery plan so that the
     critical batch and on-line functions provided under this  Mortgage
     Agreement can be performed from an alternate site within seventy-two (72)
     hours of interruption of service.  Systematics also agrees to cause CPI to
     perform a comprehensive test of the "hot site" at least once annually and
     will provide Fidelity evidence of same at CPI's facilities.  CPI's Disaster
     Recovery Plan is available for review by Fidelity at CPI's facilities.

     Systematics will cause CPI to provide backup for its computer facilities at
     all times during the term of this Agreement, including an Uninterruptable
     Power Supply (UPS) with diesel generators to backup the electrical power,
     to keep Fidelity's critical batch and on-line functions operational within
     the guidelines set forth in CPI's Third Party Review.  In the event of a
     disaster at CPI's facilities in which its UPS and diesel generators are
     deemed inoperable, Systematics will cause CPI to transfer processing to its
     backup site (hot site) in a reasonable time frame after a disaster per
     CPI's Disaster Recovery Plan.  Systematics warrants that the procedures set
     forth in the Disaster Recovery Plan are true and correct and that
     Systematics will, during the Original and any Extended Term of this
     Exhibit, maintain at least the same level of Disaster Recovery standards as
     currently exist in such Plan.

14.  WARRANTIES
     ----------

     Systematics represents and warrants that the mortgage loan processing
     performed by the System conforms to the specifications set forth in the
     Documentation.  Systematics further represents and warrants that the System
     was developed by CPI for its own use, and that CPI and Systematics have all
     the necessary rights to use

                                      I-8

     such System to provide mortgage loan servicing to Fidelity under the terms
     of this Exhibit, and that Fidelity has the right to use the System as
     described herein, including without limitation, for on-line processing of
     Data.  Systematics, at its own expense, shall indemnify and hold harmless
     Fidelity, its parent, divisions, subsidiaries, affiliates or assignees, and
     their directors, officers, employees and agents and defend any action
     brought against same with respect to any claim, demand, cause of action,
     debt or liability, including attorneys' fees, to the extent that it is
     based upon a claim that the CPI System, or any aspect thereof used
     hereunder, including without limitation Fidelity's on-line access and use
     of the System, infringes or violates any patents, trademark, copyrights,
     trade secrets or other proprietary rights of any third party provided
     Fidelity promptly provides Systematics with written notice of any claim
     which Fidelity believes falls within the scope of this paragraph.  In the
     event that the CPI System or any portion thereof is held to constitute an
     infringement or its use is enjoined, Systematics shall, within two (2)
     business days from loss of use by Fidelity of the System, and at
     Systematics' expense, do one of the following as Systematics may choose in
     its reasonable discretion:  (i) modify the infringing portion, without
     impairing in any material respect its functionality or performance, so that
     the product is no longer infringing, (ii) procure for Fidelity the right to
     continue to use the infringing portion, or (iii) replace said infringing
     product with a non-infringing product which performs to Fidelity's
     satisfaction as well as the infringing product.  If Systematics is unable
     to do any of the foregoing then, at Fidelity's option and written notice
     from Fidelity, this Exhibit I shall be terminated and Systematics will
     provide full reasonable assistance, at its own expense, to convert Fidelity
     to another service provider.  Systematics further warrants that it shall
     use its best efforts to cause CPI to make the System conform to all changes
     in appropriate government regulations, tax laws, and all mortgage industry
     and mortgage agency related laws and regulations that are deemed necessary
     by CPI's User Group, industry trends, market conditions and CPI's judgment.
     In addition, Systematics agrees to cause CPI to continue to support,
     through the end of the term of this Exhibit, all reporting requirements as
     they exist as of the commencement date of this Exhibit of private investors
     which are supported by CPI as of the commencement date of this Exhibit,
     including those in Fidelity's current business plan which Fidelity is using
     or plans to begin using by year end 1993 and which are currently supported
     by CPI.  Should the aforementioned reporting requirements change and such
     change is not supported by CPI's standard software released to its
     commercial customers in general, CPI's custom programming services are
     available to Fidelity to accommodate such changes.  Any such services shall
     be ordered in accordance with Paragraph 7.1 of this Exhibit.  THE FOREGOING
     WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
     INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY
     AND FITNESS FOR A PARTICULAR PURPOSE.

                                      I-9

15.  PERFORMANCE STANDARDS
     ---------------------

     15.1 REGULAR PROCESSING RESPONSE TIME.  Provided that Fidelity has
          --------------------------------                             
          transmitted and released its input data at the mutually agreed upon
          time, Systematics shall have a maximum of eight (8) hours to process
          such input data and make the data available to Fidelity for
          transmission (the "Regular Processing Cycle").  If the processed data
          becomes available to Fidelity after the eight (8) hours allowed for
          the regular processing cycle, it will be deemed to be a "Late
          Processing Cycle."

          Month-end Processing Response Time.  Provided that Fidelity has
          ----------------------------------                             
          transmitted and released its input data at the mutually agreed upon
          time, Systematics shall have a maximum of twelve (12) hours to process
          such month-end input data and make the data available to Fidelity for
          transmission.  If the processed data becomes available to Fidelity
          after the twelve (12) hours allowed for the processing cycle, it will
          be deemed to be a Late Processing Cycle.

          Systematics shall be allowed two (2) Late Processing Cycles per month
          ("Force Majeure" or "Disaster Recovery" events are exempted).
          Fidelity may elect at no additional charge to have this data processed
          in a separate cycle or combined into Fidelity's next processing cycle.

          [CM]       

          Should Fidelity not transmit the data to Systematics on time or if
          Fidelity does not release its data to Systematics for processing
          according to the mutually agreed upon schedule, Systematics will make
          a reasonable effort to complete processing on time for Fidelity,
          however, under those circumstances, Systematics does not guarantee
          such results.

     15.2 UPTIME AVAILABILITY.  The On-Line Systems will be available to
          -------------------                                           
          Fidelity in accordance with the system availability times as per
          Addendum I, Schedule A, with a monthly average "uptime" of [CM]. If
          such percentage of uptime is not achieved on the average in any given
          month, Systematics will use its best efforts to meet such percentage
          in the subsequent months. [CM]
                                      I-10

          [CM]

     15.3 RESPONSE TIME MEASUREMENT/RESPONSE TIME GUARANTEE.  "Response Time"
          -------------------------------------------------                  
          shall be measured from CPI's CPU to Fidelity's CPU using NETSPY or
          similar software.  Systematics shall, on a daily basis, monitor the
          Response Time from CPI's CPU to Fidelity's CPU through the use of such
          software.  The results of such monitoring shall be provided to
          Fidelity upon request.  Fidelity shall also have the right to monitor
          Response Time using NETSPY (or similar software) from its own CPU.
          Provided Fidelity is operating the On-Line Systems according to CPI or
          Systematics specifications for Fidelity's usage, Systematics shall
          provide the following on-line system response time (the "Response
          Time"):

               .    The daily average on-line Response Time for CICS
                    transactions shall be five (5) seconds or less on a Cross
                    Domain network.

          [CM] Thereafter, provided Fidelity is operating the on-line systems
          according to CPI or Systematics specifications for Fidelity's usage,
          Systematics will provide, at Systematics' cost, a consultant at
          Fidelity's site to investigate and analyze the problem and make
          appropriate recommendations. Should it be determined that the
          degradation in response time was due to Fidelity error or non-
          conformance to specifications, Fidelity shall reimburse Systematics
          for all costs relating to such consultant services. If after
          Systematics' best efforts to attempt to cure any such problem the
          Response Time is still not achieved, CPI, Systematics and Fidelity
          will promptly meet to discuss an appropriate remedy.

16.  OPTIONAL ALTERNATIVE  TECHNOLOGY
     --------------------------------

     If at any time during the Term of this Exhibit Systematics or CPI has
     available or offers to any of its current or prospective clients, on an
     optional basis, any delivery

                                      I-11

     methods for systems similar to the System or portion thereof, including,
     without limitation, use of an alternative technology platform or
     architecture (the "Alternative Technology"), then Systematics shall offer
     such Alternative Technology to Fidelity [CM]. Systematics shall submit a
     proposal to Fidelity regarding the implementation of such Alternative
     Technology which shall include information reasonably requested by
     Fidelity, including without limitation, information regarding conversion,
     operation and logistical details of implementing such Alternative
     Technology along with a price for providing such Alternative Technology. If
     Fidelity decides to obtain the Alternative Technology, then this Exhibit
     shall be amended to incorporate the terms, conditions and pricing related
     to the Alternative Technology. Reasonable costs of conversion to the
     Alternative Technology shall be paid by Fidelity. [CM]

17.  REMOTE FILE UPDATE FACILITY (RFUF)
     ----------------------------------

     Systematics will make the ability to remotely update duplicate master files
     at Fidelity's site ("RFUF") available for Fidelity's use during the term of
     this Exhibit at a rate of [CM] per month based on Fidelity's portfolio size
     of less than [CM] loans. Should Fidelity's portfolio exceed [CM] loans, the
     pricing for RFUF shall be at [CM]. In addition to this monthly charge,
     Fidelity shall be responsible for all reasonable out-of-pocket expenses
     incurred by Systematics for the installation and testing of such product at
     Fidelity's facility.

18.  BANKRUPTCY
     ----------

     18.1 Systematics acknowledges that if Systematics or CPI, as a debtor-in-
          possession or a trustee in bankruptcy in a case under the Bankruptcy
          Code, rejects this Agreement or any agreement supplementary hereto,
          Fidelity may elect to retain its rights under this Agreement or any
          agreement supplementary hereto as provided in Section 365(n) of the
          Bankruptcy Code.  Upon written request of Fidelity to Systematics, CPI
          or the Bankruptcy Trustee, Systematics, CPI or such Bankruptcy Trustee
          shall not interfere with the rights of Fidelity as provided in this
          Agreement or any agreement supplementary hereto and shall, if
          requested, cause a current copy of the source code and related
          documentation to be provided to Fidelity.

                                      I-12

     18.2 In the event that Systematics ceases to provide services hereunder,
          for any cause other than Fidelity's breach of this Agreement, or if
          Systematics otherwise breaches its obligations, Systematics shall
          furnish to Fidelity a current copy of the source code and related
          documentation.  In addition, Systematics shall provide Fidelity with
          instruction on how to utilize the Software.

     18.3 Upon taking possession of the source code and related documentation
          for the Software, Fidelity agrees that the source code and related
          documentation for the Software shall be subject to the restrictions as
          set out herein.

     18.4 Fidelity acknowledges that the rights described in this Section 18 do
          not include any third party environmental software utilized to provide
          the services hereunder.

19.  ADDITIONAL USE
     --------------

     In the event of excessive use by Fidelity of Letter Writer and CICS
     options, Systematics will cooperate and work with Fidelity to reduce such
     excess usage.  In the event of such excess usage, Systematics will meet
     with Fidelity at least quarterly to discuss such matters.

20.  TERMINATION OF MORTGAGE PROCESSING
     ----------------------------------

     In the event that Systematics breaches any material provision of this
     Exhibit I, Fidelity may, at its option, terminate the Services provided
     under without terminating the Agreement.

21.  DISPUTE RESOLUTION
     ------------------

     Any disputes arising under this Exhibit I shall be administered and
     resolved in accordance with Section 12 of the Agreement.  Systematics will
     cause CPI to comply with this provision.

                                      I-13

                                   ADDENDUM I
                MORTGAGE SERVICING PACKAGE WITH ON-LINE SERVICES

1.   DEFINITION OF MORTGAGE SERVICING PACKAGE
     ----------------------------------------

     The Mortgage Servicing Package ("MSP") referred to by this Exhibit is a
     series of computer programs developed by CPI and currently employed by CPI
     to perform EDP services for its Clients.  CPI's Documentation is
     incorporated herein by reference as a definition of the functions of MSP. A
     list of the standard output reports produced by the MSP is included in the
     Documentation.

2.   BASIC PROCESSING CHARGES
     ------------------------

     In consideration for processing data in accordance with the MSP and for
     Fidelity's use of the Systems, Fidelity shall be charged and shall pay to
     CPI processing charges according to the following table:

     Minimum Monthly Number of Loans:                 [CM]
                                                     ------

                         
                             LOANS         MONTHLY RATE PER
       From                   To                LOAN
      ------               --------        ---------------- 
        0                    10,000               
                                                  
      10,001                 20,000               
                                                  
      20,001                 30,000               
                                                  
      30,001                 50,000               
                                                  
      50,001                 75,000               
                                                  
      75,001                100,000             [CM]   
                                                  
     100,001                125,000               
                                                  
     125,001                150,000               
                                                  
     150,001                175,000               
                                                  
     175,001                200,000               
                                                  
     200,001                300,000               
 
    This charge is to cover regular monthly and normal year-end processing.
    Loans which have been paid-in-full, foreclosed, or transferred to a non-
    affiliated company, and are

                                     A-I-1

    therefore inactive zero balance loans, will be billed to Fidelity at the
    rate of [CM] per loan per month for the first [CM] loans and [CM].

    The above fees cover total on-line transactions equal to a maximum of ten
    (10) transactions per loan per month. For example, if Fidelity has a
    processing portfolio of 10,000 loans the above fees cover up to 100,000
    transactions per month. CPI shall have the right to bill Fidelity and
    Fidelity agrees to pay a fee as described in Addendum II, Section 3., Item
    g. for the number of transactions over and above the maximum number of
    transactions.

    For the fees described above, the processing service will also include the
    following:

    1.   All documentation updates, telephone support, and enhancement videos
         (if applicable).

    2.   All shared standard enhancements added to the MSP Software System
         during the term of this Mortgage Agreement. (Note: Custom charges
         requested by Fidelity shall be paid by Fidelity as defined by
         Fidelity's SSR (see Article 7) for such custom changes.)

    3.   Up to one hundred (100) LetterWriter letters per each one thousand
         (1,000) loans per month (the "Allowable Amount"). Additional letters
         produced above the allowable amount will be billable as described in
         Addendum II.

    4.   The Interest Accrual Subsystem Base monthly rate. (Note: Fidelity shall
         pay the installation charges for such system).

    5.   [CM]

3.  CONVERSION SERVICES

    3.1  GENERAL.  Each party agrees to use their best efforts to convert
         --------                                                        
         Fidelity's mortgage servicing portfolio.  Fidelity agrees at the time
         this Mortgage Agreement is executed, to identify its Project
         Coordinator.  Fidelity's Project Coordinator will be responsible for
         the overall conversion effort, for all communications with CPI and for
         identifying and authorizing conversion critical programming
         modifications to the MSP.

                                     A-I-2

    3.2  PROJECT MANAGEMENT AND TECHNICAL SERVICES.  CPI will provide Fidelity
         ------------------------------------------                           
         with specific project management and technical services during the
         conversion process. CPI will charge Fidelity for such services based on
         the attached Schedule I.  Services beyond the scope of those included
         in such Schedule I will be billed at the CPI Optional Processing and
         Support Service Rates described in Addendum II. [CM]

    3.3  CONVERSION PROGRAMMING.  CPI will provide file conversion programming
         -----------------------                                              
         to convert Fidelity's servicing portfolio from the present method of
         processing the data to the MSP. Fidelity will use its best efforts to
         see that CPI is provided with documentation and cooperation with
         respect to the preconverted data. CPI will be responsible for the
         initial loading and balancing of the files, for performing file
         validation tests on the converted files and for ensuring that all of
         the Fidelity's mortgage servicing computer files have been correctly
         converted to the formats required by the MSP.

    3.4  OPTIONAL CONVERSION SERVICES.  CPI provides optional conversion
         -----------------------------                                  
         services which have been identified to Fidelity by CPI in the CPI
         conducted planning session. Services rendered by CPI to Fidelity will
         be identified and described in CPI's System Service Requests ("SSR")
         which acts as a "Work Order". CPI shall render Fidelity an invoice for
         these services within thirty (30) days from the date of completion.
         CPI's "850 Report" ("Mortgage Servicing Client Project Inventory") will
         be provided periodically to Fidelity's Project Coordinator to identify
         all approved SSRs to be billed to Fidelity. Conversion critical
         software modifications requested by Fidelity must be identified,
         defined and a price approved by Fidelity prior to the final conversion
         critical SSR due date established by CPI and Fidelity in the published
         conversion schedule. CPI will provide Fidelity's coordinator with a
         periodic report identifying all conversion critical SSRs known to CPI.
         CPI will not be obligated to complete software modifications requested
         by Fidelity by final conversion which are not received by CPI and prior
         approved by Fidelity or the said date in the final conversions
         schedule.

                                     A-I-3

                                   ADDENDUM I
                                   SCHEDULE I

                            ESTIMATED ONE TIME COSTS
                            ------------------------

                                                                              
I.    Mortgage Servicing Package
      --------------------------
      A.      MSP Conversion Support
              1.         Project Management                                                                          
              2.         Definition/Data Mapping (4 Days)                        
              3.         Trial Conversion (2 Man Weeks support on-site)          
              4.         Final Conversion (4 Man Weeks support on-site)          
              5.         Month-end Follow up (If needed - 1 Man Week)            
                                                                                 
                                                                   Subtotal                
                                                                                 
      B.      MSP Training Support                                               
              1.         Project Team Training/Needs Assessment (1 Week)                                             
              2.         System Administration Training (3 Days)                 
              3.         Train the Trainer (3 Weeks)                             [CM]
              4.         End-User Course Development ($[CM])
                                                                                 
                                                                   Subtotal                 
                                                                                 
      C.      MSP Conversion Programming                                         
              1.         Conversion Program, Trial and Final, Verification       
                         Load and Balance, and Headers                                                              
              2.         Year-to-Date Transactions for IRS Combined Reporting    
              3.         Lockbox Setup and Testing (if needed)                   
                                                                                 
                                                                   Subtotal                                          
                                                                                 
                                       TOTAL ESTIMATED MSP CONVERSION COSTS                                         
                                                                                 
II.   Telecommunications And Installation Costs (IBM/Telex)                      
      -----------------------------------------------------                      
                                                                                 
      A.      Standard Installation Charge (Site survey, hardware installation   
              and training) ($[CM]/day)                                                                       
      B.      Actual Satellite Earth Station Installation (Estimate)             
      C.      Freight & Shipping (Estimate)                                      
                                                                                 
                                                                   Subtotal                                               
                                                                                 
                                             TOTAL ESTIMATED ONE TIME COSTS                                         
*****************************************************************************************

III.  Optional Programming Services
      -----------------------------
      A.      Additional Trial Conversion (if needed)                            
      B.      Interest Accrual Installation                                      
      C.      General Ledger Interface                                           
      D.      Modification and Custom Programming                                
                                                                                 
                                                     TOTAL ESTIMATED OPTION      
*****************************************************************************************
                          TOTAL ESTIMATED ONE TIME COSTS PLUS OPTIONAL COST      

- ----------------
Note:  1.   CPI out-of-pocket expenses for travel, lodging, meals, and any
            applicable sales tax are reimbursed based on actual expense.
       2.   Additional on-site support, if required, will be billed at
            $ [CM] per day plus expenses .
       3.   Freight, postage and shipping are reimbursed based on actual
            expense.
       4.   Costs for training support are based on Jacksonville delivery.
            On-site training services will be billed at $[CM] per day plus
            materials.
       5.   Fidelity out-of-pocket expenses for travel, lodging, meals, and any
            applicable sales tax are not included but estimated at $[CM].

Systematics agrees that in no event shall the charges for the MSP conversion
services specified in Schedule I to this Exhibit exceed [CM].

                                     A-I-4

 
                                   ADDENDUM I
                                   SCHEDULE A

                           SYSTEM AVAILABILITY TIMES

1.  CPI ON-LINE SYSTEMS SCHEDULED SYSTEM AVAILABILITY

    (Note: All times are Local Client time)

DAY OF WEEK                   START-TIME              STOP-TIME*
                                                
Monday                              0700                    2000
Tuesday                             0700                    2000
Wednesday                           0700                    2000
Thursday                            0700                    2000
Friday                              0700                    2000
Saturday                            0700                    2000
Sunday                              not available

* Note: Alaska, Hawaii, or Puerto Rico Clients' hours may vary.

2.  EXCEPTIONS TO NORMAL ON-LINE SYSTEMS USAGE AVAILABILITY
 
  a.  HOLIDAY SCHEDULES:    CPI annually publishes the dates on which CPI
      observes the following holidays via electronic mail (CIMON).
 
      1.  Memorial Day                               7.  President's Day
      2.  Independence Day                           8.  Columbus' Day
      3.  Labor Day
      4.  Thanksgiving
      5.  Christmas
      6.  New Year's

      With the exception of President's Day and Columbus Day, no support or
      regular systems processing will be made available from 0700 on the
      dates published until 0700 the following day. If Fidelity observes
      additional processing holidays, Fidelity should notify CPI Client
      Services in writing at least 15 days prior to the scheduled holiday.

  b.  PREVENTATIVE MAINTENANCE will normally be conducted on the CPI in-house
      equipment until 0800 Eastern Time each Monday morning. This schedule
      will automatically change to Tuesday morning when CPI is closed for a
      holiday on Monday. Occasionally, the systems may not be available on
      Saturdays when CPI is making hardware/software upgrades or change-
      overs. In such instances, CPI will provide notice via electronic mail
      (CIMON).

  c.  YEAR-END PROCESSING:  CPI will publish a special year-end processing
      schedule at least 60 days prior to each year-end. Fidelity agrees to
      cooperate in meeting the special year-end processing schedule.

                                     A-I-5

                                  ADDENDUM II

                  CPI OPTIONAL PROCESSING AND SUPPORT SERVICES
                                 BILLING RATES

                             (As of March 1, 1992)

                               TABLE OF CONTENTS
                               -----------------

                                                                       
  1.  REMOTE SERVICES......................................................   1
      a.      Data Terminal Equipment Support..............................   1
      b.      Software Support.............................................   1
      c.      Communication Equipment......................................   1
      d.      Teleprocessing Support Charges...............................   1
      e.      CPI's Electronic Mail Communication System ("CIMON").........   1
      f.      CPI's On-Line Reporting Environment ("CORE").................   1
      g.      CPI's On-Line Training System................................   1
 
  2.  PERSONNEL AND RELATED................................................   2
 
  3.  COMPUTER PROCESSING..................................................   2
 
  4.  MEDIA AND OTHER......................................................   2

  5.  SPECIAL PROCESSING & SERVICES.......................................    3

  6.  DOCUMENTATION.......................................................    4

                                     A-II-1

                                  ADDENDUM II

          CPI OPTIONAL PROCESSING AND SUPPORT SERVICES BILLING RATES

                            Effective March 1, 1992
             (These rates are subject to adjustment as set out in
                   Section 5.1, Exhibit I to the Agreement.

                                                                              INSTALLATION             MONTHLY       
                                                                              CHARGE *                 CHARGE           
                                                                                                               
1.  REMOTE SERVICES                                                                                              
                                                                                                                        
    a.   Data Terminal Equipment Support                                       [CM]                   [CM]                        
         1.   PC RJE System or MICRO Based Systems                           
         2.   Training on Client Hardware Configuration                      
         3.   Coordination of Interface on Client Supplied Equipment         
                                                                             
    b.   Software Support                                                               
         1.   Batch Data Entry                                               
         2.   Televoice (without RMF) Maintenance and  Support               

                                                                                        
    c.   Communication Equipment                                                        
         1.   Transmission Links                                                        
         2.   9600 BPS Port Charge (per 9600 BPS)                                       
         3.   Dial-Up 4800 BPS Port/Line Charge (MICRO per System)                      
         4.   Dial-Up Lockbox Port/Line Charge                                          
                                                                                        
    d.   Teleprocessing Support Charges                                                 
         1.   Point to Point Leased Line Support (Per Line)                             
         2.   Multidrop Branch Office Support (Each Branch)                             
         3.   RJE/3270 On-line (Per Controller or Emulator)                             
         4.   CPU to CPU (Bisync NJE)                                                   
         5.   NJE Cross Domain Facility                                                 
         6.   Cross Domain Facility                                                     
         7.   Excess Terminal Charge (above 2.5 Terminals per 1,000 loans)              
                                                                                        
    e.   Electronic Mail Communication System ("CIMON")+                                 
         1.   1-10 Boxes +++                                                            
         2.   11-50 Boxes                                                               
         3.   Over 50 Boxes                                                             
                                                                                         
    f.   On-Line Reporting Environment ("CORE")+                              
         1.   Compressed Print Set-up (for Non-supported Printers)         
                                                                                        
    g.   On-Line Training System                                           

*   Fidelity also reimburses CPI for reasonable travel, meals, and lodging
    expenses.
+   Available to Remote Clients only.
++  Plus the cost of any sales or use tax (if applicable).
+++ Each subscribing CPI Client will be supplied with one (1)
    CPI Communication Box at no charge.
x   At proposed rates.

                                     A-II-2

                                                                   ADDENDUM II
- ------------------------------------------------------------------------------- 

                                                                                                 Rate Per Unit*
                                                                                                ----------------
                                                                                           
2.    PERSONNEL AND RELATED                                                                          [CM]
 
      a.  Senior Consultants                                  per hour                          
      b.  Consultants                                         per hour                          
      c.  Senior Analysts                                     per hour                          
      d.  Analysts                                            per hour                          
      e.  Senior Programmer/Analyst                           per hour                          
      f.  Senior Systems Programmer                           per hour                          
      g.  Programmer/Analyst                                  per hour                          
      h.  Programmers                                         per hour                          
      i.  Client Services Representative                      per hour                          
      j.  Hardware & Telecommunications Specialists           per hour                          
      k.  Key Entry/Report Preparation                        per hour                          
      l.  Monthly Client Telephone                            Up to 50,000 loans                
          Support Charge (Non-Bundled Clients)                50,001 to 100,000 loans           
                                                              More than 100,000 loans           
      m.  On-Site S&P Software Installation                   per day                           
                                                                                                
3.    COMPUTER PROCESSING                                                                       
                                                                                                
      a.  Central processing unit:  IBM 9021-962**            per minute                        
      b.  3380 disk/input/output                              per minute                        
      c.  Magnetic tape drive:                                per minute of occupancy           
      d.  Formatted microfiche tape or disk output            per 1000 lines                    
      e.  Laser Printing (non-special forms)                  per page                          
      f.  Easytrieve Class "C"                                                                  
      g.  Excess Transaction Fee:  (Above the maximum allowable of 10 transactions)             

 
 
                                                                                                   Rate Per Unit
                                                                                                   ------------- 
                                                                                                 
4.    MEDIA AND OTHER
      a.  Stock Forms, 15 lb. greenbar paper, price per 1000 sheets:
          1 part wide - 10.00                 1 part narrow -  7.00
          2 part wide - 28.00                 2 part narrow - 20.00
          Impact printing - 0.75 per 1000 lines
      b.  Tape rental; per reel per month, in-house backup                                                 [CM] 
      c.  Tapes shipped out of house will be billed to Fidelity                                            
          if not returned within six (6) months to CPI 

*       In addition to the Rate Per Unit Costs for Items in Section 2., Fidelity
        shall pay the out-of-pocket expenses for CPI's personnel when at 
        Fidelity's site, plus the cost of shipping materials to the Fidelity's
        site (when applicable).

**      Due to periodic CPU upgrades, CPI may adjust the "per minute" rate
        throughout the year without advance notice provided such adjustments 
        do not materially affect the total charge to Fidelity for such service.

Note 1: The run time charge for Easytrieve is based on the rates in 3.a and 3.b
        above.  [CM]
                                     A-II-3

                                                                     ADDENDUM II
- --------------------------------------------------------------------------------

4.  MEDIA AND OTHER (CONT'D)

    d.  Microfiche

   (i) ORIGINALS                (ii) COPIES
 
From      To     Price     From      To      Price
- --------------------------------------------------
      0     500                  0    1,000  
    501   1,000              1,001    2,000  
  1,001   1,500              2,001    3,000  
  1,501   3,000   [CM]       3,001    5,000   [CM]
  3,001   5,000              5,001   10,000  
  5,001   8,000             10,001   25,000  
  8,001    plus             25,001     plus  
==================================================

    These scaled prices are based on the total fiche produced for a billing
    month. For instance, if two thousand (2,000) original fiche and three
    thousand fifty (3,050) fiche copies are generated in a given month, the cost
    for each original fiche would be [CM] and the cost for the fiche copies 
    would be [CM] per copy.

                                                                                          BASE             PER UNIT
                                                                                                   
5.  SPECIAL PROCESSING & SERVICES
    a.  FHA monthly charge processing via combined tape per item                          
        ($25 minimum)                                                                     
    b.  MSP Loan Master File Copy                                                         

    c.  FNMA/FHLMC Laser Compare 0-19,999 loans:                                          
          20,000-30,000 loans:                                                            
          Over 30,000:                                                                    
    d.  Chemical Bank Transfer Subsystem                                                  
                                                                                          
    e.  Interest Accrual Subsystem                                                        
          The interest accrual subsystem including the trial and final                    
          initialization of file, load and balance and coordination will be               
          provided to Fidelity.  CPI will charge Fidelity a fee of [CM] for               
          the file installation; [CM] for initialization cycle; and [CM]                  [CM]                [CM]
          for initialization run at trial.  CPI shall render Fidelity an invoice          
          within ten (10) days of initialization.                                         
    f.  MI Audit Tapes Subsystem                                                          
                                                                                          
    g.  Tax Subsystem                                                                     
                                                                                          
    h.  CUYA HOGA Tax System                                                              
                                                                                          
    i.  Reruns, Extra Cycles and Test Runs                                                
        Reodds                                                                            

    j.  Jacksonville Airport Delivery                                                     
    k.  Local Delivery                                                                    
    l.  Microcomputer Application:  per month                                             
    m.  Letterwriter:  (Standard)  per letter                                             
           (ARMS)                                                                         
        Training in Jacksonville, Florida(optional)                                       
    n.  Mass Transmission Charge - Hazard Insurance, tax service,                         
        MIP, PMI ($[CM] minimum)
    o.  MI Tapes (Delinquency or Audit)                                                   

Note 2:  Per Person; Fidelity pays out-of-pocket expenses for its employees.

                                     A-II-4

                                                                     ADDENDUM II
- --------------------------------------------------------------------------------

5.  SPECIAL PROCESSING AND SERVICES (CONT'D)

    p.  Monthly Processing for Shipment or Transmissions       [CM]
        to Third Parties (e.g., FNMA, GNMA, FHLMC)
    q.  FHA 2344                                               [CM]
    r.  Master File Verification (full)                        [CM]          N/A
        Master File Verification (sample)                      [CM]
    s.  Report Changes to Delivery Receipt                  Time &
                                                            Material
    t.  Tape Copies                                                          [CM]
                                                                             (per tape)
    u.  Audit Confirmations                                    [CM]
    v.  Run Standalone Edit Programs vs. Test Files                          [CM]
                                                                             (per run)
    w.  Download Extract File                               [CM] min./mo     [CM] per
                                                                             record/day

                                                            [CM]             [CM]
                                                            -------------    -------------
                                                            [CM]             [CM]  
                                                            -------------    -------------
6.  DOCUMENTATION
 
    a.  MORTGAGE SERVICING PACKAGE
          MSP Reference Manual                              3                [CM]
          MSP Sample Reports Manual                         1                    
          MSP Source Documentation Packet                   1                    
          MSP On-Line Inquiry User Manual                   3                    
          MSP On-Line Collections User Manual               3                    
          MSP On-Line LetterWriter User Manual              1                    
          MSP On-Line Data Entry User Manual                3                    
          Systems Administrators Guide                      1                    
          Workstation Manuals as Issued                     (Note D)             
                                                                                 
    b.  RESIDENTIAL LOAN INVENTORY CONTROL PACKAGE                               
          RLIC User Manual                                  3                    
          RLIC On-Line Data Entry User Manual               3                    
          RLIC On-Line LetterWriter User Manual             1                    
          RLIC Sample Reports                               3                    
          RLIC Source Document Packet                       1                    
          RLIC Market Position Reporting                     (Note A)            
          RLIC Buy Price Workstation Users Guide            1                    
                                                                                 
    c.  RESIDENTIAL LOAN PRODUCTION SYSTEMS                                      
          RLPC System Administrators Guide                   (Note A)            
          RLPC Reference Guide                               (Note B)            
          RLPC RLIC/MSP Interface Guide                     1                    
          RLPC IQ                                                                

NOTES:
A -  Issued to each student attending the CPI training session.
B -  One issued per software license.
C -  Available at CPI's cost plus stocking and service fee.
D -  Determined at time of issue.
E -  When establishing a network, one CIMON Coordinators Guide and five
     additional CIMON Users Guides are issued at no additional charge.

                                     A-II-5

                                                                      ADDENDUM II
- --------------------------------------------------------------------------------

6.  DOCUMENTATION (CONT'D)
 
    d.  MICRO-COMPUTER BASED SYSTEMS
          MIDSS Users Guide                              3           
          MIDSS Communique/Support Reference Guide       1           
          Portfolio Evaluation Model (PEM) User Manual   1           
          PCDOCS User Guide                              3           
          PCDOCS Communique/Support Reference Guide      1           
                                                                     
    e.  EASYTRIEVE                                                   
          Pansophic Easytrieve Plus Reference Manual      (Note C)   
          Pansophic Easytrieve Plus Users Guide           (Note C)   
                                                                     
    f.  TECHNICAL OR SYSTEMS MANUALS                                 
        (FOR LICENSE CLIENTS ONLY)                                   
          On-Line Systems Technical Reference Guide      1           
          MSP S&P Manual                                 1           [CM]
          RLIC S&P Manual                                1           
          CLMP Analyst Manual                            1           
          FM Manual                                      1           
          OS ODDS User Guide                             1           
          OS ODDS System Programmer's Guide              1           
          OLDE System Manual                             1           
                                                                     
    g.  MISCELLANEOUS                                                
          CIMON Users Guide                               (Note E)   
          CIMON Coordinators Guide                       1           
          CPI TeleVoice Users Guide                      3           
          CORE Users Guide                                N/A        
          Laser Check User Guide                         3           

NOTES:
A -  Issued to each student attending the CPI training session.
B -  One issued per software license.
C -  Available at CPI's cost plus stocking and service fee.
D -  Determined at time of issue.
E -  When establishing a network, one CIMON Coordinators Guide and five
     additional CIMON Users Guides are issued at no additional charge.

                                     A-II-6

       [FIDELITY FEDERAL BANK LOGO]

       ADMINISTRATIVE OFFICES
       4565 COLORADO BOULEVARD
       P.O.BOX 1631
       GLENDALE, CALIFORNIA 91209-1631 (818)956-7100

       January 4, 1994

       Mr. James E. Stutz
       1702 Sienna Canyon Drive
       Encinitas, CA 92024

       Dear Jim:

       We are pleased that you are considering our offer of employment as
       Executive Vice President of Retail Banking. Everyone who spoke with you
       was impressed with your qualifications and concluded that you fit our
       vision of the ideal person to oversee this important function.

       Accordingly, we extend this formal offer of employment to include the
       following terms and conditions:

       .  Corporate title: Executive Vice President, Retail Banking Group

       .  Reporting to: Richard M. Greenwood, President and CEO

       .  Annual salary: $180,000 paid bi-weekly over 26 pay periods per year

       .  Incentive potential is equal to 40% of base salary, incentive is paid
          annually.

       .  You will receive use of a new luxury car plus all maintenance,
          insurance, registration, and gasoline, or $1,150 a month allowance.

       .  You will receive an up-front relocation bonus of $25,000 grossed up on
          your first day of employment.

       .  You will receive a temporary housing allowance of $1500.00 a month for
          the first six (6) months of your employment to cover costs of normal
          living expenses in the Glendale area, (i.e. room, board, etc).

       .  You will be eligible for executive medical benefits from your date of
          hire.

                                 Exhibit 10.19

       James E. Stutz
       Offer Letter
       January 4, 1994

       In addition to the aforementioned, we are prepared to offer the following
       severance arrangement. If your employment with the bank is terminated in
       the event of the Bank's sale or recapitalization:

       .  You will be entitled to 12 months of salary as severance during the
          subsequent period of your employment. This will be as witnessed by a
          change-in-control severance agreement, to be signed on the date of
          your employment.

       Please acknowledge your acceptance of the above terms and conditions by
       signing below and returning one of the copies of this letter. In the
       meantime, if you have any questions or need further information please
       call.

       Sincerely,
       
       /s/ WALTER F. ABBOTT

       Walter F. Abbott
       Vice President, Human Resources

       /s/ JAMES E. STUTZ              JANUARY 4, 1994 
       --------------------------      -------------------
       James E. Stutz                  Date

                                       2

[LETTERHEAD OF CITADEL HOLDING CORPORATION]

CONFIDENTIAL

December 14, 1993

Mr. Steve Wesson
622 Gayer Drive
Monte Nido, Calabasas
California, 91302

Dear Steve:

I am pleased that you have agreed to assume the position of President & CEO of 
Doran Street Real Estate Corporation, a subsidiary of Citadel Holding 
Corporation (Citadel), subject to Board approval of your appointment. As you 
know, Citadel and Fidelity Federal Bank (Fidelity) are contemplating a 
transaction which would involve transferring certain assets from Fidelity to 
Citadel's newly formed subsidiary, Doran Street Real Estate Corporation. (This 
transaction will be referred to as "the Doran Street Transaction", hereafter).

Everyone who spoke with you was most impressed with your qualifications, and 
conclude that you fit our vision of the ideal person to oversee that important 
function.

The remainder of this letter sets forth the terms and conditions of your 
employment, as we have mutually agreed:

1.  CORPORATE TITLE:  President & CEO, Doran Street Real Estate Corporation

2.  REPORTING TO:

    a.  Immediate (as defined below): President & Chief Executive Officer of 
        Citadel

    b.  Long-term (as defined below): Chairman of the Board of Directors of 
        Citadel

                                 Exhibit 10.20

Mr. Steve Wesson
December 14, 1993
Page 2

3.  EMPLOYMENT START DATE:

    a.  Immediate: Interim employment commencing November 15, 1993. We
        understand that you are currently subject to a consulting contract with
        your former employer, but that the terms of that contract do not
        preclude your full-time employment with another entity. We also
        understand that you do not anticipate that the amount of time required
        to perform to your consulting contract will interfere substantially with
        your duties at Doran Street and that the contract expires in July, 1994.

    b.  Long Term: Employment effective pursuant to formal written contract with
        establishment and commencement of operations, on the effective date of
        the Doran Street Transaction. It is contemplated by the parties to the
        employment contract that while Doran Street may exist as a formal entity
        in the immediate future, it may be several months before the Doran
        Street Transaction is consummated. If the Doran Street Transaction is
        not consummated for any reason, no long-term employment, hence no formal
        written contract is contemplated.

4.  EMPLOYMENT CONTRACT PROVISIONS:

    a.  Immediate: Employment is at will, on a month-to-month basis, except that
        if you are terminated without cause you will be entitled to three months
        salary as severance pay.

    b.  Long Term: Initial contract providing for a maximum of 24 months of
        severance, reduced monthly to a rolling maximum of 12 months severance,
        at the end of the first year of employment, and continuing thereafter.
        The written contract will provide for its effectiveness as of the date
        the Doran Street Transaction is consummated.

5.  ANNUAL CASH COMPENSATION (IMMEDIATE AND LONG-TERM):

    a.  Annual Salary: $225,000, paid bi-weekly over 26 pay periods/year.

    b.  Annual Bonus: Preliminary thoughts include: Generally, 3% of pre-tax
        income in excess of income required to generate a 12% pre-tax return on
        equity employed to shareholders--subject to a minimum annual bonus of
        $75,000. Specific provisions wil be designed and incorporated into the
        employment contract.

 
Mr. Steve Wesson
December 14, 1993
Page 3

6.  LONG-TERM BONUS: Preliminary thoughts include: Upon the sale of Doran Street
    or at the end of 5 years, whichever is sooner, a long-term bonus = to 3% of
    Doran Street market value (as determined by J.P. Morgan or a similar
    investment banking entity, in the event that Doran Street is not publicly
    traded) that is in excess of the employed shareholder equity investment +
    12% compound annual return LESS the value of all bonus and retirement or
    deferred compensation payments or accruals made during the period. Specific
    provisions will be designed and incorporated into the employment contract.

7.  RETIREMENT OR DEFERRED COMPENSATION: $45,000 pre-tax annual contribution to
    a qualified retirement vehicle on your behalf, or the same amount in
    deferred compensation. This amount would be funded or accrued at the end of
    each fiscal year for which you are employed. If you are terminated other
    than for cause prior to the end of a fiscal year, you would be entitled to a
    prorated portion of such retirement or deferred compensation.

8.  EXECUTIVE BENEFITS/PERQUISITES

    a.  Immediate:

        (1)  Auto Allowance: $1,150.00 per month.

        (2)  Executive Medical Insurance (under Fidelity Federal Bank plan):
             Reimbursement of up to $10,000 uninsured medical costs in excess of
             those covered by group medical plans, providing IRS guidelines
             followed.

        (3)  Others: Club memberships and other benefits determined on an "as 
             needed" basis.

    b.  Long-term:

        (1)  Reasonable auto allowance policy, as established by Doran Street.

        (2)  Reasonable medical insurance, expense reimbursement, vacation 
             accrual, and other benefits as established by Doran Street.
 
        (3)  Others: Club memberships determined on an "as needed" basis and 
             subject to prior approval by Citadel's Chairman of the Board.

 
Mr. Steve Wesson
December 14, 1993
Page 4

NOTE: ALL PROPOSED PROVISIONS FOR INCLUSION IN THE WRITTEN EMPLOYMENT CONTRACT 
ARE SUBJECT TO CONTINUING DISCUSSIONS AND DESIGN OF SPECIFICS WITHIN THE 30 DAYS
FOLLOWING EMPLOYMENT START DATE. FURTHER, NONE OF THE ABOVE PROPOSED PROVISIONS 
HAVE BEEN APPROVED BY THE BOARD OF DIRECTORS AS YET. NO EMPLOYMENT PROVISIONS 
DESCRIBED HEREIN, IMMEDIATE OR LONG-TERM, SHALL BE ENFORCEABLE, ABSENT BOARD 
APPROVAL.

This letter intends to reflect our respective current understandings and does 
not constitute an employment contract. Please acknowledge acceptance of the 
foregoing terms and conditions by signing in the space provided below and 
returning one of the copies of this letter to my attention. In the meantime, if 
you have any questions or need further information, please call.

Once again, Steve, we believe we have found the right individual for the job and
that you will make a valuable addition to our team. We look forward to working 
with you soon.

Best regards,

/s/ RICHARD M. GREENWOOD
Richard M. Greenwood
President and CEO

AGREED AND ACCEPTED:

/s/ STEVE WESSON                            14th December 1993
- -----------------                       ------------------------
  Steve Wesson                          Date

                        Subsidiaries of the Registrant
 
             [SUBSIDIARIES OF THE REGISTRANT CHART APPEARS HERE] 
             
CITADEL HOLDING CORPORATION
Date and State of Incorporation:
   March 15, 1983 - Delaware
Date of Initial Stock Issue:
   December 13, 1983
Nature of Business:
   Holding Company

DORAN STREET REAL ESTATE CORPORATION
Date and State of Incorporation:
   September 15, 1993 - Delaware
Percentage of Ownership:
   100% by Citadel Holding Corporation
Nature of Business:
   Real Estate

GATEWAY INVESTMENT SERVICES, INC.
Date and State of Incorporation:
   October 30, 1989 - California
Percentage of Ownership:
   100% by Citadel Holding Corporation
Nature of Business:
   Provides securities and annuity products to Fidelity Federal
   Bank customers through licensed representatives

FIDELITY FEDERAL BANK, a Federal Savings Bank
Date of Charter:
   August 17, 1937
   (as Fidelity Federal Savings and Loan Association)
Date of Name Change to Fidelity Federal Bank, FSB:
   September 28, 1989
Percentage of Ownership:
   100% by Citadel Holding Corporation
Nature of Business:
  Federally Chartered Savings Bank

CHINO EQUITIES, INC.
Date and State of Incorporation:
   December 29, 1983 - California
Percentage of Ownership:
   100% by Fidelity Federal Bank, FSB
Nature of Business:
   Real Estate Investments

CITADEL SERVICE CORPORATION
dba FIDELITY INSURANCE AGENCY OF GLENDALE
Date and State of Incorporation:
   November 19, 1970 - California
Percentage of Ownership:
   100% by Fidelity Federal Bank, FSB
Nature of Business:
   Operates Insurance Agency

CITADEL HOSPITALITY OF CALIFORNIA, INC.
Date and State of Incorporation:
   September 25, 1992 - California
Percentage of Ownership:
   100% by Fidelity Federal Bank, FSB
Nature of Business:
   Holds liquor license for Holiday Inn
   (Long Beach REO #480)

CITADEL HOSPITALITY OF FLORIDA, INC.
Date and State of Incorporation:
   November 21, 1991 - Florida
Percentage of Ownership:
   100% by Fidelity Federal Bank, FSB
Nature of Business:
   Holds liquor license for Holiday Inn
   (Altamonte Springs REO #385)

CITADEL HOSPITALITY OF PENNSYLVANIA, INC.
Date and State of Incorporation:
   November 14, 1989 - Pennsylvania
Percentage of Ownership:
   100% by Fidelity Federal Bank, FSB
Nature of Business:
   Holiday Inn was sold 4/30/90. Liquor license was transferred
   to new owner. Corporation has no other assets.

FIDELITY NATIONAL TRUST COMPANY
Date of Charter:
   September 23, 1981
Percentage of Ownership:
   99% by Citadel Service Corporation
   1% by Directors
Nature of Business:
   Trust Functions

GATEWAY MORTGAGE CORPORATION
Date and State of Incorporation:
   July 7, 1972 - California
Percentage of Ownership:
   100% by Citadel Service Corporation
Nature of Business:
   Acts as Trustee under deeds of trust, handles foreclosures 
   and related items.

                                  Exhibit 21

THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CITADEL
HOLDING CORPORATION'S 1993 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE 
TO SUCH FINANCIAL STATEMENTS.

                                                                                   At or for the year ended December 31,
                                                                                 ----------------------------------------

(Dollars in thousands)                                                                1993          1992          1991
                                                                                 -----------    ----------    -----------
                                                                                                   
9-03(1)        Cash and due from banks                                            $    85,961    $  110,262    $
9-03(2)        Interest bearing deposits                                                    -
9-03(3)        Federal funds sold - purchased securities for resale                    60,000             -
9-03(4)        Trading account assets                                                       -             -
9-03(6)        Investment and mortgage backed securities held for sale                183,367
9-03(6)        Investment and mortgage backed securities held to
               maturity - carrying value                                                    -        67,337
9-03(6)        Investment and mortgage backed securities held to
               maturity - market value                                                      -        69,041
9-03(7)        Total loans                                                          3,797,215     4,056,058
9-03(7)(2)     Allowance for loan losses                                               83,832        64,277
9-03(11)       Total assets                                                         4,389,519     4,698,326

9-03(12)       Deposits                                                             3,368,643     3,457,918
9-03(13)       Short-term borrowings                                                  311,530       552,000
9-03(15)       Other liabilities                                                       39,243        48,822
9-03(16)       Long-term debt                                                         482,700       416,400

9-03(19)       Preferred stock - mandatory redemption                                       -             -
9-03(20)       Preferred stock - no mandatory redemption                                    -             -
9-03(21)       Common stock                                                                66            33
9-03(22)       Other stockholders' equity                                             187,337       223,153
9-03(23)       Total liabilities and stockholders' equity                           4,389,519     4,693,326

9-04(1)        Interest and fees on loans                                             275,101       363,445    502,874
9-04(2)        Interest and dividends on investments                                   19,880        15,162     23,119
9-04(4)        Other interest income                                                        -             -          -
9-04(5)        Total interest income                                                  289,592       370,722    520,124

9-04(6)        Interest on deposits                                                   131,618       175,024    278,617
9-04(9)        Total interest expense                                                 188,391       239,941    378,017

9-04(10)       Net interest income                                                    101,201       130,781    142,107
9-04(11)       Provision for loan losses                                               65,100        51,180     49,843
9-04(13)(h)    Investment securities gains/losses                                       1,288             -      8,994
9-04(14)       Other expenses                                                         105,341        77,911     79,446
9-04(15)       Income/loss before income tax                                         (103,628)       (3,795)    18,314
9-04(17)       Income/ loss before extraordinary items                               (103,628)       (3,795)    18,314
9-04(18)       Extraordinary items, less tax                                                -             -          -
9-04(19)       Cumulative change in accounting principles                                   -             -          -
9-04(20)       Net income or loss                                                     (67,161)        2,046      2,663
9-04(21)       Earnings per share - primary                                            (11.56)         0.62       0.81
9-04(21)       Earnings per share - fully diluted                                      (11.56)         0.62       0.81

I.B.5          Net yield - interest earning assets - actual                              6.65%         7.94%      9.80%
III.C.1(a)     Loans on nonaccrual                                                     93,475       112,041     68,982
III.C.1(b)     Accruing loans past due 90 days or more                                      -             -          -
III.C.1(c)     Troubled debt restructuring                                             28,713        87,304      6,939
III.C.2        Potential problem loans                                                      -             -          -
IV.A.1         Allowance for loan loss - beginning of period                           64,277        52,374     16,552
IV.A.2         Total charge-offs                                                       50,504        27,350     17,005
IV.A.3         Total recoveries                                                         4,959           473      2,984
IV.A.4         Allowance for loan loss - end of period                                 83,832        64,277     52,374
IV.B.1         Loan loss allowance allocated to domestic loans                         83,832        64,277     52,374
IV.B.2         Loan loss allowance allocated to foreign loans                               -             -          -
IV.B.3         Loan loss allowance - unallocated                                            -             -          -

                                  Exhibit 27